*2314 Held that of the sums drawn by petitioner from the corporation of which he was president and majority stockholder, that portion which he applied to the purchase of property for the corporation and taxes and interest thereon did not constitute dividends.
*331 Proceeding for the redetermination of deficiencies in income tax for the years and in the amounts as follows:
| 1922 | $7,989.86 |
| 1923 | 10,220.46 |
| 1924 | 3,106.31 |
| 1925 | 3,284.64 |
For the year 1925 the respondent has also asserted a penalty in the amount of $821.16 for delinquency in filing return.
The one issue raised is whether respondent erred in treating as dividends certain amounts drawn from successive corporations of which petitioner was president and majority stockholder.
FINDINGS OF FACT.
Petitioner in 1918 acquired 51 per cent of the stock of the Commercial Auto & Supply Co., a Virginia corporation, which was then engaged in selling automobiles at 829 Fourteenth Street, N.W., Washington, D.C. In 1920 or 1921 petitioner purchased the outstanding*2315 minority stock and thereby became the sole owner of the corporate stock. In 1922 the building in which the corporation conducted its business was sold, which necessitated its finding a new location. A survey of available buildings disclosed none suitable and it was decided that it would be necessary to construct a building to meet the corporation's needs. Petitioner, who was president of *332 the corporation, purchased in his own name a lot at Fourteenth and R Streets, N.W., Washington, D.C., and arranged to erect a building thereon for the use of the corporation. It was necessary to secure outside capital for the purchase of the building site and the construction of the building, and the firm that financed the project required that the financing be done in petitioner's name, rather than that of the corporation, because of his ownership of other property. In purchasing the new building site and constructing the building thereon, petitioner paid out of his own resources $25,000 worth of first deeds of trust and $25,000 cash which he obtained from the Commercial Auto & Supply Co. He also borrowed $150,000 by placing a first deed of trust on the property. Construction of*2316 the new building was started late in 1922 and completed in July, 1923, and the company took possession in August of that year. The total cost of the land and building was $227,333.24.
In 1924 the business of the Commercial Auto & Supply Co. was incorporated under the laws of Delaware under the name of Joseph McReynolds, Inc. Petitioner was president of the corporation, owning 80 per cent of its capital stock, the remaining 20 per cent being owned by his wife and son.
In the taxable years petitioner drew from the corporation large sums of money which were charged to his personal account. A part of the amounts drawn were applied by petitioner to the purchase of the land at Fourteenth and R Streets and the construction of the building thereon. Against the withdrawals made by petitioner and charged to him there was credited his annual salary of $30,000, and in later years rent which he charged the corporation. Transcripts of his account for the years involved disclose withdrawals, credits, and amounts applied to the purchase of property as follows:
| Total withdrawals | $64,938.97 | |
| Salary credit | 30,000.00 | |
| Net withdrawals | 34,938.97 | |
| Withdrawals applied to purchase of property | 38,000.00 | |
| Excess of payments on property over net withdrawals | 3,061.03 | |
| 1923 | ||
| Total withdrawals | 95,552.09 | |
| Salary credit | $30,000.00 | |
| Rent credit | 5,000.00 | |
| 35,000.00 | ||
| Net withdrawals | 65,552.09 | |
| Withdrawals applied to purchase of property | 70,209.45 | |
| Excess of payments on property over net withdrawals | 4,657.36 | |
| 1924 | ||
| Total withdrawals | $70,563.98 | |
| Salary credit | $30,000.00 | |
| Rent credit | 12,000.00 | |
| Credits not detailed | 4,900.00 | |
| 46,900.00 | ||
| Net withdrawals | 23,663.98 | |
| Interest paid on trust on building | 4,050.00 | |
| Withdrawals unaccounted for | 19,613.98 | |
| 1925 | ||
| Total withdrawals | 203,435.27 | |
| Salary credit | $30,000.00 | |
| Rent credit | 12,000.00 | |
| Mortgage transferred to corporation | 123,000.00 | |
| 165,000.00 | ||
| Net withdrawals | 38,435.27 | |
| Interest paid on trust on building | $12,749.50 | |
| Taxes paid | 2,655.11 | |
| 15,404.61 | ||
