Court Opinion

ID: 4600196
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:25:00.005721+00
Date Added: 2024-06-11T07:52:15.965870
License: Public Domain

VIRGINIA H. HOLDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Holden v. CommissionerDocket No. 5885.United States Board of Tax Appeals9 B.T.A. 220; 1927 BTA LEXIS 2647; November 21, 1927, Promulgated *2647  Where a corporation in 1917 expressly made a loan to a third person who in turn loaned the amount to its stockholders in approximate proportion to their stock and took their notes, and in 1921 the corporation declared a dividend payable in bills receivable and all the notes were canceled, and other circumstances indicated that the transaction was intended to be a loan, held that the stockholder received a dividend in 1921, even if she understood in 1917 that she was then receiving a dividend.  Ralph S. Rounds, Esq., and Francis E. Neagle, Esq., for the petitioner.  Philip M. Clark, Esq., for the respondent.  STERNHAGEN *220  This proceeding involves a deficiency of $8,378.54, income tax for 1921, resulting from the respondent's action in including within gross income for that year $30,000, alleged by petitioner to have been received by her as a dividend in 1917.  FINDINGS OF FACT.  The petitioner is a citizen of the United States.  In 1917 and for a time thereafter she was a resident of Cleveland, Ohio.  In 1921 she was a resident of New York City.  She now resides at Blue Hill, Maine.  Until 1921 the petitioner's affairs were managed*2648  by the Cleveland Trust Co. of Cleveland, Ohio, hereafter called the Trust Company.  The Trust Company prepared her income-tax returns for her.  The president of the Trust Company, Frederick H. Goff, had been for many years a friend of her husband's family, his lawyer up to the time of her husband's death, and her lawyer after that.  She regularly consulted Goff with regard to her affairs.  Petitioner's chief financial interest during the period from 1917 to 1921 consisted of stock in the Cleveland-Sarnia Saw Mills Co., an Ontario corporation, which will be hereafter referred to as the Sarnia Company, but she was never an officer or director thereof *221  and never had any active participation in its management or personal knowledge of its affairs.  All of the stock of the Sarnia Company is and since before 1917 has been divided between the petitioner and the trustees of the A. F. Holden Estate.  The petitioner owned 2,499 shares and the trustees owned 2,501 shares.  A. F. Holden was a brother of petitioner's husband.  In 1917 the petitioner's shares of stock were held under a revocable trust of which Alfred R. Horr was trustee.  The Trust Company was the agent named in the*2649  trust instrument to receive the income from the trustee, and was also made custodian of the securities.  The petitioner does not at present bear, and never had borne, any relation whatever to the A. F. Holden Estate, and is not, to any extent, a beneficiary of that estate.  At that time Goff was one of the trustees of this estate.  The other trustee was Ben P. Bole, a brother-in-law of A. F. Holden.  Goff was the president and a director of the Sarnia Company and was important in the administration of that company.  The Sarnia Company was in the lumber and logging business, with a plant at Sarnia, Ontario.  In 1917 and in 1921 it did no business in the United States, nor was it subject to any United States taxes.  It was a prosperous company and in 1917 and for several years prior thereto had regularly paid quarterly dividends at the rate of 6 per cent a year.  Dividends had been paid regularly up to the time of trial.  The Sarnia Company had a capital stock of $500,000.  At the beginning of 1917 the surplus of the company was approximately from $600,000 to $700,000.  Nineteen hundred and seventeen was a prosperous year for the company.  For some time prior to July, 1917, the*2650 Sarnia Company had been pursuing to some extent a policy of liquidation.  During the year prior to July, 1917, the petitioner received, in addition to the regular dividends upon her stock, over $100,000 in liquidating dividends.  On or about July 10, 1917, the petitioner consulted Goff, discussed with him the liquidation of the Sarnia Company, and urged the liquidation, as she had at other times.  Goff expressed himself as thinking that the company was in such a financial position that it was right and proper for it to pay another liquidating dividend.  