*712 Petitioner corporation was organized in 1911 for the purpose of holding investments. Its stock was held by 5 brothers and sisters. The oldest brother was president, treasurer and general manager, and the full conduct of its affairs was left to him by the other stockholders. All moneys belonging to petitioner were kept in his personal bank account, upon which he drew annual dividend checks to the order of the other stockholders. He died in 1935. From 1911 to the time of his death he used moneys belonging to petitioner for his own benefit, but entered these sums regularly upon the books of petitioner as amounts "due from Treasurer." Upon his death the other stockholders first learned of these unauthorized advances which, at that time, amounted to over $100,000. Thereupon, with the consent of all the other stockholders, petitioner filed a claim against the estate of the deceased brother for the amount due on such book account plus interest. A settlement of this claim, including principal and interest, was authorized and payment was accordingly made by the estate and accepted by petitioner. Held, amount claimed and received by petitioner as such interest was "interest" within*713 the meaning of section 353(a) of the Revenue Act of 1937; held, further, petitioner is a personal holding company and is liable for penalty on account of failure to file return as such.
*252 The Commissioner has determined against this petitioner for the year 1937 a deficiency in income tax in the amount of $2,048.18, a deficiency in personal holding company surtax in the amount of $35,909.67, and a delinquency penalty in the amount of $8,977.42 for failure to make timely filing of a personal holding company surtax return. In addition petitioner, by amended petition, claims an overpayment of income tax in the sum of $12,245.71.
The main issue is whether the excess sum of $38,849.57 received by the petitioner in 1937 in settlement of a claim against the estate of its deceased treasurer constituted "interest" within the scope of section 353(a) of the Revenue Act of 1937 so as to bring petitioner within the definition of a "personal holding company" set forth in section 352 of the same act. If*714 so, it is necessary to consider whether a 25 percent delinquency penalty should attach for failure to make timely return of personal holding company surtax. Petitioner claims that the $38,849.57 included by it in taxable income for 1937 represented damages for the loss of capital and, therefore, should not have been taxable. The income tax deficiency arises solely as the result *253 of an error in the method of calculation of the tax on petitioner's return, and petitioner alleges no error with regard to respondent's determination with reference thereto.
FINDINGS OF FACT.
The Vertex Investment Co., hereinafter referred to as petitioner, was incorporated under the laws of the State of California on December 19, 1911, with a total capital stock issue of 5,000 shares. Directly after petitioner's organization its capital stock was divided equally among the five children of Sarah Schwabacher. These five individuals were Louis A. Schwabacher, Jennie S. Rosenbaummina A. Eckstein, Edgar B. Schwabacher, and Samuel I. Schwabacher.
The stockholdings remained the same until the death of Louis A. Schwabacher on August 1, 1935, except that one share belonging to Edgar B. Schwabacher*715 was nominally held by Helen M. Crowley, a nonrelative, who had been made secretary of the corporation.
The petitioner was not organized to act as an operating corporation but was organized for the sole purpose of investing and reinvesting its funds. These funds were transferred to the corporation at its incorporation by Sarah Schwabacher and consisted of certain securities acquired by her from the estate of her deceased husband, Abraham Schwabacher, who had died in 1909. In exchange for these securities Sarah Schwabacher caused petitioner's stock to be issued to her five children.
The entire management and control of petitioner were left in the hands of Louis A. Schwabacher. He was president, treasurer and general manager. He received all moneys and deposited them in an account kept in his own name at the Wells Fargo Bank & Union Trust Co. in San Francisco. This account was his personal account in which he kept his own funds. Although he thus mingled the corporate moneys and income with his own cash, he kept two sets of books at his office, one designated as his personal accounts and the other as the books of petitioner.
None of the four other stockholders ever inquired*716 into the affairs of the corporation prior to the death of Louis. Each year he sent each of the four others dividend checks ranging in amounts from $2,000 to $10,000, signed by him personally. The other stockholders did not realize, or paid no attention to, the fact that Louis had commingled petitioner's funds in the bank with his own, although they should have been aware of this by reason of their receipt of these dividend checks so signed and drawn on his personal account.
Louis kept his own books current and at the close of each year employed a public accountant to transcribe into the Vertex account book the entries (from his own books) which he had designated as *254 receipts or disbursements for petitioner. The accountant annually made up a statement of petitioner's financial condition in which Louis' account with petitioner was designated as funds "due from treasurer." None of these statements was ever transmitted to any of the stockholders other than Louis himself. However, the statements and petitioner's books were available for inspection if any stockholder had desired to inspect them.
