*65 Decision will be entered under Rule 50.
1. Held, that the mere crediting of dividends to the accounts of petitioner's stockholders under the circumstances existing in the instant case did not constitute payments and petitioner is not entitled to a basic surtax credit of $ 39,200 as claimed in its personal holding company return for dividends paid during the taxable year, section 27 (b) (1) of the Internal Revenue Code.
2. Petitioner was licensed on December 31, 1942, to pay dividends of $ 39,200 through the Chase National Bank of New York City to be credited to the blocked accounts of petitioner's two stockholders. On the same date petitioner issued two checks aggregating $ 28,400 drawn on the Chase National Bank of New York City and payable to the Chase National Bank for deposit to the credit of the blocked accounts of the two stockholders. These two checks were delivered by petitioner to the authorized agent of the two stockholders and this agent mailed them on December 31, 1942, to the Chase National Bank for deposit to the credit of the two stockholders. The checks were deposited to the credit of the two stockholders on January 2, 1943. Held, there was a payment*66 of dividends by petitioner of $ 28,400 on December 31, 1942, and petitioner is entitled to a dividends paid credit of that amount under section 27 (b) (1) of the Internal Revenue Code.
*613 Respondent determined a deficiency in petitioner's personal holding company surtax in the amount of $ 30,753.69 and an overassessment in petitioner's income tax in the amount of $ 732.69 for the calendar year 1942. Respondent determined that petitioner reported its income on a cash receipts and disbursements basis and accordingly eliminated $ 2,355.41 from the dividend income erroneously reported by petitioner. This adjustment to petitioner's net income is not contested. Respondent also determined that in the computation of petitioner's undistributed subchapter A net income, section 504 of the Internal Revenue Code, petitioner was not entitled to any dividend paid credit as defined by section 27 (b).
By appropriate assignment of error petitioner contests the disallowance of a dividend paid credit and contends that it is entitled to a credit of $ 39,200, the amount claimed in its tax return. In support of this assignment of error, petitioner alleges facts as follows:
On or before the end of the calendar year December 31, 1942, the corporation credited*68 the account of Charles E. Bedaux with dividends in the sum of $ 3,920 and the account of Fern L. Bedaux in the sum of $ 35,280, and pursuant to the long custom and practice by the parties, such transfer on the books of the corporation to the said stockholders constituted a payment of the said dividends. On or before the end of the calendar year December 31, 1942, there was actually transferred from the account of the corporation to the personal account of Charles E. Bedaux the sum of $ 2,840, and to the account of the said Fern L. Bedaux the sum of $ 25,560, or a total sum of $ 28,400; and thereafter on or about the 30th day of January, 1943, a further sum of $ 1,080 was transferred to the individual bank account of Charles E. Bedaux, and the sum of $ 7,920 was transferred to the individual account of Fern L. Bedaux.
FINDINGS OF FACT.
Petitioner is a corporation organized in 1922 under the laws of the State of Delaware. Its corporate income and declared value excess-profits *614 and personal holding company tax returns for the calendar year 1942 were filed with the collector of internal revenue for the third district of New York.
During 1942 petitioner was a personal holding*69 company with 10 per cent of its stock owned by Charles E. Bedaux and 90 per cent of its stock owned by Fern L. Bedaux, wife of Charles E. Bedaux. During 1942 Charles and Fern constituted the petitioner's board of directors, and during the taxable year there was no meeting of the board of directors of petitioner.
In 1942 and prior thereto Charles and his wife were in Occupied France. They were unable to communicate regularly with petitioner's management during 1942 due to war conditions. In December 1941 Charles and Fern were able to send a cablegram from France to petitioner which cablegram read:
International Bedaux Company, Incorporated,
6300 Chrysler Building,
New York.
Attention of Mrs. Waite stop We hereby appoint Mrs. Isabel Cameron Waite as sole representative of the International Bedaux Company with full discretionary powers and without limit of time.
