Herbert v. Commissioner , 32 B.T.A. 372 ( 1935 )

LEON S. HERBERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Herbert v. Commissioner

Docket No. 72949.

United States Board of Tax Appeals

32 B.T.A. 372; 1935 BTA LEXIS 954;

April 16, 1935, Promulgated

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">*954 DIVIDEND PAID BY CREDIT - YEAR IN WHICH TAXABLE. - A corporation in which petitioner owned substantially all the stock declared a dividend on December 9, 1930, payable on January 10, 1931. On December 31, 1930, petitioner was indebted to the corporation in an amount in excess of the dividend on his stock, and on that date the corporation credited his account with the amount of the dividend. Held the amount so credited represented income in 1930.

C. J. McGuire, Esq., for the petitioner.

Roy N. McMillan, Esq., and Wilford H. Payne, Esq., for the respondent.

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ARUNDELL

">*373 Petitioner seeks a redetermination of the deficiency proposed by the Commissioner for the year 1930, in the amount of $3,991.89. The case was submitted on a stipulation of facts and documentary evidence, but no oral testimony was offered. The case raises the question as to the year in which a dividend is to be taxed.

FINDINGS OF FACT.

During the year 1930 petitioner owned substantially all of the capital stock, both common and preferred, of the Herbert Hosiery Mills, Inc., a corporation.

The holders of the preferred stock of the Herbert Hosiery Mills, Inc. ">*955 , were entitled to receive, and the corporation was bound to pay out of the net earnings of the company, a fixed cumulative dividend of 7 percent per annum, payable either quarterly, half-yearly, or yearly, as the board of directors of the corporation might determine.

On or about January 10, 1930, petitioner received a dividend on the preferred stock which he owned at that time, such dividend so received being in the amount of $32,830. The amount of this dividend was returned as income on the Federal income tax return filed by petitioner for the year 1930 and the tax thereon was paid by petitioner.

On December 9, 1930, the Herbert Hosiery Mills, Inc., declared a 7 percent dividend on its preferred capital stock, such dividend to be payable January 10, 1931, to stockholders of record on December 9, 1930. On these dates petitioner was the owner of 4,960 shares of preferred stock. As a result of this dividend declaration petitioner was entitled to receive, and eventually did receive, a dividend in the amount of $32,830. The resolution adopted on December 9, 1930, authorizing the dividend reads as follows:

A regular meeting of the Board of Directors of Herbert Hosiery Mills, ">*956 Inc., was held at the office of the company in Norristown, Pa., on Tuesday, December 9, 1930, at ten i'clock A.M.

The following directors were present

Leon S. Herbert, Chairman presiding.

H. L. Kauffmann, Comprising a quorum of the board.

The minutes of the previous meeting were read and upon motion were ordered to be approved.

On motion duly made and seconded, a dividend of seven percent was declared on the preferred stock of the Company for the year 1930, payable January 10, 1931, to stockholders of record this date.

On December 31, 1930, petitioner was indebted to the Herbert Hosiery Mills, Inc., in the amount of $51,165.23. On the books of the Herbert Hosiery Mills, Inc., the aforesaid dividend, declared on December 9, 1930, was credited to petitioner's account on December 31, 1930, such credit being in the amount of $32,830. After such ">*374 credit on December 31, 1930, the net debit in petitioner's account on the books of the corporation was $18,335.23.

Petitioner keeps his accounts and returns his income for income tax purposes on the cash receipts and disbursements basis. He did not include in his taxable income for the year 1930 the dividend of">*957 $32,830 declared on December 9, 1930, and payable to stockholders of record on December 9, 1930. He returned such dividend as income for the year 1931. In his final determination of petitioner's tax liability for the year 1930 respondent included the $32,830 in petitioner's income.

On the information return, form 1099, filed by the Herbert Hosiery Mills, Inc., with the Bureau of Internal Revenue, for the year 1930, the payment of dividends to petitioner in the aggregate of $65,660 was reported.

OPINION.

ARUNDELL: It is petitioner's view that he could not have constructively received the dividend declared on December 9, 1930, prior to the time that he could have legally demanded its payment which was on January 10, 1931. He reasons that it takes more than a book credit by a debtor corporation to the creditor's account on its books to make him the recipient of taxable income. Respondent, on the other hand, argues that the declaration of the dividend on December 9, 1930, served to create the relationship of debtor and creditor between the corporation and the petitioner, and that, when the money so owing was used to pay an obligation of petitioner, it was the same as if the">*958 money had been in fact paid directly to petitioner, citing ; .

We think on the facts here present the respondent is right. We start with the fact that petitioner was indebted to the Herbert Hosiery Mills, Inc., in the sum of $51,165.23. Whether this sum represented cash advances to the petitioner does not appear. Petitioner owned substantially all of the stock of the Herbert Hosiery Mills, and, in the absence of a showing to the contrary, it may be assumed he completely dominated and controlled its operations. Thus when on December 31, 1930, the corporation credited to petitioner's account on its books the amount of the dividend declared on December 9, 1930, in the sum of $32,830 and the corporation's books showed that the personal indebtedness of the petitioner to the corporation was thereby reduced to $18,335.23, it is only fair to assume that this action was taken, not only with the acquiescence of petitioner, but under his direction. At least there is not one iota of evidence offered in this case to the contrary, and it does">*959 not appear that ">*375 petitioner ever objected to the corporation's action in using the dividends to reduce his personal indebtedness. That the corporation thought that it had paid petitioner the dividend in 1930 appears from the fact that it so reported to the Bureau of Internal Revenue. It is evident that the sum of $65,660 listed on the information return represents the two dividends, the one in question here, and the one paid in January 1930.

While it is entirely true that one on a cash basis is not to be taxed on a dividend until its receipt, either actual or constructive, and in the ordinary case a dividend is not to be regarded as income to a stockholder before its due date, there is nothing inconsistent with this view in taxing one on the receipt of income, if in fact it is received, before its due date, which is the effect of what occurred here. The dividend was never received in possession, and no check was ever sent covering it, and the only action ever taken by the Herbert Hosiery Mills in the way of payment was by crediting petitioner's account on its books on December 31, 1930. This constituted payment and respondent's action is accordingly approved.

">*960 Decision will be entered for the respondent.