From 1911 until the death of Louis in 1935 the credit balance due from Louis*717 to petitioner by reason of cash received and not disbursed on petitioner's account mounted yearly, with few exceptions, until at the date of his death both books of account showed a balance of $140,124.01. The bank account of Louis contained only $7,178.94, however, on that date. It was later discovered that at no time during petitioner's existence, except in the first two or three years, did Louis' bank balance equal the amount acknowledged by him to be due to petitioner. At no time prior to his death did any of the other stockholders know that he was in debt to the corporation on his own account nor did they ever consent to his borrowing or withholding funds from petitioner for his own use.
Upon the death of Louis on August 1, 1935, his brother, Samuel L. Schwabacher, became president of petitioner and together with Norma B. Schwabacher, Louis' widow, became executor under the decedent's will. The executors employed the firm of Heller, Ehrman, White & McAuliffe as attorneys. Lloyd W. Dinkelspiel, one of the members of that firm, is the nephew of Norma B. Schwabacher. That law firm at all times thereafter, to and including April 6, 1937, acted as attorneys for the executors.
*718 Shortly after becoming petitioner's president, Samuel Schwabacher learned for the first time that his brother Louis had died owing petitioner considerable money. The other stockholders learned of this shortly prior to April 1937.
Although no fee was ever paid or agreement made concerning employment, Samuel Schwabacher believed that Lloyd Dinkelspiel was counsel for petitioner after Louis' death. In all subsequent negotiations between petitioner and Louis' executors leading up to the settlement of petitioner's claim later filed with such executors, Samuel considered Dinkelspiel as acting as counsel to both parties.
The executors paid to petitioner $5,644.23 from Louis' bank account leaving a debt of $134,479.78 due from Louis' estate, according to the books of account he had kept. A creditor's claim was filed by petitioner against Louis' estate in the Superior Court for San Francisco, wherein it was claimed there was owing the sum of $134,479.78 plus interest at 5 percent from the respective dates of the advances to Louis as shown on the two sets of account books. Discussions were had between Dinkelspiel and Samuel Schwabacher relating to settlement *255 of the claim, *719 at which times Dinkelspiel contended that the estate was not obligated to pay interest, Schwabacher, on behalf of petitioner, taking the opposite view. It was finally agreed that a settlement should be made on the following basis:
| CLAIM: | |
| Face amounts of claim | $134,479.78 |
| Interest: | |
| Four years' interest on face amount of claim to Aug. 1, 1935, the date of death, at 5% per annum | 26,895.80 |
| Interest on the face amount of claim from Aug. 1, 1935, to Mar. 15, 1937 at 5% | 11,486.79 |
| 172,862.37 | |
| SETTLEMENT: | |
| 86 shares of stock of Schwabacher Bros. & Co. at an agreed valuation of $500 per share | $43,000.00 |
| 1,000 shares Vertex Investment Co. stock at an agreed valuation of $120 per share | 120,000.00 |
| Surrender of Vertex Investment Co. dividends | 10,650.00 |
| * $173,650.00 |
Upon the representations and advice of Samuel Schwabacher, petitioner's stockholders consented to this settlement by formal corporate resolution.
A petition asking leave to compromise and settle the claim as above outlined was filed by the executors with the Superior Court. That court authorized the executors to compromise*720 and settle petitioner's claim as set forth above. On the basis of these principal and interest computations as of the date of payment, the estate was obligated to pay added interest of $466.98, making a total of $173,329.35. The difference between that amount and the agreed valuation of the assets transferred was refunded by petitioner to the estate.
Petitioner filed an ordinary corporate income and excess profits tax return, Form 1120, for 1937, calculated on a cash receipts and disbursements basis. The return, filed in the first district of California, disclosed gross income of $71,397.31 as follows:
| Dividends | $20,695.57 |
| Profits from sale of stock | 11,810.92 |
| Interest on loans, notes, bonds, etc | 41.25 |
| Excess received on claim | 38,849.57 |
| 71,397.31 |
The Commissioner determined that the $38,849.57 item constituted interest and that, so treated, over 80 percent of petitioner's gross income was personal holding company income as that term is defined in section 353 of the Revenue Act of 1937, thereby subjecting petitioner *256 to the personal holding company surtax provisions of section 351 of the same act. Accordingly, the Commissioner held that petitioner*721 was liable for personal holding company surtax in the amount of $35,909.67, puls a penalty of 25 percent for failure to file a personal holding company return.
