*2259 1. Respondent having failed to mail a notice to petitioner within 60 days after making a jeopardy assessment for 1920 and 1921, and the time elapsed from the filing of returns to the date of notification being more than the statutory period for assessment plus the 60-day period provided by section 279(b) of the Revenue Act of 1926, collection is held to be barred, following J. H. Reese,15 B.T.A. 1261">15 B.T.A. 1261.
2. Held that petitioner's salary received in 1922 and 1923 from the company of which he was president was taxable in the full amount received, and that the respondent correctly included in income the amounts paid by petitioner from his salary to former officers of the company to reimburse them for advances made, the company being under no legal obligation to repay the advances.
3. Deductions allowed for interest paid in 1922 and 1923.
*649 These proceedings, which on stipulation were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes for the*2260 years and in the amounts as follows:
| 1920 | $1,873.32 |
| 1921 | 733.18 |
| 1922 | 421.77 |
| 1923 | 1,692.84 |
Petitioner alleges that the jeopardy assessment which the respondent has made for the years 1920 and 1921 is invalid because barred by the statute of limitations and, further, that the respondent failed to comply with the provisions of the Revenue Act of 1926 in failing to notify petitioner of the assessment within 60 days.
*650 For all the taxable years petitioner alleges error in respondent's inclusion in income of amounts which petitioner received from a company of which he was president and which he turned over to former officers who had advanced funds to the company.
At the conclusion of the hearing, the petitions were amended to claim, as an alternative, deductions for interest paid.
% findings of fact/.
Petitioner, during the taxable years, was president of the American Life & Accident Insurance Co., hereinafter called the American Co., which was a Kentucky corporation, of the type known as assessment companies, and having no capital stock.
The American Co. was organized about 1906 and in 1913 it was merged or consolidated with the Union Sick*2261 & Accident Co., hereinafter called the Union Co., the merged company continuing business under the name of the former. Prior to the merger of the two companies petitioner was president, and his uncle, Robert Dinwiddie, was secretary and treasurer of the Union Co. Messrs. Walker and West were officers of the American Co. before 1913. The receipts of these two companies consisted of dues and assessments paid by policyholders and advances made by officers. Under the laws of Kentucky in force in the early years of the operation of these companies, assessment insurance companies were required to pay, first, policy losses and, second, operating expenses such as office expenses and the expenses of agencies and agents. At first a reserve of only $4,000 was required to be carried by assessment companies, which was later increased to $10,000. This reserve was for the protection of policyholders and the companies could not borrow against it. If, after payment of the expenses above mentioned, any surplus remained from dues and assessments, salaries of officers could be paid from it.
Until the merger of the American and Union companies in 1913, neither had sufficient income to meet policies*2262 and operating expenses. Consequently, they had no surplus and they could not borrow money, because to have done so would result in liabilities exceeding assets which condition, if discovered by the State Insurance Department, would result in receivership for the companies. In this situation, advances were made by Dinwiddie to the Union Co. and by Walker and West to the American Co. under oral agreements with the directors that if and when the companies had sufficient income the advances would be repaid in the guise of salaries. For reasons above set out, these advances were never carried on the books of the companies as liabilities, nor did the companies ever enter into any written agreements concerning them.
*651 From the time of the merger of the American and Union companies in 1913 until 1917 the income of the merged company from dues and assessments was sufficient to meet its expenses and in the latter year its income began to exceed its expenses. When petitioner became president of the merged American Co. in 1913 he entered into a written agreement with Robert Dinwiddie whereby he agreed to pay to Dinwiddie the sum of $29,000, which the latter had advanced to the*2263 Union Co. prior to 1913. In evidence of his obligation he gave Dinwiddie his personal notes in the principal sum of $29,000, and bearing 6 per cent interest. Subsequently, petitioner also agreed to pay to Walker and West the funds they had advanced to the American Co. prior to 1913 to the extent of $62,000. At the time he entered into this agreement he paid Walker and West $10,000 in cash and gave them 520 personal notes, each in the amount of $100. In June of 1917 Walker and West withdrew from the company and Robert Dinwiddie became secretary under an agreement whereby he was to receive one-fourth of the income of the company, after payment of losses and expenses and payments on petitioner's notes, and the petitioner was to receive three-fourths.
The directors of the Union and American companies were aware of the fact that advances were being made to the companies by Dinwiddie, Walker, and West, and the directors of the merged company knew of the agreements whereby the petitioner undertook to repay the advances. When petitioner entered into the agreements to repay the advances he had faith in the future of the company and believed that in time his salary from it would more*2264 than enable him to pay off his notes.
