Meyer v. Commissioner

BEN R. MEYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

RAY C. MEYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MILTON E. GETZ, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ESTELLE C. GETZ, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Meyer v. Commissioner

Docket Nos. 72248, 72249, 72250, 72251, 75610, 75611, 75612, 75613, 79030, 79031, 79032, 79033, 84684, 84685, 84686, 84687, 93046, 93047, 93048, 93064.

United States Board of Tax Appeals

45 B.T.A. 228; 1941 BTA LEXIS 1151;

September 30, 1941, Promulgated

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Petitioners owned all the stock in corporation A, which in turn owned all the stock of corporation B. Petitioner withdrew amounts of money from corporation B which were charged on the books of that corporation to accounts standing in the names of petitioners. Interest on amounts so charged was also charged to those accounts. Petitioners paid certain amounts to corporation B, all of which were credited on those accounts, some of the amounts so paid being designated as interest. Held, that the net withdrawals from corporation B were distributions from its earnings or profits made to petitioners and constituted dividends includable in petitioners' income.

Thomas R. Dempsey, Esq., and Wellman P. Thayer, Esq., for the petitioners.

Samuel Taylor, Esq., for the respondent.

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TYSON

The respondent determined deficiencies in income tax against petitioners for the calendar years 1930 to 1935, inclusive, in the following amounts:

Petitioner	Docket No.	Year	Deficiency
	72248	1930	$22,520.44
	75613	1931	14,767.08
	79032	1932	9,926.53
Ben R. Meyer	84684	1933	9,501.28
	93048	1934	3,967.63
	93048	1935	3,256.25
	72249	1930	24,947.03
	75612	1931	13,807.40
	79031	1932	9,201.96
Ray C. Meyer	84685	1933	9,336.98
	93046	1934	4,443.03
	93046	1935	3,481.84
	72250	1930	15,062.50
	75610	1931	10,536.53
	79033	1932	15,549.20
Milton E. Getz	84686	1933	8,785.80
	93047	1934	1,390.47
	93047	1935	1,910.14
	72251	1930	14,299.28
	75611	1931	7,733.58
	79030	1932	11,575.82
Estelle C. Getz	84687	1933	6,390.74
	93064	1934	2,059.55
	93064	1935	2,138.18

Petitioners, in all docket numbers, allege that the respondent erred in including in income as dividends amounts received by them from the Kaspare Cohn Co., Ltd., as loans. Petitioners, in Docket Nos. 93047, 79033, 84686, 93046, 84685, 79031, 93048, 84684, 79032, 93064, 84687, and 79030, allege in addition that respondent also erred in failing to allow as deductions from gross income of those petitioners amounts paid to the Kaspare Cohn Co., Ltd., as interest in the years 1932, 1933, and 1934. Petitioners, in Docket Nos. 79031 and 79032, also allege in addition that the respondent erred in adding to income for 1932 of each of those petitioners, Ben R. Meyer and Ray C. Meyer, $7.075 as salary received by them during that year; and the petitioner in Docket No. 84686 also alleges in addition that the respondent erred in adding to the gross income of that petitioner, Milton E. Getz, for the year 1933, $5,000 representing attorneys' fees paid by Getz in that year for defending stockholders' liability.

The proceedings are consolidated and submitted on stipulated facts, oral testimony, and documentary evidence. The stipulated facts are included in our findings of fact by reference, but only such of those facts as are deemed material and essential to decision of the issues presented are set out herein. The petitioners concerned have submitted no evidence with regard to the alleged error of respondent in adding the above mentioned $1,075 to the 1932 income of Ben R. Meyer and Ray C. Meyer; nor has petitioner, Milton E. Getz, submitted any evidence with regard to the alleged error of respondent in adding to his 1933 income the above mentioned $5,000. The assigned errors with regard to these two amounts of $1,075 and $5,000 are therefore deemed to have been abandoned.

FINDINGS OF FACT.

Petitioner Ben R. Meyer and Ray C. Meyer are husband and wife, residing at Los Angeles, California. Petitioners Milton E. Getz and Estelle C. Getz are hubsand and wife, residing at Beverly Hills, California. Ray C. Meyer and Estelle C. Getz are sisters, the daughters of Kaspare and Hulda Cohn, the latter two having died prior to 1927. For each of the taxable years in question each of the petitioners filed a separate individual income tax return with the collector of internal revenue for the sixth district of California.

