Wiese v. Commissioner of Internal Revenue

• Decision Date: 09 February 1938
• Docket Number: No. 10967.,10967.
• Citation: 93 F.2d 921
• Parties: WIESE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

93 F.2d 921 (1938)

WIESE v. COMMISSIONER OF INTERNAL REVENUE.

No. 10967.

Circuit Court of Appeals, Eighth Circuit.

January 17, 1938.

Rehearing Denied February 9, 1938.

H. Kennedy McCook, of Washington, D. C. (Howard L. Donham, of St. Louis, Mo., on the brief), for petitioner.

Morton K. Rothschild, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before GARDNER, SANBORN, and THOMAS, Circuit Judges.

THOMAS, Circuit Judge.

This petition for review of a decision of the Board of Tax Appeals, 35 B.T.A. 701, raises the question whether withdrawals of earnings made by the sole owner of the stock of a corporation during the years 1926 to 1932, inclusive, are to be considered income to the stockholder for the years in which the withdrawals were made, or in 1932, when the charges against the stockholder were canceled on the books of the corporation.

The petitioner owned all of the stock of the Wiese Printing Company, a corporation organized under the laws of Missouri in 1925. No minute books were ever kept by the corporation, except for the minutes of the first meeting, and no dividends were ever declared by the board of directors.

There was carried on the books of the corporation, beginning in 1925, an account entitled "Harry E. Weise" to which was debited all withdrawals made by petitioner, except salary payments, and to which was credited all credits from the corporation to which he was entitled. No notes were signed for the funds which were withdrawn and charged to this account, nor did petitioner every pay any interest upon the money which he took out of the company.

In December, 1932, the petitioner employed a certified public accountant to examine the books of the printing company. This accountant noticed that the ledger showed a large debit balance in the "Harry E. Weise" account. He made an analysis of the account, and discovered that there were included in it charges which should have been charged to the corporation. The other items in the account represented withdrawals of cash by the petitioner for his personal use. The accountant therefore made, with the acquiescence and consent of the petitioner, a series of journal entries in the books of the corporation as of December 31, 1932. By these entries he charged against the corporation certain items which he thought had been improperly charged to the Harry E. Wiese account, and transferred the debit balance of that account to a new account entitled "Harry E. Wiese — Withdrawals of profits not formally authorized in the minutes of the company."

Prior to the making of these journal entries in the books of the corporation, that is, from 1925 to 1931, inclusive, the debit balance of the "Harry E. Wiese" account was carried as an account receivable in the balance sheets attached to its federal income tax returns. The balance sheet attached to the original return for the year 1931 and filed March 14, 1932, showed as of December 31, 1931, accounts receivable in the amount of $115,418.36 and surplus in the amount of $117,200.46. With the making of the journal entries in 1932, the corporation elected to treat the debit balance in the Wiese account no longer as an addition to accounts receivable, but as a reduction of surplus. Accordingly, when on March 15, 1933, the corporation filed a corrected income tax return for the year 1931 and an original return for the year 1932, the surplus was shown as of the end of 1931 and the beginning of 1932 to be $14,007.09. The difference made in the amount of surplus by these entries is the sum of $103,193.37.

Although the petitioner filed his personal federal income tax returns for all years from 1925 to 1932, inclusive, upon the basis of cash receipts and disbursements, none of these withdrawals for personal use had been, until 1932, included in the petitioner's returns. On March 15, 1933, the petitioner filed amended personal federal income tax returns for the calendar years 1930 and 1931, and included therein as dividends the amounts which he had withdrawn from the company and charged to his personal account in those years. On August 1, 1935, the petitioner filed amended personal income tax returns for the calendar years 1926 to 1929, inclusive, reporting the amounts withdrawn in those years. The additional taxes shown by the amended returns were paid.

In 1933 a federal revenue agent examined the books of the Wiese Printing Company and concluded that the entire amount of the withdrawals not authorized by the minutes of the company was income to the petitioner in the year 1932. The Commissioner of Internal Revenue thereupon increased the net income of the petitioner for 1932 by $103,193.37, and on August 3, 1934, advised petitioner of his deficiency for 1932 and his overassessment for the years 1930 and 1931. Upon appeal the Board of Tax Appeals entered its order of redetermination sustaining the conclusion of the Commissioner.

All of the assignments of error attack the finding that the $103,193.37 was income to petitioner in the year 1...