*1399 1. During the years 1934 to 1936, inclusive, the petitioner corporation, Ross Brothers Horse & Mule Co., was engaged in the business of conducting a public auction and otherwise selling horses and mules on a commission basis. The petitioner, W. R. Ross, president and principal stockholder of the corporation, and several other officers of the corporation, bought and sold horses and mules, which purchases and sales were reflected by an account on the books of the corporation under the designation "W. R. Ross Mule Account." The petitioner corporation filed income tax returns reporting the income realized from the commission business, and partnership returns were filed reporting the profits reflected by the W. R. Ross mule account. There was no segregation of duties or time of the officers between the two activities and the computation of the portions of the profits distrbuted to the officers was based on the profits from both activities treated as a unit. Held, that the trading activities recorded in the W. R. Ross mule account were a part of the business of the corporation and the net profits realized therefrom constituted taxable income to it.
2. The corporation, Ross Brothers*1400 Horse & Mule Co., disposed of its business and all of its assets on December 31, 1936, and during 1937 conducted no business and had no income.
3. The petitioner, W. R. Ross, is liable, as transferee of the Ross Brothers Horse & Mule Co., for income and excess profits taxes of the Company for the years 1934 to 1936, inclusive.
4. The petitioners, W. R. Ross and Mary Catherine Ross, are entitled to deductions for two bad debts claimed for 1935 but are denied the deduction of another claimed for the same year.
*1155 The respondent has determined deficiencies in income and excess profits taxes as follows:
| Petitioner | Docket No. | Year | Income tax | Excess profits tax |
| W. R. Ross | 94474 | 1935 | $4,517.38 | |
| Mary Catherine Ross | 94475 | 1935 | 4,517.38 | |
| 1934 | 10,013.75 | $3,641.36 | ||
| Ross Brothers Horse & Mule Co | 94476 | 1935 | 11,957.35 | 4,348.13 |
| 1934 | 10,013.75 | 3,641.36 | ||
| 1935 | 11,957.35 | 4,348.13 | ||
| W. R. Ross | 98898 | 1936 | 8,123.71 | 7,022.88 |
| 1937 | 2,914.90 | 2,175.20 |
*1156 *1401 The principal question presented is whether the respondent erred in his determination that the petitioner corporation, Ross Brothers Horse & Mule Co., was conducting a trading business through an account designated on its books as the "W. R. Ross Mule Account", and that the profits reflected in that account constituted taxable income to the corporation. Another question presented is whether the Ross Brothers Horse & Mule Co., the corporation, was in existence in 1937 and received taxable income during that year. The respondent has also determined that petitioner W. R. Ross is liable, as transferee of the Ross Brothers Horse & Mule Co., for the income and excess profits taxes of that company for the years 1934 to 1937, inclusive. Another issue is whether petitioners W. R. Ross and Mary Catherine Ross are entitled to deductions for certain bad debts in the year 1935.
FINDINGS OF FACT.
The petitioners, W. R. Ross and Mary Catherine Ross, are husband and wife, residing at Fort Worth, Texas. For the year 1935 they filed separate income tax returns on the community property basis.
The petitioner, W. R. Ross, has been engaged in the horse and mule business since about 1904. At*1402 first he operated as a sole proprietor and his business consisted of buying horses and mules and shipping them to Fort Worth, Texas, where they were sold at an auction conducted by the Fort Worth Horse & Mule Co. Later he formed a partnership with a brother, and still later a third brother joined them in the business. By 1916 they had built up a considerable business as traders in livestock and they decided to incorporate and open their own auction or commission house in Fort Worth.
In December 1916 the three brothers caused the incorporation of the petitioner, Ross Brothers Horse & Mule Co., sometimes referred to herein as the corporation, with its principal office and place of business at Fort Worth, Texas. Article 2 of the corporate charter provided that "The purpose for which it is formed is the raising, buying and selling of live stock, particularly the buying and selling of horses and mules on commission and otherwise." It was understood between the brothers that the principal business of the corporation would be that of conducting public auctions and otherwise selling livestock on the commission basis. Petitioner W. R. Ross had been interested in trading in horses and*1403 mules, while his brothers had been more interested in trading in cattle and sheep, and it was agreed that each might continue to carry on a trading business on the side and that any profits resulting therefrom would belong to *1157 the respective individuals. Shortly after the corporation was organized W. R. Ross opened a trading account with the corporation and began buying and selling horses and mules through that account. The account was designated as the "W. R. Ross Mule Account" and was kept on the books of the corporation in the same way the accounts of a number of other individual traders were kept. It was agreed that, if W. R. Ross would support the public auction conducted by the corporation by bidding for horses and mules put up for sale, the corporation would not charge him any commissions on any horses and mules sold through his account.
The Ross Brothers Horse & Mule Co. had an authorized capital stock of $60,000, divided into 600 shares of a par value of $100 each. W. R. Ross subscribed and paid cash for 300 shares, while his two brothers subscribed and paid for the remaining 300 shares. W. R. Ross was made president of the corporation and one of his brothers*1404 was secretary and treasurer. Some few years later, probably in 1921 or 1922, the brothers withdrew from the business and W. R. Ross at that time acquired all of the stock except possibly two shares. One share was acquired by John C. Hicks for $100 cash in 1917, or at or about the time of the withdrawal of the brothers. Hicks had been employed by the corporation in the office and as bookkeeper since about the time of its organization and upon the retirement or withdrawal of the brothers he was made secretary and treasurer. At some date not shown a second share of stock was purchased by D. H. Pershall for $100 cash. At all times thereafter the issued and outstanding stock of the corporation stood 598 shares in the name of W. R. Ross and one share each in the names of John C. Hicks and D. H. Pershall.
