Court Opinion

ID: 4613916
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:54:30.48086+00
Date Added: 2024-06-11T07:54:42.376930
License: Public Domain

THE SANFORD CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sanford Corp. v. CommissionerDocket No. 91217.United States Board of Tax Appeals38 B.T.A. 139; 1938 BTA LEXIS 910; July 20, 1938, Promulgated *910  A personal holding corporation on a cash basis declared a dividend one day prior to the close of its fiscal year.  Its sole stockholder, who alone had authority to pay out funds, was in a distant state and was not informed of the dividend until after the close of the fiscal year.  He then wrote and cashed a check for the dividend.  Held, the corporation did not pay the dividend within its taxable year and is not entitled to a deduction under section 351(b)(2)(c) of the Revenue Act of 1934.  Theodore B. Benson, Esq., and Charles E. Foster, Jr., Esq., for the petitioner.  Irving M. Tullar, Esq., for the respondent.  MURDOCK *139  The Commissioner determined a deficiency of $2,212.60 in surtax against the petitioner for its fiscal year ended November 30, 1935.  The only issue is whether the petitioner paid a dividend of $7,375.34 in its fiscal year within the meaning of section 351(b)(2)(c) of the Revenue Act of 1934, and was, therefore, entitled to deduct that amount in computing its "undistributed adjusted net income." The facts are not in dispute.  FINDINGS OF FACT.  The petitioner is a personal holding company within the meaning of*911  section 351 of the Revenue Act of 1934.  It kept its books and filed its return on the cash receipts and disbursements basis for the fiscal year ended November 30, 1935.  The income tax return of the petitioner as a personal holding company for *140  the fiscal year was filed with the collector of internal revenue at Camden, New Jersey.  A deduction of $7,375.34 was claimed on that return for dividends paid within the meaning of section 351(b)(2)(c).  The Commissioner disallowed that deduction in its entirety and determined the deficiency by taxing the resulting undistributed adjusted net income at a rate of 30 percent under section 351(a)(1).  The board of directors of the petitioner met on November 29, 1935, in Philadelphia and declared a dividend of $73.7534 per share on the 100 shares of stock outstanding, payable on the date.  Director Bernard L. Mock, who owned all of the 100 shares, was not present at the meeting but was in California at that time and for some time thereafter.  He alone was authorized to sign checks or orders for the payment of funds of the petitioner.  The amount of the dividend payable to Mock, $7,375.34, was credited to his account under date*912  of November 29, 1935, although the actual entry may have been made after December 1, 1935.  That account showed a credit balance due Mock immediately prior to the date of the above credit.  The petitioner had funds in its bank account on November 30, 1935, in excess of the amount of the dividend.  Mock was not informed until after the close of the fiscal year that the dividend had been declared.  He then, on December 31, 1935, drew a check, as president of the petitioner, on a Philadelphia bank payable to himself for $7,375.34 in payment of the dividend.  The check was antedated November 29, 1935.  It was paid early in January 1936.  Mock had written to his accountants in Philadelphia on September 30, 1935, from California, stating that he approved of and urged the declaration of "a dividend of the amount that might be taxable" to the petitioner if that were practical.  A balance sheet of the petitioner as of November 30, 1935, shows a surplus of $8,219.51.  OPINION.  MURDOCK: The petitioner contends that this dividend was constructively paid on November 29, 1935, since it was then unqualifiedly subject to the demands of Mock, although it concedes that a corporation on a*913  cash basis ordinarily may not be said to have paid a dividend by merely declaring it and crediting it on its books to the stockholder's account.  The respondent agrees that the dividend was regularly declared, but contends that it was not paid during the fiscal year.  The statute allows a deduction for "dividends paid during the taxable year." The question seems to be novel and no direct authorities are cited.  The petitioner argues by analogy from decisions and regulations holding that a stockholder is liable for tax on dividends constructively received by him where they are unqualifiedly subject to his demand.  It *141  may be doubtful whether the facts in this record show constructive receipt by Mock prior to the close of the fiscal year on November 30, 1935.  Payment was to be made by a check to be drawn by Mock, and a reasonable time might have to be allowed for him to learn the amount and draw the check.  Constructive receipt is a principle sparingly applied.  Perhaps it is never applied to the recipient's advantage because to do so would be contrary to the purpose of the rule.  However, constructive receipt would not necessarily show payment by the corporation where, *914  in fact, there was none.  That is the situation here.  The statute allows the deduction only where the dividend was paid within the taxable year.  The petitioner could have declared and paid the dividend earlier, but it actually did not pay it within its taxable year.  Consequently, it has not shown that it is entitled to the deduction.  Decision will be entered for the respondent.