*1117 On December 28, 1936, petitioner corporation declared a dividend and immediately credited it to the accounts of its two stockholders, who thereupon had the unrestricted right and power to withdraw the same. On December 30, 1936, the petitioner, for the first time, ascertained, that, by reason of the liability to its stockholders for the dividends, its credit standing had been impaired, and it thereupon levied an assessment upon the stock of $40 per share, to be contributed by the stockholders of petitioner as paid-in surplus, and petitioner thereupon charged the assessment to the personal accounts of the stockholders. Held, the dividend was paid during the taxable year 1936, within the meaning of section 27(a), Revenue Act of 1936, and the assessment upon the stock was a bona fide assessment and neither a diminution in the amount of the previously declared dividend nor a renunciation by the stockholders of their rights thereto.
*457 The Commissioner determined a deficiency of $6,126.21 in income tax and a deficiency*1118 of $611.87 in excess profits tax for the calendar year 1936. The sole question for decision is whether the petitioner should be allowed a credit under section 27(a) of the Revenue Act of 1936 for dividends paid in the amount of $11,500, for the purpose of computing its surtax on undistributed profits.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of North Carolina in 1921, and has since been engaged in the electrical engineering and contracting business, with its principal office at Charlotte. It filed its return for the calendar year 1936 with the collector of internal revenue for the District of North Carolina.
The petitioner had an authorized capital stock of $25,000, divided into 250 shares of the par value of $100 each. Until December 15, 1936, 115 of its shares had been issued and were outstanding. Sixty of those issued shares were owned by R. H Bouligny, president of the petitioner, and 55 were owned by O. R. Rowe. The petitioner declared a 100 percent stock dividend on December 15, 1936, and, during the remainder of the year 1936, 120 of the total outstanding shares were owned by Bouligny and 110 were owned by Rowe.
By resolution*1119 the petitioner declared a cash dividend on December 28, 1936, of $11,500, representing a dividend of 50 percent on the 230 shares then outstanding. On the same date it credited on its books $6,000 of the dividend to the personal account of Bouligny and $5,500 thereof to the personal account of Rowe. Two days thereafter, on December 30, 1936, the petitioner authorized an assessment of $9,200, or $40 per share on its 230 shares. The minutes of the directors' meeting authorized the assessment are as follows:
The chairman announced that the meeting was called for the purpose of increasing the working capital of the corporation. After discussion of the subject, it was decided to assess all the stock of the corporation on record as of December 27, 1936, Forty Dollars per share to be paid into the surplus of the corporation, whereupon * * * it was unanimously resolved that this be done.
Of the amounts assessed the petitioner, under date of December 28, 1936, charged $4,800 against Bouligny and $4,400 against Rowe in their personal accounts.
When the cash dividend of $11,500 was declared on December 28, 1936, the petitioner had a surplus in excess of that amount, and it had a cash*1120 balance in bank of approximately $15,000.
On December 30, 1936, Bouligny and Rowe conferred with the petitioner's accountant, D. H. McCollough, and informed him of the action of petitioner in declaring the cash dividend. McCollough, *458 who was familiar with the business and financial affairs of the petitioner, stated that if the obligation to the stockholders for the dividends was carried on the books of petitioner as a liability, the balance sheet would disclose an improper ratio of current liabilities to assets and thereby impair the petitioner's credit standing and its ability to procure bonds required of it as contractor. He suggested that Bouligny and Rowe pay into the surplus of the petitioner so much of the amounts credited to their accounts as dividends as they did not actually require for their personal needs and informed them at the same time that they would have to include the entire amounts of the dividends declared and credited to them in their personal income tax returns. Because of such suggestion, Bouligny and Rowe decided to make the assessment of $40 per share. They thereupon caused the resolution of December 30, 1936, to be passed and directed petitioner's*1121 bookkeeper to charge the assessment to their personal accounts, which was done.
Personal accounts of Bouligny and Rowe have been carried on the books of the petitioner since 1930 and it has been the practice of the petitioner to credit thereto any amounts due from it to Bouligny and Rowe and for the latter to make withdrawals therefrom as they needed money or as the financial condition of the petitioner permitted. Each of them had authority to draw and sign checks against the funds of the petitioner. On December 28, 1936, when the dividends were credited to their personal accounts, neithr Bouligny nor Rowe was indebted to the petitioner.
In their individual income tax returns for the year 1936 Bouligny and Rowe reported the amounts of $6,000 and $5,500 which were credited to their respective accounts as dividends on December 28, 1936, as income from dividends, and they paid income tax on those returns.