In 1927 the business of the corporation had grown to such an extent that Ross felt he needed help and as a result he brought Frank Harp and D. H. Pershall into the business. Harp died in 1929 and Parker Jameson took his place, succeeding to both the duties and remunerations of Harp. The duties and responsibilities of Pershall and Harp, and later of Pershall and Jameson, were practically*1405 the same as those of Ross himself, except that Ross was "supposed to be the boss, and the guider." They assisted in the managing of the business, purchased and sold horses and mules, kept in touch with breeders and traders, and in general endeavored to promote both the auction and the trading businesses. They were allowed to share in the profits from both activities and were each given a salary allowance in the same amount as the salary paid to Ross. Beginning in 1924, Ross had allowed to John C. Hicks a small share of the profits from the trading business and when Pershall and Harp were brought into the business Hicks was allowed a more substantial share of such profits and was *1158 similarly allowed to share in the profits from the auction business. He took no part, however, in the conduct of the auctions and did not participate in the trading operations, but continued to devote his time to work in the office, where he kept or supervised the keeping of the books.
The W. R. Ross mule account, which in the beginning had been used to record the individual trading of W. R. Ross, was continuously maintained on the books of the corporation and during the years here in question*1406 was used to record all purchases and sales of horses and mules by Ross, Pershall, and Jameson, exclusive of those sold on commission. With respect to such purchases and sales there were no written agreements between the three individuals conducting such activities. Neither was there any written agreement with respect thereto between them and the corporation.
The corporation conducted its horse and mule auction in the city of Fort Worth, Texas. The auction was open to the general public and was conducted on Monday of each week and sometimes extended into the following day or days. The corporation maintained the facilities necessary for the conduct of the auction, including an office, receiving pens, feeding facilities, and a public auction ring with seating arrangements for the general public. The horses and mules were generally shipped to Fort Worth by train or truck. After the animals arrived they were cared for by employees of the corporation until sold and taken away by the purchaser. The corporation received a commission of $2.50 per head for each horse or mule sold at the auction for a price of $10 or more, but received no commission in case the animal brought less than*1407 $10. It was customary for the owner to be present at the auction or have some one there to represent him. If an owner thought the bid price for his animal was inadequate, he could withdraw the animal and put it up at a subsequent sale. If the animal was sold at such subsequent sale only one commission would be charged and such commission would be collected from the vendor. The corporation also charged the traders a certain fee for feeding and taking care of the animals while they remained in its pens or barns. In some instances the animals shipped to the corporation would be sold at private sale, in which event the corporation received the same commission. All such private sales were made with the knowledge of the owners. In all sales, whether made at auction or private sale, the records of the corporation and the statement or invoice delivered to the purchaser would show the names of the seller of each animal and the price paid therefor.
It was customary for individuals or partnerships trading with the corporation to make a deposit or otherwise arrange for credit. In purchasing the horses and mules from the breeders or owners to be *1159 shipped in for sale, the*1408 trader, having previously arranged for credit, would draw drafts on the corporation to cover the purchase price of the animals. In some instances breeders or owners of horses and mules desiring to sell them at the auction would draw drafts on the corporation to pay off a lien or encumbrance on the animals before they were shipped in. Sometimes the corporation advanced credit to traders who purchased animals at the auction or private sale, pending the shipment of such animals to other places.
The corporation found it necessary to borrow considerable sums of money in order to finance its customers. Such borrowengs were made from a bank upon the personal endorsement of W. R. Ross.
Throughout the years in question the corporation maintained separate accounts on its books for a large number of individuals and partnerships engaged in trading as described. When horses or mules were sold at auction or private sale, the purchaser received a statement or invoice from the Ross Brothers Horse & Mule Co. and when the purchase price was received its bookkeeper would credit the proper amount to the account of the vendor. After the account was charged with commissions and other expenses, *1409 the credit balance would be available to the vendor or he could leave it on deposit for future transactions. The corporation made no charge for keeping the accounts of the various traders.
The W. R. Ross mule account constituted a record of all purchases and sales of horses and mules initiated by the three officers of the corporation, namely, Ross, Pershall, and Jameson. About 90 percent of the purchases recorded in that account were made through the public auction and the remainder through private deals with breeders and traders. No separate pens or other facilities were maintained at the stockyards under the name of the W. R. Ross mule account and the animals thus purchased were usually held in the pens of the corporation, pending shipment to customers or agents in other parts of the country. The account was not charged for the use of such facilities, but charges for feed and other incidental expenses were entered thereon as in the account of other traders. If the animals purchased through the account were to be held for any length of time they would be shipped out to a farm owned by W. R. Ross. The animals purchased through the account were usually shipped to agents or*1410 customers in other places, such as Atlanta, Georgia, and Memphis, Tennessee, and large numbers were sold to the United States Government, the Turkish Government and to interests in the West Indies. Occasionally animals that had been purchased through the account would be sold through the auction. No charge was made on the books of the corporation for commissions on the sales of animals carried through the W. R. Ross mule account, whether the sale was through the auction or privately.
