White v. Comm'r of Internal Revenue, Docket No. 28984.

• Decision Date: 21 March 1952
• Docket Number: Docket No. 28984.
• Citation: 17 T.C. 1562
• Parties: CARL L. WHITE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 1562

CARL L. WHITE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 28984.

Tax Court of the United States.

Promulgated March 21, 1952.

Prior to and during the taxable year, petitioner withdrew, from a corporation in which he was an officer and a stockholder, amounts which exceeded his salary, bonus, and travel allowance. Held, such excessive withdrawals were loans and were not dividends within the meaning of section 115(a) of the Internal Revenue Code. J. G. Williamson, Esq., and Glenn A. Railsback, C.P.A., for the petitioner.

F. S. Gettle, Esq., and W. B. Riley, Esq., for the respondent.

This case involves an income tax deficiency of $42,399.18 for the calendar year 1944. The issues are (1) whether certain withdrawals by petitioner from a corporation constituted dividend distributions to the extent of the corporation's surplus at the end of the taxable year, or represented loans by the corporation to the petitioner; and (2) whether that portion of petitioner's total withdrawals over a three-year period, which exceeded the corporation's surplus at December 31, 1944, constituted a return of capital and, to the extent it exceeded the basis of petitioner's corporate stock, constituted a long term capital gain taxable in 1944. In the event that such withdrawals are determined to be taxable either as dividends or as capital gains, petitioner contends that his withdrawals during 1942 and 1943 should not be taxed to him in 1944.

FINDINGS OF FACT.

The petitioner is a resident of Eudora, Arkansas. His income tax return for the taxable year 1944 was filed with the collector of internal revenue for the district of Arkansas.

The Breece-White Manufacturing Company is an Arkansas corporation, sometimes referred to herein as the company, which was organized in or about January 1936 for the purpose of manufacturing lumber and wood products. The company continued the lumber business formerly conducted by petitioner and A. B. Vaughters, as partners; and it has been continuously engaged in the lumber business from the date of its organization. The authorized and outstanding capital stock of the company during 1944 was 500 shares of $100 par value common stock which was owned by the officers of the company as follows:

+----------------------------------------------+
                ¦Carl L. White-President            ¦200 shares¦
                +-----------------------------------+----------¦
                ¦Robert G. White-Vice-President     ¦100 shares¦
                +-----------------------------------+----------¦
                ¦A. B. Vaughters-Secretary-Treasurer¦200 shares¦
                +----------------------------------------------+
                

Robert G. White is petitioner's son. He acquired his 100 shares of stock in the company on or about January 1, 1942. He has remained the owner of such shares at all times material hereto.

The petitioner was experienced in buying and selling timber and lumber, and he was largely responsible for the conduct of the company's business outside of the office. Vaughters operated the office, kept the records, and consulted with petitioner regarding the conduct of the business. Robert G. White participated very little in the conduct of the company's business during the taxable year.

At all times material hereto, petitioner and Vaughters were authorized to and did separately draw checks on the company's funds. No counter signature was required on company checks drawn by either petitioner or Vaughters. Both offers drew checks on the company to pay their personal obligations. The company carried personal accounts for petitioner and Vaughters on its books of account. Their respective personal accounts were charged with their withdrawals and credited with salary, bonus, and traveling expenses. The debit or credit balances of these personal accounts were carried on the books of the company as an account receivable or an account payable, as the case might be. The company paid no interest on the credit balances in these personal accounts and charged no interest on the debit balances therein. During the taxable year and the two preceding years, no notes were given by petitioner to evidence any indebtedness for the debit balance in his personal account, and no notes were given by the company to evidence any indebtedness to Vaughters for the credit balance in his personal account.

During 1939, 1940, and part of 1941, petitioner's withdrawals from the company exceeded the amounts credited to his account for salary, expenses, and bonus. During these three years the largest debit balance in petitioner's personal account was $16,593.47 on May 31, 1941. By the end of 1941, credits to petitioner's personal account had wiped out this debit balance, so that on December 31, 1941, his account was in balance.

