*136 Decision will be entered for the petitioner in Docket No. 1813, and for the respondent in Docket No. 2049.
1. The Coast Carton Co. was issued a charter for a period expiring in 1929, and the charter was not extended or renewed. Thereafter through 1939, the taxable year, the stockholders of the corporation continued its business without knowledge of the expiration of the franchise or change of the corporate form of transacting business. Held, that the Coast Carton Co. was in 1939 an association taxable as a corporation.
2. The association deducted amounts in its return for 1939 for compensation paid to officers with knowledge that the individuals performed no services for it for the payments. Held, that the return was false and fraudulent and was filed with intent of evading income and declared value excess profits taxes.
*676 These proceedings, involving the calendar year 1939, were consolidated for hearing and involve, in Docket No. 2049, deficiencies in income tax of $ 401.23, declared value excess profits tax of $ 286.48, and fraud penalties*137 thereon totaling $ 343.86. The deficiencies and penalties were asserted against J. L. Norie, the petitioner in Docket No. 1813, as a transferee of the Coast Carton Co. Upon brief the respondent concedes that J. L. Norie is not liable as a transferee, and accordingly a decision of no transferee liability will be entered in that proceeding. The issue in Docket No. 2049 is whether the petitioner was taxable as a corporation and, if so, whether the deficiencies are subject to fraud penalties. An alternative issue is whether the deficiencies were due to negligence and intentional disregard of rules and regulations.
FINDINGS OF FACT.
On September 8, 1904, the State of Washington granted a charter to the Coast Carton Co. (hereinafter referred to as the corporation) for a period of 25 years. The corporation paid franchise taxes to July 1, 1929. The charter was never renewed. The corporation engaged in the business of manufacturing paper boxes and cartons in Seattle, Washington.
J. L. Norie first acquired stock in the corporation in 1916. Later, when he became an employee of the corporation, he increased his stock holdings, and by 1924 owned all of the corporation's outstanding stock, *138 consisting of common stock of a par value of $ 29,300 and preferred stock of a par value of $ 25,000. He has been active in *677 the affairs of the business since 1919; was president, treasurer and manager, and a director of the corporation and performed practically all of the bookkeeping for it. In 1924 he transferred 10 shares of his common stock to his wife, Martha K. Norie; 11 shares to his son, James L. Norie, Jr.; and 10 shares to his daughter, Mary E. Banks. Stock certificates were issued in their names for the respective shares transferred. The certificates have at all times been in the possession of J. L. Norie. No meetings of directors or stockholders of the corporation were held after 1926.
The business conducted by the corporation was transacted in the name of Coast Carton Co. after the expiration of the charter of the corporation in 1929. The volume of business transacted each year from 1924 through 1939 ranged from $ 70,000 to $ 100,000. The petitioner kept its accounts on an accrual basis. Corporate income and capital stock tax returns were filed after 1929 in the name of Coast Carton Co., the income tax return for 1939 having been filed with the collector*139 for the district of Washington on March 15, 1940.
At some undisclosed time in 1940 after August 12, counsel for J. L. Norie informed him that the charter of the corporation had expired in 1929. Until that time J. L. Norie acted under the assumption that the corporate charter had not expired. The income in 1940, 1941, and 1942 from the business conducted in the name of the Coast Carton Co. was reported in individual returns filed by J. L. Norie on advice of his counsel. The method of managing and conducting the business of the corporation after 1929 was not materially changed from what it had been theretofore.
The corporation owned the building in which it transacted business. Its name was painted on the building prior to 1930 and has never been removed. Stationery bearing the name of the corporation is still being used. Checking accounts maintained in the name of the Coast Carton Co. were not changed until after 1939. Checks on the accounts were signed by J. L. Norie, as treasurer. Supplies were purchased, bank loans were made, and general business dealings were conducted during 1939 in the name of Coast Carton Co., a corporation. In a financial statement made to a bank in*140 August 1939, and signed by J. L. Norie as treasurer of the Coast Carton Co., information was given that the outstanding stock of the corporation was "owned in the family"; that title to the real estate listed in the statement was in the name of the corporation; and that J. L. Norie was president and treasurer, and Mary E. Banks, acting secretary, of the corporation. A financial statement was made by J. L. Norie to the same bank in June 1939 for his own account, in which he represented that he owned practically all of the stock of the corporation.
