Faitoute v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 82387.
| Decision Date | 12 July 1938 |
| Docket Number | Docket No. 82387. |
| Citation | 38 BTA 32 |
| Parties | MOSES W. FAITOUTE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
John A. Conlin, C. P. A., for the petitioner.
Charles H. Curl, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income tax for 1932 in the amount of $60,083.53. The petition alleges that the respondent erred in the determination of the deficiency (1) in treating as taxable dividends $94,000 which represented money borrowed by the petitioner from the Faitoute Iron & Steel Co., of which the petitioner was the sole stockholder; (2) in disallowing the deduction from gross income of $42,537.50 sustained on the sale of $100,000 par value of City of Asbury Park, New Jersey, bonds; and (3) in disallowing the deduction of a capital net loss of $18,512.50 sustained on the sale of 100 shares of stock of National Newark & Essex Banking Co. The respondent has conceded the third point in issue.
The petitioner is a resident of Short Hills, New Jersey. He filed his income tax return for 1932 with the collector of internal revenue at Newark, New Jersey. The return shows a net income of $40,637.13. In the determination of the deficiency the respondent added to the net income reported dividends in the amount of $94,000, a loss of $42,537.50 on the sale of $100,000 City of Asbury Park bonds, and a capital net loss of $18,512.50 on the sale of National Newark & Essex Banking Co. stock.
The petitioner owns all of the capital stock of the Faitoute Iron & Steel Co., a New Jersey corporation, which is a distributor of iron and steel products. The number of shares outstanding in 1932 was 301. This corporation was profitable and had accumulated a large surplus prior to 1930. Its undivided profits at the end of 1931 were $974,524.33, and at the end of 1932, $945,895. The earnings and dividends paid upon the stock from 1929 to 1934, inclusive, were as follows:
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Year | Earnings | Dividends
-------------------|------------|----------
1929 _____________ | ? | $44,268
1930 _____________ | ? | 52,374
1931 _____________ | $14,413.49 | 2,408
1932 _____________ | $20,944.25 | $62,608
1933 _____________ | 26,540.36 | 2,408
1934 _____________ | 39,233.64 | 53,879
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In 1918 the corporation loaned to the petitioner $95,866.69. This loan was in an open account entitled "Exchange Account." In this account loans by the corporation to officers and employees were debited when made and credited when paid back. A debit balance in the account has always been carried as accounts receivable on the corporation's books of account and in its balance sheets. The petitioner never paid any interest upon the money which he borrowed from the corporation in 1918. He paid the money back to the corporation on April 9, 1936.
The corporation also made loans to the petitioner during the year 1932 as follows:
March 29, 1932 ____________________________________ $60,000
April 5, 1932 _____________________________________ 10,000
April 6, 1932 _____________________________________ 29,000
_______
Total _______________________________________ 99,000
These loans were charged to the petitioner in the "Exchange Account." The petitioner paid back $5,000 of the $99,000 on June 13, 1932. The balance of $94,000 was paid back to the corporation as follows:
October 31, 1934 __________________________________ $30,000
December 5, 1934 __________________________________ 20,000
12, 1934 __________________________________ 15,000
20, 1934 __________________________________ 20,000
28, 1934 __________________________________ 9,000
Upon the petitioner's books of account the amounts borrowed from the corporation have always been carried as liabilities.
Inasmuch as the petitioner paid no interest upon his borrowings from the corporation the respondent, in the determination of the deficiency, has treated not the $99,000 but the $94,000, the net amount borrowed in 1932 and not paid back at the close of the year, as a dividend received by the petitioner.
In January 1931 the petitioner purchased $50,000 Asbury Park 5¾ percent bonds due April 1, 1934, at a cost of $51,687.50. On June 1, 1931, he purchased $25,000 par value 6 percent Asbury Park bonds due December 1, 1933, and $25,000 par value 6 percent bonds due December 1, 1934, at a cost of $51,000, a total of $102,687.50. On December 27, 1932, he sold these bonds to J. S. Rippel & Co., Newark, New Jersey, at market price, receiving therefor $60,150, plus $936.12 of accrued interest. The memorandum of the purchase received by the petitioner from J. S. Rippel & Co. reads as follows:
J. S. RIPPEL & Co 18 Clinton Street Newark: Market 3-3430 New York: Rector 2-2295 NEWARK, N. J. December 27, 1932 as of Dec. 29
Bought of Mr. Moses W. Faitoute, 182 Frelinghuysen Avenue, Newark, N. J.
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Quantity Security Total
$25,000.00 Asbury Park, N. J. temp. loan 6% December
1, 1933 at 72.90 and interest _________ $18,225.00
Interest 28 days ________________________ 116.67
____________ $18,341.67
$50,000.00 Asbury Park, N. J. temp. loan 5¾%
April 1, 1934 at 55.90 and interest ___ $27,950.00
Interest 2 months 28 days _______________ 702.78
____________ $28,652.78
$25,000.00 Asbury Park, N. J. temp. loan 6% December
1, 1934 at 55.90 and interest _________ $13,975.00
Interest 28 days ________________________ 116.67
____________ 14,091.67
___________
$61,086.12
At or about the same time the same or a like amount of bonds were purchased from J. S. Rippel & Co. by the Faitoute Iron & Steel Co. The amount paid therefor is not shown by the record. The petitioner neither at the time of the sale of the bonds nor later entered into any agreement with the corporation for the repurchase of the bonds and he has never repurchased the bonds from the corporation.
The first question for consideration is whether the petitioner is liable to income tax upon the $94,000 representing his net borrowings from the Faitoute Iron & Steel Co. in 1932. The respondent has not treated the $99,000 borrowed in 1932 as a dividend, but has held that $94,000, which represents the borrowings for the year 1932 not paid back by the end of the year, is taxable to the petitioner as a dividend received from the corporation.
Section 115 (a) of the Revenue Act of 1932 provides that:
* * * 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.
The argument of the respondent...
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