He asked if she was interested in any particular amount, himself suggested a $60,000 dividend on the entire stock, and she expressed her satisfaction with that amount.  At Goff's direction, the petitioner signed a note for $30,000, dated July 10, 1917, payable on demand to the order of C. C. McConkie, bearing interest at the rate of 5 per cent a year.  McConkie was and is employed as the auditor of the Sarnia Company, and for other *222  companies in which Goff was interested.  The note was delivered to the Cleveland Trust Company and was held by the Trust Company until 1922.  A similar note was signed by Goff as trustee of*2651  the A. F. Holden Estate.  This note was not signed by anyone other than Goff.  Neither of these notes was delivered to McConkie.  He did not see the note signed by Goff until a few days before the hearing, when he secured it from the Trust Company.  These notes were never indorsed.  The petitioner signed the note as she had signed many other papers at Goff's direction.  She thought it was only a matter of bookkeeping, signed it "in the interests of the transaction," and gave very little thought to the matter, except that she understood at the time that the transaction was unusual.  She did not consider that she was requesting a loan from McConkie.  On July 10, 1917, the board of directors of the Sarnia Company passed the following resolution: RESOLVED: That the company will make a loan of $60,000 to Mr. C. C. McConkie, interest at 5 per cent per annum payable on demand, to be secured by collateral satisfactory to F. H. Goff.  On that date McConkie received from the Sarnia Company a check for $60,000, and gave to it his demand note bearing interest at the rate of 5 per cent a year.  Also on that date Goff signed the following memorandum: CLEVELAND, O., July 10th, 1917.*2652  THIS IS TO EVIDENCE that C. C. McConkie has this day given to The Cleveland-Sarnia Saw Mills Company his note payable upon demand at Five Percent interest in the sum of Sixty Thousand Dollars, which has been delivered to and is held by said Company.  It is further to evidence that Mr. McConkie has deposited with The Cleveland Trust Company two notes for $30,000 each, both payable on demand, at Five Percent interest, on signed by Virginia Hawley Holden and the other by the trustees of A. F. Holden.  It is intended later on to have a dividend declared by the Sarnia Company, which shall be used to pay the note given by Mr. McConkie to said Company and at that time the notes given by Virginia Hawley Holden and the trustees of A. F. Holden to him are to be cancelled.  In the meantime the trustees of the A. F. Holden Estate and Mrs. Virginia Hawley Holden are to indemnify and hold him harmless on said note given by him to the Sarnia Saw Mills Company.  F. H. GOFF, A. F. HOLDEN, Trustees.On the same date McConkie deposited the check for $60,000, received by him from the Sarnia Company, in his personal account in the Citizen's Savings & Trust Co.  He thereupon gave his check*2653  for $30,000 to the Trust Company as agent for the trustees of the A. F. Holden Estate and another check for $30,000 to the Trust Company as agent for Virginia H. Holden.  The Trust Company credited *223  $30,000 to the petitioner's account and $30,000 to the account of the Trustees of the A. F. Holden Estate.  Petitioner considered that the amount credited to her account was in payment of a further liquidating dividend.  On July 31, 1917, after paying out the amount of $60,000, the Sarnia Company had cash on hand of approximately $176,000.  The minutes of a meeting of the Board of Directors of the Sarnia Company, including Goff, on October 4, 1921, contained the following: It was resolved that a dividend by and is hereby declared, of 12% of the capital stock of the company amounting to $60,000, to be payable at once to stockholders of record as of October 1st, 1921.  It was further resolved that said dividend, instead of being payable in cash, should be paid by distribution of bills Receivable.  Clearing entries were made on the corporate books of account.  The note for $60,000 given by McConkie to the Sarnia Company was marked "Paid Oct. 4, 1921, The Cleveland-Sarnia*2654  Saw Mills Co., Ltd." McConkie secured the note shortly after October 4, 1921.  The signature is crossed off.  No indorsement appears on the note.  McConkie did not at any time pay the note to the Sarnia Company, nor did the petitioner or the trustees of the A. F. Holden Estate pay their notes to McConkie.  No payment of principal or interest was demanded or made on any of these notes at any time.  