No written or oral agreement was entered into after 1929 covering *678 the operation, management, control, or division of profits of the business conducted under the name of Coast Carton Co. No demand was ever made by Mary E. Banks or James L. Norie, Jr., for the stock certificates issued in their names, or by Esther Norie, wife of J. L. Norie, Jr., for the stock certificate issued in the name of her husband. Neither was a demand ever made upon J. L. Norie for an accounting of assets and profits. There was never any distribution of profits of the business except in the form of salaries.
Martha K. Norie died intestate in June 1937, *141 and her husband was appointed administrator of her estate. In July 1937 the interest of James L. Norie, Jr., and Mary E. Banks in the estate of their deceased mother was transferred to their father. The inventory filed by administrator on March 23, 1938, for the community personal property of her estate included 522 shares of the 543 shares of outstanding stock of the Coast Carton Co., par value $ 100 a share. The estate has not been settled.
James L. Norie, Jr., was an employee of the petitioner, Coast Carton Co., prior to 1938. In January 1938 the company sent him east to endeavor to obtain new articles for manufacture. While there, without knowledge of his father, but known to his wife, he joined an organization to engage in a war in Spain. Prior to his departure from Seattle, he executed a power of attorney in favor of his wife. J. L. Norie did not learn of his son's venture until the receipt during the next month of a letter from him written abroad. No other information was received about him until June 1939, when the Norie family was informed that he had been killed in Spain on April 3, 1938.
James L. Norie, Jr., died testate. The decree issued on November 3, 1939, *142 setting aside the estate to the decedent's widow, in lieu of homestead, listed 11 shares of stock of the Coast Carton Co. as an asset of the estate which had come into the hands of the administratrix of the estate.
During 1938 Esther Norie received checks from the Coast Carton Co. payable to her husband and used the proceeds thereof to support herself and two minor daughters. Her understanding was that the checks represented salary of her husband. The joint income tax return filed by Esther Norie for herself and husband for 1938 reported salary of $ 2,934 received from the Coast Carton Co.
Each week in 1939 through October 27 the Coast Carton Co. issued a check for maintenance and support of Esther Norie and her two minor children. Each check was in the amount of $ 60, except one issued January 27 for $ 54 and one issued June 2 for $ 66. Prior to June 9 the checks were issued in favor of James L. Norie, Jr.; thereafter in favor of his widow. The first five checks, totaling $ 294, were cashed by Esther Norie. Her policy was not to cash the checks unless the *679 proceeds were needed for maintenance of herself and her family. In the spring of 1939 she received some insurance*143 money under policies taken out by her husband. At about that time she tendered to J. L. Norie the next five checks, aggregating $ 300, but he declined to accept them, remarking that they belonged to her and that she might need them some day. These five checks were in possession of Esther Norie, uncashed, on December 31, 1941. The remaining checks, aggregating $ 1,986, were not delivered to Esther Norie and are still in the possession of petitioner.
The return filed by Esther Norie for 1939 reported the receipt of $ 540 from the Coast Carton Co. as compensation for services rendered. Esther Norie did not at any time render services to the Coast Carton Co.
For many years prior to the death of Martha K. Norie, $ 47 of her husband's salary was deposited to her credit each week for operating the family home. Upon her death in 1937, J. L. Norie made arrangements with his daughter to keep house for him. Each week thereafter, through October 1939, J. L. Norie caused the Coast Carton Co. to issue a check for $ 47 to his daughter for household expenses. Of the 43 checks, totaling $ 2,021, issued in 1939, the first one, issued January 6, was cashed in July 1939, and the remaining checks*144 were not cashed and were canceled prior to the close of 1939. Mary E. Banks performed no service for the Coast Carton Co.
All of the checks issued in 1939 in favor of James L. Norie, Jr., and his wife, and the check for $ 47 issued to and cashed by Mary E. Banks, were charged on the books of the Coast Carton Co. to an account entitled "Salaries G. & A." and at the close of 1939 were transferred as a charge to profit and loss.
In the income tax return filed by the Coast Carton Co. on a corporate form for 1938, a deduction of $ 12,829 was claimed for compensation of officers, as follows:
| J. L. Norie, president | $ 7,445 |
| J. L. Norie, Jr., secretary | 2,940 |
| Mary E. Banks, vice president | 2,444 |
A statement was made in the return that the officers devoted all of their time to the business.
