*879 The petitioner was the sole stockholder of the G corporation, which owned all of the preferred and two thirds of the common stock of the Z corporation. The remaining one third of the common stock of Z was owned by D. The petitioner and D were indebted to Z. The petitioner was solvent and able to pay the debt, and D was insolvent. Z also was insolvent and its only liability, with minor exceptions, was an account payable to G in an amount substantially in excess of the value of its assets. Z canceled the indebtedness of the petitioner and D. Held, that the amount of the indebtedness of the petitioner which was canceled constituted income of the petitioner at the time of cancellation, and, under the circumstances of this particular case, the cancellation had the effect of the payment of an ordinary dividend by G to the petitioner.
*836 The Commissioner determined a deficiency in the petitioner's income tax for the year 1931 in the amount of $4,085.09. The only issue in the case is whether or not the Commissioner erred in*880 including $21,204.75 in the petitioner's income for 1931.
FINDINGS OF FACT.
The petitioner is an individual. His address was Tulsa, Oklahoma, at the time he filed his income tax return for the calendar year 1931.
He owned during 1931 all of the outstanding stock of the Galvez Oil Corporation (hereinafter referred to as Galvez). Galvez at that time owned all of the outstanding preferred stock and two thirds of the outstanding common stock of the Gibson-Zahniser Oil Corporation (hereinafter referred to as Zahniser). The remaining one third of the common stock of Zahniser was owned by J. H. Dickson.
The outstanding capital stock of Zahniser consisted of 2,500 shares of preferred stock, each share having a par value of $100, and 1,000 shares of common stock of no par value. The total amount of the common stock was carried on the books of Zahniser at $2 in the year 1931.
The petitioner was the president of Zahniser and was also a director in 1931. One share of the common stock of Zahniser, which belonged to Galvez, stood in the petitioner's name merely for the purpose of qualifying him as an officer and director of Zahniser. The petitioner devoted very little of his*881 time to the affairs of Zahniser and drew no salary from that corporation. The active management of Zahniser was in the hands of Dickson. He was vice president, *837 general manager, and a director of Zahniser. John F. James, the petitioner's private secretary, was secretary of Zahniser and one of its directors. The other two directors of Zahniser were a stenographer for the corporation and the wife of Dickson. Four of the five directors held only qualifying shares, Dickson being the only one of the five who owned his shares.
Zahniser carried an account on its books in the name of the petitioner. The account began in 1923, contained debit and credit entries for each year from 1923 to 1931 inclusive, except that there were no credit entries for 1929 or 1930, and showed a debit balance at the end of 1931 in the amount of $21,204.75. Zahniser carried a similar account in the name of Dickson which showed a debit balance at the end of 1931 of $47,082.60. Dickson became hopelessly insolvent in 1929 or 1930 and was forever after unable to pay his debt to Zahniser. The petitioner was solvent and able to pay his debt to Zahniser.
The following resolution, proposed by James, *882 was adopted at a meeting of the board of directors of Zahniser on December 30, 1931, at which all of the directors were present:
RESOLVED that the indebtedness of Addison H. Gibson and J. H. Dickson to this company as of December 31, 1931, be hereby cancelled, the company taking this action merely to benefit the said debtors and without any consideration cancelling the said debts.
Zahniser had accounts payable at the end of 1931 amounting to $144,225.28 of which $143,609.82 was owed to Galvez. The value of the assets of Zahniser at that time was substantially less than the amount of its accounts payable. Galvez had a surplus at that time in excess of $21,204.75, after due allowance for the partial worthlessness of the debt due from Zahniser.
The Commissioner added to the petitioner's income, as reported on his return, $21,204.75 as dividends from Galvez. He made the following explanation in the statement accompanying the notice of deficiency:
The forgiveness of your indebtedness by the Gibson-Zahniser Oil Corporation had the same effect as a liquidating dividend or return of capital from the Gibson-Zahniser Oil Corporation to the Galvez Oil Company, followed by a distribution*883 of a similar amount to you as the sole stockholder of the Galvez Oil Company from its accumulated earnings. The amount forgiven is, therefore, taxable as a dividend.
OPINION.