*1160 Only one bank account was maintained and that stood in the name of the corporation. Any funds reflected by the books of the corporation as belonging to the W. R. Ross mule account were commingled with the funds derived from commissions or other sources of profit. The W. R. Ross mule account had no stationery or other independent business forms of its own. The letterhead on the stationery of the corporation set forth the names of the officers and reads as follows: "Ross Brothers Horse & Mule Co. - Wholesale Horses, Mules and Commission Dealers - Ft. Worth, Texas." The same heading was printed on the invoices, drafts, and other forms used in the commission and trading business. The*1411 stationery was used for correspondence pertaining to the trading business conducted under the mule account as well as the commission business.
Throughout the years 1934 to 1936, inclusive, the corporation paid salaries to its officers as follows: W. R. Ross, president, $6,000; D. H. Pershall, vice president, $6,000; Parker Jameson, vice president, $6,000; and John C. Hicks, secretary and treasurer, $2,400. No part of the salaries of these individuals was charged to the W. R. Ross mule account.
The corporation filed income tax returns for the years 1917 to 1936, inclusive, in which it reported the income derived from the commission business but it did not report in these returns any part of the income derived from the trading activities reflected by the mule account. For the years 1934 to 1936, inclusive, the returns filed by the corporation showed gross income, net income, and dividends paid as follows:
| Year | Gross income | Net income | Dividends paid |
| 1934 | $46,714.50 | $10,242.16 | 1 $10,242.16 |
| 1935 | 57,776.61 | 15,203.16 | 15,203.16 |
| 1936 | 56,014.50 | 11,126.21 | 11,126.21 |
*1412 At the end of each year the entire amount shown as the net income of the corporation was distributed to its four officers and reported by them in their returns as dividends received. The distributions for the years 1934, 1935, and 1936 were made as follows:
| 1934 | 1935 | 1936 | |
| W. R. Ross | $5,377.12 | $7,981.65 | $5,841.26 |
| D. H. Pershall | 1,995.49 | 2,787.25 | 2,039.80 |
| Parker Jameson | 1,995.49 | 2,787.25 | 2,039.80 |
| John C. Hicks | 874.06 | 1,647.01 | 1,205.35 |
| Total | 10,242.16 | 15,203.16 | 11,126.21 |
*1161 During the years in which the mule account constituted a record of the purchases and sales of horses and mules initiated by W. R. Ross, that is, prior to about 1924, the profits or losses resulting therefrom were reported in the individual returns of W. R. Ross and his wife. After Hicks, Pershall, and Jameson began to share in the profits, they reported in their individual returns pro rata shares of such profits or losses. No separate returns were filed on behalf of the mule account for the years 1917 to 1932, inclusive. During the year 1934 a revenue agent, in the course of his examination of the books of the corporation, advised Hicks that partnership*1413 returns should be filed for the W. R. Ross mule account. Such a return was prepared by the agent for 1933 and since that time partnership returns have been filed on behalf of that account each year. The gross receipts from sales and the net profits therefrom reflected by the mule account were reported on partnership returns for the years 1934 to 1937 and were as follows:
| Year | Gross receipts | Net profits |
| 1934 | $843,324.17 | $72,783.04 |
| 1935 | 1 353,035.92 | 87,138.58 |
| 1936 | 852,908.13 | 58,504.04 |
| 1937 | 595,591.34 | 29,482.91 |
Distribution of the net profits of the mule account was shown on the partnership return as follows:
| 1934 | 1935 | 1936 | 1937 | |
| W. R. Ross | $41,661.10 | $49,197.75 | $34,273.94 | $16,461.29 |
| D. H. Rershall | 12,359.72 | 13,275.41 | 7,983.55 | 5,405.20 |
| Parker Jameson | 12,359.72 | 13,275.41 | 7,983.55 | 5,405.20 |
| John C. Hicks | 6,402.50 | 11,390.01 | 8,263.00 | 2,211.22 |
| Total | 72,783.04 | 87,138.58 | 58,504.04 | 29,482.91 |
*1414 In arriving at the distributable profits of the mule account at the end of each year, the inventory of horses and mules on hand at the time would be included and the credit balance, or net income shown, would be transferred and credited to the accounts of the four officers of the corporation as shown above. A portion of the profits reported in the W. R. Ross mule account return for each of the above years were amounts representing 50 percent of the profits of three partnerships, namely, Franklin & Co., Neal & Ross, and E. J. Ward & Co., which conducted regular trading with the corporation, each having a separate account on the corporate books. The W. R. Ross mule account was considered as owning a one-half interest in each of those partnerships.
