*2453 DIVIDEND INCOME. - The petitioner and another were the equal owners of the capital of a corporation engaged in the mortgage loan business from the latter part of 1909 to 1920, inclusive. Early in the existence of the corporation the petitioner and his associate agreed that the profits or losses of the business should be ascertained and settled at the end of each month and that the proportionate shares of the two owners should be credited or charged to a personal account on the books of the corporation. This method of accounting was consistently followed until about February 1, 1917. Held that during each year the excess of the monthly credits over the monthly losses constituted dividend income in the year in which the credits were made and that the sum of such credits from March 1, 1913, to February 1, 1920, should not be treated as a gain upon the disposition of petitioner's stock in the latter year.
*208 This proceeding involves an alleged deficiency in income in the amount of $4,668.47 for the calendar year 1920. Petitioner claims that*2454 the respondent erred (1) in adding to his income for the year 1920, $26,055.52 alleged to be a gain derived from the disposition of *209 corporate stock, and (2) that the March 1, 1913, value of petitioner's capital interest in a corporation was in excess of the amount received in the disposition of his stock in the year 1920.
FINDINGS OF FACT.
During all the years herein mentioned petitioner was a resident of Minneapolis, Minn. In the year 1909 the Prudential Insurance Co. of America prevailed upon petitioner and one T. A. Jamieson to become the representatives of said Prudential Co. in the making and caring for mortgage loans which the Prudential Co. might wish to make in the territory tributary to Minneapolis. Thereupon, the petitioner and Jamieson organized a corporation under the name and style of Towle-Jamieson Investment Co., which will be hereinafter referred to as the Investment Co. Petitioner and Jamieson each contributed $1,000 in cash toward the capital of said company, and under date of October 28, 1909, an operating agreement was entered into by the Prudential Co. and the Investment Co., the petitioner and Jamieson. The petitioner and Jamieson were at*2455 all times, until 1920, the equal beneficial owners of all the outstanding stock of the corporation. In order to qualify their wives to act as directors a few shares were allowed to stand in the names of the wives.
Shortly after the Investment Co. began business the petitioner and Jamieson entered into an agreement respecting the accounting for gains or losses, as the case may be, and agreed that the corporation, at the end of each month, make an accounting of its gains or losses during that month and either credit or charge the same to personal accounts, one in the name of the petitioner and another in the name of Jamieson. Early in the year 1911 the profits of the Investment Co. up to that time were ascertained and divided in equal parts between the petitioner and Jamieson, and a credit entry of the petitioner's share was made upon his personal account on the books of the corporation. Thereafter, monthly, similar credit entries were made when the month's business showed a gain, and debit entries when the month's business showed a deficit. On March 1, 1913, the credit balance in petitioner's account stood at $14,536.52. The sum of the monthly credits, less monthly deficits*2456 from March 1, 1913, to February 1, 1917, aggregated $21,736.17. In the earlier years of the existence of the corporation this account showed occasional withdrawals and in the year 1913 it showed four credit entries, each designated as "interest on credit balances," and when the account was closed out in February, 1917, there was an additional credit entry designated "a/c discount," $2,727.13. This *210 brought the credit balance as of February 1, 1917, to the sum of $39,000. Another account in all respects similar was kept for Jamieson during the same time and was closed out in the same manner. During the period from October, 1909, to February, 1917, the gains and profits of the corporation were divided equally and so credited to the petitioner's and Jamieson's accounts except during the months from May to December, inclusive, 1911, when the petitioner was actively engaged in other business pursuits and during which time two-thirds of the corporation's profits were allotted to Jamieson and one-third to the petitioner.
Following the 1st of February, 1917, the petitioner and Jamieson each paid in to the corporation as additional capital the sum of $10,000, which amount, *2457 together with the $1,000 originally paid in by each, and with the balance in the personal accounts above described, aggregated $50,000 each, and thereupon a new stock issue was made increasing the capital stock of the corporation to the total of $100,000.
In carrying on its business the Investment Co., for the purpose of financing mortgage loans prior to their acceptance by the Prudential Co., frequently borrowed considerable sums of money from banks.
