*123 Decisions will be entered for the respondent.
Held, the evidence does not support petitioners' contention that there was constructive receipt of income during the year 1940.
*426 The respondent determined deficiencies of $ 3,203.08 and $ 3,154.94 in the income taxes of petitioner Van W. Peabody and petitioner Madge A. Peabody, respectively, for the year 1941. He also determined an overassessment of $ 1,779.28 in each petitioner's tax for the year 1940.
The single issue is whether the amount of $ 20,000 representing extra compensation of petitioner Van W. Peabody credited to him in 1941 by James F. Waters, a corporation, is properly includible in his income for 1940 or 1941.
FINDINGS OF FACT.
Certain facts were*124 stipulated. The portions thereof material to the issue are as follows:
The petitioners are individuals, domiciled and residing in California. Petitioner Van W. Peabody and petitioner Madge A. Peabody now are and at all times herein mentioned were husband and wife, domiciled in California, and all of the earnings of the petitioner and his wife involved in these cases for the years 1940 and 1941 are and were during those years community property. The returns for both years were filed with the collector for the first district of California, at San Francisco, California. Hereinafter Van W. Peabody will be called the petitioner.
James F. Waters, a corporation (now James F. Waters, Inc.), hereinafter called Waters Corporation, was incorporated in 1934, and at *427 all times since its incorporation the petitioner has been and now is an officer of that corporation. The corporation was engaged in various phases of the automobile business.
James F. Waters, an individual, owned all of the stock of the corporation from the date of its incorporation in 1934 until late in the year 1938. Late in the year 1938 James F. Waters Securities Corporation, a corporation, was merged into the Waters*125 Corporation. Until his death on May 10, 1941, James F. Waters, an individual, was the president and the chief stockholder of Waters Corporation. From 1938 until May 10, 1941, James F. Waters and his wife owned more than two-thirds of the issued and outstanding stock of Waters Corporation. At all times during the month of December 1940 the total number of outstanding shares of the corporation was 32,888.63 and at all times during that period the shareholders of the corporation whose individual stock holdings exceeded 5 percent of the outstanding stock of the corporation, together with the number of shares so owned, were as follows:
| James F. Waters | 17,877.89 shares |
| Ronnie K. Waters | 5,039.28 shares |
| Robert A. Waters, Sr | 3,871.01 shares |
| Mary E. Waters | 2,254.32 shares |
On December 28, 1940, James F. Waters transferred 200 shares of his stock of the corporation to others and thereafter owned 17,677.89 shares of stock of the corporation.
During the calendar year 1940 the taxable net income of Waters Corporation was $ 226,710.11. The number of cars sold, the dollar amount of sales, the cost of sales, the gross profit, and the net profit of the corporation for the calendar *126 months of October, November, and December, 1940, and January and February, 1941, are as follows:
| Cars sold | Amount sales | Cost of sales | Gross profit | Net profit | |
| 1940 | |||||
| Oct | 982 | $ 787,081.37 | $ 714,058.39 | $ 73,022.98 | $ 15,307.43 |
| Nov | 1,058 | 877,033.79 | 804,101.18 | 72,932.61 | 20,223.87 |
| Dec | 863 | 744,672.06 | 683,756.19 | 60,915.87 | * 19,460.47 |
| 1941 | |||||
| Jan | 1,003 | 843,147.78 | 773,097.87 | 70,049.91 | 19,694.19 |
| Feb | 918 | 786,766.02 | 725,492.76 | 61,273.26 | 13,959.28 |
The following is a balance sheet of Waters Corporation as of December 31, 1940:
| ASSETS | |
| Cash | $ 19,863.10 |
| Conditional sales contracts | 20,235.41 |
| Accounts receivable less reserves | 81,766.87 |
| Repossession reserve with Bank of America N. T. & S. A. | $ 37,459.67 |
| Notes and accounts receivable due from officers | 293,488.98 |
| Inventories | |
| New cars at cost | 327,534.76 |
| Used cars less reserves | 110,998.00 |
| Parts and accessories | 81,008.05 |
| Supplies and work in process | 4,336.70 |
| Securities of affiliated companies at cost | 335,134.88 |
| Land, buildings, furniture and fixtures, machinery, tools, | |
| equipment and service cars, etc. less depreciation | 467,298.91 |
| Other real estate, less depreciation | 67,057.95 |
| Deferred items | 23,150.53 |
| Good will | 50,000.00 |
| Total assets | 1,919,333.81 |
| LIABILITIES AND NET WORTH | |
| Notes payable to Bank of America secured by new cars | 308,148.14 |
| Notes payable to Bank of America secured by real estate | 125,000.00 |
| Notes payable to Bank of America unsecured | 65,000.00 |
| Accounts payable | 100,126.75 |
| Customers deposits | 67,341.49 |
| Accrued items, including income taxes, sales taxes, etc | 89,131.07 |
| Miscellaneous items | 8,275.11 |
| Reserves | 72,841.51 |
| Net worth | 1,083,469.74 |
| Total liabilities | 1,919,333.81 |
*127 *428 Petitioner Van W. Peabody is entitled to a personal exemption of $ 1,250 for the taxable year 1941 and petitioner Madge A. Peabody is entitled to a personal exemption of $ 250 and credit for dependents of $ 400 for the same taxable year.
The Waters Corporation declared dividends of $ 194,332.78, which were all paid during 1940 except $ 1,872. The corporation was on an accrual basis in 1940.
The record discloses the following additional facts:
The Waters Corporation controlled two subsidiaries, one in Michigan, hereinafter called the Michigan company, and the other in New York, hereinafter called the New York company. The Michigan company assembled taxicabs in Detroit and the New York company distributed them in New York. They were sold under conditional sales contracts and otherwise. The New York company also had an automobile franchise in Long Island City. During 1940 all three companies were operated with financial success.