*1162 The gross income reported by the corporation consisted of profits derived from commissions, sale of feed, insurance, interest, sale of halters and yardage, yardage being the excess of amounts collected from consignors over the amount paid to stockyards for the rent of stalls, while the gross income reported on the partnership return for the mule account consisted entirely of profits from trading in horses and mules plus*1415 50 percent of the profits of each of the three partnerships mentioned above, which were also engaged in trading activities. For the years 1934, 1935, and 1936 the gross income reported by the corporation was made up of the following:
| 1934 | 1935 | 1936 | |
| Commissions received | $59,739.10 | $81,152.65 | $66,645.85 |
| Sale of feed | 8,757.08 | 5,079.29 | 14,107.27 |
| Interest received | 1,588.56 | 5,693.18 | 6,465.30 |
| Insurance | 761.20 | 719.83 | 543.68 |
| Yardage | 456.00 | ||
| Sale of halters | 3,724.05 |
Except for the two shares of stock in the corporation purchased by Hicks and Pershall for $100 per share, neither Hicks, Pershall, Harp nor Jameson made any investment in the corporation, nor did they ever pay anything to Ross for any of the 598 shares which stood in his name. By oral agreement, however, "the stock was considered as having been owned" by the four individuals in certain proportions and distribution of the profits from the auction and the trading activities taken as a unit was made according to the percentages in which the stock of the corporation "was considered as having been owned." At January 1, 1934, and up to June 30, 1934, Ross was "considered" as owning 315*1416 shares, or 52.5 percent of the total outstanding stock; Pershall, 130 shares, or 21.666 percent; Jameson, 130 shares, or 21.666 percent; and Hicks, 25 shares, or 4.1667 percent. After June 30, 1934, Ross was still "considered" as owning 315 shares, or 52.5 percent; Pershall 110 shares, or 18.3333 percent; Jameson 110 shares, or 18.3333 percent; and Hicks 65 shares, or 10.8334 percent. Treating the profits from the auction and the trading activities as a unit and without deducting the salary allowances during the year to Ross, Pershall, and Jameson, the total of the amounts received by each such individual represented the same percentage of the total profits from all sources as the above percentage of "considered" stockholdings of each bore to the total stock of the corporation outstanding. In the case of Hicks, the total of the amounts received by him as his share of the profits from all sources, exclusive of his salary, represented the same percentage of those profits as his percentage of the "considered" stockholdings was of the total stock outstanding. For the year 1936 Ross received from all sources approximately $110 *1163 more than the above percentages would indicate, *1417 while Pershall and Jameson each received approximately $42 less and Hicks received approximately $25 less. These variations approximated one-eighth of 1 percent in the case of Ross, one-twentieth of 1 percent in the cases of Pershall and Jameson, and one-fortieth of 1 percent in the case of Hicks.
On December 28, 1936, the directors of the corporation held a special meeting and adopted resolutions authorizing the president and secretary to sell the assets of the corporation, including all accounts receivable, equipment, and good will, to the Ross Brothers Horse & Mule Co., a copartnership, at a price equal to the net value to be determined by the books of the company as of December 31, 1936, and to take all the necessary steps to wind up its affairs, to pay all its debts, to distribute the remaining assets among the stockholders in proportion to their stockholdings, and to execute and file all instruments necessary to dissolve the corporation in the manner provided by law, the sale to be consummated on December 31, 1936. The stockholders in a special meeting held on the same day approved the resolutions of the directors and further resolved that the treasurer of the corporation*1418 be authorized and directed to pay out of the funds of the corporation the amount of $60,000 to the holders of the entire capital stock upon delivery by them of their stock certificates for cancellation; and, further, the officers were directed to certify as to the dissolution of the corporation to the Secretary of State of Texas at Austin, Texas.
On December 31, 1936, and pursuant to the foregoing resolution, assets in an amount which exactly equaled the liabilities of the corporation exclusive of capital stock were transferred to a partnership by the same name in consideration of the assumption of the liabilities. Also on December 31, 1936, the remaining assets, which exactly equaled the par value of the capital stock, the corporation having no surplus, were distributed $59,800 to petitioner W. R. Ross, and $100 each to John C. Hicks and D. H. Pershall. The dissolution papers were drawn by an attorney, executed by the proper officers of the corporation, and delivered by them to the corporation's bookkeeper to be notarized and mailed to the Secretary of State of Texas. Shortly thereafter the bookkeeper was killed in an accident. The officers of the corporation believed that*1419 he had mailed the dissolution papers, but in August or September 1937 a notice was received from the Secretary of State concerning the franchise tax. Upon inquiry they were advised that the Secretary of State had no record of the dissolution of the corporation. Thereupon, they had the necessary papers prepared, executed, and filed, and the Secretary of State issued a formal certificate of dissolution bearing date of September 17, 1937.
*1164 For the year 1937 two partnership returns were filed, one designated "Ross Brothers Horse & Mule Company", in which the profits from all sources other than the trading activities were reported, and the other designated "W. R. Ross Mule Account", in which the profits from the trading activities were reported. The net income shown by the return first mentioned was $6,593.42, while the net income shown in the second return was $29,482.91. On each of these returns the net income was divided according to the following percentages: W. R. Ross, 55.83; D. H. Pershall, 18.33; Parker Jameson, 18.33; John C. Hicks, 7.51.
In determining the deficiencies for 1934 to 1937, inclusive, the respondent held that the W. R. Ross mule account was not*1420 a partnership conducting a separate business, but was part of the business conducted by the corporation, Ross Brothers Horse & Mule Co., and that the profits resulting therefrom were a part of the corporate net income. He refused to accept the partnership return filed for the Ross Brothers Horse & Mule Co. for the period between January 1 and September 17, 1937, holding that the corporation was not dissolved until that latter date. Of the $6,593.42 reported on that partnership return, being the net income for 1937 from all sources other than the trading activities, the respondent held that a portion thereof, or $4,670.34, represented income received during the interval mentioned and was taxable to the corporation for the year 1937. The net income reported on the partnership return designated "W. R. Ross Mule Account" for 1937 in the amount of $29,482.91 was increased by $102.50 and a portion thereof, or $20,956.33, was held to be taxable to the corporation for 1937. The respondent has determined that petitioner W. R. Ross is liable as transferee for the income and excess profits taxes of the corporation for the years 1934 to 1937, inclusive.