Kaspare Cohn, Inc., hereinafter referred to as Cohn, Inc., is a California corporation organized in 1909, with its principal office in Los Angeles, California. All the stock of Cohn, Inc., has at all times since its organization through 1935 been held by members of the Kaspare Cohn family, including therein the Meyer and Getz families; and during 1928 and 1929 such stock was owned and held by petitioners.

During the years 1930 through 1935 the issued and outstanding stock of Cohn, Inc., consisting of 1,000 shares, was owned and held as follows:

Ben R. Meyer and Ray C. Meyer	(community property) 212 shares
Ray C. Meyer	(separate property) 288 shares
Milton E. Getz and Estelle C. Getz	(community property) 212 shares
Estelle C. Getz	(separate property) 288 shares

The Kaspare Cohn Co., Ltd., is a corporation organized on May 27, 1927, at the direction of Ben R. Meyer under the laws of Canada and under the name of "Rayben Limited", which name was changed on February 17, 1930, to "Kaspare Cohn Company, Limited." That corporation will be at all times hereinafter referred to as Limited. Since November 18, 1927, all of the shares of stock of Limited (except qualifying shares) have been held by Cohn, inc.

During each of the years 1928 through 1935, inclusive, Ben R. Meyer was president and Milton E. Getz was vice president of Cohn, Inc., and at all times from and after February 17, 1928, they alternately held similar offices in Limited. On February 17, 1928, Milton E. Getz and Estelle C. Getz were elected directors of Limited and thereafter remained, together with Ben R. Meyer, the sole three directors of that corporation, as well as three of the five directors of Cohn, Inc.

Since 1916 Meyer has been president and Getz has been vice president of the Union Bank & Trust Co. of Los Angeles, which at the time of the hearing had deposits in excess of $41,000,000.

During November and December 1927, Cohn, Inc., received from Limited $2,250,000, and during January and February 1928, $360,000. On the books of Limited these two transactions were treated as loans made to Cohn, Inc.

Shortly after the receipt by Cohn, Inc., of these "loans" from Limited petitioners began to withdraw large sums from Cohn, Inc., which were charged on that corporation's books to accounts entitled "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz."

For the period from November 19, 1927, through February 29, 1928, (on which latter date Limited took over the assets of Cohn, Inc., as hereinafter mentioned) petitioners made withdrawals from Cohn, Inc., in amounts which were charged to accounts on the books of Cohn, Inc., as follows:

Ben R. Meyer & Ray C. Meyer	Milton E. Getz & Estelle C. Getz
$368,917.13	$291,992.61

Credits representing dividends paid by Cohn, Inc., to petitioners were made to those same accounts as follows:

Ben R. Meyer & Ray C. Meyer		Milton E. Getz & Estelle C. Getz
Dec. 31, 1927	$87,500	Dec. 31, 1927	$87,500

On February 29, 1928, Limited was authorized by the Department of State of California to transact business in that state, and moved into the office occupied by Cohn, inc., in the Union Bank Building in Los Angeles, California, which remained as Limited's principal place of business up through the year 1935. On the same date, the assets of Cohn, Inc., (except the capital stock of Limited and cash) were transferred to Limited and the liabilities of Cohn, Inc., were assumed by Limited.

From March 9, 1928, up to and including 1935, petitioners made withdrawals from Limited in the same manner as they had theretofore made withdrawals from Cohn, Inc. The amount of withdrawals in each year made by Ben R. Meyer and his wife were on a fifty-fifty basis and the same was true as to the withdrawals made by Milton E. Getz and his wife. Such withdrawals were charged to the respective open accounts of "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz" on the books of Limited. During the same years petitioners made payments to Limited which were credited on those accounts. Also, petitioners made certain other payments to Limited which were designated as "interest" on those open accounts. The amounts of such withdrawals, payments, and "interest" payments made by petitioners during 1928 to 1935, inclusive, were as set out in the following tabulation:

	Open account of "Ben R. & Ray C. Meyer"
Year	Withdrawals charged	Payments credited	"Interest" paid Dec. 31
1928	$ 448,219.96	$111,700.00
1929	651,216.89	255,012.50
1930	327,594.66	3,585.39
1931	261,508.21	38,500.00
1932	189,509.94	115,000.00	$48,000.00
1933	109,723.57	46,000.00	49,963.36
1934	76,150.00	39,246.00	53,030.40
1935	44,695.46	475.42

	Open account of "Milton E. & Estelle C. Getz"
Year	Withdrawals charged	Payments credited	"Interest" paid Dec. 31
1928	$274,163.70	$111,700.00
1929	246,716.89	18,750.00
1930	191,594.64
1931	121,258.20
1932	86,209.94	1,500.00	$55,000.00
1933	83,835.45	36,000.00	38,435.45
1934	49,650.00	25,300.00	32,640.50
1935	38,712.17	500.00

The books of Limited show no payments by petitioners of any amounts as "interest" other than those set out in the above tabulation.

Prior to 1929 Limited paid dividends. In 1928 Limited's indebtedness had increased to about $5,000,000 and no dividends were paid by it after 1928.

During the years 1928 to 1935, inclusive, the accumulated earnings or profits of Limited available for distribution as dividends at the end of each taxable year were in excess of the net withdrawals made by petitioners from Limited in each of those years by the following amounts:

1928	$4,338,184.99
1929	4,662,172.94
1930	2,357,305.86
1931	2,426,956.61
1932	$1,828,217.23
1933	761,524.80
1934	556,804.75
1935	120,560.20

On August 1 and December 31, 1934, each petitioner herein executed 4 percent demand notes in favor of Limited in certain amounts as follows and each of such notes represented one-half of, and was credited in its face amount against, the balance carried on the following dates in the respective accounts of "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz":

Date of each note	Face amount of each note of Ben R. Meyer & Ray C. Meyer	Face amount of each note of Milton E. Getz & Estelle C. Getz	For one-half of balance as of -
August 1, 1934	$1,590,938.67	$979,216.66	Oct. 31, 1933
December 31, 1934	48,338.78	35,117.72	Dec. 31, 1934

Ben R. Meyer and Milton E. Getz each executed a 4 percent demand note, payable to Limited, dated January 2, 1936, in the respective face amounts of $44,220.04 and $38,212.17, and each such note represented and was credited in the face amount thereof, respectively, against the balance carried on December 31, 1935, in the respective accounts of "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz."

Withdrawals by petitioners from Limited during the taxable years were made frequently in large and small amounts, as and when they chose. The following tabulation shows as to Ben R. Meyer and his wife, Ray C. Meyer, and also Milton E. Getz and his wife, Estelle C. Getz, respectively: (1) the net amounts withdrawn from Limited during each of the taxable years after deducting from their total gross withdrawals in each year the total amount of all their payments, including "interest", made to Limited in each of such years and also after deducting the amounts by which payments made to Limited in 1934 exceeded the withdrawals during that year, first from the withdrawals for the year 1933 and, second, any balance thereof from the withdrawals for the year 1932; such excess payments in 1934 being in the amounts of $16,126.40 by Ben R. and Ray C. Meyer and $8,290.50 by Milton E. and Estelle C. Getz (the net withdrawals do not however reflect the credits given on Limited's books for the above mentioned notes); (2) the combined gross income of husband and wife for each of the taxable years as shown by their income tax returns, other than the amounts in controversy in these proceedings; and (3) their total cash disbursements, according to their books, for their living expenses and other personal uses.