Charles and Fern Bedaux, sole stockholders.
The cablegram was followed by a letter to Mrs. Waite, reading:
23 December, 1941
Mrs. Isabella Waite,
14832 86th Avenue,
Jamaica, Long Island, N. Y.
Dear Friend:
Enclosed is a copy of our cable making you sole representative of International Bedaux. *70 Now you have a real job on your hands. But you are silly to think you are not equal to it. I know you will fight for International with tooth and nails. * * *
* * * *
Congratulations. Fix your own salary. And Happy New Year. You have our deepest affection.
(Signed) Charles and Fern Bedaux.
Under date of January 10, 1942, petitioner received the following cable from Fern and Charles:
International Bedaux,
101 Park Avenue,
New York, New York.
Attention of Mrs. Isabella Waite
We confirm Charles Bedaux gives to Mrs. Isabella Waite powers for management of personal interests.
Fern and Charles Bedaux.
Pursuant to these instructions Mrs. Waite assumed the responsibility for the management of petitioner's business in 1942 and continued *615 in this capacity after 1942. She had been an employee of petitioner for more than 10 years and was its secretary and treasurer and largely in charge of its business affairs.
During 1942, the bank accounts of petitioner and those of Charles E. Bedaux were blocked by the Treasury Department. Apparently Fern L. Bedaux had no bank account in the United States during that time. On December 30, 1942, the petitioner made an application, *71 signed by Isabella C. Waite as secretary of petitioner, to the Treasury Department to pay dividends from the blocked bank account of petitioner. The following statement was made a part of the application:
Applicant is now operating under license No. NY 461419-BE expiring December 31, 1942, and it has been licensed to operate for the first six months of the year 1943 under license No. NY 492597-BE dated January 1, 1943.
During the year 1942 the estimated net income of the corporation is the sum of $ 39,243.80. Applicant is a holding corporation and is required to pay dividends on its earnings for the year 1942, otherwise it will be heavily penalized by the assessment of holding company surtaxes, which together with normal taxes would be a sum about equal to the corporation's net income.
The corporation has issued and outstanding 10,000 shares of its no par capital stock of which Fern L. Bedaux owns 9,000 shares, and Mr. Charles E. Bedaux owns 1000 shares. The last known address of Mr. and Mrs. Bedaux, said stockholders, was Lyon, France.
Applicant desires to pay a dividend in the sum of $ 39,200 of which amount $ 35,280 is payable to Mrs. Fern L. Bedaux and $ 3,920 is payable to*72 Mr. Charles E. Bedaux. At the present time the corporation has a cash balance of $ 39,952.87 from which to pay said dividends, and it has various sums which will be paid to it early in 1943 from royalties from its affiliated companies.
Applicant requests a license to pay the sum of $ 3,920 to the Chase National Bank of the City of New York, Grand Central Branch, to be credited to the blocked account of Mr. Charles E. Bedaux, and the sum of $ 35,280 to Isabella C. Waite and George Link, Jr., as attorneys in fact for Mrs. Fern L. Bedaux, to be paid to the Chase National Bank of the City of New York, Grand Central Branch for credit to the blocked account of Isabella C. Waite and George Link, Jr., as attorneys in fact for Mrs. Fern L. Bedaux.
On December 31, 1942, based upon the statements made in the application the Treasury Department issued to petitioner the license which, in part, stated:
1. Pursuant to your application of December 30, 1942, the following transaction is hereby licensed:
Make payments aggregating $ 39,200.00 to the following, covering capital stock dividend by withdrawal from your account at the domestic bank or banks of deposit mentioned in your License No. NY-461419-BE, *73 or the renewal thereof:
$ 3,920.00 to the Chase National Bank of the City of New York, Grand
Central Branch, New York, N. Y., for credit to the blocked account
of Mr. Charles B. Bedaux
35,280.00 to the Chase National Bank of the City of New York, Grand
Central Branch, New York, N. Y., for credit to the blocked account
of Isabella C. Waite and George Link, Jr., as attorneys in fact for
Mrs. Fern L. Bedaux.