Sometime prior to 1932 W. R. Ross*1421 advanced money to one of his brothers and C. T. Lake for a venture in the cattle business. Lake and petitioner's brother sustained a loss on the venture, Lake's share of the loss being $15,466.51. On January 10, 1932, Lake executed a promissory note in the amount of $15,466.51, payable to W. R. Ross on January 10, 1933. The amount of the note represented one-half of the net cash advanced by Ross to Lake and his brother. At the time the note was given, Lake was engaged in the cattle and sheep business and was operating several ranches. A wealthy aunt was backing him financially at a Fort Worth bank and petitioner belieyed that he had good chances of collecting the note.
The note was not paid when it fell due on January 10, 1933, but Lake assured Ross that he would pay it as soon as he was in a position to do so. Ross checked the situation at the bank where both of them were doing business and was advised that Lake had *1165 good prospects for the future, although he could not pay the note at that time.
In the latter part of 1934 Lake was involved in an automobile accident, which left him unable to carry on his business. In 1935 his aunt refused to back him any further*1422 and the bank closed him out. During that year Ross made an investigation of his financial condition at the bank and was advised that his chances of collecting anything on the note were hopeless. Ross charged the debt off as worthless during that year. He has never collected anything on the debt. The debt became worthless in 1935 and was ascertained to be so.
Sometime prior to 1931 petitioner W. R. Ross furnished J. I. Williams with mules and money in a joint mule business conducted by Williams at Brenham, Texas. The business turned out to be a failure and upon the termination thereof it was determined that Williams owed Ross $5,864.52, which represented William's one-half of the loss sustained. On October 10, 1931, Williams executed a promissory note payable to Ross on October 10, 1932, for his half of the loss. At the time Williams executed the note he owned his home in Fort Worth and a certain amount of notes arising from the mule business in Brenham, Texas. Williams was considered a good mule man and when Ross accepted the note he thought it was good and would be paid.
The note was not paid when it fell due on October 10, 1932. At that time Ross had a talk with Williams, *1423 who had begun to drink, and he assured Ross that he would straighten up and recoup his losses if Ross would stake him in the business again. Ross had a high regard for Williams' ability in the mule business and caused him to be employed by the Ross Brothers Horse & Mule Co., telling him that if he would quit drinking he would consider putting him back into the mule business. Thereafter Williams' drinking increased to the extent that in 1935 the company had to discharge him. By that time he had lost his home and had no other assets. At that time Ross gave up all hopes of staking him in the mule business and during that year he charged off the debt. The debt became worthless in 1935 and was ascertained to be so.
Sometime prior to 1930 petitioner W. R. Ross advanced money to A. C. Golightly for a joint venture in the automobile business. The venture turned out to be a failure and at the conclusion thereof Golightly was unable to pay Ross for his share of the loss. For a considerable period prior to 1930 he made monthly payments of $50 on the debt. On December 31, 1930, Golightly executed a promissory note in the amount of $9,276.83, payable to Ross on June 30, 1931. The amount*1424 of the note represented the balance due as Golightly's share of the money lost in the automobile venture.
*1166 On March 21, 1931, a payment of $25 was made on the note and on May 31, 1931, a check in the amount of $25 was received by Ross as a payment on the note, but the check was returned by the bank unpaid.
The note was not paid when it fell due on June 30, 1931. At that time Golightly was in the grocery business. Ross visited his place of business and looked over his stock of goods, and he was assured by Golightly that he would pay the debt as soon as he was able to do so. He had known Golightly for a long period of time and knew that he had a good reputation for paying his debts.
Ross tried to collect the debt from time to time, but Golightly's grocery business went from bad to worse and he finally went out of business in the latter part of 1934. At that time Ross made another effort to collect the note, but found it was a hopeless case. In the first part of 1935 Ross discussed the matter with Hicks and they decided to charge the debt off, which was done sometime during that year.
In their respective income tax returns for 1935 the petitioners, W. R. Ross*1425 and Mary Catherine Ross, each deducted as bad debts his or her one-half community interest in the Lake, Williams, and Golightly debts, or $15,291.43 each. The respondent disallowed the deductions.
OPINION.
TURNER: The principal issue presented is whether the trading business conducted through the W. R. Ross mule account was a branch or a part of the business conducted by the corporation, Ross Brothers Horse & Mule Co., with the result that the profits realized therefrom constituted a part of and should be included in the income of the corporation.
The petitioners claim that during the years in question the W. R. Ross mule account was a partnership composed of four individuals, Ross, Pershall, Jameson, and Hicks; that the trading business conducted by the partnership was separate and distinct from the commission business of the Ross Brothers Horse & Mule Co.; and that the profits resulting therefrom were distributable directly to the four partners. The respondent claims that the mule account was part and parcel of the Ross Brothers Horse & Mule Co., the corporation; that it was not a separate entity; and that the profits realized from that account constituted income of the*1426 corporation. By affirmative allegations contained in an amended answer, the respondent pleads in the alternative that if the Board should determine that the profits reflected by the W. R. Ross mule account were the profits of a partnership and not of the corporation, the deductions claimed by the corporation on its return should be apportioned between it and the partnership in accordance with the provisions of section 45 of the Revenue Act of 1934. The petitioners plead in *1167 the alternative that if the Board should determine that the auction and trading activities were the activities of a single business enterprise and the profits therefrom are to be combined for Federal tax purposes, it should further hold that the activities in question and the income therefrom were the activities and income of the "W. R. Ross Mule Account," a partnership, and not the income of the Ross Brothers Horse & Mule Co., the corporation.
