*2903 The respondent's determination that certain payments received by petitioner in 1921, which were made out of corporate funds, were dividends within the meaning of section 201(a) of the Revenue Act of 1921, approved.
*814 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for 1921, in the amount of $34,303.20. The entire deficiency is not in dispute but only so much thereof as results from the respondent's action, (1) in holding that certain payments made, in cash, to the petitioner by the Pittsburgh & Bessemer Coal Co. were dividends subject to surtax; and (2) in allowing a credit for but one instead of two dependent persons under 18 years of age, for the purpose of computing the normal tax. At the hearing the parties stipulated that respondent, in computing the normal tax, had allowed a credit of $400 for one dependent person, and that the petitioner is entitled to a credit of $800 for two dependent persons. This stipulation disposes of the second issue, leaving only the first for our consideration and decision.
*2904 FINDINGS OF FACT.
Petitioner, an individual having his office at 706 First National Bank Building, Pittsburgh, Pa., is the president and one of the two stockholders of the Pittsburgh & Bessemer Coal Co., a Pennsylvania corporation carrying on business as a coal sales agency.
The Pittsburgh & Bessemer Coal Co. was organized in 1916 and received its charter in January, 1917.
During 1917 and 1918, petitioner owned all of the capital stock of the Pittsburgh & Bessemer Coal Co. On January 1, 1919, A. S. McQueen acquired 26 per cent of the stock of that company; and throughout 1919, 1920, and 1921, the capital stock of the said company was owned by the petitioner and A. S. McQueen in the proportions of 74 per cent and 26 per cent, respectively.
Acting in accordance with the advice and instructions of counsel, the Pittsburgh & Bessemer Coal Co. filed returns of income, for 1918, 1919, and 1920, on Form 1065, as a personal service corporation. In his return for 1918 petitioner reported all of the taxable income of *815 the aforementioned company as reflected by its books of account for that year; while for 1919 and 1920 he reported 74 per cent of the income of the said*2905 company for those years.
On March 14, 1919, the coal company issued a voucher check to Lamb for $7,563.82, which bore the following notation: "In payment of one-fourth of 1918 Federal Taxes included in personal return filed by F. G. Lamb with Collector of Internal Revenue." Three promissory notes dated March 15, 1919, were issued by the company to Lamb, each for $7,563.82, payable on demand, without interest. The company paid these notes by three checks dated June 10, 1919, September 2, 1919, and December 1, 1919. The petitioner gave the collector his personal checks on June 11, 1919, September 9, 1919, and December 1, 1919, each in the amount of $8,035.76.
At or about the time for filing returns for the calendar year 1919, petitioner and A. S. McQueen, as officers and sole stockholders of the Pittsburgh & Bessemer Coal Co., agreed that should assessments of additional taxes be made against them or any refunds of taxes be made to them they would adjust the matter between themselves and the company as the necessities of the occasion required and as their interests might appear. This agreement was later reduced to writing, as will hereinafter more fully appear.
The income*2906 reported by the petitioner in his return for 1920 as his distributive share of the net income of the Pittsburgh & Bessemer Coal Co. amounted to $162,184.16, and the portion of the total tax shown on the return attributable to including the said sum of $162,184.16 as income amounted to $84,255.62. The total tax shown on his return was paid by the petitioner in four installments on or before the due dates thereof.
During 1921 the Pittsburgh & Bessemer Coal Co. made cash payments to petitioner as follows:
| Date | Voucher No. | Amount |
| Mar. 11 | 305 | $22,000.00 |
| June 6 | 603 | 22,000.00 |
| Sept. 13 | 907 | 22,000.00 |
| Dec. 12 | 1,204 | 18,255.62 |
| Total | 84,255.62 |
Each of the above listed vouchers contained a notation substantially as follows: "Advance Account U.S.I. Revenue Taxes 1920." In or about the month of April 1921, there was assessed against the petitioner additional income tax for 1918, in the amount of $1,866.80, which he paid; and on June 21, 1921, the Pittsburgh & Bessemer Coal Company, by its voucher numbered 617, paid a like amount, in cash, to petitioner, the voucher containing the notation, "Account *816 of U.S.I.R. Income Taxes for 1918." The total*2907 payments made to the petitioner amounted to $86,128.70. During the same year, the company made four cash payments to A. S. McQueen, totaling $16,727.62, each voucher containing a notation to the same effect as, "Advance Account U.S.I.R. Taxes 1920." The petitioner deposited these advances in his bank account and paid each installment of the tax by his personal check.
