*1025 In December 1936 the board of directors of petitioner met and declared a dividend out of surplus. On or before December 31, 1936, petitioner delivered the dividend checks to its shareholders. On that date petitioner did not have sufficient cash on deposit to meet the face amount of the checks. Petitioner was solvent and made a practice of issuing checks in excess of its balance in the regular course of business, the bank honoring its overdrafts. Held, petitioner is entitled to a credit against the undistributed profits surtax for dividends paid equal to the face amount of the checks.
*311 In this proceeding petitioner asks redetermination of a deficiency in income tax for the year ended December 31, 1936, in the amount of $14,072.96.
The sole issue before the Board concerns the disallowance by respondent of petitioner's claim for a credit for dividends paid during the taxable year.
FINDINGS OF FACT.
Petitioner is a corporation organized under the laws of the State of California and was incorporated November 24, 1928. It is engaged in*1026 the business of tractor and implement sales and service. Since December 1, 1928, Harold Garside Hilton has been president of the company.
*312 Petitioner did its banking during the taxable year with the Modesto Trust & Savings Bank, hereinafter cvalled the Modesto Bank, which early in 1937 became a branch of the Anglo California National Bank.
In December 1936 petitioner had an established line of credit in the amount of $650,000 with the Modesto Bank. Its loans from the bank outstanding at that time were approximately $415,000.
On December 29, 1936, the board of directors of petitioner met and declared a dividend of $167 per share, payable on December 31, 1936, on the 473 shares of petitioner's capital stock authorized and outstanding, or in the total amount of $78,991, by the following resolution:
After discussion as to how the company could best meet the exacting levy of the income tax on the 1936 income including the undistributed profits tax, the board was of the opinion the latter tax could be held to a minimum and legally avoided in part, if not entirely, by the payment of a cash dividend. As the cash on hand was insufficient to meet such a heavy drain on*1027 the company's finances, Director and Vice President Boothe stated he had been conducting negotiations with W. W. Giddings, President of the Modesto Trust & Savings Bank, for a loan on the company's note in a sum between seventy and eighty thousand dollars; that the president of the bank had agreed to make such a loan and the funds in the required amount were now available at such time as the company presented its note at the bank. Director Boothe further stated that Director Nichols had estimated the net income for the year 1936 to be approximately $80,000. Director Nichols, thereupon, confirmed the statement of Director Boothe. The Board was of the opinion that a cash dividend should be paid and upon motion and second and affirmative vote of all directors present the following preamble and resolution was adopted:
WHEREAS, the profits of the year 1936 and the accumulated earned surplus of this corporation prior to the year 1936 are sufficient;
Be it resolved, and it is hereby resolved, that a cash dividend of $167 per share is hereby declared on each and every share of this company's outstanding capital stock of record as at the close of business December 29, 1936; and that*1028 said dividend shall be payable on December 31, 1936. * * *
The loan referred to in the resolution of the board of directors was not arranged and no note was executed for this purpose. At the time the dividend was declared petitioner had sufficient earned surplus out of which to pay the dividend. On December 31, 1936, petitioner had cash on hand in the amount of $5,763.25 and on deposit in the amount of $8,202.58.
It was the practice of petitioner to issue checks in excess of cash on deposit in the bank. From one to three days after the checks were paid the corporate officers would sign short term notes in amounts sufficient to cover the checks. In carrying on its regular business, petitioner frequently had overdrafts at the bank caused by the purchase of carloads of tractors. These overdrafts were *313 always paid by the bank and within a day or two thereafter the overdrafts were covered by loans.
On December 31, 1936, petitioner had outstanding checks in the amount of $90,937. Of this amount the sum of $78,991 was in dividend checks.
On or before December 31, 1936, petitioner issued and delivered, and each of the shareholders of record received, dividend checks*1029 of petitioner dated December 31, 1936, as follows:
| Shareholder | Shares held | Number of check | Amount of check |
| H. G. Hilton | 270 | 4876 | $45,090 |
| Clyde D. Boothe | 200 | 4877 | 33,400 |
| H. S. Nichols | 1 | 4878 | 167 |
| Irene Hilton | 1 | 4879 | 167 |
| Gilbert L. Jones | 1 | 4880 | 167 |
| 78,991 |
On or before December 31, 1936, the checks issued to H. S. Nichols, Irene Hilton, and Gilbert L. Jones, as shareholders of record, were properly endorsed by them and delivered to the true owner of those shares, H. G. Hilton.
The face amount of the checks was included in gross income by Boothe and Hilton and their respective wives as community property on their individual income tax returns for the year 1936.
The dividend checks were not paid until December 28, 1937. The cash to meet the checks was placed in the Anglo California National Bank on December 27 or 28, 1937. Petitioner obtained this amount by loan from another bank, the American Trust Co. In April or May 1937, petitioner had transferred its checking amount to the American Trust Co.
In computing surtax on undistributed profits for the year 1936, petitioner claimed a credit for dividends paid in the amount of*1030 $78,991. Respondent disallowed the credit.
OPINION.