The respondent, to support his contention that the trading operations reflected by the W. R. Ross mule account were the operations of the Ross Brothers Horse & Mule Co., points, among other things, to the fact that the mule account had no separate physical*1427 facilities for conducting its business; that it had no separate finances or bank account; that all payments for the purchase of livestock through that account and for the feed and supplies for such livestock were made by the corporation; that all receipts from the sales made through the account were received by the corporation; and that all borrowings to carry on the business of buying and selling were made by the corporation. He emphasizes particularly the fact that the corporation charged the mule account no commission on the sale of any animal carried into that account, whereas other vendors were charged $2.50 for each animal sold for $10 or more.
Petitioners contend that in the horse and mule commission business it is customary for the commission house to furnish to its customers certain facilities and services, for some of which charges are made, while as to others there is no charge; and, except for the fact that no commissions were charged on sales by and for the mule account, that account was treated in the same way as any and all other trading customers of the corporation; and, further, that there is nothing in the treatment of the mule account to indicate that the trading*1428 reflected therein was any more the trading of the corporation than the dealings of any of the other trading customers.
On first impression the answering argument of the petitioners may seem plausible and convincing, but on examination it appears so only if we presuppose the conclusion contended for. There is nothing conclusive or particularly indicative, for instance, about the fact that the trading activities have been recorded in the books of the corporation in a separate account any more than that the commissions received from the auction were separately recorded. It would seem to us good practice that the accounts should be so kept whether the trading so recorded be that of an outside trader or of the corporation itself. Furthermore, since the corporation through its auction stood to profit from the activities of its regular trading customers, there is nothing strange about the granting of the use of its facilities to such customers or the keeping of accounts on its books *1168 reflecting its dealing for or with wuch customers, and the keeping of such accounts for customers neither refutes nor establishes the point in issue. In fact, we find only two practices which*1429 might tend to support the conclusion that the W. R. Ross mule account was a business enterprise separate and apart from the corporation. One was the paying or crediting of the profits reflected by the mule account at the end of each year directly to Ross, Pershall, Jameson, and Hicks instead of the carrying of such profits into corporate surplus and undivided profits and then making the distribution from surplus. The other practice was that of reporting such profits for income tax purposes as the profits of the four individuals and not as the profits of the corporation. The first practice is of little significance, since the corporation at no time during its existence maintained a surplus or undivided profits account, but consistently at the end of each year paid over to the individuals named, or transferred to their personal accounts, its entire profits for the year from commissions or otherwise. As to the second practice, it is, of course, elementary that the reporting of the profits of the mule account by the individuals in their income is of no moment if in truth the trading activities and the profits therefrom were those of the corporation.
With respect to the failure of*1430 the auction to charge commissions on horses and mules handled through the mule account, which fact the respondent emphasizes as showing the unity of the auction and the trading activities, it would seem apparent that such treatment of the mule account, if a separate entity as the petitioners contend, would most likely result in very substantial savings to it at the expense of the auction. In answer the petitioners claim that very rarely were horses and mules belonging to the mule account sold through the auction and consequently any withholding thereby of profits from the auction were insignificant. It is to be noted, however, that the corporation charged commissions on private sales made for customers as well as on sales made through the auction. The record indicates that most of the mules disposed of through the mule account were either used in filling orders received from customers away from Fort Worth or were shipped to agents for sale elsewhere and the petitioners have given us no basis for making any determination as to the percentage of such sales, which in the case of admittedly independent traders would be classified as private sales on which commissions would be charged*1431 or the percentage on which commissions would not be charged. The total sales reflected by the mule account were $843,324.17 for 1934, $1,353,035.92 for 1935, and $852,908.13 for 1936. Accordingly if the auction and the trading businesses be considered separately, it is readily apparent that through this failure to charge the mule account with commissions *1169 on its sales at auction and privately a substantial portion of what otherwise would have been profits for the auction business may have been retained by the mule account, a result which would not normally occur if the auction and trading activities were conducted by two separate entities as the petitioners claim. There are other factors, however, in respect of which the facts are fully established which in our opinion leave no doubt that the auction and the trading activities constituted a single business enterprise.
When the corporation was first organized Ross and his brothers agreed that each might trade on his own account and that the profits or losses should accrue to or against the respective individuals. They made this arrangement, according to Ross, because he was interested in trading in horses and mules, *1432 while his brothers were interested in trading in cattle and sheep. After Ross purchased the stock held by his brothers, however, the reason and need for keeping the operations reflected in the mule account separate and apart from the operations of the corporation no longer existed and the evidence of record convinces us that the business was thereafter regarded and conducted as a single enterprise. At all times subsequent to the withdrawal of his brothers and up to 1927, Ross had full direction and control of both the auction and trading activities and except for a small allowance to Hicks in 1924 and subsequent years, he received at the end of each year full distribution of all profits from all activities. In 1927, however, due to the fact that the business had grown substantially and Ross had extensive outside interests which required his attention, he decided to bring D. H. Pershall and Frank Harp, two experienced mule men, into the business, and upon the death of Harp in 1929, Jameson succeeded to Harp's position and rights. The bringing in of Pershall and Harp, and later Jameson, brought no change in the unity of the operations. According to the testimony of Ross, the duties*1433 and responsibilities of Pershall and Harp, and later of Pershall and Jameson, were practically the same as his except that he was "supposed to be the boss, and the guider." Hicks did not participate in the conduct of the auction or trading activities and his duties were not affected in any way by the bringing in of Pershall, Harp, and Jameson. Further, according to the testimony of both Ross and Hicks, there was no segregation or attempt at segregation of the time and efforts of Ross, Pershall, and Jameson in their conduct of the auction and trading activities, and in the course of conducting the auction they were very often and at the same time performing those acts and duties the results of which were reflected in the mule account.
