*936 1. Where a corporation canceled certain notes of its principal stockholders, which had been transferred to it in part payment of its capital stock, the amounts of the canceled debts are dividends and not tax-free gifts.
2. Where petitioners filed tax returns, to which were attached consents in writing waiving limitation, and did not question their authenticity, they will be accepted as part of the record and given effect accordingly.
*473 The respondent determined deficiencies in income tax for 1928 as follows:
| Petitioner | Docket No. | Deficiency |
| Ennalls Waggaman | 61244 | $7,232.43 |
| Floyd P. Waggaman | 61245 | 6,933.95 |
*474 Petitioners plead limitation and allege that the respondent erred in including in their incomes the amounts of certain promissory notes, which Waggaman & Brawner, Inc. canceled and returned to them in the taxable year. Respondent determined that the cancellation of the notes was a dividend, while petitioners claim that it was a forgiveness of debts, a gift, or, in the*937 alternative, a correction of an error.
FINDINGS OF FACT.
John F. Waggaman, father of the petitioners, and John W. Brawner, had been business associates for many years prior to August 1, 1909. On that date John F. Waggaman retired and by deed of trust transferred his entire estate to his eldest son, Henry E. Waggaman, and John W. Brawner, as trustees for the equal benefit of his three sons, Henry E. Waggaman, Floyd P. Waggaman and Ennalls Waggaman. The trust was to terminate ten years after the death of the grantor. Henry E. Waggaman died August 25, 1909; his widow, Viola R. Waggaman, by the terms of the trust, succeeded to his interest; and John W. Brawner became the sole trustee of the estate. Viola R. Waggaman on April 29, 1918, conveyed her interest to Brawner, as trustee, to pay the income to her during life, and at her death to pay the principal in equal shares to Floyd P. Waggaman, Ennalls Waggaman, and Brawner. The grantor, John F. Waggaman, died on May 18, 1918, and his wife died August 26, 1926.
It was provided in the deed of trust that the grantor should receive $1,000 per month, and each of the three sons $150 per month until the death of the grantor, after*938 which the grantor's widow should receive $500 monthly and the three sons each $200.
The Waggaman trust property consisted of vacant and improved real estate in Washington, trust notes, and corporate securities, including a large block of stock in the Emerson Drug Co. of Baltimore, Maryland.
From time to time the trustee, in addition to the regular income provided in the trust, made advancements to the three principal beneficiaries; viz., the petitioners and Viola R. Waggaman, the widow of Henry E. Waggaman, which were paid from the principal of the trust, or its accumulations. By November 20, 1919, these additional advancements amounted to, Floyd P. Waggaman, $33,268.51; Ennalls Waggaman, $32,943.57; and Viola R. Burnside (formerly Viola R. Waggaman), $23,653.75. On account of the creation of the above mentioned trust by Viola R. Waggaman and her remarriage, it was agreed to cancel the indebtedness against her in the sum of $23,653.75 and a corresponding amount against each of the petitioners. This left a balance of $9,614.76 charged against Floyd P. *475 Waggaman and $9,289.82 against Ennalls Waggaman. From that time until February 1, 1924, other advances were made*939 to the petitioners, when the amounts were, Floyd P. Waggaman, $42,934.65, and Ennalls Waggaman, $42,570.73. There was no specific authority in the deed of trust authorizing the trustee to make these advances, so in order to adjust his accounts for settlement purposes he required petitioners to give notes representing the amounts of the advances, which were carried as assets of the estate. Petitioners did not consider that they would ever be called upon to pay these notes and believed that they were merely receiving in advance part of what would be distributed to them on the termination of the trust.
Petitioner Floyd P. Waggaman and the trustee, John W. Brawner, had been in the real estate business as partners in Washington for many years, and in January 1920 the business was incorporated under the laws of Virginia under the name of Waggaman & Brawner, Inc. Petitioner Ennalls Waggaman also became a stockholder in the corporation and at all times hereinafter mentioned both petitioners and Brawner were officers and directors of the corporation. The stock was closely held by them and office associates.