| Withdrawals unaccounted for | 23,030.66 |
*2317 *333 A fair rental for the building at Fourteenth and R Streets would be $30,000 per year. Expenses in connection with the building exceeded $12,000 per year which petitioner charged the corporation. Financial statistics of the Commercial Auto & Supply Co. and of its successor, Joseph McReynolds, Inc., are as follows:
| 1922 | 1923 | 1924 | 1925 | |
| Gross sales | $1,281,000.00 | Not given. | $1,241,000.00 | Not given. |
| Purchases | 998,000.00 | do | 894,000.00 | Do. |
| Expenses | 123,088.31 | do | 182,000.00 | Do. |
| Cash (Dec. 31) | 43,000.00 | $10,211.86 | Not given. | Do. |
| Accounts payable (Dec. 31) | 11,036.47 | 11,244.50 | 10,168.41 | Do. |
| Notes payable (Dec. 31) | None. | 176,285.34 | 98,799.73 | Do. |
| Capital stock | 17,700.00 | 17,700.00 | 17,700.00 | $17,700.00 |
| Surplus (Dec. 31) | 147,560.64 | 233,112.38 | 216,216.11 | 187,203.60 |
| Earnings | 50,802.47 | 91,274.04 | ||
| Loss | 3,612.02 | 12,663.22 |
Notes payable represent amounts borrowed to cover purchase drafts for new cars which were shipped with sight draft attached to bill of lading.
On April 23, 1926, petitioner transferred the property at Fourteenth and R Streets to the corporation.
After the corporation moved into the new*2318 building in 1923 it was found that the building was not well adapted to the corporation's needs. Unsuccessful efforts were thereafter made to sell it until in 1927, when petitioner arranged to trade it for other property, and under date of October 14, 1927, a resolution of the board of directors *334 was passed authorizing the transfer of the premises to petitioner for his demand note in the amount of $123,000 and his assumption of the existing encumbrance of $125,000. Petitioner has since then paid $63,000 on his note.
The respondent treated as dividends received by petitioner the following amounts of the withdrawals set forth above:
| 1922 | $35,957.43 |
| 1923 | 60,552.09 |
| 1924 | 23,667.83 |
| 1925 | 21,267.77 |
The respondent has also asserted a 25 per cent penalty for delinquency in filing return for the year 1925.
OPINION.
ARUNDELL: In the taxable years petitioner drew from the corporation of which he was president, certain sums of money in excess of the salary paid him by the corporation and the rent which he charged it. The respondent has treated a part of the these excess sums as dividends received by the petitioner.
In our opinion the respondent*2319 erred in treating as dividends that part of the amounts drawn by petitioner which he applied to the purchase of the building site and the construction of the building. The site was acquired and the building constructed in the name of the petitioner, but for the corporation and not for himself, as is shown by his subsequent transfer of the property to the corporation. He received no benefit from the amounts which he drew from the corporation and paid over for property which he was acquiring for the corporation. The amounts which it is shown were applied to the acquisition of the property for the corporation, and interest and taxes in connection therewith, are:
| 1922 | $38,000.00 |
| 1923 | 70,209.45 |
| 1924 | 4,050.00 |
| 1925 | 15,404.61 |
The amounts expended by petitioner in 1922 and 1923 in the acquisition of the building for the corporation exceeded his net withdrawals and for those years the respondent erred in taxing any amount to the petitioner as dividends. The deficiencies for those years in so far as they arise from respondent's inclusion of the alleged dividends are disapproved. For the year 1924 only $4,050 is shown to have been applied to the property acquired*2320 for the corporation, leaving $19,613.98 withdrawn by petitioner and not accounted for. There is nothing in the record to show that this amount was not for petitioner's personal use and it may accordingly be included in income as a dividend within the meaning of section 201(a) *335 of the Revenue Act of 1924. For the year 1925, while taxes and interest were paid out of the amounts drawn by petitioner, the portion of his withdrawals which is unaccounted for is greater than the $21,267.77 treated by the respondent as dividends, and we perceive no error on the part of the respondent in holding that amount to be taxable.
No issue is raised as to the penalty asserted for delinquency in filing the 1925 return.
Reviewed by the Board.
Judgment will be entered under Rule 50.