All of the foregoing payments to the petitioner and McQueen were made in pursuance of a consistent practice of the company, inaugurated in 1918, to pay to the stockholders that portion of their total taxes attributable to including in income their respective shares of the company's net income. The payments in 1919 retired promissory notes of the corporation but thereafter the payments were direct and notes were not issued to cover unpaid installments. As these payments were made, they were charged to the accounts of the petitioner and McQueen on the company's books. With payment of each successive installment of their 1920 income taxes, the accounts of these stockholders were credited with that portion of each installment attributable to including in income their distributive shares of the company's net income, *2908 and corresponding charges were made to an account denominated "Income Taxes 1920" which at the end of 1921 was closed by a charge to surplus.
On August 10, 1925, the Pittsburgh & Bessemer Coal Co., the petitioner, and A. S. McQueen, Executed the following agreement:
MEMORANDUM OF AGREEMENT
Made and entered into this 10th day of August A.D. 1925, between Pittsburgh & Bessemer Coal Company, a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania, party of the first part, and Fred G. Lamb and A. S. McQueen, both of the City of Pittsburgh, County of Allegheny and State of Pennsylvania, parties of the second part, as follows:
WHEREAS, the party of the first part has at divers times and for divers years filed its income and profits tax returns with the Federal Government upon the basis of being a personal service corporation, and,
WHEREAS, the parties of the second part have concurrently with the filing of said returns, taken up their proportionate share of the taxable income of the party of the first part, including said income in the individual incomes of the parties of the second part, paying the taxes of the party of the first part, along*2909 with their individual payments thereon, and,
WHEREAS, the party of the first part placed in the hands of the parties of the second part, the funds necessary to pay the taxes on the income of the party of the first part included in said returns, and,
WHEREAS, the parties of the second acting for and on behalf of the party of the first part paid over to the Collector of Internal Revenue said proportionate share of taxes, and,
WHEREAS, the tax returns of the party of the first part may be revised by the Bureau of Internal Revenue on a different basis from personal service, and,
WHEREAS, such revision may result in readjustment,
*817 Now, THEREFORE, in consideration of the foregoing as well as of the mutual advantages arising herefrom, and in further consideration of the sum of One Dollar, ($1.00) passing from each of the parties hereto to the other, receipt whereof is hereby acknowledged, it is mutually understood and agreed between the parties that in paying the taxes of the party of the first part as above set forth, the parties of the second part were acting merely as agents for the party of the first part; that in case of readjustment, the parties hereto will repay*2910 or refund to the other or others as the case may be, any and all sums appearing to be due in said readjustment; that the parties of the second part will deliver or pay to the party of the first part any and all amounts refunded to them on the income of the party of the first part being removed from the taxable income of the parties of the second part; and that the party of the first part will make whole the parties of the second part from any and all liabilities thereunder.
IN WITNESS WHEREOF, the party of the first part has caused these presents to be signed by its President, attested by its Secretary, and the Common or Corporate Seal affixed hereto, and the parties of the second part have set their hands and seals the day and year aforesaid.
Respondent determined deficiencies against the Pittsburgh & Bessemer Coal Co. for 1920 and 1921, in the amounts of $83,107.27 and $13,728.11, of which notice was given said company by deficiency notice dated September 30, 1926. Said deficiencies were based in part upon respondent's action in holding that the aforementioned company was not entitled to personal service classification for the years involved. An appeal was filed with this*2911 Board, in Docket No. 21137, which was decided in accordance with the following stipulation of the parties:
It is hereby stipulated and agreed by and between the parties to the above entitled appeal that the deficiency in tax for the year 1920 is $83,107.27, and for the year 1921 is $13,728.11.
In or about the month of October, 1926, respondent issued to the petitioner a certificate of overassesment, numbered 960780, of 1918 taxes, in the amount of $31,977.08. This certificate reads in part as follows:
An audit of your income tax return, Form 1040, waiver and credit agreement and a consideration of all of the claims (if any) filed by you for the year 1918 indicates that the tax assessed for this year was in excess of the amount due:
| Original assessment, Account #303660 | $32,143.05 |
| Additional assessment, April, 1921, list, page 21, line 0 | 1,866.80 |
| Total Assessment | 34,009.85 |
| Tax liability | 2,032.77 |
| Overassessment | 31,977.08 |
Your claims are based on the statement that you erroneously included $82,051.51, the net income of the Pittsburgh and Bessemer Coal Company, in your taxable income for 1918 as income from a personal service corporation.
*818 *2912 Inasmuch as this company has been denied personal service classification and is taxed as an ordinary corporation and it is apparent that the surplus was held intact, its net income has been eliminated from your return.
Notice and demand for income tax for 1918, in the total amount of $44,910.92, was made on the Pittsburgh & Bessemer Coal Co. by the collector of internal revenue at Pittsburgh, Pa., under date of March 28, 1927. Against the total tax of $44,910.92, there appeared this credit: "Cr. per 7777 IT-A-23484 $31,977.08," leaving a net amount of $12,933.84.