Thereafter, on October 6, 1939, a personal holding company tax return was filed by petitioner alleging no tax liability on the theory that the $38,849.57 did not represent personal holding company income and that, therefore, petitioner was not subject to the provisions of section 351 of the Revenue Act of 1937.
OPINION.
KERN: As stated above, the main issue is whether 80 percent of petitioner's gross income in 1937 was personal holding company income as that term is defined in section 353(a) of the Revenue Act of 1937. The facts disclose that over a period of years the deceased ex-president and ex-treasurer of petitioner had commingled the funds of petitioner with his own by depositing them together in his individual bank account and had used for his own purposes the sum of $140,124.01 from petitioner's funds without any corporate authority and without the knowledge of petitioner's other stockholders. After his death in 1935 the unauthorized use of petitioner's funds was discovered and petitioner filed a claim against*722 the officer's estate. The other stockholders of petitioner were brothers and sisters of the deceased. Upon his death one of the brothers was elected president of petitioner. This brother was also one of the coexecutors of decedent's estate. As a result of conferences between this brother, the other coexecutor (the deceased's widow), and an attorney who was acting for the estate and was considered by the new president of petitioner to be also acting for petitioner, a settlement was finally reached which proved at that time to be agreeable to all parties involved, and gained the necessary approval from the Superior Court of California. This was in 1937, at which time the principal liability of the estate to petitioner had been reduced to $134,479.78 by virtue of a cash payment of $5,644.23 from decedent's bank account. The settlement called for the transfer of certain securities and surrender of dividends, the aggregate value of which was set by the parties at $173,650, an amount $39,170.22 in excess of the principal liability. By agreement, however, $320.65 was refunded to the estate. The parties in their settlement agreement and in their application to the Superior Court designated*723 the amounts to be received by petitioner in excess of $134,479.78 as interest, and that court sanctioned the settlement as proposed.
Petitioner now claims that none of this amount was, in fact, "interest" as that term is used in the revenue acts, but was return of *257 lost capital or damages for loss of capital. Petitioner therefore contends that this amount did not constitute taxable income and, accordingly, asks a refund of that part of its Federal income taxes paid for the taxable year on account of the receipt of this item.
In support of this contention the petitioner advances two arguments. The first is to the effect that its settlement with the estate of Louis Schwabacher was for a sum far less than that to which it was entitled, in that it could have recovered, in an action for an accounting, the profits made by Louis by the use of petitioner's funds. The short answer to this contention is that we are concerned with what petitioner did rather than with what it could have done. Petitioner brought no action for accounting and nothing in the record indicates that petitioner even contemplated the possibility of such an action during the taxable year and prior to*724 the settlement above outlined. It filed a claim against Louis' estate predicated upon advances made by petitioner to Louis as shown by its books and in the principal amount shown therein as an indebtedness. In addition to this amount petitioner claimed certain amounts as interest and was paid certain amounts as interest. No reference was made to profits made by Louis as the result of his use of the unauthorized advances. Even if a claim has been made for such profits and a settlement payment had been made therefor, the amounts so paid would have constituted taxable income to petitioner and not a return of lost capital. .
The second argument advanced by petitioner in support of its contention that the amounts received by it as interest did not constitute taxable income is to the effect that such amounts, in reality constituted damages and must be considered as damages for loss of capital. The argument that these amounts must be considered as damages and not as interest is also relied upon by petitioner in its contention that the amounts in question did not constitute personal holding company income within*725 the meaning of section 353(a) of the Revenue Act of 1937, 1 and therefore 80 per centum of its gross income for the taxable year was not personal holding company income and petitioner is not subject to the personal holding company surtax imposed by section 351 of that act.