*616 The license authorizing the release of funds in petitioner's blocked bank account was received by Isabella between three and four p. m. on December 31, 1942. Thereafter, on December 31, 1942, she recorded on petitioner's books as a liability the amount of $ 39,200 for dividends payable, making the following journal entries:| Account No. | Dr. | Cr. |
| 169 Surplus | $ 39,200 | |
| 174 To Dividends Payable | $ 39,200 | |
| Dividend of $ 3.92 per share on 10,000 shares by consent | ||
| of stockholders. | ||
| 174 Dividends Payable | 35,280 | |
| 161 To Mrs. Fern L. Bedaux | 35,280 | |
| To credit Mrs. Bedaux's account with $ 3.92 per share | ||
| on 9,000 shares. | ||
| 174 Dividends Payable | 3,920 | |
| 160 To Mr. Chas. E. Bedaux | 3,920 | |
| To credit Mr. Bedaux's a/c with $ 3.92 per share on | ||
| 1,000 shares. |
*74 Appropriate entries were made in the general ledger accounts of petitioner in order to record these journal entries.
Isabella then, on the same day, mailed two checks made payable to the order of Chase National Bank and dated December 31, 1942, for deposit with the Chase National Bank. Petitioner's check C 4280 was in the amount of $ 25,560 and was deposited in the blocked account of Isabelle C. Waite and George Link, Jr., as attorneys in fact for Fern L. Bedaux. Petitioner's check C 4281 was in the amount of $ 2,840 and was deposited in the blocked account of Charles E. Bedaux. Both checks were credited to the said accounts on January 2, 1943. Entries reflecting the dividend payments by checks were made in petitioner's books on December 31, 1942.
The amount of $ 10,800 representing the balance of dividends was deposited to the aforementioned bank accounts sometime during January 1943.
Petitioner's ledger account for Charles E. Bedaux was offered as an exhibit at the hearing. The account's balance on January 1, 1942, was $ 14,326.28. During 1942 seven debits and one credit were made to the account, including the one debit and one credit made on December 31, 1942, to record *75 the dividend transaction. The account on December 31, 1942, showed a credit balance of $ 6,398.48.
The first entry shown on petitioner's ledger account for Fern L. Bedaux, which was also included in the record as an exhibit, is the $ 35,280 credit made on December 31, 1942, for dividends. After recording on the account the dividend check for $ 25,560 on December 31, 1942, the balance of the account was $ 9,720 which was the year-end balance of the account. This remaining $ 9,720 was charged to the account January 31, 1943, when that amount was deposited to the *617 credit of Fern L. Bedaux's blocked account with the Chase National Bank.
In the deficiency determination respondent allowed no dividends paid credit in the computation of petitioner's undistributed subchapter A net income.
In their individual income tax returns for the calendar year 1942, Charles and Fern reported these dividends as income received for the calendar year 1942.
The payment of dividends by petitioner, acting through and by Isabella C. Waite who was secretary and assistant treasurer of petitioner and authorized to act for petitioner on all financial matters, was subsequently approved and ratified by *76 Charles E. Bedaux and Fern L. Bedaux.
Petitioner's personal holding company return for 1942, which was timely filed on Form 1120H, showed subchapter A net income of $ 38,771.51. This return also showed a dividends paid credit of $ 39,200, which, when taken into account in the computation, showed no "undistributed subchapter A net income."
Petitioner paid dividends to its two stockholders aggregating $ 28,400 on December 31, 1942.
OPINION.
In computing petitioner's undistributed subchapter A net income for the year 1942, respondent disallowed the entire dividends paid credit claimed by petitioner in the amount of $ 39,200, and he still contends that his disallowance of the entire amount was correct.
