*2897 Corporations A, B and C were affiliated. The president and treasurer of corporation A was also the president and treasurer of corporation B, which owned all the stock of corporation A. Upon the evidence, held that a withdrawal of funds by the individual from corporation A constituted a loan and not a taxable distribution, and that the amount should be included in the invested capital of the affiliated corporations.
*863 These are proceedings duly consolidated for hearing and decision for the redetermination of deficiencies in income and profits taxes as follows:
| Docket | Kind of tax | Year | Deficiency | |
| No. | ||||
| Howard M. Taylor | 12732 | Income tax | 1920 | $7,927.47 |
| International Bedding Co | 12733 | Income and profits tax | 1921 | 1,314.59 |
The errors assigned in Docket No. 12732 are as follows:
(1) The respondent has treated a loan to petitioner by the Associated Building Co. of $58,806.23 as a taxable distribution of corporate earnings to the extent of $46,047.98, the balance of $12,758.25*2898 being treated by respondent as return of capital.
(2) In making the allocation between the taxable distribution and the return of capital, respondent has erroneously computed the available earnings accumulated from February 28, 1913, to March 10, 1920, of both the Associated Building Co. and the International Bedding Co.
(3) In determining that portion of the amount of $58,806.23 constituting a taxable distribution of earnings respondent has erroneously taken into consideration the available earnings accumulated since February 28, 1913, of the Associated Building Co.
(4) In determining that portion of the amount of $58,806.23 constituting a taxable distribution of earnings respondent has erroneously failed to reduce the available earnings of International Bedding Co. and the Associated Building Co. by the operating deficit of the Diamond Pillow, Feather & Down Co.
*864 The errors assigned under Docket No. 12733 are:
(1) The respondent erred in computing the tax against the consolidated corporations under the provisions of section 302 of the Revenue Act of 1918 instead of section 301 of the said Act.
(2) The respondent erred in reducing the consolidated invested*2899 capital by the amount of $58,806.23.
FINDINGS OF FACT.
The petitioner, Howard M. Taylor, is an individual residing at Baltimore, Md.
The petitioners, International Bedding Co., the Associated Building Co., and the Diamond Pillow, Feather & Down Co., are Maryland corporations and were affiliated in 1920 and 1921.
Howard M. Taylor, prior to March 10, 1920, was the owner of 196 shares of the total of 400 outstanding shares of stock of the International Bedding Co. He also owned 80 shares of the total of 200 shares of outstanding stock of the Diamond Pillow, Feather & Down Co. The remainder of the stock of these two corporations was owned by Franklin L. Groff.
Taylor offered to either sell Groff his holdings in the International Bedding Co. and the Diamond Pillow, Feather & Down Co., or buy Groff's holdings in those two companies. Groff did not desire to do either, but finally agreed to sell his holdings to Taylor, and Taylor agreed to pay cash therefor. Taylor borrowed $100,000 in his own name from the Merchants' National Bank, giving a note therefor, and on March 10, 1920, paid this amount to Groff and received Groff's stock.
Taylor has been president, treasurer*2900 and a director of each of the three companies since March 10, 1920. Taylor did not own any of the stock of the Associated Building Co. This stock was owned by the International Bedding Co.
The Associated Building Co. borrowed $100,000 from the Eutaw Savings Bank and Fred R. Dorton, giving therefor two mortgages on its property, one for $70,000 and one for $30,000. With this money there was paid off a mortgage on the Associated Building Co. amounting to $23,000, and one on some land which the Associated Building Co. had purchased, amounting to about $18,000. The difference between the sum of these amounts and the $100,000 borrowed, amounting to $58,806.23, was received by Taylor directly from the Associated Building Co. Taylor took out $100,000 life insurance made payable to his estate in order to protect the company against the indebtedness. He gave the Associated Building Co. no note, nor did he agree to pay any interest upon the alleged loan. No part of this amount has been repaid by Taylor, no interest has been demanded by the Associated Building Co., nor has any been paid. The amount *865 advanced to Taylor was treated at the direction of Taylor as an account*2901 receivable on the books of the Associated Building Co. This is the only entry on any of the books of any of the corporations with regard to this item. There was no authorization by the board of directors for the transfer of this amount to Taylor.