For the calendar years 1942 to 1944, inclusive, petitioner's total withdrawals, credits, and the debit balances in his personal account at December 31 are reflected in the following table:

+------------------------------------------+
                ¦    ¦Total debit¦Total debit¦Dec. 31 debit¦
                +----+-----------+-----------+-------------¦
                ¦Year¦entries    ¦entries    ¦balance      ¦
                +----+-----------+-----------+-------------¦
                ¦1942¦$37,750.97 ¦$27,000    ¦$10,750.97   ¦
                +----+-----------+-----------+-------------¦
                ¦1943¦83,852.09  ¦27,000     ¦67,603.06    ¦
                +----+-----------+-----------+-------------¦
                ¦1944¦69,177.16  ¦22,739     ¦114,041.22   ¦
                +------------------------------------------+
                

Petitioner's withdrawals and credits in 1944, and subsequent thereto, were handled in the same manner as his withdrawals and credits prior thereto. The principal debit entries in his personal account for each of the years 1942 to 1944, inclusive, were cash and tax payments, while his credit entries were his monthly salary of $500, his bonuses, and one credit entry in 1944 for expenses. A breakdown of petitioner's 1944 withdrawals shows: Case— $62,885; local, state, and Federal taxes— $5,918.44; Miscellaneous personal items consisting largely of payments for water, gas, electricity, etc.— $373.72. A breakdown of petitioner's total credit entries for 1944 shows: Salary— $6,000; bonus— $15,739; and expense— $1,000.

The net worth of the company on December 31, 1944, was between $400,000 and $500,000. Petitioner's 200 shares of stock in the company at that date were worth approximately $180,000. Petitioner's personal assets were insufficient to pay the debit balances in his personal account with the company on December 31, 1943, or 1944, without borrowing on his 200 shares of stock.

During the period 1942 to 1944, inclusive, neither A. B. Vaughters nor Robert G. White, who together owned three-fifths of the stock of the company, received any dividends from the company or borrowed any money from it. During this period the company owed Vaughters for undrawn compensation consisting of salary and bonuses credited to his personal account. On December 31, 1943, and 1944, Vaughters' personal account with the company showed credit balances of $22,883.97 and $34,773.37, respectively. The company needed money for its operations and Vaughters left his credit balances with the company. Vaughters could not have withdrawn all the money due him in 1944; his withdrawals normally were his $300 a month salary and such part of his bonus as he needed.

Petitioner lost the bulk of the money which he withdrew from the company in gambling. Vaughters and petitioner's son knew that petitioner was using the excessive withdrawals for gambling. Vaughters objected before, during, and after the taxable year to petitioner's excessive withdrawals. Petitioner would promise to and would quit (his excessive withdrawals) for a time, but sooner or later would resume his excessive withdrawals. Petitioner continued his gambling with the hope that he could recoup some of his losses and put the money back into the company.

Prior to 1950 Vaughters and Robert G. White took no action to stop petitioner's excessive withdrawals. Vaughters discussed the situation with petitioner's son, but not too much, as it was a ticklish question; and he did not know, in case of a showdown, whether the son would vote with him to stop his father's excessive withdrawals. Vaughters feared that positive action would wreck the business, which he preferred to continue, objecting from time to time as petitioner's withdrawals became excessive, in the hope that petitioner would eventually balance his personal account as he had done at December 31, 1941.

By December 31, 1949, the debit balance in petitioner's personal account had reached $268,769.23. Vaughters again discussed the matter with petitioner and advised him that something should be done about his excessive withdrawals. Petitioner agreed, and, at Vaughters' request, he assigned his 200 shares of stock to the company as security for the debit balance in his personal account. This assignment of stock, dated January 21, 1950, was recorded with the recorder of Chicot County, Arkansas, on January 24, 1950. Petitioner's stock certificates No. 6 for 30 shares and No. 7 for 170 shares, were duly endorsed by petitioner and delivered to the company. A notation of petitioner's assignment was also made on the stock-certificate stubs in the company's stock-record book.

After the assignment of his stock certificates, petitioner continued his excessive withdrawals. The debit entries in his personal account for February and March, 1950, included cash withdrawals of $8,100 while his credit entries were only for his monthly salary of $500. When these further withdrawals came to his attention, Vaughters began seriously to consider retiring from the company; and within a few months thereafter, he did retire. In June 1950 Vaughters transferred his 200 shares of stock to the company in exchange for certain of its assets and resigned as an officer of the company. At the time he retired, Vaughters' personal account had a credit balance of about $34,000. The company satisfied this obligation by giving Vaughters a...