	Ben R. & Ray C. Meyer
Year	Net amounts withdrawn	Gross income	Disbursements for
	from Limited		personal use and living
			expenses
1930	$324,009.27	$72,127.41	$444,319.60
1931	223,008.21	77,613.32	343,040.93
1932	24,143.75	75,764.48	259,831.93
1933	none	83,696.29	234,737.48
1934	none	67,862.35	155,412.89
1935	44,220.04	21,242.96	63,027.39

	Milton E. & Estelle C. Getz
Year	Net amounts withdrawn	Gross income	Disbursements for
	from Limited		personal use and living
			expenses
1930	$191,594.64	$74,684.69	$201,933.62
1931	121,258.20	89,443.55	192,845.82
1932	29,709.94	85,087.35	160,976.43
1933	1,109.50	75,547.43	300,574.77
1934	none	59,093.32	95,353.98
1935	38,212.17	37,511.00	51,012.80

From 1928 to 1935, inclusive, the balance sheets of petitioners showed net worth as follows:

Year	Ben R. & Ray C. Meyer	Milton E. & Estelle C. Getz
1928	($552,371.05)	No balance sheet
1929	(237,851.14)	$930,954.25
1930	(534,763.67)	654,420.33
1931	(769,558.45)	539,170.26
1932	($885,004.43)	$524,461.13
1933	(944,313.90)	486,375.81
1934	(945,139.14)	416,893.29
1935	(996,131.65)	398,435.49

The assets of petitioners, which are shown on their balance sheets at cost, could not have been sold at their cost, as so shown, during the taxable years here in question. During those years the Meyers were insolvent and could not have repaid their withdrawals, and the Getzes could not have repaid theirs without selling most, if not all, of their assets, including their home and furnishings.

During the period from 1928 to 1935, the above mentioned withdrawals were carried as accounts payable on petitioners' books, which on December 31 of each year showed liabilities to Limited, as follows:

Year	Ben R. & Ray C. Meyer	Milton E. & Estelle C. Getz
1928	$1,677,339.61
1929	1,498,327.11	$1,257,035.81
1930	1,784,378.50	1,529,964.69
1931	2,021,386.71	1,676,222.89
1932	$2,095,896.65	$1,760,932.83
1933	2,159,620.22	1,808,768.28
1934	2,796,524.22	1,952,393.28
1935	2,804,724.26	1,961,155.45

During the year 1933, Milton E. and Estelle C. Getz mortgaged certain property owned by them for $150,000 and that sum was paid over by them to Limited during that year. The amount of this payment was not credited to the open account of "Milton E. & Estelle C. Getz", which embraced, as hereinbefore shown, the withdrawals from Limited by Milton E. and Estelle C. Getz and the credits of principal and interest for payments made by them to Limited, but was credited to an account standing in the name of "Milton E. Getz - a/c Mtg. Maria de Francis." On May 1, 1935, in connection with a refinancing of the obligations of Limited, Limited deeded to Maria de Francis certain property owned by it in consideration of a $50,000 reduction by Maria de Francis of her loan to Milton E. Getz secured by the aforesaid mortgage. The $50,000 was charged by Limited to the above mentioned account of "Milton E. Getz - a/c Mtg. Maria de Francis."

During the year 1935 the creditors of Limited were pressing it for payment of its obligations. Payment of these obligations by the company had become impossible because of the depressed value of its assets. Many of these obligations had been guaranteed by petitioners Ben R. Meyer and Milton E. Getz and the creditors holding such guarantees demanded satisfaction thereof by these petitioners. These petitioners were likewise unable, because of depressed values, to fulfill their guarantees. On or about May 1, 1935, a plan was worked out whereby certain creditors' claims against Limited were paid, in whole or in part, and those creditors whose claims were not paid in their entirety became beneficiaries of a trust created jointly by Limited and petitioners Ben R. Meyer and Milton E. Getz. Limited transferred to this trust substantially all of its properties having any value. Ben R. Meyer transferred to this trust property having a cost to him, as shown by his books, of $1,096,562.07. Milton E. Getz transferred to this trust property having a cost to him, as shown by his books, of $1,349,550.43. The property so transfered to this trust by these petitioners constituted substantially all the properties owned by them and/or by petitioners Ray C. Meyer and Estelle C. Getz, except personal effects.

Between May 1, and December 31, 1935, Limited received $6,600 income from properties transferred by Ben R. Meyer to the above mentioned trust. This amount was credited to an account on Limited's books designated "Ben R. Meyer Special A/c, A/c Trust Agreement 1028." During the same period, Ben R. Meyer paid to the trustee $4,037.05 in cash and this amount was likewise credited to the same account on the books of Limited. This latter amount is not included in the schedule of payments made to Limited as shown in the account of "Ben R. & Ray C. Meyer" as hereinbefore set out. During the same period, Limited paid out on account of repairs to the aforesaid properties the sum of $338.76. These payments were charged to the same account.

