*844 In the years from 1925 to 1931, inclusive, petitioner withdrew funds from a corporation of which he was the sole stockholder. The corporation at all times had accumulated earnings in excess of the withdrawals. No dividend was formally declared at any time, but in 1932 the total amount of withdrawals was credited to petitioner's account on the books of the corporation and charged against surplus. Held, the amount constituted a dividend taxable to the petitioner in 1932.
*701 Respondent determined a deficiency in petitioner's income tax for the year 1932 in the amount of $30,080.17. Petitioner assigns as error the action of the respondent in treating as dividends received in 1932 amounts theretofore in prior years withdrawn by petitioner from a corporation of which he was the sole stockholder. Respondent denies the alleged error, and specially pleads that in any event petitioner is now estopped to deny that such withdrawals were loans and that their discharge by corporate action in 1932 constituted a dividend taxable to him as income for 1932.
*845 FINDINGS OF FACT.
Petitioner is a citizen of the State of Missouri, residing in the city of St. Louis.
The Wiese Printing Co. is a corporation organized in 1925 under the laws of Missouri, having outstanding 500 shares of capital stock. Since incorporation of the Wiese Printing Co. petitioner has owned 498 shares of its capital stock, and has been in complete control of the corporation, with the title of president. Two qualifying shares of stock were issued in the names of two employees of the company, but the actual owner was the petitioner.
There has been carried on the books of the printing company since 1925 an account for petitioner to which were debited all withdrawals made by him, except salary payments, during the respective years, and to which were credited all credits from the corporation to which he was entitled.
Prior to the incorporation of the printing company, petitioner conducted the business in his individual capacity. No minute books were ever kept by the corporation, except for the minutes of the *702 first meeting organizing the corporation, and no dividends were ever authorized by the board of directors of the corporation in any year.
*846 In December 1932 petitioner, as president of the printing company, employed a certified public accountant to make an examination of the books of the company. In making the examination the accountant noted that the ledger disclosed a large debit balance in petitioner's account. As a result of an analysis of this account, it was ascertained that there were included therein charges which were applicable to the corporation. The other items in the account represented withdrawals of cash from the corporation by petitioner for his personal use, and personal items of petitioner which were paid out of the corporation's funds.
The said accountant made as of December 31, 1932, with the acquiescence and consent of the petitioner, a series of journal entries to reflect certain adjustments on the books of account of the corporation, including the following:
| Withdrawals of profits not formally authorized | ||
| in the minutes of the company | $94,801.95 | |
| Harry E. Wiese | $94,801.95 | |
| To transfer withdrawals to a separate account: | ||
| 1926 | $4,582.00 | |
| 1927 | 8,728.51 | |
| 1928 | 18,333.33 | |
| 1929 | 27,201.41 | |
| 1930 | 3,928.03 | |
| 1931 | 30,572.64 | |
| 1932 | 1,456.03 | |
| $94,801.95 |
The*847 ledger accounts of the corporation were adjusted accordingly, and a new account was opened, entitled "Harry E. Wiese - Withdrawals of Profits Not Formally Authorized in the Minutes of the Company", with a debit balance of $94,801.95.
On March 15, 1933, the petitioner filed amended personal Federal income tax returns for the calendar years 1930 and 1931, and included therein as dividends the amounts of $3,928.03 and $30,572.64, respectively, representing withdrawals from the corporation of the nature referred to hereinabove, which had not been previously reported in the petitioner's Federal income tax returns for the years 1930 and 1931. He thereafter paid the additional taxes shown on the amended returns.
On August 1, 1935, the petitioner filed amended personal Federal income tax returns for the calendar years 1926 to 1929, inclusive, and reported thereon as dividends the amounts representing *703 withdrawals from the printing company of the nature referred to hereinabove, not authorized by the board of directors but received by the petitioner in the years indicated and charged to his personal account, as follows:
| 1926 | $4,582.00 |
| 1927 | 9,023.71 |
| 1928 | 18,522.03 |
| 1929 | 28,431.91 |
*848 The petitioner paid to the collector of internal revenue the additional amounts shown as taxes by said amended returns.
At all times when withdrawals were made by petitioner from the printing company and charged to his account, there were available sufficient earnings with which to make such distributions, and the authorized capital of the corporation was at no time impaired as the result of such distributions.
The petitioner filed his personal Federal income tax returns for all years from 1925 to 1932, inclusive, upon the basis of cash receipts and disbursements.
As the result of a revenue agent's examination in August 1933, he concluded that $106,156.37 represented withdrawals not authorized in the minutes of the company, and concluded that this amount was income to the petitioner in the year 1932. Respondent, in his 90-day letter dated August 3, 1934, sustained the revenue agent, but reduced the amount of $106,156.37 by $2,963 and increased the net income of petitioner by $103,193.37.
Both the revenue agent and the respondent arrived at the amount of $106,156.37 by totaling the adjusting entries made as of December 31, 1932, which reduced the personal account of petitioner.
*849 In the year 1932 petitioner withdrew from the corporation in excess of salary $1,456.03, which was reported as a dividend in his original Federal income tax return for that year, filed with the collector of internal revenue on March 15, 1933.
The Wiese Printing Co., in its original Federal income tax returns for the years 1925 to 1931, inclusive, included, as accounts receivable in the balance sheets attached to the returns for those years, the withdrawals of the petitioner which were later reported as dividends in the amended returns filed by petitioner, as hereinabove set forth. However, said amounts were not included as accounts receivable in the balance sheet attached to the return filed by the printing company for the year 1932.