Since the property of the trust consisted largely of real estate, the trustee, *940 Brawner, conceived the idea that its handling and ultimate distribution would be facilitated by conveying it to Waggaman & Brawner, Inc., in exchange for capital stock of the corporation, and then holding the stock in the trust and distributing it in the final settlement. Apparently this was agreed to, for on January 3, 1924 the directors of the corporation passed a resolution authorizing its officers to purchase the assets of the Waggaman estate and to provide for such purchase by increasing the capital stock to $1,000,000. A similar resolution was passed at a stockholders' meeting on January 17, 1924.
On January 28, 1924, the trustee, Brawner, submitted to the corporation a written proposition by which he offered to sell to the corporation all of the then assets of the Waggaman estate, for which the corporation was to pay $800,000 in its capital stock and assume all liabilities. A list of the assets and liabilities was attached to the writing and referred to therein. This proposition was approved in writing by the petitioners. The attached list showed a net worth of $800,000, and included in the item of notes receivable among the assets were, F. P. Waggaman, $42,934.65; Ennalls*941 Waggaman, $42,570.73. On the same day at a meeting of the board of directors of the corporation, after recitals that the offer had been made and that it was necessary for the board to determine the value of the assets of the estate to be paid in, the board of directors resolved and fixed the values of the estate and its various assets in exactly *476 the same amounts as stated in the written offer, including the notes receivable of petitioners F. P. Waggaman and Ennalls Waggaman in the respective amounts of $42,934.65 and $42,570.73. The offer was thereupon accepted.
Thereafter, on February 1, 1924, the trustee executed a bill of sale to the corporation conveying all of the trust property to the corporation. The bill of sale contained an itemized statement of the estate's assets and liabilities, which showed in notes receivable, as assets, the notes of petitioners F. P. Waggaman, $42,934.65, and Ennalls Waggaman, $42,570.73. This bill of sale was approved and witnessed by both petitioners. These notes, or renewals thereof, were carried as assets of the corporation until May 25, 1928, and in addition each of the petitioners signed and delivered notes for interest as follows: *942 Floyd P. Waggaman, $4,874.57; Ennalls Waggaman, $7,905.66.
The Waggaman trust terminated May 18, 1928, and the remaining property; viz., 8,000 shares of stock in Waggaman & Brawner, Inc., was equally distributed in accordance with the terms of the trust into three equal parts and each of the petitioners received a full one third without deduction for the advances theretofore made. The question arose as to what disposition should be made of the notes. Counsel was consulted and on May 25, 1928, the board of directors of the corporation passed a resolution reading in part as follows:
That the treasurer be and he is hereby authorized to cancel the following notes of Floyd P. and Ennalls Waggaman held by the Company and to make them a gift of the cancelled notes, which represent advances made by the Estate of John F. Waggaman and inadvertently carried into the assets of the Company when the corporation of Waggaman & Brawner, Inc., purchased the assets of the John F. Waggaman Estate and issued therefor stock in the said corporation.
That the treasurer be and he is hereby instructed to notify Mr. Floyd P. Waggaman, at Cannes, France, and Major Ennalls Waggaman, at Danbury, Connecticut, *943 that the debt is forgiven and cancelled and return to them the said notes.
| Note of Floyd P. Waggaman, Jan. 31, 1926 | $43,280.47 |
| Note of Floyd P. Waggaman, Jan. 31, 1926 | 4,874.57 |
| Note of Ennalls Waggaman, Oct. 1, 1927 | 42,570.73 |
| Note of Ennalls Waggaman, Oct. 1, 1927 | 7,905.66 |
Subsequently all of the stockholders of Waggaman & Brawner, Inc., ratified in writing this resolution and action of the board of directors. The notes were canceled as directed and returned to the petitioners.
The income tax return of the corporation for 1928 showed surplus and undivided profits of $210,991.13 at the first of the year and $133,272.60 at the end of the year. During the year $106,700 was paid in cash dividends, and the notes of petitioners in the sum of $98,631.43 were debited against surplus.
