*3185 During the taxable year the stockholders of the corporation in which the petitioners held stock unanimously agreed to release them of all liability for payment of the amounts shown by the corporate books to be due from them. Held that the evidence discloses an intention to distribute profits without regard to stock holdings and that the amount of which each petitioner was discharged represents a payment of dividends.
*787 These proceedings, which by agreement of counsel were consolidated for hearing and decision, involve deficiencies in income taxes for the year 1921 in the amount of $3,223.44 in the case of Ida L. Dowling, and in the sum of $2,854.12 in the case of Jacob Loewer. The issue involved in each proceeding is whether the sum of $24,824.82, of which each petitioner was released and discharged by the corporation in which they held stock, was a dividend payment.
FINDINGS OF FACT.
Prior to and during 1921, the petitioners were stockholders of V. Loewer's Gambrinus Brewing Co., a New York corporation*3186 which was engaged in the manufacture and sale of lager beer, ales and porter prior to the enactment of the Prohibition Act, and since then has been engaged in manufacturing and selling cereal beverages.
In 1902 and for some time thereafter the corporation's capital stock of $100,000, consisting of 1,000 shares of a par value of $100 each, was held equally by Jacob Loewer, his brother, George Loewer, and his sister, Katharina Muller. After the death, on January 10, 1915, of George Loewer, his widow (now Ida L. Dowling) acquired his stock holdings, and Jacob Loewer and Katharina Muller transferred most of their stock to members of their respective families. During 1920 and on April 21, 1921, each family group held one-third of the corporation's stock, distributed as follows:
| Shares | |
| Jacob Loewer | 84 1/3 |
| Ida L. Dowling | 333 1/3 |
| Henry D. Muller | 54 |
| Henry D. Muller, Jr | 54 |
| Katharina Muller | 63 1/3 |
| Charles L. Draz | 10 |
| Irene Snyder | 54 |
| Florence Folcke | 54 |
| Valentine L. Muller | 54 |
| Amelia Loewer | 83 |
| Vera K. Halstead | 73 |
| Robert M. Halstead | 10 |
| Amy C. Draz | 73 |
*788 Prior to 1920 it was the custom of the officers to draw various small sums from the corporation*3187 to meet expenses incident to the solicitation of business. Such sums as were advanced were acknowledged by the giving of an "I.O.U." slip. Prior to 1914 the amounts advanced were carried as an item in an account known as "Cash on Hand." Subsequently, advancements were charged to a special loan account carried under the name of each officer receiving advances. On December 18, 1913, the corporation's board of directors adopted a resolution relieving the officers of all liability for withdrawals theretofore made, and directing that an item of $23,198.85, representing the amount of such withdrawals, as well as an additional anticipated item of $6,801.15, be adjusted by charging one-fifth of the total of $30,000 to expense on December 31, 1913, and a like amount annually commencing July 2, 1914.
On April 21, 1921, the account of Jacob Loewer showed that he had withdrawn a total of $24,824.82, some of which was used by him to pay business expenses of the corporation. At the same time the corporate books reflected that there had been loaned to Ida L. Dowling, secretary, at various times during 1920, the sum of $19,159.20, and in 1921, prior to April 21, the sum of $5,665.62, a total*3188 of $24,824.82. The amount paid was entered on the corporate books as a loan to the recipient.
Some time during the year 1920, Henry D. Muller, Jr., secetary of the corporation from about 1916 to the first of January, 1921, being dissatisfied with the manner in which the business of the corporation was being conducted, threatened to institute legal proceedings against the officers and directors of the corporation for an accounting of certain monies which Jacob Loewer, the president, and Henry D. Muller, the treasurer, had withdrawn from the treasury without the consent of the stockholders. During the latter part of 1920 it was decided to submit the entire matter to the stockholders. At a meeting of the stockholders on April 21, 1921, at which all the stockholders were present in person or were represented by proxy, a resolution was unanimously adopted providing that "All special loan accounts and accounts of every other nature and description appearing upon the books to be owing by Mr. Jacob Loewer, Mr. Henry D. Muller, Sr. and Mrs. Ida L. Dowling, and *789 any other accounts appearing to be due by any other stockholders, are hereby directed to be cancelled, released and*3189 discharged, and the Auditor of the Company is directed to cancel the same of record, * * *." The sum due from each of the petitioners, and Henry D. Muller, according to the corporate books, was $24,824.82, a total of $74,474.46, which was released and charged to surplus. The petitioners did not render any service to the corporation for the release of the sum shown to be due from them. Of the corporation's 13 stockholders, only the petitioners and Henry D. Muller received any benefit from the resolution.
