Cohn-Goodman Co. v. Commissioner

OPINION.

ARtjndell : At the hearing of this case the respondent moved that the appeal be dismissed in so far as it relates to the years 1917 and 1918, as overassessments have been found for those years and the Board is therefore without jurisdiction. The amounts of the original assessments for the years 1917 and 1918 were $2,535.40 and $15,220.11, respectively. The Commissioner subsequently assessed additional taxes for those years in the respective amounts of $6,046.22 and $6,138.38. Of these amounts the notice appealed from sets forth $1,551.38 for 1917 and $2,567.92 for 1918 as overassessments. There is then, for each year an amount in excess of the amount reported by the petitioner which was assessed prior to June 3, 1924, concerning which the Commissioner made a final determination prior to the enactment of the 1926 Act, and an appeal from such determination was pending before the Board when that Act was enacted. The case therefore comes within the provisions of section 283 (f) of the Revenue Act of 1926 and we have jurisdiction over the appeal for the years 1917 and 1918. Appeal of Covert Gear Co., 4 B. T. A. 1025; Appeal of William A. Slater Mills, Inc., 5 B. T. A. 971. The respondent’s motion to dismiss is denied.

In considering the merits of the case it may be divided conveniently into three periods: First, the fiscal year ended November 30, 1917; second, the period December 1, 1917, to May 30, 1920; third, the period May 31, to November 31,1920.

First period. By the directors’ resolution of March 1, 1911, the amounts of $50,000 and $47,000 then standing on the petitioner’s books to the credit of Cohn and Goodman, respectively, were recognized as borrowed funds and clearly those amounts can not be included in invested capital for the period here under consideration. While thereafter in this period there was no formal corporate action taken to convert the earnings into dividends, the earnings were credited to the accounts of the individual stockholders and were considered by the officers of the petitioner as belonging to the stockholders as is evidenced by the agreement of January 14, 1918, set forth in the findings of fact.

Second period. By the resolution of January 14, 1918, the amounts standing to the credit of the stockholders as of November 30, 1917, were recognized as obligations of the petitioner. Such amounts, therefore, can not be included in invested capital. Appeal of Kelly-Buckley Co., 1 B. T. A. 1154; Appeal of O'Neil Construction Co., 4 B. T. A. 401. That certain restrictions were placed on the stockholders’ right of withdrawal does not change the character of the amounts involved. Most loans carry certain restrictions, such as to the time of payment. The same situation exists as to the amounts credited to the special surplus account during the balance of this period. Under the resolution of January 14, 1918, it was not necessary that formal declarations of dividends be made in order to make a distribution of surplus as it was agreed that entering a portion of the profits in the special surplus account should “operate and be tantamount from time to time to declaration of dividends or other distribution on the part of said Company.” The amounts involved being separated from the petitioner’s earnings and recognized by it as obligations to its stockholders, we are of the opinion that they constituted borrowed capital and can not be included in invested capital. See Appeal of Wm. H. Davidow Sons Co., 1 B. T. A. 1215; Appeal of Webb Press Co., Ltd., 3 B. T. A. 247; Appeal of William Greilich & Sons, Inc., 3 B. T. A. 1333; Lobsitz Hardware Co. v. Commissioner, 5 B. T. A. 295.

The petitioner cites Eaton v. English & Mersick Co., 7 Fed. (2d) 54, and Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 137, in support of its contentions. These cases are readily distinguishable from this one. In the English & Mersick case the court found that the resolutions set forth did not constitute the declaration of dividends and did not create an indebtedness of the corporation. In the Davidson case it was found that there had been no declaration of a dividend and that the amount involved at all times belonged to the corporation.

In the present case the resolution relating to the amounts entered in he special surplus account clearly shows that both the petitioner and its stockholders recognized the entering of the credits as the declaration of dividends and the amounts appearing therein as the property of the stockholders.

Third period. On May 31, 1920, the petitioner, by its stockholders and directors, took appropriate action to increase its capital stock from $50,000 represented by 500 shares of common stock, to $352,-500 represented by 3,000 shares of preferred at a par value of $100 each and 1,500 shares of common without par value but valued by the petitioner at $35 per share. Of the new stock 2,825 shares of preferred and all of the common, 1,500 shares, were issued, the petitioner receiving therefor, in part, the surplus standing to the credit of its stockholders, and for the balance, notes of the stockholders with the stock as collateral security, as shown by the findings of fact. The evidence shows that the petitioner deemed the new stock to be fully paid and the respondent does not deny nor does the record show that the items paid in, namely the surplus account and notes of stockholders, were not equal in value to the par value of the preferred stock and the value of $35 per share ascribed to the common. For the period beginning May 31, 1920, the petitioner is therefore entitled to have included in its invested capital the amount of $285,000 by which its capital stock was increased at that date. Pictorial Review Co., 5 B. T. A. 416.

Judgment will 5e entered on 15 days'1 notice, %mder Rule 50.