1933 BTA LEXIS 1003">*1003 Respondent sustained in treating as liquidating dividends the excess over the cost of corporate stock of the amounts received by petitioner from the corporation, including advances made to him in prior years.
29 B.T.A. 83">*83 In this proceeding, contesting respondent's determination of a deficiency in income tax of $10,223.31 for the year 1927, the sole issue 29 B.T.A. 83">*84 is whether advances made to petitioner by a corporation were loans or distributions in liquidation.
FINDINGS OF FACT.
Petitioner is a resident of New York City, but during the period 1913 to 1927 resided in Richmond, Virginia, and was president, treasurer and general manager of the Weisberger Co., a Virginia corporation, engaged in the department store business. The company had outstanding 1,000 shares of stock having a par value of $100 each. Petitioner, throughout the existence of the corporation, owned 550 shares, which cost him $55,000. Of the remainder, C. K. Sunshine owned 300 shares; B. A. Spayne owned 100 shares and A. D. Kramer, 50 shares. Petitioner1933 BTA LEXIS 1003">*1004 was the only stockholder actively engaged in the conduct of the business. Subsequent to 1921, petitioner's salary was $12,000 a year; prior thereto it was $20,000 a year.
The company occupied a store building under lease made in 1913, calling for a rental of $12,000 a year for 10 years, and $18,000 a year for a renewal period of five years, expiring on February 15, 1928. Some time prior to the expiration of the lease, petitioner, representing the company, negotiated with the lessor for a new lease. The lessor demanded a rental of $40,000 a year; the company offered to pay $24,000 a year. In July 1927, while he was still negotiating with the lessor, petitioner was advised that the premises had been leased to the L. F. M. Stores Co., an organization operating a number of stores in various cities, effective immediately upon the expiration of the lease held by the Weisberger Co. That same month, the L. F. M. Stores Co. offered to purchase the stock in trade and fixtures of the Weisberger Co. in order that it might open up immediately and have the advantage of the 1927 fall business. On August 27, 1927, the Weisberger Co. accepted the offer and sold its stock in trade and fixtures1933 BTA LEXIS 1003">*1005 and delivery equipment for cash, reserving the corporate name, accounts receivable, electric signs, good will and corporate records. Shortly thereafter petitioner, acting for the company, made some unsuccessful efforts to obtain new quarters in which to carry on the business. In June 1926 the company sold its real estate in Richmond.
On July 1, 1926, petitioner was indebted to the Weisberger Co. for principal of and interest on various advances made by the corporation to him up to that time, totaling $96,250. These advances were not made on the basis of or in proportion to the amount of capital stock owned by petitioner. Five hundred dollars had been similarly advanced to C. K. Sunshine.
29 B.T.A. 83">*85 Thereafter, distributions or advances were made by the company to its stockholders as follows:
| Date | Weisberger | Spayne | Kramer | Sunshine | Total |
| (owning 55%) | (owning 10%) | (owning | (owning | (100%) | |
| 5%) | 30%) | ||||
| Various, prior to 7-1-26 | $96,250 | $500 | $96,750 | ||
| 7-1-26 | $10,000 | $5,000 | 30,000 | 45,000 | |
| 2-28-27 | 7,500 | 3,750 | 22,000 | 33,250 | |
| 7-31-27 | 8,250 | 1,500 | 750 | 4,500 | 15,000 |
| 8-1-27 | 5,500 | 1,000 | 500 | 3,000 | 10,000 |
| 9-6-27 | 27,500 | 5,000 | 2,500 | 15,000 | 50,000 |
| Total | 137,500 | 25,000 | 12,500 | 75,000 | 250,000 |
1933 BTA LEXIS 1003">*1006 No notes or other evidence of indebtedness were given by the stockholders to the corporation as representing these advances, which were carried as accounts receivable on the company's books. Prior to July 1, 1926, interest was charged on some of the loans made by petitioner, but subsequent to that date neither petitioner nor the other stockholders were charged with any interest on amounts thus received. Although petitioner was solvent and able to repay his withdrawals in 1926, 1927 and 1928, the corporation made no demand for repayment. Acting upon the advice of his attorney, petitioner in his income tax return for 1929, reported the receipt of 25 per centum of $137,500 as a dividend, and in his return for 1930 reported the receipt as a dividend of the remaining 75 per centum of that amount. In 1929 and 1930 petitioner sustained substantial losses upon transactions on the stock market. There are no entries on the books of the Weisberger Co. showing that any dividend had been credited or paid to petitioner in 1928, 1929 or 1930. Petitioner never repaid to the corporation the amount of his indebtedness on July 1, 1926, nor did he or the other stockholders ever repay to the corporation1933 BTA LEXIS 1003">*1007 the amounts advanced to them in 1926 and 1927.
Both in 1926 and in the period of the company's operation in 1927 its volume of business decreased substantially from that of prior years; its merchandise purchases were comparatively small and its inventories greatly reduced. Its return for 1926 shows accounts receivable as of January 1, 1926, of $159,345.52, and as of December 31, 1926, of $193,830.82. Its return for 1927 shows accounts receivable as of December 31 of that year to be $254,357.89, of which $250,000 represented the amounts advanced to its stockholders. Its cash on hand on that date was $885.95. As shown by its returns the company's surplus on January 1, 1926, was $182,613.83; on December 31, 1926, $163,341.84 and on December 31, 1927, $145,388.59. Dividends were declared by the company at the rate of 10 per centum on January 14, 1919, January 13, 1920, March 14, 1921, June 12, 1924, December 18, 1924, and December 31, 1926.