VAN FOSSAN: The only issue for our determination is whether or not petitioner is entitled to a dividends paid credit for the year 1936. Petitioner contends that it is entitled to credit for a cash dividend paid by check. It maintains that even if we should find that the dividend was not paid in cash, the payment was made in petitioner's obligations having a value equal to the face amount of the checks. Respondent argues, however, that there was no actual payment of a dividend during the taxable year and, hence, no credit is allowable.
*314 The applicable provisions of the statute are section 27(a) and (d) and section 115(a) of the Revenue Act of 1936. 1
*1031 The fact that petitioner had a surplus out of which to declare the dividend is not questioned, nor is the action of the board of directors in the declaration disputed. The issue turns upon whether or not a divided was, in fact, paid during the taxable year.
At the hearing, respondent indicated his position to be that since petitioner did not have sufficient cash on hand to cover the face amount of the checks, no dividend was paid. It is clear, however, the a corporation need not have sufficient cash on hand to meet a declared dividend. In , certiorari denied, , the Circuit Court of Appeals for the Fifth Circuit said:
* * * That A. & J., Inc., did not carry cash on hand sufficient to pay what it had unreservedly put to the credit of A. D. Saenger, Inc., is unimportant. It could on demand have borrowed it or raised it by sale of some of its investments. No case of refusal to pay appears. * * *
In , the Court of Claims stated:
The cash balances of the Baker Ice Machine Company, Inc., as shown by the books of its*1032 Omaha and Los Angeles offices, were not sufficient at all times during the years 1924 and 1925 to pay the dividends credited to plaintiff's account, but the cash position alone is not conclusive as to the ability of the company to pay. It is only one of the items going to make up its capital and surplus, ; , and the fact that the cash balances may at times fall below the amount of dividends standing on the books to the credit of a stockholder does not of itself establish that the amounts so credited to the stockholder are not available to him. * * *
In both the Saenger and Baker cases the dividend was held includiable in the shareholders' gross income even though the corporation *315 declaring the dividend did not have sufficient cash balance to meet the dividend. Under these holdings, the fact that cash on deposit was not sufficient to pay the dividend checks is not enough to cause the dividend to be ineffective.
Article 42-3 of Regulations 94 provides that "dividends on corporate stock are subject to tax when*1033 unqualifiedly made subject to the demand of the shareholder." There would seem to be no question as to the liability of the stockholders for tax on the dividends in question and, as a matter of fact, they returned them and paid tax accordingly. There is no question of the solvency of the corporation. Though it did not have cash on hand, it had ample credit at the bank. We find no evidence of an agreement that the checks would not be cashed or presented for payment. Petitioner's president testified that at the time the checks were received it was the intention of the two stockholders to cash them immediately. Definite arrangements for a loan were made. Cf. . The reason the loan was not consummated and the checks cashed forthwith was twofold, the lack of necessity for immediate funds by the stockholders and a change in the policy of the bank as to carrying loans on petitioner's contracts. We are of the opinion that the dividend was paid and that credit claimed was allowable. It is thus unnecessary to consider petitioner's alternative contention that if the dividend does not come within section 27(a) as a dividend paid*1034 in the taxable year, the case comes within the terms of section 27(d) as a dividend paid in obligations of the corporation.
Reviewed by the Board.
Decision will be entered under Rule 50.
DISNEY concurs only in the result.
OPPER, concurring: The stockholders having actually received their dividend checks prior to the end of the taxable year, there would seem to be no question that they were liable as individuals for the income tax thereon. Their failure to call for the funds placed at their disposal would not relieve them from that liability under the doctrine of constructive receipt. Hiram C. Wilson,17 B.T.A. 976">17 B.T.A. 976; Harvey H. Ostenberg et al., Administrators,17 B.T.A. 738">17 B.T.A. 738, 745; cf. Avery v. Commissioner,292 U.S. 210">292 U.S. 210; Elvira Scatena,32 B.T.A. 675">32 B.T.A. 675, 679; affd. (C.C.A., 9th Cir.), 85 Fed.(2d) 729. It appears from the statement of facts that the stockholders recognized this liability and included the dividends in their individual income for that year. These seem to me the strongest reasons for granting the dividends paid credit to the petitioner corporation, since the*1035 basic purpose *316 of sections 14 and 27, Revenue Act of 1936, was fulfilled by the procedure adopted. See Foley Securities Corporation,38 B.T.A. 1036">38 B.T.A. 1036; affd., 106 Fed.(2d) 731. The dividend being taxable to the shareholders, credit for its payment should be available to the corporation.
Footnotes
1. SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
(a) DIVIDENDS PAID CREDIT IN GENERAL. - For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.
* * *
(d) DIVIDENDS IN OBLIGATIONS OF THE CORPORATION. - If a dividend is paid in obligations of the corporation, the amount of the dividends paid credit with respect thereto shall be the face value of the obligations, or their fair market value at the time of the payment, whichever is the lower. If the fair market value is lower than the face value, then when the obligation is redeemed by the corporation, the excess of the amount for which redeemed over the fair market value at the time of the dividend payment (to the extent not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable year in which the redemption occurs.
SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(a) DEFINITION OF DIVIDEND. - The term "dividend" when used in this title (except in section 203(a)(3) and section 207(c)(1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. ↩