That the two activities were treated and regarded as one business and not as two separate enterprises is further indicated, we think, by the fact that the "considered" holdings of stock in the corporation by *1170 the four individuals controlled and determined the distribution of profits from all activities. Except for the two shares purchased by Pershall and Hicks, neither Pershall, Jameson, nor Hicks bought any shares from Ross or the corporation*1434 and they paid nothing to any one for the right to share in the auction or trading profits, and so far as the recorded holdings of stocks were concerned, Ross continued to hold and own all shares except the two qualifying shares belonging to Pershall and Hicks. There is testimony, however, to the effect that an oral agreement was reached as to the number of shares of stock "considered as having been owned" by each of the individuals and to the effect also that the mule account was owned in the same proportions "as by oral agreement" the stock of the corporation "was considered as having been owned." According to Hicks and in keeping with that understanding, the "considered" stockholdings at January 1, 1934, were: Ross, 315 shares; Pershall, 130 shares; Jameson, 130 shares; and Hicks, 25 shares. This continued until June 30, 1934, when by oral agreement the holdings were changed and from that date to the time the corporation was dissolved the stock was "considered as having been owned" 315 shares by Ross, 110 shares by Pershall, 110 shares by Jameson, and 65 shares by Hicks. Except for a slight variation in 1936, the profits from all sources, auction and trading, and prior to the*1435 deduction of the equal salary allowances to Ross, Pershall, and Jameson, were divided and paid over, or credited to the four individuals according to the exact percentages indicated by the division of the stock shown above. This, we think, definitely signifies that the four individuals regarded the auction and trading activities as one enterprise. The fact that the total of the amounts received by each of the four corresponds to the amounts computed by use of such percentages carried to several decimal places can not in our opinion be attributed to mere accident. This conclusion is further strengthened by the fact that in making these computations consideration was given to the shift in the percentages which took place by agreement of the parties at June 30, 1934. Some question as to the force of these facts is raised by the petitioners because the percentages were made to apply without the elimination of the amounts allowed as salary to Ross, Pershall, and Jameson, but after the elimination of the salary paid to Hicks. If that point is of importance, the reason for such treatment may be found in the fact that the duties performed by Pershall and Harp, and later Jameson, were*1436 in the management and conduct of the auction and trading activities and in the actual production of the income distributed, while the duties performed by Hicks did not relate directly to the production of such income. He continued his duties in the office, and, so far as the record shows, neither his duties nor his salary were changed or affected by the bringing in of Pershall, Harp, or Jameson. It is true that the percentages do not reflect the payments *1171 made to the parties for 1936 with the same mathematical exactness as in 1934 and 1935. The variations are not in our opinion substantial enough, however, to indicate any change in the business. Ross received approximately $110 in excess of the amount indicated by his percentage and Pershall, Jameson, and Hicks less by approximately $42, $42, and $25, respectively. The variations if expressed in the percentages were approximately an eighth of 1 percent for Ross, one-twentieth of 1 percent each for Pershall and Jameson, and one-fortieth of 1 percent for Hicks.
In support of their contention that the auction and trading activities were separate business enterprises and should be recognized as such for income tax purposes, *1437 the petitioners have made various computations designed to show that the profits from the trading activities and those from the auction or other sources were not distributed according to the same percentages. To illustrate: On the basis of those computations, the distributions from the W. R. Ross mule account in 1934 were 57.241 percent for Ross; 16.982 percent for Pershall; 16.982 percent for Jameson; and 8.795 percent for Hicks, while the distributions from commissions and other income were 52.51 percent for Ross; 19.48 percent for Pershall; 19.46 percent for Jameson; and 8.53 percent for Hicks. In connection with those computations, however, it is to be noted that they were applied after the exclusion of the salary allowances to Ross, Pershall, and Jameson and that these salary allowances were charged in full to the profits attributed to the corporation as distinguished from the profits from trading. It is also to be noted that they do not take into consideration the agreement reached by the parties on June 30, 1934, as to the change of "considered" stockholdings. Furthermore, they indicate a conclusion directly contrary to the testimony of one or more of petitioners' witnesses*1438 to the effect that the trading account was owned by the four individuals in the same proportions as "by oral agreement" the stock of the corporation "was considered as having been owned" by them.
After studying carefully the business activities carried on, the history as reflected by the evidence of record, the facts and data pertaining to those operations, the attitude and conduct of the parties in carrying on those operations, and the basis on which the profits were distributed, it is our conclusion that the two activities constituted one business enterprise, and it becomes unnecessary to consider the alternative contention of the respondent concerning the applicability of section 45 of the Revenue Act of 1934.
Petitioners have pleaded in the alternative that, if the above conclusion should be reached, we should hold that the business was conducted by the W. R. Ross mule account, a partnership, and not by Ross Brothers Horse & Mule Co., the corporation. We find no merit in that contention. That the corporation was regularly organized *1172 under the law, with powers to carry on the business here attributed to it, is not open to question, and it continued in existence*1439 until its formal dissolution was effected under the law of Texas and in accordance with the resolutions adopted by its directors and stockholders on December 28, 1936. There is nothing in the record at all to support any conclusion that the auction business was not conducted by and did not belong to the corporation, and we have already stated our reasons for concluding that the auction and trading activities constituted a single business enterprise. The petitioners' alternative contention is denied.
