Baird v. Comm'r of Internal Revenue, Docket Nos. 48075

• Decision Date: 05 December 1955
• Docket Number: Docket Nos. 48075,48076.
• Citation: 25 T.C. 387
• Parties: WILLIAM C. BAIRD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HAROLD J. BAIRD AND LOUISE R. BAIRD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

25 T.C. 387

WILLIAM C. BAIRD, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HAROLD J. BAIRD AND LOUISE R. BAIRD, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 48075

48076.

Tax Court of the United States.

Filed December 5, 1955.

Prior to and during the taxable years 1947 to 1951, inclusive, petitioners William C. Baird and Harold J. Baird, as officers and minority shareholders of a family-owned corporation, withdrew large sums of corporate funds for their personal use, which were entered on the corporate books as accounts and notes receivable, but for which no notes were executed until after the revenue agent investigated the character of the alleged ‘loans.’ While their wives were nominal officers and owned all of the corporate stock, except two shares held by the husbands, the latter had virtually complete control of corporate affairs, dictated its policies, and were able to withdraw corporate profits for their personal use, without any plan or tangible means of repayment, and without objection by the majority stockholders, who received no part of the withdrawals. Held: That the amounts so withdrawn were not bona fide loans, but were informal distributions of taxable dividends to William C. and Harold J. Baird within the meaning of section 115(a) Internal Revenue Code of 1939. No part of such withdrawals were chargeable as dividends to the wife of petitioner William C. Baird. Held, further, since the amounts of the dividends omitted from petitioners' respective returns during the taxable years 1947 and 1948 were in excess of 25 per centum of their reported gross income in those years, section 275(c), Internal Revenue Code of 1939 is applicable. James W. Allen, C.P.A., for the petitioners.

J. Elton Mitchiner, Esq., for the respondent.

The respondent determined deficiencies in the Federal income taxes of the petitioners as follows:

+-----------------------------------------------+
                ¦      ¦                  ¦Harold J. Baird and  ¦
                +------+------------------+---------------------¦
                ¦      ¦William C. Baird  ¦Louise R. Baird      ¦
                +------+------------------+---------------------¦
                ¦Year  ¦Deficiency        ¦Deficiency           ¦
                +------+------------------+---------------------¦
                ¦1947  ¦$1,343.56         ¦$1,749.63            ¦
                +------+------------------+---------------------¦
                ¦1948  ¦3,960.50          ¦1,031.84             ¦
                +------+------------------+---------------------¦
                ¦1949  ¦7,167.92          ¦5,982.02             ¦
                +------+------------------+---------------------¦
                ¦1950  ¦1,298.27          ¦507.68               ¦
                +------+------------------+---------------------¦
                ¦1951  ¦1,702.48          ¦939.14               ¦
                +------+------------------+---------------------¦
                ¦      ¦$15,472.73        ¦$10,210.31           ¦
                +-----------------------------------------------+
                

By amended answer, respondent asserted that the taxable income of the petitioner William C. Baird should have been reduced in the amount of $1,000 in the taxable year 1948 and increased in a like amount in the taxable year 1949; and conversely that the taxable income of petitioners Harold J. Baird and Louise R. Baird should have been increased in the amount of $1,000 in the taxable year 1948 and reduced in a like amount in the taxable year 1949.

In conformity with section 272(e), Internal Revenue Code of 1939, at the hearing respondent asserted increased deficiencies in income taxes resulting therefrom for the taxable years as follows:

+----------------------------------------------------+
                ¦      ¦                      ¦Harold J. Baird and   ¦
                +------+----------------------+----------------------¦
                ¦      ¦William C. Baird      ¦Louise R. Baird       ¦
                +------+----------------------+----------------------¦
                ¦Year  ¦Increased deficiency  ¦Increased deficiency  ¦
                +------+----------------------+----------------------¦
                ¦1948  ¦                      ¦$264.00               ¦
                +------+----------------------+----------------------¦
                ¦1949  ¦$519.20               ¦                      ¦
                +----------------------------------------------------+
                

The issues presented for our consideration are (1) whether certain individual and joint withdrawals by the Baird brothers (from Baird and Company, a corporation in which they were stockholders and officers), during each of the taxable years 1947 to 1951, inclusive, constituted informal dividends or loans, and (2) whether the statute of limitations bars assessment and collection of the deficiencies involved herein for the years 1947 and 1948. The last issue will depend on the resolution of the first issue since respondent is relying in this regard on section 275(c) of the Internal Revenue Code of 1939. Certain minor adjustments have not been challenged by petitioners, and will be reflected in the Rule 50 computation.

