*1732 A distribution to the principal shareholders of a corporation not strictly in proportion to their holdings, is held to be within the statutory definition of a dividend, and the fact that it was referred to as a gift in the corporate resolution authorizing it, together with oral testimony of other principal shareholders and directors that the amount distributed to one of them (the petitioner) was prompted by their gratitude for his service in preserving an estate of which they were beneficiaries - a reason applicable to petitioner, but not the other distributees - is insufficient to support the conclusion that the distribution to petitioner was a gift.
*1305 The respondent determined a deficiency of $5,854.56 in the decedent's income tax for 1926, resulting from the inclusion in decedent's income, as a dividend, of $37,675 which petitioner contends was a gift. The evidence was taken by depositions.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the United States, with its office*1733 at Washington, D.C., and is the executor of the last will and testament of John W. Brawner, deceased, hereinafter called the decedent, who died January 24, 1929.
The decedent and John F. Waggaman had been business associates for many years prior to August 1, 1909. On the latter date John F. Waggaman retired and by deed of trust transferred his entire estate to his eldest son, Henry Elliott Waggaman, and decedent, as trustees, for the equal benefit of his three sons, Henry Elliott Waggaman, Floyd P. Waggaman, and Ennalls Waggaman. The trust was to terminate ten years after the death of John F. Waggaman. Upon the death of Henry Elliott Waggaman on August 25, 1909, his widow, Viola R. Waggaman, by the terms of the trust instrument, succeeded to his beneficial interest, and decedent became the sole trustee of the estate. On April 29, 1918, Viola R. Waggaman conveyed her interest to decedent, in trust to pay the income therefrom to her during her life and, at her death, to pay to each of her surviving children $25,000, and to pay the income from the remainder, if any, to Alice V. Waggaman, the widow of John F. Waggaman, during her life, and at her death to pay the principal in equal*1734 shares to Floyd P. Waggaman, Ennalls Waggaman, and the decedent. John F. Waggaman died on May 18, 1918, and Alice V. Waggaman died on August 26, 1926. When decedent took charge of the John F. Waggaman estate it was practically insolvent, and, under decedent's management, the estate was restored to a sound condition by 1926 and was of substantial value.
*1306 The decedent and Floyd P. Waggaman had been engaged in the real eatate business as partners since 1906, and in January, 1920, the business was incorporated under the laws of Virginia, under the name of Waggaman & Brawner, Inc. In 1924 the decedent, as trustee, transferred all of the assets of the John F. Waggaman estate then in his hands to Waggaman & Brawner, Inc., for 8,000 shares of its stock.
In 1926 Waggaman & Brawner, Inc., received as a stock dividend, about 7,500 shares of preferred stock of the Emerson Drug Company. It distributed part of this stock in 1925, and on January 4, 1926, its board of directors authorized the distribution of the remainder (5,020 shares) by a resolution reading as follows:
On motion of Mr. F. P. Waggaman, duly seconded, it was resolved that 5,020 shares of the Preferred Stock*1735 B of the Emerson Drug Company, be distributed to the following stockholders in the following amounts:
| John W. Brawner | 1,507 |
| F. P. Waggaman | 1,507 |
| Ennalls Waggaman | 1,506 |
| W. E. Burnside | 500 |
Mr. Waggaman said that he had communicated with Major Ennalls Waggaman relative to this gift and that the same had met with his entire approval. After some discussion, the resolution was unanimously adopted and the officers directed to transfer the stock as indicated in this report.
Pursuant to said resolution, the decedent received in 1926, 1,507 shares of preferred stock of the Emerson Drug Company, having a market value of $37,675 at the time of receipt.
At the time of the passage of the resolution, the stockholders of Waggaman & Brawner, Inc., and their respective stockholdings, were as follows:
| Shares | |
| John W. Brawner | 350 |
| Ennalls Waggaman | 250 |
| Floyd P. Waggaman | 250 |
| W. Eben Burnside | 75 |
| Sarah F. Wetherall | 5 |
| Elizabeth S. Billard | 5 |
| John W. Brawner, trustee, John F. Waggaman Estate | 8,000 |
| Alice V. Waggaman | 100 |
| William A. Boss | 50 |
| Total | 9,085 |
At that time the directors consisted of the six persons first above mentioned, and Henry W. *1736 Febrey, who owned no stock. The decedent was president of the corporation from the time of its organization until his death, during which period he received regularly a salary and bonus for his services. The officers of the corporation, the time devoted to the business, and the salaries received by each during 1926, were as follows:
| Office | Time devoted to business | Salary | |
| John W. Brawner | President | All | $25,855.00 |
| Floyd P. Waggaman | 1st vice president | 1/2 year | 25,510.00 |
| Ennalls Waggaman | 2nd vice president | None | 25,500.00 |
| W. Eben Burnside | Secretary-treasurer | All | 5,600.00 |
| Elizabeth S. Billard | Asst. Secretary | All | 562.50 |
| Sarah F. Wetherall | Asst. treasurer | All | 562.50 |
*1307 The decedent omitted the value of the shares received by him as aforesaid from his income-tax return for 1926, and the respondent, in computing decedent's net income, treated the distribution as a dividend subject to surtax.
OPINION.
STERNHAGEN: The respondent has held that the 1,507 shares of Emerson stock were received by decedent as a dividend, and that their agreed value was income free from normal tax and subject to surtax. Petitioner insists that they*1737 were received as a gift, and therefore excluded from decedent's gross income by virtue of section 213(b)(3).
There is testimony by Floyd P. and Ennalls Waggaman that the decedent had devoted himself earnestly and successfully to preserving and expanding the estate of John F. Waggaman, their father, of which they were beneficiaries, and that for his long continued and successful efforts in their behalf and for his guidance and counsel they were deeply grateful. This prompted them to have the Emerson shares distributed equally among them. "We figured that Mr. Brawner for the work he had done for us was entitled to share with us." As to the 500 shares distributed to Burnside, it was said, "Burnside had no interest at all. * * * We gave him 500 shares more than he was entitled to under the distribution."
We are unable to find that the transfer in question was a gift, and are of opinion that the respondent should be sustained. This was a distribution made by the corporation to its shareholders, and there is no evidence that it was not out of earnings or profits accumulated subsequent to February 28, 1913, as postulated by the respondent. *1738 Thus it is squarely within the statutory definition of a dividend in section 201(a), Revenue Act of 1926. The language of the corporate resolution is not entirely determinative of the nature of the distribution, nor is the fact that the distribution was to only some of the shareholders and not strictly in proportion to holdings. , affirming . The other shareholders have not complained and must therefore, in this proceeding, be deemed to have ratified.
*1308 This transfer to decedent was but a part of the entire distribution of 5,020 shares, and any explanation or characterization of it must fit the whole. Obviously it will not do to say that a corporate distribution to its principal shareholders may be taken free from tax because the directors choose to call it a gift and explain it by their gratitude for the service and devotion of one of them. This would enable the taxpayers to determine their own tax liability by the mere use of words. This is especially so when the reason and motive for the distribution are applicable to but one and can not apply to the others. It would be peculiar*1739 if the same distribution were a gift to one and dividends to others, or, if it represented separate gifts to all, each upon different reasons.
Judgment will be entered for the respondent.