The Commissioner, in computing the petitioner's surtax on undistributed profits for the year 1936, did not allow any dividends paid credit on account of the cash dividend of $11,500 declared and credited to the accounts of Bouligny and Rowe on December 28, 1936.
OPINION.
*1122 TYSON: The question presented for decision is whether the Commissioner erred in failing to allow a dividends paid credit of $11,500 in computing the petitioner's surtax on undistributed profits for the year 1936. The dividends paid credit allowed to corporations by section 27 of the Revenue Act of 1936 is a factor in the computation of the undistributed net income of the corporation on which the *459 surtax is imposed, section 14(a)(2), and (b); and it "shall be the amount of dividends paid during the taxable year", section 27(a).
The point of difference between the parties is whether the dividend of 50 percent declared on December 28, 1936, and immediately credited to the accounts of its stockholders was paid during the taxable year within the meaning of section 27(a). The evidence shows that this dividend was duly declared without restriction, was credited to the personal accounts of the stockholders, and thereafter was under their absolute control, but that during the taxable year no portion thereof was actually withdrawn by the stockholders or paid to them in money or property. The Commissioner contends that the statute contemplates actual payment by the corporation*1123 to the stockholders and that, since this was not done, the credit claimed should be disallowed. On the contrary, the petitioner contends that it became obligated unconditionally to the stockholders for the dividend on December 28, 1936; that on that date the dividends became immediately available to the stockholders and subject to their absolute control; and that such facts are sufficient to constitute payment within the meaning of section 27(a).
Recently decided cases recognize that dividends may be declared and credited to stockholders in such manner and under such circumstances as to constitute the equivalent of actual payment. The test in such cases is whether the right of the stockholder has so matured as to subject the dividend credited on the corporation's books to the complete control of the stockholder and remove it from the control of the corporation. Whenever that test is satisfied, the book credit is regarded as the equivalent of cash and constitutes payment of the dividend for the purpose of the dividends paid credit, under section 27(a). *1124 ; ; ; ; .
We think that the best test established in the cited cases has been met and the petitioner is entitled to the credit in the amount of $11,500. The evidence shows that on December 28, 1936, the petitioner's directors intended to, and the petitioner did in fact, pay a dividend in the amount of $11,500, and that the amounts credited to the stockholders were removed on that day from the control of the petitioner and came within the complete control of the stockholders. The petitioner on that date had both an earned surplus and cash on hand in excess of the dividend declared, the resolution imposed no restriction on the right of withdrawal, each of the stockholders had the authority to draw checks against the petitioner's funds, and there is no evidence whateveer *460 of any collateral understanding that the amounts would not be withdrawn. The payments on that date of the dividends by the corporation*1125 were real and the dividends were constructively received by the stockholders on that date.
With reference to the assessment of $40 per share levied upon the stock two days after the declaration of the dividend and the crediting of the amount thereof to the stockholders, we think the evidence is conclusive that such action was what it purported to be, namely, a bona fide assessment against the stock. The circumstances under which it was brought about and the reasons for making it do not warrant the conclusion that it was a diminution in the amount of the dividends previously declared and credited to the stockholders' accounts, or that it was a renunciation by the stockholders of their right to any part of such dividends. It was not until December 3 and after the right of the stockholders to the dividend had attached unconditionally that the question of levying the assessment arose. It was then, for the first time, that the petitioner and its stockholders, through the advice given them by the petitioner's accountant, became aware of the fact that the petitioner's credit standing had been impaired and that some remedial action was necessary to restore it. The accountant advised*1126 that, as such remedial action, some amount be contributed by the stockholders to the corporation as paid-in surplus to create a proper ratio of current assets to liabilities, and the stockholders thereupon consented to an assessment of $40 per share, which was duly made by the corporation. The adoption of this procedure was not intended as a cancellation or restoration to the petitioner in part of the dividend which had been declared and credited. The finality of such declaration and credit was fully recognized by the petitioner and the two stockholders, both of whom were informed by the accountant at the time he gave his above mentioned advice, that the stockholders would be required, despite the assessment, to report in their personal income tax returns the full amount of the dividends declared and credited to them, and they gave due effect to their understanding of the transaction by including the full amount of the dividends in their gross income for the year 1936. By such inclusion in the income of the stockholders, the purpose of sections 14 and 27(a) was fulfilled. See *1127 ;; and concurring opinion in
Decision will be entered under Rule 50.