Petitioner, on the other hand, contends that it is entitled to a dividends paid credit of the entire amount of $ 39,200 which it claimed on its personal holding company return. The basis of this contention is that constructive payment of this amount of dividends was made by petitioner on December 31, 1942, by unconditionally crediting to the account of its stockholder, Fern L. Bedaux, $ 35,280 and by unconditionally crediting to its other stockholder, Charles E. Bedaux, on the same date, *77 $ 3,920. Petitioner further points out that each of the stockholders reported on his income tax return for 1942 the full amount of the dividends thus credited as having been received in 1942, and paid tax thereon. Petitioner contends in the alternative that if it be held that it did not constructively pay to its two stockholders $ 39,200 dividends in 1942, that, nevertheless, it actually paid dividends in that year of $ 28,400 to its two stockholders of record and that it is entitled to a dividends paid credit of at least that amount in 1942.
*618 The basis of this latter contention is that on December 31, 1942, petitioner issued its check for $ 25,560 as a dividend on the stock owned by Fern and its check for $ 2,840 as a dividend on the stock owned by Charles, and that petitioner delivered these two checks to Isabella C. Waite, the duly appointed agent of the two stockholders, for deposit in the Chase National Bank for the account of each of the stockholders. Petitioner contends that the delivery of those two checks to Isabella C. Waite, as agent of the stockholders, was payment to them of the dividends in 1942, although the checks were not actually deposited to the accounts*78 of the two stockholders in the Chase National Bank until January 2, 1943.
Petitioner, a personal holding company, in the computation of its undistributed subchapter A net income, section 504 (a) of the Code, is entitled to a credit for dividends paid during the taxable year, section 27 (b) (1) of the Code, which reads as follows:
SEC. 27. CORPORATION DIVIDENDS PAID CREDIT.
* * * *
(b) Basic Surtax Credit. -- As used in this chapter the term "basic surtax credit" means the sum of:
(1) The dividends paid during the taxable year, increased by the consent dividends credit provided in section 28, and reduced by the amount of the credit provided in section 26 (a), * * *
In regard to the time and manner of dividend payments it is provided in Treasury Regulations 111 at section 29.27 (b)-2 that:
* * * A dividend will be considered as paid when it is received by the shareholder. An allowance for dividends paid will not be permitted unless the shareholder receives the dividend during the taxable year for which the credit is claimed.
If a dividend is paid by check and the check bearing a date within the taxable year is deposited in the mails, in a cover properly stamped and addressed*79 to the shareholder at his last known address, at such time that in the ordinary handling of the mails the check would be received by the shareholder within the taxable year, a presumption arises that the dividend was paid to the shareholder in such year.
The payment of a dividend during the taxable year to the authorized agent of the shareholder will be deemed payment of the dividend to the shareholder during such year.
If a corporation, instead of paying the dividend directly to the shareholder, credits the account of the shareholder on the books of the corporation with the amount of the dividend, the allowance for a dividend paid will not be permitted unless it be shown to the satisfaction of the Commissioner that such crediting constituted payment of the dividend to the shareholder within the taxable year.
It will be noted that the last paragraph of the foregoing regulation provides for constructive payment of the dividend by a credit to the stockholder. The Commissioner has determined that constructive payment to the stockholders of $ 39,200 was not made to them in 1942, within the meaning of the regulation. We doubt if petitioner's evidence *619 on this point is sufficient*80 to overcome the presumptive correctness of respondent's determination.
Our Findings of Fact show that on December 31, 1942, petitioner issued checks in payment of the dividends to the two stockholders which aggregated $ 28,400 and delivered them to Mrs. Waite, who was agent and representative of the stockholders. Mrs. Waite was the only witness who testified at the hearing and in her testimony she explained why checks were not issued for the full amount of the dividends, namely, $ 39,200. She explained this matter in her testimony when speaking of the checks which were issued on December 31, 1942, as follows:
I believe it was $ 28,200.00 in the case of Mrs. Bedaux -- substantially that amount -- and $ 2,920 in the case of Mr. Bedaux. It was in equal proportions to the stock ownership, for as much as we could pay out without leaving International without any funds whatsoever.