As the notes held by Dinwiddie, Walker, and West came due, petitioner was sometimes able to meet them out of withdrawals from the American Co. and at other times he was forced to borrow funds. During the taxable years petitioner paid interest, for which no deductions were taken in his returns, in the following amounts:
| 1920 | $1,624.64 |
| 1921 | 967.25 |
| 1922 | 2,142.98 |
| 1923 | 1,640.84 |
Petitioner's withdrawals from the American Co. which were entered in his salary account on the books of the company, and the amounts reported as income in his income-tax returns for the taxable years, were as follows:
| Year | Withdrawals | Returned as income |
| 1920 | $24,000 | $10,008.46 |
| 1921 | 18,300 | 9,949.15 |
| 1922 | 15,900 | 12,552.46 |
| 1923 | 34,900 | 19,960.59 |
*652 The respondent, in determining the deficiencies involved, increased petitioner's income by the difference between the above amounts, namely, $13,991.54 for 1920; $8,350.85 for 1921; $3,347.54 for 1922; and $14,939.41 for 1923. In the American Co.'s annual reports to the State Insurance Department the full amounts drawn by petitioner were reported as salaries drawn*2265 by him.
Petitioner's income-tax return for 1920 bears on its face stamps reading "Rec'd. March 15, 1921; Internal Revenue Office, Dist. Ky." and "Paid Mar. 15, 1921, Elwood Hamilton, Collector, Dist. Ky." Petitioner's check issued in payment of the tax shown on his 1920 return is dated March 14, 1921. His 1921 return bears on its face a stamp reading "Kentucky Mar. 15, 1922."
For the years 1920 and 1921 respondent assessed under section 279(a) of the Revenue Act of 1926 the deficiencies determined. The notice of deficiencies for those years, dated November 3, 1926, was not mailed within 60 days after making the jeopardy assessment.
OPINION.
ARUNDELL: For the years 1920 and 1921 petitioner pleads two legal bars against the deficiencies, namely, the statute of limitations against assessment, and the failure of the respondent to comply with the provisions of section 279(b) of the Revenue Act of 1926. As to the first, the statute of limitations, the evidence is insufficient to enable us to pass upon it, in that it is not shown when the jeopardy assessment was made. On the other point, however, the petitioner must be sustained. The pleadings and the evidence show that the*2266 notice of the assessment, which also advised petitioner of his right of appeal under section 274(a) of the Revenue Act of 1926, was mailed November 3, 1926. Under section 277 of the Revenue Act of 1926, which was in force when the assessment was made, the respondent had five years to assess for 1920 and four years for 1921, and under section 279(b) he had 60 days more in which to notify the petitioner of the assessment. Counsel for the respondent in his answer admits that the respondent did not mail the deficiency notice within 60 days after making the jeopardy assessment. While in view of the lack of evidence, as pointed out above, we must assume that the assessment for 1920 and 1921 was timely made, nevertheless, the time elapsed from the filing of the returns to the date of notification of the assessment is more than the time for making assessment plus the additional 60 days for notification. The respondent failed to show that any of the exceptions in section 278 were applicable, , and under the rule laid down in *2267 , *653 we must hold that the notice of November 3, 1926, is invalid and collection of the deficiencies for 1920 and 1921 barred by the statute of limitations.
This leaves for disposition on the merits the deficiencies determined for the years 1922 and 1923. The claim of the petitioner as to these deficiencies is that the amounts added to his income by the respondent were merely amounts which he had previously advanced to the corporation and were paid by it. The evidence does not show that petitioner ever advanced any money to either of the two companies which were merged in 1913 and of which petitioner then became president. The only advances of which there is evidence are those made by Dinwiddie, Walker, and West. These the petitioner agreed to and did repay out of amounts drawn from the insurance company.
In our opinion all of the amounts withdrawn by the petitioner from the insurance company, and which were entered on its books as salary, were income to the petitioner. In the first place the testimony of petitioner and of the general counsel for the company is explicit that there was no legal obligation on the part of*2268 the company to repay any of the advances made to it. Had they been legal obligations the company would have been insolvent and receivership would inevitably have followed. The directors very carefully saw to it that there was no written agreement which would obligate the company.
Neither the notes executed by petitioner nor the written agreements with Dinwiddie, Walker, and West are in evidence, and so we do not know what they recited as consideration. It appears plainly, however, from the petitioner's testimony that the real consideration was the relinquishment by Dinwiddie, Walker, and West of their right to future profits. Being officers of the company, they were entitled to draw as salaries all of the company income after payment of losses and expenses. Petitioner expected, when he entered into the agreements, that the income of the merged company would some day greatly exceed losses and expenses, and that his expectations were well founded is demonstrated by the large amounts available for salaries in the taxable years, which amounts were not only entered in petitioner's salary account and drawn by him, but were also reported to the State Insurance Department as salaries. *2269 The substance, then, of what petitioner did was to buy out the interests of other officers and in the taxable years he devoted part of his salary to the payment of his indebtedness on this purchase. This state of facts does not serve to exclude from taxable income any of the salary received by petitioner nor does it permit of any *654 deduction on account of the amounts paid out by petitioner on his indebtedness.
In the alternative, petitioner asks for deductions for interest paid in the taxable years. The amounts paid which are set forth in the findings of fact are properly deductible and allowances therefor will be made on recomputation.
Reviewed by the Board.
Judgment of no deficiency will be entered for the years 1920 and 1921. Judgment will be entered under Rule 50 for the years 1922 and 1923.
PHILLIPS dissents.