In the income tax return filed by the Coast Carton Co. on a corporate form for 1939, the following deductions, totaling $ 8,887, were claimed as compensation of officers, without specifying the title of the officers and the amount of time they devoted to the activities of the business:
| J. L. Norie | $ 6,260 |
| J. L. Norie, Jr | 780 |
| Mrs. J. L. Norie, Jr | 1,800 |
| Mary E. Banks | 47 |
*680 *145 These deductions were taken from the books and records of the business. The returns for 1938 and 1939 were signed by J. L. Norie as president.
The return of petitioner for 1939 was false and fraudulent and was filed with intent of evading income and declared value excess profits taxes. Part of the deficiency is due to fraud with intent to evade tax.
OPINION.
It does not appear whether respondent determined the deficiencies against the petitioner upon the ground that it was a corporation de jure or de facto, or an association taxable as a corporation. Upon brief, petitioner argues, in substance, that, upon the expiration of the charter of the Coast Carton Co. in 1929, the corporation ceased to exist for all purposes, and that thereafter J. L. Norie, as sole stockholder, did not form an association with any person to conduct petitioner's business. Upon brief, respondent contends that petitioner is taxable as a corporation or an association. He relies principally upon the taxability of petitioner as an association, upon the theory that the status of the corporation in the taxable year under state law is immaterial in this proceeding. In view of the position of the parties*146 and lack of difference in rates of taxation of corporations and associations, there is no need to determine whether petitioner was a de jure or de facto corporation in 1939. See John Crocker, 32 B. T. A. 861; affd., 84 Fed. (2d) 64; Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110">269 U.S. 110; Wholesalers Adjustment Co. v. Commissioner, 88 Fed. (2d) 156; Calvin Zimmerman, 31 B. T. A. 754.
The term "corporation" in the Revenue Act of 1938 includes associations. Sec. 901 (a) (2). Petitioner argues that no body of persons agreed to become associated for the operation of its business after the expiration of the corporation's charter and, accordingly, that we must find under the guiding principles set forth in Hecht v. Malley, 265 U.S. 144">265 U.S. 144, and Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344, that it was not an association, but a sole proprietorship. The contention is predicated upon the theory that J. L. Norie, as the sole stockholder of the corporation, was the owner*147 of petitioner's business. The record fails to prove such a premise for the argument.
J. L. Norie testified that he never disposed of any of his stock, the 31 shares, 10 each to his wife and daughter, and 11 to his son, having been transferred in 1924, for no purpose other than to qualify them to serve as officers of the corporation.
The statutes of Washington provide that the powers of corporations shall be exercised by a board of not less than two trustees, who shall be stockholders. Sec. 3812, vol. 5, Remington's Revised Statutes of Washington. Petitioner does not cite any state statute requiring other *681 officers to be stockholders, and we find none. The record does not show whether the corporation ever had duly elected trustees. Apparently the stock was transferred for reasons other than to qualify the stockholders as officers of the corporation. His testimony is inconsistent with other evidence in the record. As late as 1939 he represented to a bank in one application for credit that he and members of his family owned all of the corporation's outstanding stock, and in another application that he owned practically all of the stock. The certificate issued in favor*148 of J. L. Norie, Jr., was among the assets of his estate which were set aside to his widow by a court decree issued in November 1939. Furthermore, the witness, acting as administrator of the estate of his wife, listed 522 out of 543 shares of outstanding stock of the corporation as community property of the estate. The remaining shares could be none other than those outstanding in the names of Mary E. Banks and James L. Norie, Jr. This action of J. L. Norie constitutes recognition by him that the stock outstanding in the names of his daughter and deceased son was not owned by him. Martha K. Norie died intestate in 1937. Her one-half of the community estate, which included the stock outstanding in the name of her husband, subject to community debts, descended in equal shares to her two children both of whom were living at the time of her death. Remington's Revised Statutes of Washington, vol. 3, sec. 1342. In 1937 J. L. Norie acquired by assignment the interest of his son and daughter in the estate of their deceased mother. The estate has not been settled. We accept this documentary evidence to establish ownership of the corporate stock rather than the testimony of J. L. Norie. *149 This conclusion is not inconsistent with our finding from testimony of J. L. Norie that he has at all times had possession of the stock certificates. He held them, not as the owner thereof, but as a custodian for the owners.
Accordingly, the stock issued by the corporation was held during 1939, not by one individual, as contended by petitioner, but by three persons and an estate in process of administration. The ownership of petitioner in 1939 was evidenced by those certificates. This conclusion renders it unnecessary to decide whether a business owned by one individual may be taxed as an association. There is authority, however, for holding that sole ownership is not fatal to such view. Lombard Trustees, Ltd. v. Commissioner, 136 Fed. (2d) 22. The stock certificates here were as transferable as the "expectancy fractions" evidencing ownership in that case.