Between May 1 and December 31, 1935, Milton E. Getz paid to the trustee the sum of $6,458.90 in cash and this amount was credited to an account on Limited's books designated "Milton E. Getz Special A/c, A/c Trust Agreement 1028." This amount is not included in the schedule of payments made to Limited shown in the account of "Milton E. & Estelle C. Getz", as hereinabove set out.

In addition to transferring their properties to the trust, as above mentioned, petitioners Ben R. Meyer and Milton E. Getz obligated themselves under the terms of the trust agreement to pay to the trust, for the benefit of the creditors, an aggregate sum of $15,000 per year for the five-year period beginning May 1, 1935. This obligation has been fulfilled by Ben R. Meyer making monthly payments of $750 and Milton E. Getz making monthly payments of $500. These payments were voluntarily continued by these petitioners from May 1, 1940, to the time of the hearing.

Limited has always kept its books on a fiscal year basis, beginning November 1 and ending October 31 in the following year. At all times during the taxable years 1930 to 1935, inclusive, petitioners were on a cash receipts and disbursements basis.

The books of Cohn, Inc., and Limited were kept on a cash receipts and disbursements basis, except that certain amounts were charged on the books of Limited as interest on the open accounts standing in the names of "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz." Such interest charges are not included in the amounts of the "withdrawals" hereinbefore set out as charges to those two open accounts. The interest so charged by Limited on these accounts was reported by Limited in its Federal income tax returns as income for the respective taxable years here involved, but no taxable net income was reported by Limited in any of those years. The amounts of interest and rates so charged were as follows:

October 31	Rate of interest	Ben R. & Ray C. Meyer	Milton E. & Estelle C. Getz
	Percent
1928	5	$45,379.00	$28,790.00
1929	5	68,529.50	56,227.62
1930	5	83,307.40	70,509.00
1931	5	102,847.37	83,014.81
1932	4	$93,372.84	$72,872.61
1933	2	49,973.57	38,435.45
1934	2	49,973.57	38,435.45
1935	4	53,030.40	32,640.50

The respondent determined that the amount of the withdrawals made by the petitioners from Limited during each of the taxable years, diminished by the amounts, other than interest, paid to Limited by petitioners in each of those years, constituted distributions to petitioners taxable as dividends. In determining such amounts the payments to Limited by petitioners of so-called "interest" during 1932, 1933, and 1934, were not taken into consideration.

In computing the deficiencies for the years 1932, 1933, and 1934, the respondent disallowed the claimed deductions from gross income of the so-called "interest" paid to Limited by petitioners on the open accounts of "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz" during these years.

In computing the deficiences of Milton E. and Estelle C. Getz for the year 1933, the respondent did not take into consideration the $150,000 paid by them to Limited and credited to the account of "Milton E. Getz, a/c Mtg. Maria de Francis", in arriving at the net withdrawals from Limited by those petitioners, nor did he consider the charge to this account of the amount of $50,000 during 1935. Neither did he consider in arriving at the net withdrawals of petitioners for 1935 the amounts of $6,600 and $4,037.05 carried on Limited's books in the account of "Ben R. Meyer Special A/c, A/c Trust Agreement 1028" or the amount of $6,458.90 carried on Limited's books in the account of "Milton E. Getz Special A/c, A/c Trust Agreement 1028."

The petitions herein relating to the deficiencies asserted for the years 1930 and 1931 were filed on May 12, 1933, and April 14, 1934, respectively.

During the taxable years, respectively, the petitioners received as distributions from the earnings and profits of Limited accumulated after February 28, 1913, the net amounts withdrawn by them from Limited in each of those years as hereinbefore tabulated.

OPINION.

TYSON: The respondent, on brief, concedes that there are no deficiences of any of the petitioners for the year 1934. He also concedes, on brief, that the amounts of withdrawals by petitioners from Limited in each of the years 1932, 1933, and 1934, determined by him to constitute dividends to petitioners in those respective years, should be reduced by the amounts which were paid by petitioners in each of such years and designated on the books of Limited as "interest" in the accounts of "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz."