The corporation's surplus at the close of 1912, 1913, and 1920 amounted to $426,886.01, $453,433.31, and $522,437.90, respectively.
In their income-tax returns for the year 1921, the petitioners reported the release of the amount shown to be due from them to the corporation. They did not, however, include the amount in their returns as taxable income. On an audit of their returns, the respondent included the sums released as income for surtax purposes on the ground that the amounts released represented distributions of earnings or prfits accumulated subsequent to March 1, 1913.
OPINION.
ARUNDELL: The petitioners are contending that the release by V. Loewer's Gambrinus*3190 Brewing Co. of the amounts appearing on its books to be owing by them does not constitute a payment of dividends, as determined by the respondent, but is a gift of the amounts involved.
For some time prior to the year 1920, it was the practice of the corporation to permit its officers to make withdrawals of corporate funds to pay expenses incident to the solicitation of business. The accounts set up because of the advancements were adjusted periodically by charging the amounts thereof to expense. The evidence shows that by the latter part of 1920, when Henry D. Muller, Jr., alleged that some of the officers were withdrawing corporate funds without proper authority and threatened to institute suit against all of the officers for an accounting, the special loan accounts of Jacob Loewer and Henry D. Muller were charged with withdrawals amounting to more than $48,000. By April 21, 1921, the accounts showed withdrawals by each officer of $24,824.82. On various dates in 1920, and in 1921 prior to April 21, the corporation paid to Ida L. Dowling sums totaling $24,824.82, an amount equal to the figure the books showed was owing by Loewer and Muller. This amount was charged to Mrs. *3191 Dowling as a loan. From January 1, 1920, to April 21, 1921, one-third of the corporation's stock was held by Ida L. Dowling and the balance was owned by Loewer and Muller and the members of their respective families.
*790 The amounts appearing on the books to be due from Loewer and Muller were advanced to them at various times prior to April 21, 1921, in sums of less than $100. We do not doubt that some portion of the advances made was used by the officers to pay ordinary and necessary business expenses incurred in carrying out the affairs of the corporation, but it would, indeed, be a coincidence if the amount advanced to each officer for the purpose stated would total the same figure on April 21, 1921. No attempt was made to explain this unusual situation.
That the corporation did not regard the money advanced to Loewer and Muller as having been expended for business expenses, is evidenced by the manner in which the amount was treated on the books. As advances were made, the amount thereof was charged to the recipient as a loan, and upon the adjustment of the accounts as a result of the action taken by the stockholders on April 21, 1921, the amount was charged to*3192 surplus instead of expense.
We have not been furnished with the dates on which the several alleged loans were made to Ida L. Dowling, but it appears that the first payment was not made until after the filing of the complaint against the withdrawal of funds by Loewer and Muller. In any event, it is clear from the testimony of Loewer and the sum charged to this petitioner was forgiven by the corporation in order to place Mrs. Dowling in possession of the same amount Loewer and Muller were charged with having received and to save the corporation the expense of defending a court proceeding for an accounting. Judging the transaction in the light of these facts, as well as other circumstances, we are of the opinion that the corporation never intended to demand payment of the amount paid to Mrs. Dowling.
It is being urged in behalf of Mrs. Dowling that since the distributions were not made according to stock holdings, they are not dividends within the meaning of section 201 of the Revenue Act of 1921. We have previously held that dividends may be distributed other than ratably according to stock holdings. *3193 , and . In the instant case, the distribution made to the heads of the three family groups of stockholders resulted from the unanimous agreement of all the share owners.
No point is being made by either petitioner that the amounts distributed, if dividends, are not taxable income in the year 1921.
It is our conclusion from a careful consideration of all the evidence that the amount of which each petitioner was released and discharged represents a payment of dividends, and, therefore, taxable income.
Judgment will be entered for the respondent.