In the year 1920, owing to his wife's illness, the petitioner desired to withdraw from the Investment Co., and, with the consent of all parties in interest, he turned in to the company his entire capital stock holdings of $50,000 par value and received therefor assets of the corporation having an agreed value of $51,371.36.
In a subsequent year the petitioner reacquired a one-half interest in the Investment Co. Jamieson died several years ago, but the Investment Co. has been continued under the management of the petitioner, the widow retaining the interest formerly owned by Jamieson.
During the years 1910, 1911, and 1912 the net income of the Investment Co. was reported for the purposes of the excise tax then in force in*2458 the amounts of $4,064.56, $10,431.03, and $10,713.14, respectively.
The income-tax returns made and filed by the petitioner for the years 1913 to 1917, inclusive, were prepared on the basis of cash receipts and disbursements and the profits credited to the account of the petitioner on the books of the Investment Co. for those years were not included in the income reported in the returns. The petitioner was on the cash basis for the taxable year.
In determining the deficiency the respondent has computed profit on the disposition of the petitioner's stock in the Investment Co. as follows:
*211
| Selling price | $51,371.36 | |
| Cost: Cash paid in for stock in 1909 | $1,000.00 | |
| Petitioner's credit balance in his account | ||
| as of December 31, 1912, plus 1/6th of the | ||
| earnings for 1913 | 14,315.84 | |
| Additional cash paid in for stock in 1917 | 10,000.00 | |
| 25,315.84 | ||
| Alleged profits | 26,055.52 |
OPINION.
TRUSSELL: At the trial evidence was adduced showing the net earnings from 1910 to 1912, inclusive, as being relatively large upon the then capital of $2,000; also that the contract with the Prudential Co. had a large capital value which should be allocated*2459 to the respective capital stock interests. We are of the opinion, however, that any capital value predicated upon these earnings, as well as any value in the contract, is much more attributable to the personal business reputations of Towle and Jamieson than to the capital value of the Investment Co. stock.
With respect to the amount of $1,371.36, the excess of the agreed value of assets received by the petitioner over the par value of his stock, we are of the opinion that this figure represents a realization of the then current profits of the corporation and should be included in petitioner's income for the year 1920. The balance of the amount added to income by the respondent represents the credit balance of petitioner's account accrued subsequent to March 1, 1913, and prior to the closing of said account in February, 1917.
Upon consideration of all the evidence in this case, including the petitioner's personal account upon the books of the corporation and the corporation's profit and loss account, photostats of which were introduced into the record, we are of the opinion that the gains made by the corporation were divided between the petitioner and his associate monthly, *2460 and petitioner's share credited to his account, subject to his withdrawal at any time, and without any agreed limitation thereon. Petitioner during all those years was a director and treasurer of the corporation and could have withdrawn the amounts credited to his account at any time he chose to do so. The divisions and allocation of the profits were made pursuant to an agreement between the petitioner and his associate and without any corporate action in the nature of a declaration of dividends. It is apparent from the record that the petitioner, his associate, and the corporation at all times treated the profits as divided and distributed and that the credit balances standing upon petitioner's account were regarded as loans to the corporation, upon which the corporation appears to have paid interest.
*212 Under the facts before us we feel that it is apparent that his share of the earnings of the corporation was unqualifiedly subject to the demand of the petitioner from the times in the several years when determined and divided according to the books.
We have consistently and repeatedly held that where income was definitely available to a taxpayer reporting on the*2461 basis of cash receipts and disbursements, he could not, by intentionally postponing or avoiding collection of the cash, prevent a determination that the income was realized within the year in which it became available to him. ; affd., ; .
It seems apparent in the instant case that both parties have erred in failing to include the income in the several prior years when taxable or to now voluntarily amend the returns to correct the errors in the original returns.
With respect to the issue here before us we think but one conclusion is possible, namely, that his share of the corporation earnings from 1913 to 1917, inclusive, was realized by the petitioner in those years and, therefore, it should not be included in income for the taxable year. This conclusion makes it unnecessary to go into any consideration of the claims of the petitioner relative to the value as of March 1, 1913, of that portion of the stock which was acquired prior to that date.
Reviewed by the Board.
Judgment will be entered pursuant to Rule 50.
MORRIS, SMITH, AND STERNHAGEN dissent. *2462