During 1940 James F. Waters spent practically all of his time in the East. About a week before Christmas that year he returned to San Francisco and discussed with the petitioner the payment to petitioner *429 of an extra compensation for *128 the year 1940. The amount thereof was placed at $ 20,000, with no restriction as to the time of payment. Through James F. Waters, the petitioner was negotiating the purchase of the Waters Corporation stock then in the corporate treasury, and he desired to leave the $ 20,000 where it would be immediately available if and when he should be able to acquire the stock. He did not need the money for other purposes.
The Waters Corporation included the $ 20,000 extra compensation payable to the petitioner in its income and excess profits tax returns for 1940.
William Lockhart, one of the petitioner's subordinates in the company organization, was the treasurer and auditor of the Waters Corporation. The books of that corporation for the year 1940 were closed in the latter part of January 1941. At that time Lockhart personally entered on the books the $ 20,000 payment to the petitioner and opened an account payable to him for the same amount. Both entries were included in the corporation's 1940 business.
The petitioner had charge of keeping sufficient working funds available for the needs of all three companies. He transferred funds from one company to another as exigencies required. *129 The average daily balance of the Waters Corporation during December 1940 was $ 62,880 and during January 1941, $ 58,307.69. On December 31, 1940, the corporation's conditional sales contracts, amounting to $ 20,235.40, were highly negotiable. Ninety-five percent of the $ 81,766.77 representing accounts receivable could have been hypothecated. Over $ 46,000 could have been borrowed immediately on new cars. The sum of $ 35,000 was available to the corporation on an open line of credit. The New York company had a net worth of over $ 513,000 on December 31, 1940. Included therein was the sum of $ 411,848.49 in unpledged conditional sales contracts on which 80 percent thereof could have been borrowed from its bank and made available for transfer to the Waters Corporation, if needed by that company. Five persons, any two of whom could act, were authorized to sign checks of the Waters Corporation. James F. Waters was one of these persons, the petitioner was another, and the three remaining individuals were the petitioner's subordinates.
Prior to March 15, 1941, Robert L. Schwerin, a certified public accountant and the accountant of the Waters Corporation, prepared income tax returns*130 for the petitioner and his wife for the year 1940. Included therein was the item of extra compensation of $ 20,000 divided equally between the taxpayers. The returns were signed and executed on March 13, 1941, and returned to Schwerin's office on March 14, 1941.
Shortly before March 14, 1941, the petitioner had a long distance telephone conversation with James F. Waters, then in New York. Waters *430 had discussed with a New York attorney the propriety of including certain bonuses given by the New York and Michigan companies to their employees and was advised that such bonuses should not be included in the income of the recipients for 1940. Such bonuses had a definite stated payment date while the bonus given to the petitioner had no such restriction.
On March 14, 1941, the petitioner telephoned Schwerin that he wanted to have the returns changed by excluding the $ 20,000 compensation item. At that time the petitioner did not know of the difference between the New York and Michigan companies' bonuses and his own. Schwerin objected to the elimination of the item, but excluded it upon the petitioner's direction, and the returns were filed accordingly.
In April or May 1941*131 the petitioner ascertained that the bonuses given by the New York and Michigan companies were on a different basis from his own and thereupon so informed Schwerin, asking him to file amended returns reporting the $ 20,000 as compensation.
James F. Waters died in May 1941. The petitioner withdrew the $ 20,000 in June 1941. The petitioner forwarded his amended income tax return for the year 1940 to the collector of internal revenue accompanied by letter of transmittal dated August 27, 1941, explaining the reason for the omission of the bonus in his original return. The petitioner's wife also forwarded her similar return accompanied by a copy of the petitioner's letter of August 27, 1941.
Before Christmas 1940 James F. Waters stated to Schwerin that the petitioner would receive a bonus of $ 20,000 for that year. Lockhart made the same statement to Schwerin prior to the conversation of the latter with James F. Waters.
OPINION.
The petitioner contends that the $ 20,000 allowed him by the Waters Corporation as extra compensation for the year 1940 was constructively received by him in that year and hence is includible in his gross income therefor. The respondent asserts that its collection*132 in 1941 determines the date of its taxability.
The petitioner relies on the provisions of section 29.42-2, Regulations 111, 1 and asserts that they apply to the facts before us. We agree *431 that the regulations lay down appropriate tests for constructive receipt, but we can not accept petitioner's conclusion.
*133 Applying the regulation tests, we find that the income was not credited to the account of the taxpayer in the taxable year, nor was it set apart for him in any manner. Though there were general funds on hand, no funds were labeled in any way as available for the taxpayer to draw upon them. He had an agreement as to the amount with the president of the corporation, but there is no evidence of any action by the board of directors binding the corporation. There are no minutes or other record of any corporate action. Such an agreement with the president was not tantamount to crediting or setting apart "to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition on which payment is to be made," nor can we say that such income was "made available to him so that it [could] be drawn at any time, and its receipt brought within his own control and disposition." The book entries were not made until after the close of the taxable year.
Parenthetically, it may be stated that the petitioner's vacillation in the manner of treatment of the income in his tax return does not lend strength to his contention that the funds were actually available*134 to him and subject to his demand and control during the taxable year 1940.
We hold that the petitioners have not proven the applicability of the pertinent regulations, nor have they proven respondent's determination to be wrong.
Decisions will be entered for the respondent.
Footnotes
*. Before certain closing adjustments and Christmas bonuses and turkeys to nonexecutive employees.↩
1. Sec. 29.42-2. Income Not Reduced to Possession. -- Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. * * *↩