Broadly stated, petitioner's contention is that amounts to which a taxpayer is entitled as damages can be considered neither as "income" nor as "interest" within the meaning of the revenue acts. That "damages" may in certain circumstances constitute taxable income is well established. ; *258 . That "damages" may constitute "interest" is also a conclusion warranted by the authorities, if the so-called damages represented a payment imposed by law for the use or detention of money. *726 In , we said: "Interest is the compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention", citing 33 Corpus Juris 178. And in the more recent case of , in defining "interest, as generally understood" we used, among others, the same definition. See, also, 33 Corpus Juris 182. If the amounts received by petitioner in the instant proceeding in excess of the principal amount claimed are to be considered as damages for the detention of money, they will come under the definitions given above and will constitute interest. In so far as they may be considered damages for the detention of money, the receipts in question differ materially from awards of damages qua damages rendered in legal actions arising from the conversion, either voluntary or involuntary, of property. See ; ; *727 . But cf. . Since the amounts here involved, if considered as such damages, come within our definition of "interest", and since there are no cases involving similar facts which require a holding to the contrary, we question the validity of petitioner's contention that amounts to which petitioner might be entitled as damages can not be "interest" within the meaning of section 353(a), supra.
However, as we view the facts shown here by the record, and particularly the acts of petitioner itself, it is not necessary to consider the question of whether damages in the ordinary sense can be considered as interest. In all cases of conversion, the tort may be waived and the wrongdoer may be sued in contract. 1 C.J. 1033; ; . Even in the case of embezzlement "the embezzler incurs an equivalent debt as surely as if he had borrowed with the consent of the owner", the law fixing upon him "the duty to account for and to repay the value of what is taken." *728 . See, also, concurring opinion of Magruder, J., in . Where an officer of a corporation appropriates or uses its money for his own purposes he is chargeable with interest thereon. 19 C.J.S. 132, citing ; . An unauthorized loan or advance to an officer may be ratified by the corporation by unanimous action of its stockholders, and after such ratification it will be considered a debt. . See Fletcher on Corporations, vol. 4, § 2507.
*259 Our analysis of the facts indicates that the deceased was the president and treasurer of petitioner corporation, the other stockholders of which were his brothers and sisters, who left the conduct of its affairs in his hands. As in other corporations having a small and intimate group of stockholders, the business and corporate records of petitioner were on an informal basis. The deceased over a long period of time had made a practice of*729 causing the corporation to make advances to him, which he recorded in the corporate books of account as a debt owing by him to the corporation. While there were no dfforts on his part as disclosed by the records to keep these advances secret, they appear to have been unknown to the other stockholders and were unauthorized at the time when they were made. The fact that he kept the funds of petitioner in his own account should have been known to the other stockholders, since they were paid dividends from time to time by checks drawn on his personal account. Upon the death of the deceased the other stockholders learned of the unauthorized advances made to and by their dead brother. They, at that time, and as the remaining stockholders and directors fo petitioner, were faced with the problem of how petitioner should treat these unauthorized advances. Motivated by feelings of family sentiment and solidarity, they took the course which was calculated to cause no family scandal. Instead of advancing a claim which was based upon tort and would impute the crime of embezzlement to their dead brother, it was decided to advance a claim predicated upon book advances which were to be treated*730 as a debt which the deceased brother owed to the corporation. In the claim filed against the deceased's estate petitioner included a claim for interest on the account "from the respective dates of the advances." The claim of petitioner was allowed and paid in the total principal amount claimed, plus interest on this total principal amount at 5 percent from August 1931 to and including the date of payment.
Petitioner thereby waived any tort on the part of the deceased, ratified the advances, and proceeded on the theory of contract. In all of its actions it treated the account as a valid indebtedness and treated as interest the excess of payments received over principal amount claimed. We see no reason to treat it differently.
The $38,849.57 was interest within the scope of section 353(a) of the Revenue Act of 1937 and, inasmuch as petitioner admits that more than 50 percent in value of its stock was owned during 1937 by not more than 5 individuals, we conclude that petitioner should have filed a personal holding company return, and we sustain respondent's determination of deficiency.
The sole remaining issue is in regard to the 25 percent delinquency penalty asserted by*731 respondent. Petitioner makes no argument on this point, nor do the facts reveal any mitigating circumstances in *260 its favor. We therefore sustain respondent on this point. See .
Decision will be entered under Rule 50.
Footnotes
*. The excess over the amount of the claim to be refunded to the estate. ↩
1. SEC. 353. PERSONAL HOLDING COMPANY INCOME.
For the purposes of this title the term "personal holding company income" means the portion of the gross income which consists of:
(a) Dividends, interest, royalties (other than mineral, oil, or gas royalties), annuities. ↩