The only issues remaining for decision are (1) whether the net withdrawals of petitioners from Limited during each of the taxable years, except 1934 (i.e., their total withdrawals less the total amounts, including "interest", paid by them to Limited), constituted loans, as contended by the petitioners, or distributions, taxable as dividends, as contended by the respondent; and (2) whether, if held to be loans, "interest" paid by petitioners in the years 1932, 1933, and 1934, is deductible from their respective gross incomes in those years.

The first issue presents two questions: First, were petitioners "shareholders" of Limited during the taxable years, within the purview of section 115(a) of the Revenue Acts of 1928, 1932, and 1934, ¹ notwithstanding they were not the record owners of Limited's stock; and, second, if they were such shareholders, did petitioners' net withdrawals from Limited during the taxable years constitute dividends, that is, "distributions" made by Limited "out of its earnings or profits", within the purview of that section.

In seeking the answer to the first question, the principle, that substance and not form should control in the application of Federal income tax laws, is particularly applicable to the facts as shown in our findings in the instant proceedings. ; ; ; ; ; and .

Looking through the form of the corporate organization of Cohn, Inc., and its record ownership of the stock of Limited, we find that, in substance, the petitioners were in reality the shareholders of Limited. Through ownership of all of the stock of Cohn, Inc., a closely held family corporation, which, in turn, owned all of the stock of Limited, the petitioners were the beneficial and real owners of the assets of Cohn, Inc., including Limited's stock. During the taxable years petitioners Ben R. Meyer and Milton E. Getz were alternately president and vice president of Limited and at least three of petitioners, viz, those two and Estelle C. Getz, were among the five directors of Cohn, Inc., and the sole directors of Limited. Through the holding of such offices, petitioners were in fact and in actual practice in absolute control of Limited and the latter's assets; and through the exercise of that control, petitioners, over a period of years including the taxable years in question, have withdrawn Limited's earnings or profits at their own discretion, for their own personal uses, and in a manner which best suited their own purposes.

In answer to the first question, as stated above, we hold that through their control of and their beneficial and real ownership of the stock of Limited, petitioners were the "shareholders" of that corporation, within the purview of section 115(a), supra.

Petitioners cite , as authority for their contention that they were not the shareholders of Limited. The facts in that case differed materially from the facts presented here. The fact in that case, that the taxpayer was not the record owner of the stock of the corporation from which his withdrawals were made, was not the basis upon which the decision rested, but it rested upon the application to the facts therein of principles which would have applied had the taxpayer been the record owner of such stock. In this connection see

We now turn to consideration of the second question, as above stated. The principle that substance and not form controls is also applicable here. Under the set-up evidenced by our findings the answer to this question must turn on the effect of what was actually done rather than on the form of the transaction, ; cf. , for "fictional corporate camouflage cannot be made the device to escape taxation." . Taxpayers will not be permitted to shift from themselves the tax burdens imposed upon income or taxable benefits derived by them merely because of the form employed in carrying out a transaction; but, instead, the form will be looked through to discover the reality of the transaction. ;;;; and

Through the exercise of their control of Cohn, Inc., and Limited we find petitioners, for their personal uses including living expenses, withdrawing Limited's accumulated earnings or profits on open accounts until, according to their respective balance sheets, at the end of 1935 the Meyers owed Limited a total of $2,840,724.26 and the Getzes owed Limited a total of $1,961,155.45, notwithstanding certain credits made to those accounts from time to time, which credits were evidently designed to reduce the amounts of the withdrawals and give the color of loans to the form of the transactions. By making withdrawals in such a manner the necessity of going through the formalities of having Limited declare dividends to Cohn, Inc., and thereafter having Cohn, Inc., declare dividends to petitioners, in order for petitioners to receive the benefit of their withdrawals, was obviated. Through their control of these two corporations petitioners took a direct route in securing for their personal uses large portions of Limited's accumulated earnings or profits without the formalities just mentioned.