It will be noted that Mrs. Waite's recollection as to the amounts of these checks is not accurate. However, for the purposes of this discussion, that inaccuracy is not material. The amounts of these two checks are correctly stated in our Findings of Fact. In the face of this testimony by Mrs. Waite, we*81 would be unable to find that petitioner made constructive payment of $ 39,200 dividends in 1942 within the meaning of (B)-2 (B)-2 section 29.27 (b)-2 of Treasury Regulations 111, quoted above. Cf. Husted Co., 43 B. T. A. 446. The mere making of bookkeeping entries does not constitute payments, but under certain circumstances they may constitute payment. We do not think that the facts and circumstances proved in the instant case show constructive payment. We hold against petitioner on that particular issue.
It will be noted, however, that a paragraph in this same regulation reads: "The payment of a dividend during the taxable year to the authorized agent of the shareholder will be deemed payment of the dividend to the shareholder during such year." We think that the facts show that this part of the regulation has been complied with to the extent of $ 28,400. Petitioner on December 30, 1942, made application to the Treasury Department to pay dividends from the blocked account of petitioner in the sum of $ 39,200. On December 31, 1942, permission was granted by the Treasury Department to pay dividends aggregating $ 39,200. However, for reasons stated by Mrs. *82 Waite in her testimony, checks were not issued for the full amount of $ 39,200. A check for $ 25,560 was issued as part payment of the dividend on the shares of stock owned by Fern, and a check for $ 2,840 was issued as part payment of the dividend on the shares of stock owned by Charles. Both of these checks were delivered to Isabella Waite as the agent for the Bedauxs. She was unquestionably their lawful agent with full power to receive these checks on their behalf, and we think that she did so on December 31, 1942. Immediately after receiving them she *620 mailed them to the Chase National Bank in New York City for deposit to the credit of the accounts of the two stockholders. The mere fact that these two checks were not received and credited by the Chase National Bank until January 2, 1943, to the blocked accounts of the two stockholders does not mean that the dividends in the respective amounts of $ 25,560 and $ 2,840 had not been paid to the two stockholders in 1942. Cf. Estate of Modie J. Spiegel, 12 T. C. 524, and Estelle Broussard, 16 T.C. 23">16 T. C. 23.
It should be remembered that we do not have the question *83 here as to when the dividends were received by the stockholders, although the evidence shows that they reported the dividends as having been received in 1942, and paid income taxes thereon. Our question here is when petitioner paid the dividends aggregating $ 28,400. It unquestionably issued its checks in that amount on December 31, 1942, and delivered them to the agent of the two stockholders, with no strings attached. That we think constituted payment. In the Broussard case, supra, we said:
* * * When the Rice Mills checks were delivered by C. E. Broussard to Sister Mary Rita Estelle in her capacity as a Sister of the Holy Cross, delivery to that Order occurred. Such seems plainly to have been the intention of the parties and there is no valid reason so far as we can see why their intention should not be given its legal effect. When this is done, we think a payment of the $ 6,000 in question to the Sisters of the Holy Cross took place on December 31, 1946.
When this same logic is applied to the facts which we have here, we think it can be said that when petitioner's two dividend checks aggregating $ 28,400 were delivered to Isabella C. Waite as the authorized agent *84 of petitioner's two stockholders, delivery to the two stockholders occurred. Such seems plainly to have been the intention of the parties and there is no valid reason so far as we can see why that intention should not be given its legal effect. When this is done, we think a payment of the $ 28,400 in question to the two stockholders took place on December 31, 1942, and we so hold. We do not think it is material that the two checks were not actually deposited to the accounts of the two stockholders until January 2, 1943.
Decision will be entered under Rule 50.