The absence of a formal agreement among the shareholders entered into for the express purpose of operating the business of the corporation after the expiration of its charter is not decisive under the peculiar facts of the case. The business of petitioner was conducted after 1929 *682 *150 without knowledge that the corporation's charter had expired, and during that period the former stockholders at least acted under the assumption that whatever agreement or authority necessary to give life to and perpetuate the existence of the corporation under state statute was still in full force and effect. No franchise taxes were paid after 1929. The failure of J. L. Norie, the corporation's principal stockholder, president, and manager, to have the corporation pay the taxes tends to indicate intention on his part to operate the business in the same manner as a corporation. He and the other stockholders should have known that the charter had expired and are in no position to complain if an organization in all respects like a de jure corporation is used by them to transact business and called upon to pay a tax on its earnings. Until 1929 they transacted business in corporate form and then, at a time when they should have known that the corporation's charter had expired, elected, in effect, by inaction, to continue the business in the same manner.
In J. C. Carlson, 27 B. T. A. 93, involving income tax liability for 1925, a corporation in 1914*151 conveyed its assets in trust, in dissolution proceedings, to three of its stockholders. The trustees continued, without change, the business conducted by the corporation prior to the transfer. We held that the continuation of the business by the trustees beyond a reasonable time after steps were taken to dissolve the corporation created an association. No agreement was entered into for conducting the business after a reasonable time for dissolution. Here, the shareholders permitted the corporation's business to continue after the charter expired, without any change in the manner of conducting its activities. The result of the failure of the former stockholders to recognize the altered situation was no different here than it was there.
In Roe Stephens Mfg. Co., 12 B. T. A. 1254, the corporation's charter expired in May 1916, with knowledge of its stockholders. Pending the organization in January 1919 of a new corporation to take over the assets, the business of the old corporation was conducted without change. We held that the shareholders did business in 1917 and 1918 as an association, contrary to their belief that they were partners.
In Rockwood v. United States, 38 Fed. (2d) 707*152 (Ct. Cls.), the corporation's charter expired in 1917 and was never extended or renewed. The corporation's business was carried on as usual by its two stockholders throughout 1918 and a corporate return was filed for that year. The evidence did not show that the former stockholders knew prior to 1927 that the charter had expired. The surviving stockholder filed a claim for refund of taxes paid for 1918, alleging that, the corporation's charter having expired in 1917, the corporation was not in existence in 1918; that the shareholders continued the *683 business as partners; and that the Commissioner had no authority to tax the business as a corporation or as an association. The court denied the refund on two grounds -- first, that the plaintiff was estopped to deny that the company was not a corporation, and, second, that if the company was not taxable as a corporation, it was taxable as an association.
The Treasury Department has power to provide rules for administration of the statute. Morrissey v. Commissioner, supra. Article 1502 of Regulations 62, promulgated under the Revenue Act of 1921, provides:
* * * A corporation which has ceased*153 to exist in contemplation of law but continues its business in corporate form is an association or corporation within the meaning of section 2, * * *
Like regulations were promulgated under the Revenue Acts of 1924, 1926, 1928, and 1932. Subsequent regulations contain the following statement:
* * * If the conduct of the affairs of the corporation continues after the expiration of its charter, or the termination of its existence, it becomes an association.
The obvious purpose of the regulations is to classify as an association a business conducted in corporate form after a corporation ceases to exist under statutory authority. During the period the regulations were in effect the statutory provision for taxing associations as corporations was continued without change. Such action of the Congress must be regarded as approval of the regulations. Morrissey v. Commissioner, supra;John Crocker, supra, and cases cited therein; Marshall Heirs v. Commissioner, 111 Fed. (2d) 935. The regulations cover corporations generally, and do not make the classification depend upon the number of stockholders*154 or an agreement for continuing the business.
Petitioner was an association during 1939 within the meaning of the statute and is taxable as a corporation.
As grounds for sustaining his determination of fraud, respondent relies upon the deduction in the return for 1939 of a total of $ 2,627 for compensation paid to J. L. Norie, Jr., and his widow, and to Mary E. Banks, with knowledge that they performed no services for the payments. Petitioner does not deny the payments and admits that the individuals performed no services for it during the period for which the salaries were paid. It answers the charge of fraud by pointing to testimony of J. L. Norie that throughout 1939 J. L. Norie, Jr., was entitled to salary under leave of absence granted to him and that the remaining item of $ 47 paid to Mary E. Banks, his daughter, was part of his salary.