29 B.T.A. 83">*86 A tentative return filed by the company for the year 1927, sworn to on March 15, 1928, bears the notation, "In Liquidation." Its final return for that year, sworn to on June 12, 1928, states, "Department Store - in Liquidation, 1933 BTA LEXIS 1003">*1008 " in answer to inquiry concerning the nature of the business. Late in 1928 petitioner advised the collector of internal revenue at Richmond that he had sold out the business of the Weisberger Co. in August 1927 and left Richmond. Late in 1927 the company received notice of assessment of state corporation franchise taxes. The company was advised that this tax could be avoided only by dissolving the corporation prior to February 15, 1928. The corporation was dissolved on February 14, 1928. An examination of the company's records in March or April 1929 disclosed that there were no entries in the company's books subsequent to December 31, 1927. Various entries have since been made. On May 29, 1929, the Weisberger Co. obtained a new charter from the State of Virginia, reviving and continuing its corporate existence and powers.
In his computation of petitioner's income for 1927, respondent determined that petitioner received a liquidating dividend from the Weisberger Co. in that year and included in petitioner's income as a capital net gain the amount of $82,500, being the difference between the total of $137,500 advanced to petitioner, and $55,000, the cost of his stock.
OPINION.
1933 BTA LEXIS 1003">*1009 GOODRICH: The issue here is one of fact whether the distributions by the company to petitioner and the other stockholders were loans, or distributions in liquidation. Petitioner contends that they were bona fide loans; that the corporation was not in liquidation in either 1926 or 1927, and therefore, that no distributions in liquidation were made in those years. In the alternative he contends that if his withdrawals in 1927 were liquidating dividends, only $41,250 should be included in his income, since that is the amount he received in cash that year. We reject both these contentions. It may be that the amounts withdrawn by petitioner prior to July 1, 1926, were intended as loans, but it is quite apparent that thereafter their character changed, and the company entered upon a pro rata distribution to its stockholders. Cf. .
Before that time interest on his withdrawals had been charged against him; thereafter it was not. The amounts paid to stock holders other than petitioner on that date and on February 28, 1927 - the two distribution dates when he received no cash - total $78,750, including a reduction in cash distributed to Sunshine, 1933 BTA LEXIS 1003">*1010 offsetting the $500 previously advanced to him. Petitioner's indebtedness then amounted to $96,250; these figures total $175,000, of which the distributions to the other stockholders amount to 45 per centum - the exact ratio of their stockholdings. Petitioner's 55 per centum of 29 B.T.A. 83">*87 the total would amount to $96,250 - exactly the amount he owed. Distributions in exact ratio of stockholdings do not occur by accident, and we think it plain that here they evidence an agreement among the stockholders to liquidate the company. Obviously, petitioner's existing indebtedness to the company was offset by omitting cash distributions to him, and after that was done he shared in the cash distributions pro rata. Moreover, no part of these distributions was ever repaid by the recipients to the company, nor is there any evidence of any intention so to do, or of any demand by the company that it be done. We are satisfied that these distributions were not loans - sec ; affd., ; 1933 BTA LEXIS 1003">*1011 ; , and it remains to be determined whether they were made in liquidation of the company within the meaning of section 201, Revenue Act of 1926.
It is clear that the company was in liquidation in 1927. Upon its returns for that year it so declared; in that year it sold its physical assets, ceased operations except for the collection of its few accounts, distributed practically all its funds, and shortly afterwards dissolved. It is likely that it began its liquidation in 1926, for it then disposed of its real estate, permitted its business to contract sharply and its inventory to decline, and distributed cash to the amount of 45 per centum of its capitalization. But whether the company was in liquidation in 1926 is immaterial here. Respondent has determined that petitioner received $137,500 upon liquidation of the company in 1927, made up of his debt of $96,250 and $41,250 cash received in that year. Of that amount respondent has treated $55,000 as return of capital - the cost of the stock - and has included the balance in income and taxed it as a liquidation dividend. Petitioner, upon1933 BTA LEXIS 1003">*1012 whom lies the burden of proof, has failed to show that determination erroneous. He has not disclosed when his indebtedness was canceled by the company, thus making the sum thereof a receipt by petitioner, and his property. It may be that $55,000 of the indebtedness was canceled on July 1, 1926, but petitioner has not so proved. On the contrary, the figures disclosing the cash distributions indicate that the entire indebtedness was canceled on February 28, 1927. It was then that the $500 previously advanced to Sunshine was offset against a cash distribution to him, and it was then that the cash distributions to the other stockholders totaled the pro rata equivalent of the withdrawals previously made by petitioner. No attack is made on respondent's treatment as capital net gain of the amount received in excess of the cost of petitioner's stock; nor does the record disclose any corporate action supporting petitioner in reporting the amounts received as dividends in 1929 and 1930.
Judgment will be entered for the respondent.