The minute book of the Pittsburgh & Bessemer Coal Co. shows only the following formal declarations of dividends by the directors:
June 27, 1917, $350 per share on 100 shares of record June 26, 1917.
September 26, 1917, $230 per share on 100 shares of record Sept. 25, 1917.
January 11, 1921, $400 per share on 100 shares of record Jan. 15, 1921.
The respondent's deficiency determination for the taxable year is based in part on his action in holding that the cash payments, totaling $86,128.70, made to the petitioner by the Pittsburgh & Bessemer Coal Co. during the year were dividends to the petitioner subject*2913 to surtax.
OPINION.
MORRIS: The question to be determined is whether certain payments received by petitioner from the Pittsburgh & Bessemer Coal Co. were dividends subject to surtax. A brief resume of the facts shows that the Pittsburgh & Bessemer Coal Co. during 1920 and 1921 had two stockholders and was engaged in operating a coal sales agency. The company, since its incorporation in 1917, had considered itself a personal service corporation and its income had been returned by petitioner until 1919 and thereafter by petitioner and A. S. McQueen. For 1920 petitioner and McQueen returned the company's income in their individual returns, the petitioner's portion thereof being $162,184.16 and the tax on this amount being $84,255.62. Petitioner elected to pay the tax due in installments and just prior to the due date of each installment the company issued a voucher to him covering the installment due. The same procedure was followed as to McQueen's portion. The petitioner deposited the voucher in his bank account and paid the installment due with his personal check. During 1921 he paid a deficiency assessed against him for 1918 taxes and was reimbursed therefor by the company. *2914 Personal service classification was subsequently denied the coal company and for 1918 a certificate of overassessment was issued to petitioner and was credited by respondent against a deficiency of the coal company for 1918. The petitioner denies that the payments, totaling $86,128.70, received by him in 1921 from the company represented dividends.
*819 Petitioner contends with respect to this latter amount that these payments were not dividends because dividends were not formally declared in these amounts, that they were not intended to be dividends nor were they treated as such by the stockholders or the corporation, and that he received the payments as an agent or trustee of funds placed in his hands for the specific purpose of paying the taxes on the corporation's net income.
The respondent contends that these payments were for the purpose of paying the petitioners individual income taxes for 1918 and 1920 and that as such the payments should be included in petitioner's net income as a distribution of corporate earnings. Respondent calls our attention to the evidence of record, which shows that these payments were at the end of the year charged to surplus. The*2915 respondent cites in support of his contention section 218(a) and (e) of the Revenue Act of 1918 and our decision in . Section 218(e) reads as follows:
Personal service corporations shall not be subject to taxation under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships. All the provisions of this title relating to partnerships and the members thereof shall so far as practicable apply to personal service corporations and the stockholders thereof: Provided, That for the purpose of this subdivision amounts distributed by a personal service corporation during its taxable year shall be accounted for by the distributees; and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for by the stockholders of such corporation at the close of its taxable year in proportion to their respective shares.
The company filed returns as a personal service corporation for the years 1918, 1919, and 1920. The statute clearly provides that the stockholders of a personal service corporation shall report in their*2916 individual returns amounts distributed to them during its taxable year and their respective proportions of the undistributed net income. Pursuant to that provision the petitioner returned his share of the company's net income for 1920 in his individual return for that year. The tax, based on that income, considering the taxable status of the company as shown by its return, was not that of the company, which the petitioner paid as an agent or trustee, but was his personal tax on income which the statute required him to report. The payment to him by the company of that part of his total tax clearly brings the case within the doctrine laid down in , wherein we held that the payment by a corporation of State and Federal income taxes assessed against its president constituted income to him in the year in which such taxes were paid.
Petitioner argues that, since dividends were not formally declared and the payments were not in proportion to stock holdings, *820 such payments should not be considered dividends. We have heretofore held that earnings or profits may be distributed without the formality of a declaration of dividends, and*2917 that this is particularly true where the distribution is made with the unanimous consent of the stockholders. ; ; and . We have also held that the mere fact that dividends were not in proportion to stock holdings is immaterial. , and While it appears that these payments were not proportionate to stock holdings, this discrepancy is accounted for by the fact that the petitioner's tax on his pro rata share of the income of the company was proportionately greater than that of McQueen's.
The petitioner insists that the agreement between the stockholders and the corporation, which was subsequently reduced to writing and is incorporated in our findings, should prevent us from approving the determination of the respondent. While this agreement is no doubt operative against or in favor of the parties thereto, as the case may be, it is not determinative of whether amounts received by petitioner are subject to income taxes.
Judgment will be entered*2918 under Rule 50.