Taylor added to the $58,806.23 he had received from the Associated Building Co. about $42,000 of his own money and paid off the amount which he owed the Merchants' National Bank.
The earnings of the International Bedding Co. accumulated between February 28, 1913, and March 10, 1920, amounted to $20,064.37. The earnings accumulated prior to February 28, 1913, amounted to $19,378.43. The accumulated earnings of the Associated Building Co. since February 28, 1913, amounted to $12,601.18.
The deficit of the Diamond Pillow, Feather & Down Co. on March 10, 1920, amounted to $11,713.70, of which $8,476.57 had accrued between February 28, 1913, and March 10, 1920. The balance of the deficit existed on February 28, 1913.
The International Bedding Co., the Associated Building Co., and the Diamond Pillow, Feather & Down Co. were affiliated during the years 1920 and 1921. The capital stock of the consolidated companies was $30,000.
*2902 Of the amount of $58,806.23 which Taylor received from the Associated Building Co., the respondent has considered $12,758.25 as a return of capital and $46,047.98 as a distribution of surplus earnings. The respondent excluded the amount of $58,806.23 from the invested capital of the three consolidated companies and computed the invested capital to be $7,323.80.
OPINION.
SIEFKIN: The principal question is whether an amount of $58,806.23, received by Howard M. Taylor from the Associated Building Co. in 1920 was a loan. The respondent has treated $12,758.25 of it as a return of capital, and the remainder, $46,047, as a distribution of earnings, taxable to Taylor, and has excluded the whole amount of $58,806.23 from invested capital of the three corporations.
The evidence discloses that Taylor owned no stock of the Associated Building Co. Stock of that company was held by the International Bedding Co., another corporation of which Taylor was the sole stockholder. Apparently no action was taken by the directors of any of the corporations authorizing the payment of a dividend of $58,806.23 to Taylor, nor was any action of any kind taken by the directors with regard to the transfer*2903 of this amount to Taylor. It was treated as an account receivable on the books of the Associated Building Co. and Taylor testified that it constituted a loan to him in the ordinary course of business of the corporation. No note was *866 given for this amount, nor was any interest agreed upon, charged, or paid. No part of the principal amount has ever been repaid, but in order to protect the corporation against this loan, Taylor took out $100,000 life insurance payable to his estate.
In , Foster, president of the corporation and the sole stockholder, with the exception of those holding qualifying shares, made withdrawals and his personal account was charged. The principal cause of Foster's indebtedness was his withdrawal of funds to purchase a vacant piece of property required by the corporation. On August 1, 1919, the corporation ceased doing active business. At the time of the hearing the corporation was in the process of liquidation. At the time Foster's indebtedness to the corporation was substantially as large as it was in 1918, but the corporation's surplus was and always had been more than sufficient*2904 to take care of Foster's indebtedness. In that case we said:
The only evidence we have is to the effect that Foster borrowed some $80,000 and promised to pay it back. The corporation gave him the use of it with the full right to reclaim it. Foster, so far as the evidence shows, was solvent and able to pay the amount, and upon the strength of his promise as an account receivable the corporation, to some extent, secured credit at the bank. By its balance sheet it held out to third persons that Foster's indebtedness was part of its assets, and Foster certified to this. We know of no authority for saying that Foster or the corporation could have contended for his or its own advantage that this belonged to Foster by way of dividend. Irrespective of whether Illinois law permitted such a dividend, we can not find any evidence that one was intended. When, in the future, either in the ordinary course or in final liquidation, Foster is relieved of the indebtedness, it will be necessary to consider whether he then realizes income. Meanwhile, what is for all other purposes a loan is not to be construed as a dividend solely to support a tax. See *2905 . Like other accounts receivable, the amount is within the petitioner's invested capital, and the Commissioner's determination is reversed.
From all the evidence we conclude that the $58,806.23 was loaned to Taylor and is, therefore, not taxable income to him. The respondent erred in including this amount in Taylor's taxable income and in excluding it from the invested capital of the three petitioning corporations.
No evidence was introduced or argument submitted with reference to the assignment of error in Docket No. 12733 with respect to the computation of the tax under section 302 of the Revenue Act of 1918. No error is apparent in the respondents action in that respect and we assume that whatever adjustments result from this opinion will be properly taken care of upon the settlement.
Reviewed by the Board.
Judgment will be entered under Rule 50.