MURDOCK: It will not make any difference in the determination of the deficiency in this particular case whether the item in controversy is taxable to the petitioner as ordinary income or whether it is taxable to him as a dividend. The reason for this is that in no event will any of the petitioner's income be subject to normal tax. The real issue in the case is, therefore, whether or not all, or any part, of *838 the $21,204.75 is income to the petitioner for the year 1931. If the amount is income to the petitioner either on the theory suggested by the Commissioner or on any other theory, the determination of the Commissioner must be approved. ; affd., ; . There is little, if any, dispute between the parties as to the facts.
The Commissioner does not contend that the forgiveness of the indebtedness was compensation for services rendered by the petitioner to*884 Zahniser, nor does he contend that it represents a dividend distributed by Zahniser to the petitioner as one of the stockholders of Zahniser. The fact is that the petitioner was not a stockholder of Zahniser and Zahniser, being insolvent, was in no position to declare an ordinary dividend. Neither was the forgiveness a gift from Zahniser to the petitioner. Cf. . If the directors of a corporation attempt to give away its assets, their action is ultra vires. ; certiorari denied, . The explanation given by James for the resolution which he prepared was:
Well, Mr. Dickson was hopelessly insolvent, and I saw no use in carrying an insolvent account on the books of a liquidating concern, and I said, as we were going to write-off Dickson's indebtedness, I thought at the same time we should write off Mr. Gibson's.
The real reason why Zahniser forgave the indebtedness due it from the petitioner is found in the petitioner's relation to Galvez and the relation of Galvez to Zahnizer. The petitioner owned all of the stock of Galvez, and the amount*885 which Zahnizer owed Galvez was far more than the value of all of the assets of Zahnizer. Galvez alone suffered in exact proportion to the benefit which the petitioner received from the forgiveness. Galvez was the only creditor or stockholder which had any reason to complain of the action of the board of directors of Zahniser in forgiving the indebtedness which the petitioner was fully able to pay. The sum of $21,204.75 had been received by the petitioner and used for his own purposes. The receipt of that sum by him was never reflected in any of his income tax returns. The money represented a loan to him until December 30, 1931, but when his indebtedness was forgiven on December 30, 1931, he was enriched at that time in the amount of $21,204.75. He was solvent. The amount became income to him at that time. Cf. ; petition to review dismissed, . Then, for the first time, had he reason to report it as income. It seems clear that on one theory or another he became liable for tax on that amount as part of his income for 1931. If this were not so, the circumstances disclose a fairly easy method*886 of avoiding or, at least, of substantially reducing tax liability.
*839 There may be room for differences of opinion as to the precise theory upon which this item is income to the petitioner. The Commissioner's theory is that the amount represents a dividend to the petitioner from Galvez. The parties are agreed that Galvez had sufficient surplus with which to pay a dividend of $21,204.75. The Commissioner was probably incorrect in stating that the forgiveness had the effect of a liquidating dividend or return of capital from Zahniser to Galvez, since it probably should be treated as a partial payment of the debt due from Zahniser to Galvez. Under such circumstances Galvez, as creditor, would come before Galvez, as a stockholder. However, it is not important to decide whether the forgiveness had the effect of a liquidating dividend or whether it had the effect of a partial payment of the debt due from Zahniser to Galvez, since either theory would support the Commissioner's contention that the petitioner in effect received an ordinary dividend from Galvez. It is true that in fact Galvez never declared any dividend to the petitioner in the amount in controversy and took*887 no active part in the matter whatever. However, its silence is important. Its failure to object to the forgiveness of the petitioner's debt by Zahniser is an indication that it consented to have the petitioner benefit in its place. The petitioner argues that since the statute of limitations had run against the major portion of the debt, the forgiveness of that portion did not represent income to him. He cited no authority for his statement that the statute of limitations had run against a portion of the debt. This was an entire active open account. The statute of limitations had not run as to a part of it, as the petitioner contends. Furthermore, even if it had run, it did not extinguish the liability. Cf. . We are unable to say that the Commissioner erred in taxing the $21,204.75 to the petitioner as a dividend to him from his wholly owned corporation, Galvez.
Decision will be entered for the respondent.