For the year 1935 the petitioners, W. R. Ross and Mary Catherine Ross, filed separate returns, reporting their share of the income from the mule account as distributions from a partnership taxable at both normal and surtax rates. In the notices of deficiencies for that year the respondent stated that, since the taxpayers had not concurred in his determination that the mule account was a part of the Ross Brothers Horse & Mule Co., and in order to protect the interests of the Government, the distributions received by them from the mule account were treated as having been received from a partnership. In view of our decision on the principal issue, it follows that the distributions received*1440 by petitioners in 1935 constituted dividends of the corporation, subject only to surtax rates. That adjustment should be made on the recomputation hereunder.
In determining the deficiencies for 1937 the respondent held that the petitioner, Ross Brothers Horse & Mule Co., was not dissolved until September 17, 1937, and that the income received by it from the commission business during the interval from January 1, 1937, to the date of dissolution, as well as the income received by the mule account during the same interval, was taxable to the corporation for the year 1937. His determination on this point is based on the fact that the certificate of dissolution was not issued by the state authorities until September 17, 1937.
The petitioners contend that the corporation was dissolved on December 31, 1936, that on that date its assets and liabilities were transferred to a copartnership of the same name, that the capital was distributed to the stockholders, that the corporation did not exist or conduct any business at any time during the year 1937, and that therefore the respondent erred in determining that it received any taxable income in that year.
We think the petitioner's*1441 contention on this point must be sustained. Although the formal certificate of dissolution was not issued until September 17, 1937, all other steps necessary to effect the dissolution of the corporation were consummated on or prior to December 31, 1936, and, more important, even though technically it may have still been alive, the corporation after that date had no assets, conducted no *1173 business, and received no income. The respondent's determination on this issue is reversed.
The respondent seeks to hold petitioner W. R. Ross liable as transferee of the corporation, Ross Brothers Horse & Mule Co., for the deficiencies determined against the corporation for the years 1934 to 1937, inclusive. In accordance with the resolutions adopted by its directors and stockholders on December 28, 1936, and in consideration for the assumption of its liabilities exclusive of capital stock, the corporation on December 31, 1936, transferred to a partnership of the same name assets in an amount which exactly equaled the liabilities so assumed and on the same date distributed its remaining assets exactly equaling its capital stock liability, $59,800 to Ross and $100 each to Pershall*1442 and Hicks. This was in addition to dividends and other distributions which had been paid to Ross during each of the taxable years and left the corporation without any assets whatsoever. It is argued on behalf of petitioner Ross that the claim that he is liable as transferee of the corporation is inconsistent and in conflict with the respondent's claim on the main issue in that the respondent there claimed that the stock of the corporation was owned in the same proportions in which the income of the mule account was shared. With respect to the argument advanced, it is necessary only to say that for the purpose of deciding this issue it matters not whether the respondent was of the view that the four individuals were the actual owners of the stock of the corporation in the proportions on which the profits were distributed, or whether he was of the view that the stock was owned 598 shares by Ross and one share each by Pershall and Hicks, as the stock account indicates, and that the "considered" ownership of the stock by the four individuals was for the purpose only of computing the distributive shares of the profits under a profitsharing arrangement with Pershall, Jameson, and Hicks*1443 in return for the services which they were to render the corporation. The controlling fact here is that the assets of the corporation after the transfer of its business and facilities to the partnership amounted to $60,000 and this amount was distributed to the stockholders of record, $59,800 being paid to Ross and $100 each to Hicks and Pershall, leaving the corporation without assets. These facts bring the petitioner W. R. Ross within the transferee provisions of the statute and to the extent of such distribution he is liable as transferee. This liability is limited, however, to the years 1934, 1935, and 1936, in as much as the corporation, whether it remained in existence after December 31, 1936, or not, had no assets, conducted no business and received no income during the year 1937.
The last issue concerns the deductibility of the three bad debts described in our findings. It is the respondent's position that they were worthless when the promissory notes were executed by the *1174 debtors and delivered to Ross, or in any event the debts became worthless prior to the year 1935. The petitioners contend that they had reasonable prospects of collecting the debts when*1444 the notes were received and that they became worthless and were properly ascertained to be so and charged off in 1935.
With respect to the Lake and Williams debts, we think the petitioners' contention must be sustained. In our opinion the facts show that up until 1935 the petitioners were justified in believing that they had some chance of collecting at least a part of those two debts. Without an extended discussion of the facts set forth in our findings, we think it will suffice to say that the record convinces us that the petitioners properly ascertained those two debts to be worthless in 1935 and charged them off in that year. We accordingly hold that they are entitled to the deductions claimed with respect thereto.
With respect to the Golightly debt, however, we have reached the opposite conclusion. Ross testified that at the time Golightly went out of the grocery business in the latter part of 1934, he made an effort to collect the debt and found that it was a "hopeless case." He did not, however, charge the debt off until some time in 1935. We accordingly sustain the respondent's determination that the Golightly debt was worthless and ascertained to be so prior to*1445 1935.
Decision will be entered under Rule 50.
Footnotes
1. Of this amount $3,533.10 was for the period from Jan. 1 to June 30, 1934, and $6,709.06 for the period from June 30 to Dec. 31, 1934. ↩
1. For 1934 the mule account was closed both at June 30 and December 31, and of the total profits for the year $42,485.24 represented the profits for the first six months and $30,297.80 for the second six months. ↩