The petitioner never paid any interest on the excess withdrawals from the corporation, nor was he charged interest on such withdrawals. He did not execute any notes or other evidences of indebtedness with respect to such excess withdrawals.
*704 OPINION.
HILL: The issue presented for decision in this case is whether the withdrawals by petitioner of funds from the printing company, of which he was the sole stockholder, in the years*850 prior to 1932, constituted dividends taxable to him as income for the respective years in which withdrawn, as contended by petitioner, or whether there was a dividend taxable to petitioner in the year 1932 in the aggregate amount of such withdrawals, as contended by the respondent.
Section 115(a) of the Revenue Act of 1932 defines the term "dividend" as meaning any distribution made by a corporation to its shareholders, whether in money or other property, out of its earnings or profits accumulated after February 28, 1913.
It is agreed by the parties that the printing company at all times had accumulated earnings or profits in excess of petitioner's withdrawals.
The issue here presents primarily a question of fact. It is obvious that a withdrawal by a stockholder of funds of a corporation does not necessarily constitute a distribution of profits, even if the corporation has an accumulation of profits in excess of the withdrawal; and such withdrawal may or may not, in the light of that fact alone, be said to be a dividend. A corporation may lend its funds, including earnings, with or without interest, on open account or upon notes, secured or unsecured; and such privilege*851 is not restricted to the lending of its funds to persons other than stockholders. Therefore, whether the withdrawals of corporate funds by petitioner, here in controversy, constituted loans or dividends in the years when withdrawn must be determined from the facts in the record before us; and the record, we think, clearly identifies the withdrawals as being loans prior to December 1932.
Petitioner points to the fact that he paid no interest on the amounts withdrawn, nor was any charged, and that he executed no notes or other evidences of indebtedness to the corporation. But these facts are not necessarily controlling. The withdrawals may still have been bona fide loans.
The amounts withdrawn each year were charged against petitioner's account on the books of the corporation, and were concurrently treated as loans both by the corporation and by petitioner. This is evidenced on the part of petitioner by the facts that in his original individual returns he did not report the amounts as dividends. If they were in reality dividends, and petitioner had no intention of repaying the amounts to the corporation, then, this fact necessarily being known to petitioner, the premises*852 compel the conclusion that he fraudulently understated his taxable income. However, fraud is not lightly to be imputed, nor such presumption *705 indulged except as the result of clear and convincing proof. ; affd., . In the absence of proof, we can not assume that the withdrawals were at the time intended to be distributions of profits, and not loans.
Also, the uncontradicted evidence affirmatively shows that the corporation consistently treated the withdrawals as loans on its books up to December 1932. In the balance sheets of the corporation attached to its original returns for each of the years from 1925 to 1931, inclusive, petitioner's withdrawals were included as accounts receivable and shown as an asset. This was wholly inconsistent with the idea that the withdrawals were dividends in the respective years.
As of December 31, 1932, petitioner's account on the corporation's books was credited with the full amount of the total withdrawals and a new account opened with a corresponding debit. The new account was entitled "Withdrawals of Profits not Formally Authorized in the Minutes of*853 the Company." Thereafter, the amount of the withdrawals was no longer carried as an asset, and, in the balance sheets of the corporation attached to its original return for 1932, the amount was not included in accounts receivable.
Petitioner argues on brief that by the entries referred to the debit balance of his account was not charged off the books, but we think the record does not support this contention. Not only did the balance of petitioner's account disappear as an asset of the corporation because of the credit to his account, but the amount in effect was charged against surplus. It is apparent that the new account, which recorded the unauthorized withdrawals removed from petitioner's personal account, was in effect merely a subdivision of the surplus account. True surplus could not be determined except by transferring the debit balance of that account into the surplus account.
By the action taken by the corporation in December 1932, petitioner for the first time acquired the unrestricted ownership of the withdrawn funds in his individual capacity. As the result of that action, the aggregate amount became a dividend, and petitioner was released from liability to repay. *854 The effect was precisely the same as if the corporation had formally declared a dividend in that amount and credited the same to petitioner's account. Theretofore, if the corporation had become insolvent, creditors might have required petitioner to pay into the corporation the amount shown as owing to it on his account; or, if by reason of a new venture or an expansion of business, the corporation needed additional funds, which were furnished by petitioner and credited on his account, it would not have constituted a contribution of capital but a payment of his indebtedness to the corporation.
*706 Respondent has determined that the withdrawals in controversy constituted loans in the years in which withdrawn and that by the corporate action taken in 1932, with the consent of petitioner, a dividend in the total amount of the loans was credited to petitioner in discharge of the loans, and that such dividend was taxable in the year 1932. The evidence is insufficient, we think, to establish that respondent's determination is erroneous.
We had before us a similar situation in *855 ; affd., ; certiorari denied, . That case involved debit balances as of December 31, 1924, standing on the books of a corporation of which the petitioners were stockholders, and representing withdrawals previously made by them. We held the amounts to be income to the petitioners not when the withdrawals were made, but in 1928, when, by appropriate corporate action, the balances were canceled and charged against surplus. To the same effect see ; and compare .
The conclusion reached renders it unnecessary to consider respondent's plea of estoppel.
Judgment will be entered for the respondent.