We are of the opinion that respondent has sustained his burden *684 under the issue. The statute limits deductions for salaries to amounts paid as compensation for personal services actually rendered. Sec. 23 (a) (1), Revenue Act of 1938. 1 The testimony of J. L. Norie, an interested party, that his son had the status of an employee*155 on leave of absence with pay for a period of about twenty months is contrary to other evidence and will not support a finding of fact to that effect. He testified that he arranged with his son in 1938 that "his salary was to go on, and his wife was to have the recompense for her maintenance." The son left Seattle in January 1938, ostensibly on a business trip, but for the real purpose, known only to his wife, of leaving the country for a period of time not disclosed in the record. No evidence was offered to show how long petitioner expected J. L. Norie, Jr., to be absent on business. The necessity for granting leave of absence to conduct an ordinary business activity is not apparent, and in a case such as this, requires some explanation. There is none in the record. The salary was paid throughout 1938, after J. L. Norie knew that his son, instead of being absent conducting business for petitioner, was in military service abroad. In an ordinary case, action of that sort on the part of an employee would be considered grounds for terminating the services of the employee; if not, a new contract of employment. Instead, the salary of the employee here was continued thereafter for*156 about twenty months, including four months after it was known that the employee had been killed in April 1938, a few months after he left Seattle. If salary was payable after being informed of the death of the employee, it should have been paid to his estate.
Other testimony of *157 J. L. Norie is that the checks drawn after being notified in June 1939 of his son's death fourteen months prior thereto were issued "because his family had to be maintained." This and other testimony contains the real reason for issuing the checks. During the time she received and cashed the checks, Mrs. James L. Norie, Jr., had no other means of supporting herself and two minor children. This was known to J. L. Norie. The petitioner provided the necessary maintenance money without consideration, so long as it was needed, and continued to issue checks, without delivering them, long after its president and manager knew they were not needed or wanted to support *685 the family of his deceased son. The checks were gratuitous contributions of petitioner for the support of the family of a former employee and not, as petitioner represented in the books, and return for 1939, compensation of an officer for services actually rendered.
A somewhat similar situation prevailed respecting the payment of $ 47 in 1939 to Mary E. Banks, and deducted as compensation for services actually rendered. Petitioner seeks to justify the deduction upon the ground that it was part of the salary of J. *158 L. Norie.
Prior to the death of his wife in 1937, J. L. Norie had $ 47 of his salary each week deposited to her credit to operate their home. It does not appear how the payments were recorded on petitioner's books or reported in income tax returns. After his wife died he made arrangements to have his daughter keep house for him and thereafter caused petitioner to make the payments to her. The payments of $ 47 a week in 1938, totaling $ 2,444, were claimed as a deduction in the return filed for that year as compensation to officers who had devoted all of their time to the affairs of petitioner. Of the checks issued for a like amount each week in 1939 through October 27, only one was cashed, and the other checks were canceled. J. L. Norie first testified that the payment was made to her for the operation of his home and then, upon being asked whether the payment, having been charged to labor on petitioner's books, in effect, was his or her salary, testified, "It was my salary, I guess." Later he testified that "a number of years ago" he was voted a salary of $ 180 a week, that he did not always draw it, and that "it is very possible that that [amount paid to Mary E. Banks] was *159 a part of my authorized salary." The amount of $ 9,889 deducted as salaries paid to J. L. Norie and Mary E. Banks in 1938 is $ 129 in excess of $ 180 a week. Accordingly, to the extent of at least $ 129, the payments in 1938 were not salary of J. L. Norie. J. L. Norie did practically all of the bookkeeping for petitioner, directed all of its activities, and should have been in a position to testify without equivocation concerning the real purpose of the payments. It is not contended that a mistake was made. The amount, like the payments to his son and daughter-in-law, was represented to be salary for services rendered, knowing that no services had been rendered. Representations of that sort disclose a fradulent intent. Allegheny Amusement Co., 37 B. T. A. 12. We hold that the deficiency is in part due to fraud with intent to evade tax, and that 50 percent of the amount of the deficiency was properly added by the Commissoner, under section 293 (b) of the Internal Revenue Code.
Decision will be entered for the petitioner in Docket No. 1813, and for the respondent in Docket No. 2049.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
(1) In general. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.↩