FINDINGS OF FACT.

The facts are partly stipulated and, to the extent so stipulated, are incorporated herein by reference.

Petitioner William C. Baird, an individual residing in Nashville, Tennessee, filed his separate Federal tax returns for the taxable years 1947 to 1951, inclusive, and petitioners Harold J. Baird and Louise R. Baird, husband and wife, also residing in Nashville, Tennessee, filed joint individual income tax returns for the taxable years 1948 to 1951, inclusive, with the then collector of internal revenue for the district of Tennessee.

Prior to June 20, 1928, petitioners William C. Baird and Harold J. Baird, who are brothers, engaged as partners in the operation of a merchandise brokerage business known as Baird Bros. & Moore, with offices in Nashville, Tennessee. On June 20, 1928, the State of Tennessee granted a corporate charter to Baird Brokerage Company, Inc., Nashville, Tennessee, with an authorized capital of 200 shares of no-par-value stock at a minimum capitalized value of $1,000, authorizing said corporation to engage in the merchandise brokerage business. On June 21, 1928, petitioners transferred all the assets of their partnership, including personal property, office equipment, accounts receivable, contracts, and goodwill to Baird Brokerage Company, Inc., for a consideration of $1,000. The same day, the entire authorized capital stock was issued at a declared value of $5 per share or an aggregate declared value of $1,000 to petitioners and their respective wives. From that time to December 31, 1951, inclusive, petitioners and their respective wives were the sole stockholders of record. Each of the brothers held 1 share of stock, and the wives, Dorothy G. Baird and Louise R. Baird, each held 99 shares of stock in the corporation. No additional capital has been contributed to the corporation from June 21, 1928, to December 31, 1951.

On August 18, 1947, the name of Baird Brokerage Company, Inc., was changed to Baird & Company by amendment to its corporate charter. Baird & Company engaged principally in the flour brokerage business, representing mills throughout the wheat-producing States on a commission basis, and at times would act as principal rather than agent in the flour trade.

The Bairds and their respective wives have been the directors of Baird & Company from January 17, 1931, to December 31, 1951, inclusive. From June 21, 1928, until March 10, 1944, petitioner Harold J. Baird was president, and William C. Baird was secretary-treasurer of the corporation; and from March 10, 1944, through December 31, 1951, the latter was president and the former was secretary-treasurer. Their wives alternately held the position of vice president of Baird & Company from June 21, 1928, through December 31, 1951. Except for acting as directors, for which they received no compensation, the wives rendered no services to said corporation from the inception of the corporation through December 31, 1951. Each of the petitioners William C. Baird and Harold J. Baird devoted virtually all of his time and services to the management of the corporate affairs of Barid & Company from June 21, 1928, through December 31, 1951. During the years involved herein Harold J. Baird served as commissioner of public works for the city of Nashville, Tennessee, and William C. Baird assumed the presidency of Baird & Company.

Since the year 1931, the surplus account on the books of Baird & Company has reflected no dividend payment. Throughout the corporate existence of Baird & Company, including the taxable years here involved, petitioners have maintained individual open accounts to which withdrawals were debited, and at the end of each year annual salaries were credited. In addition thereto, and during the taxable years 1948 and 1949, petitioners made joint withdrawals of corporate funds, debits and credits being made to an account in the cash journal entitled ‘Other Accounts' and transferred to an account entitled ‘Notes Receivable’ in the general ledger of Baird & Company. Both the individual and joint withdrawals of the Baird brothers were made by them at will for their own benefit and with the knowledge and acquiescence of their respective wives. Except for their joint withdrawals, petitioners' withdrawals have not been in proportion to their corporate stockholdings, but the total withdrawals of each were approximately the same as December 31, 1951. On December 31, 1946, the individual withdrawals of the brothers show debit balances of $12,702.24 to ‘W. C. Baird’ and $21,503.90 to ‘H. J. Baird,‘ and on December 31, 1951, these accounts show debit balances of $49,322.93 and $48,768.95, respectively.

In December 1948, the brothers withdrew $2,000, and in March 1949, $13,463 from the corporation for the joint purchase of a parcel of real estate on Peabody Street, Nashville, Tennessee, the full purchase price of $15,463.49 having been charged to the account of William C. Baird. In December 1951, one-half of said amount, or $7,731.75, was transferred to the account of Harold J. Baird, to reflect correctly the amount of said purchase attributable to each of the...