Allen v. Commissioner of Internal Revenue
| Decision Date | 05 February 1941 |
| Docket Number | No. 3600.,3600. |
| Parties | ALLEN et al. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — First Circuit |
George D. Brabson, of Washington, D. C. (D. H. Blair, of Washington, D. C., on the brief), for petitioners.
Robert N. Anderson, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to Atty. Gen., on the brief), for the Commissioner.
Before MAGRUDER and MAHONEY, Circuit Judges, and SWEENEY, District Judge.
This is a consolidation of five petitions for review of decisions of the Board of Tax Appeals. Four of the cases, involving deficiency assessments of personal income taxes, present the same question. In one the assessment is against Philip Allen and wife for the calendar year 1934; in another against Philip Allen alone for 1935 and 1936; in the third the assessment is against W. Gordon Reed and wife for 1935; and in the fourth against Reed alone for 1936. The fifth case, involving deficiency assessments against Allen & Reed, Inc., for the calendar years 1934 and 1936, has been virtually abandoned by the petitioner. In all five cases the Board upheld the Commissioner.
It appears from a confusing and unsatisfactory record that the real dispute is on a question of fact. Before the Board, the Commissioner's determination was presumptively correct and the petitioners had the burden of proving it wrong. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212. The Board concluded that the petitioners had not sustained the burden of establishing error in the Commissioner's determination that Messrs. Allen and Reed should be charged with the receipt of dividends from Allen & Reed, Inc., when certain debit balances in the individual accounts of Allen and of Reed on the books of Allen & Reed, Inc., at the end of the years 1928, 1929 and 1930 were charged off in 1934, 1935 and 1936, respectively, by appropriate entries in the books of the corporation. See Fitch v. Helvering, 8 Cir., 70 F.2d 583, 585. We have merely to say whether there was substantial evidence to sustain the Board's finding. Elmhurst Cemetery Co. v. Commissioner, 300 U.S. 37, 40, 57 S.Ct. 324, 81 L.Ed. 491. We think there was.
Allen & Reed, Inc., since its organization in 1902, has been engaged in business as a wholesale dealer in pipe fittings and steam supplies at Providence, Rhode Island. The entire common stock has at all times been owned in equal shares by Mr. Allen and his brother-in-law, Mr. Reed. They have been the officers and principal directors of the corporation from the beginning and at the present time are the only directors. They have devoted their time to the active management of the business, which has been conducted in an extremely informal manner.
Allen testified:
The two officers each had an individual personal drawing account with the corporation, "under which each was privileged to withdraw at will, and in such sums as each found necessary up to the amount to which each was entitled as compensation, or up to the respective interest of each in the business". Thus the officers might well withdraw during a given year for their personal use sums in excess of the amount voted at the end of the year as their respective salaries for that year. Withdrawals by each officer during 1928, 1929 and 1930 exceeded the amounts credited to their individual drawing accounts. In the petitions for redetermination of deficiencies filed before the Board, it was stated: "As a matter of accounting practice in order to balance the accounts of the corporation with said officers, the said withdrawals were debited against the respective officers, and these accounts were treated in the nature of accounts receivable."
As found by the Board, the following table shows the excess of withdrawals made by the officers from their personal accounts with the corporation over the credits to those accounts for the years 1928, 1929 and 1930:
Year Allen Reed Total
1928 $14,212.43 $ 4,598.85 $18,811.28
1929 22,610.71 20,899.24 43,509.95
1930 18,523.32 30,066.78 48,590.10
__________ __________
Total $55,346.46 $55,564.87
The corporation, by appropriate entries on its books at the close of 1934, charged off the above excess for 1928 in the total amount of $18,811.28; at the close of 1935 charged off the above excess for 1929 in the total amount of $43,509.95, and at the close of 1936 charged off the above excess for 1930 in the total amount of $48,590.10. This resulted in a corresponding reduction in the item of surplus in the corporate balance sheets.
At the outset the petitioners seem to have contended that the salaries formally voted at the end of each year were not understood to represent the entire compensation to be received by the officers; and that the sums withdrawn by Allen and Reed in those years were treated as current compensation and reported as such on their individual tax returns. The Commissioner's deficiency notice recites: This theory was adhered to in the original petitions filed with the Board. The petitioners stated that it was not anticipated that the sums so withdrawn by the two officers in 1928, 1929 and 1930 would be returned or repaid by them to the corporation "unless the two officers saw fit to make additional capital contributions to the business, or unless the business required it". Further:
At the trial before the Board, petitioners advanced a different explanation of these withdrawals. Counsel stated that when he drew the petitions he was under a misapprehension as to the nature of these accounts receivable. By permission of the Board the first sentence of paragraph (h) of the petition, above quoted, was amended to aver that the sums of money withdrawn by the two officers "represented in part the compensation to which they were entitled as officers and managers of the corporation, and in part constituted withdrawals of funds invested by them in joint ventures for and on behalf of the corporation."
Allen was the sole witness. We find no where in his testimony an explicit denial that the officers may have withdrawn for their personal uses during the years in question sums in excess of the salaries credited to them for those years. He testified in general terms to a course of business affecting at least in part the withdrawals through the individual drawing accounts of the officers. These two accounts were used, he said, to withdraw funds which the officers invested or placed through a joint account in various outside enterprises on behalf of Allen & Reed, Inc. Such extra-corporate enterprises consisted in the main of financing the building or operation of outside companies, through which Allen & Reed, Inc., hoped to profit by making large sales of pipe and other equipment to the debtor companies. When construction work was thus financed, the bills for the work done would be sent by the contractor to Allen & Reed, Inc., which would directly pay the same and charge the amounts thereof as withdrawals against the...
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