*477 OPINION.
SMITH: Petitioners plead limitation and allege that the respondent erred in including in their respective incomes the canceled notes, claiming that the notes were never intended to be paid, that they were erroneously transferred to the corporation, and that they were canceled to correct the error, or as a forgiveness of the debt.
Relative to the plea*944 of limitation, it is sufficient to say that the petitioners' counsel introduced in evidence the income tax returns for both petitioners for the taxable year. Both returns are stamped as being filed March 12, 1929, and on both appears in long hand "waiver 12/31/31," and attached to each return by metallic fastener is a Form 872, dated February 16, 1931, "Consent Fixing Period of Limitation upon Assessment of Income and Profits Tax," by which limitation was extended to December 31, 1931. These written consents were in each case signed by the petitioner and the respondent, and came from proper governmental custody, and were introduced in evidence by petitioners' counsel, as part of the returns, without one word of objection.
It is too late to question the genuineness of the waivers by petitioners on brief, when their counsel was responsible for their being in the record. We accept them as part of the record. The deficiency notices were mailed November 13, 1931, which was in time, and the plea of limitation is not good. The burden of proof to establish the plea of limitation is on the petitioners. *945 .
Relative to the canceled notes, it does not appear that the trustee, Brawner, had any right to make advancements from the corpus to the petitioners, or either of them or to anticipate their income. Had this right existed the trustee would doubtless merely have required receipts for his protection. When this is considered in connection with the fact that the notes were listed in the written offer of sale as part of the assets of the Waggaman estate, were appraised by the board of directors of the corporation as part of the estate, and were conveyed to and accepted in part payment of stock in the corporation, part of which was subsequently distributed to petitioners, we can not hold that the notes were transferred to the corporation by mistake. It is significant also that the written proposition was approved in writing by petitioners, and that the notes were renewed and notes given for interest during the four years they were among the assets of the corporation.
It remains to consider whether the cancellation of the notes should be considered a gift, or a dividend.
*478 Section 115(a) of the Revenue Act of 1928 provides*946 in substance that any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913, shall be considered a dividend; while section 22 provides that the value of gifts shall be exempt from taxation.
In ; affd., in , we had before us a transaction involving this same estate and corporation. The Waggaman estate was a stockholder in the Emerson Drug Co., which stock was transferred to the corporation. Thereafter a stock dividend was declared by the Drug Co., which stock was distributed by Waggaman & Brawner, Inc., among its stockholders by resolution of the directors, calling it a gift. The Commissioner held that the distribution was a dividend, which was approved by the Board as follows:
We are unable to find that the transfer in question was a gift, and are of opinion that the respondent should be sustained. This was a distribution made by the corporation to its shareholders, and there is no evidence that it was not out of earnings or profits accumulated subsequent to February 28, 1913, as*947 postulated by the respondent. Thus it is squarely within the statutory definition of a dividend in section 201(a), Revenue Act of 1926. The language of the corporate resolution is not entirely determinative of the nature of the distribution, nor is the fact that the distribution was to only some of the shareholders and not strictly in proportion to holdings. , affirming . The other shareholders have not complained and must therefore, in this proceeding, be deemed to have ratified.
In the case of , we held that the cancellation by a corporation, with the consent of its shareholders, of a debt from its president, who was its largest shareholder, created by withdrawals over a period of years, the corporation at the time of cancelation having substantial surplus and the debtor being solvent, was not a tax-free gift, but was taxable as a dividend.
The case of , is similar to that above cited, and we there held that where a corporation canceled an indebtedness of its president and principal stockholder it was*948 a dividend and not a tax-free gift. See also ; ; ; and .
The corporation in the instant cases had surplus and undivided profits far in excess of the canceled notes. It is clear that the notes were considered assets of both the estate and the corporation and were used for the purpose of making the stock of the latter fully paid and nonassessable. We hold that the cancellation of the notes must be considered a dividend.
Reviewed by the Board.
Judgment will be entered for the respondent.