From the facts before us we are convinced that pttitioners used their control of Limited to withdraw from Limited whatever funds they desired at such times and in such amounts as they chose, very much in the manner of a sole proprietor appropriating the proceeds of the business in which he is engaged to supply his personal needs and recording the transactions as charges to his personal account without any specific requirement for repayment, except if, as, and when he chose. This was the position occupied at all times by petitioners with regard to the accounts carried on the books of Limited as "Ben R. & Ray C. Meyer" and "Milton E. & Estelle C. Getz", since those accounts would never become due and payable except as and when the petitioners chose to render them so through the affirmative action of Limited, which they controlled.

At no time subsequent to 1928 did Limited make any formal distribution by way of dividends, although during each of the taxable years Limited had accumulated earnings or profits available for distribution as taxable dividends in amounts greatly in excess of the net withdrawals by petitioners in such years. It therefore appears that in following their usual practice petitioners withdrew during the taxable years earnings or profits from Limited which were available for distribution as dividends and had such withdrawals treated as loans on the books of Limited. Such a practice, in lieu of paying dividends, had many advantages: First, it did not affect the apparent book value of Limited's capital assets; second, it was a convenient method of distributing the earnings and profits of Limited without the formal declaration of dividends; and last, but not least, petitioners would be relieved of paying income tax on the withdrawals as dividends distributed if the withdrawals were held to be loans.

During each of the taxable years petitioners' withdrawals were used for their personal and living expenses. The Meyers were insolvent and could not have repaid their withdrawals; and the Getzes could not have repaid their withdrawals without selling most, if not all, of their assets, including their home and household furniture.

The fact that the withdrawals of petitioners were treated on the books of Limited and also on the books of petitioners as "loans" to petitioners is not controlling, for book entries may not be used to conceal realities as a means of relieving a taxpayer from liability for income taxes. ; affd., ; , affirming ; ; ; ; ; ; ; ; and . The fact that the payments, including payments designated as "interest", made to Limited by petitioners were credited on their respective accounts on Limited's books is not persuasive evidence that the withdrawals constituted debts of the petitioners. In all of the taxable years, except 1934, the withdrawals by each petitioner exceeded the amounts paid by such petitioner to Limited and the net result in each of those years was that the debit balance of the account of each petitioner was not reduced, but the total net withdrawals steadily increased from year to year. ;

We do not regard the giving of petitioners' demand notes dated August 1, 1934, December 31, 1934, and January 2, 1936, to Limited, in face amounts equal to the balance shown in their accounts on certain dates, of weighty significance as indicating that withdrawals of petitioners constituted debts; since the collection of those demand notes, as well as the making of same, was under the absolute control of petitioners through their control of Limited and the notes could, at their will, never become actually due and payable. Furthermore, the record shows that such notes were not worth their face value and neither of the two petitioners who testified, Meyer and Getz, could give any satisfactory reason why petitioners waited until August 1, 1934, to give the first four of such notes; but it is to be noted that those four notes were executed subsequent to the time petitioners had been apprised that deficiencies had been determined against them for the years 1930 and 1931.

Petitioners contend that the execution by Meyer and Getz of the deed of trust by which they conveyed practically all their properties to the trust to guarantee certain indebtednesses of Limited is strong evidence that the withdrawals here involved were loans. We are of the opinion that this contention is unsound. The execution of the trust deed seems to bear no relation to the withdrawals in question. By executing the trust deed, Meyer and Getz simply guaranteed certain of the debts of Limited, for a portion of which (but for what portion is not shown) they were already liable on guarantees theretofore made by them at a time or times not shown by the record.

The testimony herein of Ben R. Meyer and Milton E. Getz that at the time the withdrawals were made they considered them as loans and intended to repay them with interest, taken in the light of the facts and circumstances set out in our findings of fact, is not persuasive as evidence going to establish that the withdrawals constituted loans rather than distributions of Limited's accumulated earnings or profits. In determining whether the withdrawals in question constituted loans or dividends, "one must look not alone to book entries * * * or to isolated expressions of witnesses or parties, but one must endeavor to visualize the entire situation as it existed."

The fact that the withdrawals from Limited by petitioners were not in proportion to their stock holdings in Cohn, Inc., is not determinative of whether such withdrawals constitute loans or dividends. It is well settled that earnings may be distributed to stockholders without regard to the proportions in which the shares of stock are held; especially where, as here, the record does not disclose that any of the stockholders complained of such distributions, but, on the contrary, shows that they at least tacitly agreed thereto. , affirming ; ; ; ; affd., ; ;; and .

