Case Name: Appeal of L. W. GUNBY CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-02-13
Citations: 3 B.T.A. 714
Docket Number: Docket No. 4952
Parties: Appeal of L. W. GUNBY CO.
Judges: Before Phillips and Trammell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 3
Pages: 714–718

Head Matter:
Appeal of L. W. GUNBY CO.
Docket No. 4952.
Submitted November 7, 1925.
Decided February 13, 1926.
K. N. Parkinson, Esq., and PL. A. Walburn, O. P. A., for the taxpayer.
Pilis W. Manning, Esg., for the Commissioner.
Before Phillips and Trammell.

Opinion:
OPINION.
Teammell
: We are fully convinced that the accumulated credit to L. W. Gunby was borrowed capital and can not be included as invested capital. Even a casual examination of the notes in question and the methods of doing business fully disclose that L. W. Gunby considered the taxpayer as using his money as borrowed capital. He not only caused the amounts due him to be credited on the books, but took the precaution of having executed to him interest-bearing negotiable notes. The taxpayer contends that the notes merely represented memoranda, but, if so, they were memoranda of indebtedness. They indicated that the corporation owed Gunby money. Up to January 1,1917, the credits included 5 per cent interest on the amount of the note of the preceding year, which interest, over a period of 15 years, constituted no mean portion of the balance due.
The taxpayer raised the point that the dividend and the execution of the notes on behalf of the corporation were not authorized by a formal meeting of the board and were illegal, and therefore the amounts remained a part of surplus. While it is true that there may not have been a strict technical compliance with its by-laws in this respect, corporations may, and close corporations frequently do, distribute' earnings and profits without formal action.
The notes were given as obligations of the corporation and there is no evidence that they were not. The indebtedness was acknowledged by the directors at formal meetings. Where the rights of third persons are not impaired, the distribution of profits of a corporation among its stockholders, without any formal action on the part of the corporation, but by consent and agreement of the stockholders, is the equivalent of a dividend. Ratcliff v. Clendenin, 232 Fed. 61; Smith v. Moore, 199 Fed. 689; Spencer v. Lowe, 198 Fed. 961.
It appears that, without any objection on the part of any stockholder or director, the profits of the corporation from the date of its organization had always been distributed without any formal action.