Regensburg v. Commissioner of Internal Revenue
| Decision Date | 04 December 1944 |
| Docket Number | No. 168-172.,168-172. |
| Citation | 144 F.2d 41 |
| Parties | REGENSBURG v. COMMISSIONER OF INTERNAL REVENUE, and four other cases. |
| Court | U.S. Court of Appeals — Second Circuit |
Arthur B. Hyman, of New York City (John W. Davis, Arthur B. Hyman, and Davis M. Zimmerman, all of New York City, of counsel), for petitioners.
Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Robert N. Anderson and Harry Baum, Sp. Assts. to Atty. Gen., for respondent.
Before L. HAND, SWAN, and CHASE, Circuit Judges.
Writ of Certiorari Denied December 4, 1944. See 65 S.Ct. 272.
These proceedings involve the income tax liability for the years 1936 to 1940, inclusive, of four brothers, Mortimer, Isaac, Melville and Jerome Regensburg, who were the principal shareholders of E. Regensburg & Sons, a New York corporation, during the tax years in suit. Jerome Regensburg died on October 31, 1941 and his estate is represented by his executrix. Sophy P. Regensburg is the wife of Melville, with whom she filed a joint return for the year 1940, and she joins in his petition with respect to that year.
E. Regensburg & Sons was organized in 1903 to manufacture and deal in tobacco products. It took over the business of a family partnership which had already prospered in that field; its business career has been remarkably successful. The corporation had a capital stock of 1,000 shares of par value of $100 each. This capitalization has remained unchanged, and the shares have never been held outside the Regensburg family. The holdings of the brothers who are petitioners here are shown in the following tabulation:
1903 1931 1939 1940
Mortimer 230 264 281½ 281½
Isaac 230 264 264 268 3/8
Jerome 140 174 174 178 3/8
Melville 50 114 114 118 3/8
Ever since the business was incorporated the brothers have maintained individual open accounts in which withdrawals were debited and salaries, dividends, interest and other items were credited. Withdrawals were made at will, and have not been proportionate to their stockholdings. Smaller shareholders who were not officers or directors made no withdrawals, receiving only such funds as were paid in the form of declared dividends. Between 1903 and 1935 dividends totalling $2,270,000 were authorized. None has been declared during the tax years in suit, and the corporation shows an operating loss for each of said years, although the surplus on January 1, 1936 was some $4,850,000 and remained more than $4,000,000 on December 31, 1940.
During all the tax years in question, with one exception,* the petitioners made withdrawals in excess of the credits to their open accounts and did not report them as income. The commissioner treated such net withdrawals as dividend distributions within the meaning of section 115(a) and (b) of the Revenue Acts of 1936 and 1938, Int.Rev.Code, § 115, 26 U.S.C.A. Int.Rev. Code, § 115. The tax court sustained his ruling. This resulted in the deficiency assessments of which the petitioners complain. The principal question is whether the tax court's finding that the withdrawals were dividend distributions rather than loans is supportable. The facts are not in dispute; only the inferences to be drawn from them.
Except in a few early years and in 1939 as already noted, withdrawals by each taxpayer have exceeded credits to him so that the debit balance of each has mounted steadily. The total of their debits and credits from 1903 to the end of 1940 and their net debit balances on the latter date were as follows:
Cash withdrawn
or paid
on his behalf Total net
by corporation Credits Miscellaneous debit balance
1903-1940 Salary Dividends Dec. 31, 1940
Mortimer $2,560,845 $1,140,900 $555,000 $115,556 $ 749,388
Isaac 3,511,566 1,140,900 555,000 137,994 1,677,671
Jerome 1,535,028 861,595 394,800 73,578 250,053
Melville 1,401,400 752,645 211,650 38,185 398,919
No interest was accrued or paid and no note or other evidence of indebtedness was ever given for the debit balances. They were carried on the corporation's books as "accounts receivable", however, and were reflected in its statements of surplus, constituting a substantial part thereof. The taxpayers owned practically no property except their stock in the corporation, and no other income producing property. In 1912 Isaac was credited with a cash repayment of $10,000 and in 1924 with a cash repayment of $15,000 neither of which sufficed, however, to give him a net credit balance for those years.
Melville protested to his brothers from time to time as to the withdrawals and promises were given to discontinue or reduce them. In 1934 all the shareholders of the corporation entered into a written agreement that if any of them should sell any of his shares while indebted to the corporation the purchase price should first be applied to discharge such indebtedness without interest; or, if the corporation were the purchaser, the amount of the indebtedness should be deducted from the purchase price. In either event the shareholder was to remain liable for any unpaid balance of his debt to the corporation. As collateral security the corporation was given a lien on the shares, and a reference to the agreement was endorsed on the stock certificates. The certificates so endorsed were delivered to the corporation and are still held by it. None of the taxpayers ever sold any shares. The stock they bought in 1939 and 1940 was similarly deposited by them under the 1934 agreement. Minutes of a meeting of the board of directors held in May 1938 show that Mortimer stated that heavy losses in recent years and the large loans made to its officers had placed the corporation in an unsatisfactory condition and that such loans must cease. All salaries were then reduced 25% and a resolution was adopted "that effective at once no withdrawals of cash for the purpose of loans to officers be permitted." Nevertheless withdrawals continued to be made.
In 1942 the corporation filed a claim against the estate of Jerome, who died in 1941, for $251,277, representing "loans and advances" secured by collateral lien on his shares in the corporation. No objection was made to the claim by his executrix and it has been recognized as a duly proven and...
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