We have found as a fact that petitioners' net withdrawals from Limited during the taxable years in question were in the following amounts:

Year	Ben R. & Ray C. Meyer	Milton E. & Estelle C. Getz
1930	$324,009.27	$191,594.64
1931	223,008.21	121,258.20
1932	24,143.75	29,709.94
1933	none	$1,109.50
1934	none	none
1935	$44,220.04	38,212.17

In the light of all the facts and circumstances shown in our findings, we conclude in answer to the second question, as set out above, that the net withdrawals by petitioners were distributions to them of the earnings or profits of Limited accumulated since February 28, 1913, and not loans; and we therefore hold that the net withdrawals, in the amounts and for the taxable years as set out in the immediately preceding paragraph, are taxable to them as dividends. ;;;;;;; and Cf. ;;;

Counsel for petitioners argue, on behalf of Milton E. and Estelle C. Getz, that the amount of $150,000 paid to Limited in 1933 and credited by Limited on an account standing in the name of "Milton E. Getz a/c Mtg. Maria de Francis" should be considered as a credit to the account of "Milton E. & Estelle C. Getz." Since the parties themselves, at the time, treated this transaction as something separate and distinct from the withdrawals here in question, the testimony of Milton E. Getz that the account was set up in error is not persuasive. We hold that no part of this amount should be considered as a credit to the account of "Milton E. & Estell C. Getz" for the year 1933 in determining their net withdrawals for that year. For the same reasons we make the same holding with regard to the following: The amounts of $6,600 and $4,037.05 credited on the books of Limited during 1935 to the "Ben R. Meyer Special A/c, A/c Trust Agreement 1028", and the amount of $6,458.90 credited on the books of Limited during 1935 to the account "Milton E. Getz Special A/c, A/c Trust Agreement 1028."

We have held that through ownership of the stock of Cohn, Inc., the petitioners were the shareholders of Limited and that as such shareholders they received distributions from Limited's earnings or profits within the purview of section 115(a), supra. Since the stock of Cohn, Inc., owned by Ray C. Meyer and Estelle C. Getz in the amount of 288 shares each, was their separate property, it follows that their corresponding separate shareholding interests in Limited were also their separate property and the income derived therefrom by them as dividends is taxable to them as their separate income, respectively. Also, since the stock of Cohn, Inc., owned by Ben R. Meyer and his wife and by Milton E. Getz and his wife, respectively, was community property, it follows that their corresponding shareholding interests in Limited were community property and the income derived from their respective shares as dividends is taxable one-half to each husband and one-half to his wife.

The record discloses that the withdrawals charged to the account of "Ben R. & Ray C. Meyer" were made by Ben R. Meyer and his wife in equal amounts and that the withdrawals charged to the account of "Milton E. & Estelle C. Getz" were made by Milton E. Getz and his wife each in equal amounts. It is immaterial that the withdrawals were not in proportion to the husband's and wife's respective shareholding interests in Limited, since as hereinbefore stated, it is well settled that earnings of a corporation may be distributed to stockholders without regard to the proportions in which the shares of stock are held.

We hold that the net withdrawals of each petitioner constituted the amount of dividends received by each and, further, that one-half of the net withdrawals charged to the account of "Ben R. & Ray C. Meyer" during each of the years in question is taxable to Ray C. Meyer as her separate income and the other half thereof is taxable as the community income of Ben R. Meyer and his wife. The same is true as to the net withdrawals charged to the account of "Milton E. and Estelle C. Getz." Effect to the foregoing divisions of the income in question will be given upon the recomputation under Rule 50.

In view of decision that the withdrawals in question did not constitute loans, it follows that petitioners are not entitled to the deductions from gross income claimed as interest paid on loans.

Reviewed by the Board.

Decisions will be entered under Rule 50.

MURDOCK, BLACK, LEECH, TURNER, and HILL concur only in the result.

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Footnotes

• 1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

  (a) DEFINITION OF DIVIDEND. - The term "dividend" when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913. ↩