Petitioner was not informed of the action of the directors on October 4, 1921, until some time in 1922.  The Trust Company, or its attorney, delivered the petitioner's note to her attorneys at their request, who, at that time, informed her of the fact.  The Trust Company experienced some difficulty in locating the note, but it was finally found and canceled.  Other than the transaction here involved, the petitioner had never borrowed money from McConkie.  Prior to July, 1917, she had borrowed money from the Trust Company, which had informed her that it was willing at any time that she should borrow from it.  She had never at any time borrowed from anyone other than the Trust Company.  In July, 1917, the petitioner was not in any special need of funds.  She had not been asked by the*2655  Trust Company to curtail any loan.  She had investments in mortgages, stocks and bonds of over $100,000.  She was receiving yearly dividends of $2,500 or over on an insurance policy.  She was living at that time in Bratenahl, a suburb of Cleveland, on property which she owned.  The property was a 16-acre tract with a house thereon.  It was on the lake shore and adjoined a country club.  It was free of mortgage at that time.  She sold the property in 1920 for $185,000.  *224  Goff handled the entire transaction and all the papers went through his hands.  He is now dead.  The petitioner had given notes at others, and knew that payment or satisfaction thereof was required.  Other than this transaction, the petitioner had received dividends from the Sarnia Company and from other investments and had not signed notes in connection therewith.  The petitioner's return for 1917 was prepared and filed by the Trust Company.  No part of the amount of $30,000 here involved was included in the return.  The amount was omitted from her return for 1921 on the advice of counsel.  OPINION.  STERNHAGEN: Whatever may have been the personal belief of petitioner in 1917 as to the history*2656  of the $30,000 which she then received or the legal nature of the transaction by which she received it, the record evidence of the transaction as a loan is so unequivocal that it can not be overthrown in order to construe it to be a dividend.  The corporate resolution authorizing a loan to McConkie; McConkie's note; the note of Goff as trustee; Goff's contemporaneous memorandum, he being the dominating director of the corporation; the note of petitioner herself, an educated and experienced woman in financial matters, well aware of the function of a promissory note and the significance of her signature; the possible motive of the corporation to save Canadian taxes by making a loan instead of declaring a dividend; and the failure of petitioner to treat the amount as a dividend when making her 1917 tax return and thus her saving of taxes which if accrued would now be outlawed, all establish the transaction as a loan, deliberately and purposely made, and that the idea of a dividend, whether ordinary or in liquidation, was considered and rejected.  By way of corroboration, all of the subsequent acts carry out the idea of a loan and are inconsistent with that of a dividend - the preservation*2657  of the notes; the 1921 dividend resolution and its recognition of the bills receivable; the accounting entries; the cancelation of the notes.  Against this the petitioner places her informal conversation with Goff and her testimony that she thought she was getting a dividend.  This is, in our opinion, not effective to overcome the official and unrenounced corporate action.  If the informal understanding of this stockholder were sufficient to fix the nature of the corporate action as that of a dividend, what becomes of the understanding of Goff as the majority stockholder, who manifestly intended it to be a loan and made it such?  *225  The petitioner urges that a closely owned corporation may act informally, and so it may.  Here the corporation chose to act formally.  The petitioner insists that substance is controlling over form; we think both form and substance here converge in a loan in 1917 and a dividend in 1921.  In this the case is different from those cited by petitioner.  Both the corporation and the petitioner treated the transaction as a loan in 1917 and were substantially benefited thereby.  This was correct.  When, however, the dividend came in 1921, she was released*2658  from her note, received income, and must bear the burden of its tax.  Judgment will be entered for the respondent.Considered by GREEN and ARUNDELL.