*2391 Interest credited to the personal account of petitioner on the books of the corporation of which he was a stockholder, held to have been constructively received, the financial condition of the debtor during the taxable years being such that the amounts credited could have been paid.
*1347 These proceedings were instituted to redetermine the following deficiencies in income taxes: 1923, $700.32; 1924, $1,108.68, and 1925, $2,142.43. The issue is whether certain amounts credited to petitioner's personal account on the books of the Sullivan-Smythfield Co. for interest due on loans made to it by petitioner, should be included as part of his income. The cases were consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioner, a resident of Philadelphia, Pa., in the fall of 1922 organized the Sullivan-Smythfield Co., a corporation, to engage in the wholesale dry goods business and to acquire the business being conducted by the Young, smythe, Field Co., which was then in liquidation. The former subsequently purchased all of the assets of*2392 the latter.
A short time after the organization of the Sullivan-Smythfield Co., the petitioner verbally advised its board of directors that he would advance to the corporation, as needed, cash sufficient to properly conduct its business and would not request the payment of interest on any sums advanced, or repayment of the principal, until the corporation could do so without embarrassment.
Pursuant to this promise of the petitioner; he advanced to the Sullivan-Smythfield Co. from time to time as it needed funds, large sums of money. The amounts advanced and interest thereon were credited to the petitioner's personal account on the books of the corporation designated "Albert J. Sullivan - special." Petitioner also advanced money to the corporation without interest in order to increase its bank balance, and to enhance its credit standing with the bank from which it borrowed money. Such advances were credited to the above-mentioned account.
*1348 The following entries were made in the "Albert J. Sullivan - special" account during the taxable years:
| Dr. | ||
| 1923 | ||
| Mar. 31 | Cash | $4,000.00 |
| May 15 | do | 1,000.00 |
| do | 500.00 | |
| May 31 | Sub. to 7% C.P. stock | 33,800.00 |
| June 28 | Cash | 21,000.00 |
| Sub. to 7% C.P. stock | 100,300.00 | |
| June 39 | V. 6/121 | 322.92 |
| G.L. interest (correction) | 35.32 | |
| Balance | 21,323.43 | |
| Dec. 31 | do | 82,795.74 |
| 1924 | ||
| June 30 | do | 224,655.05 |
| Dec. 31 | do | 231,394.70 |
| 1925 | ||
| Feb. 11 | Cash | 25,000.00 |
| do | 25,000.00 | |
| do | 25,000.00 | |
| June 2 | do | 5,000.00 |
| June 12 | do | 5,000.00 |
| do | 5,000.00 | |
| June 30 | Salary account | 8,844.66 |
| Balance | 213,651.05 | |
| Dec. 31 | do | 223,535.83 |
| Cr. | ||
| 1923 | ||
| Jan. 1 | Balance | $88,128.00 |
| Jan. 31 | Accrued O.S. | 8,333.32 |
| Off. salary | 2,083.34 | |
| Jan. 5 | Cash | 12,000.00 |
| Jan. 9 | do | 12,000.00 |
| Jan. 18 | do | 3,000.00 |
| Feb. 28 | Off. salary | 2,083.33 |
| Mar. 31 | do | 2,083.33 |
| Apr. 30 | do | 2,083.33 |
| Apr. 4 | Cash | 25,000.00 |
| Apr. 11 | do | 10,000.00 |
| Apr. 24 | do | 7,500.00 |
| May 31 | Off. salary | 2,083.33 |
| June 30 | do | 2,083.33 |
| Accrued interest | 3,820.34 | |
| July 1 | Balance | 21,323.43 |
| Equipment and fixtures | 322.92 | |
| Nov. 10 | Cash | 60,000.00 |
| Dec. 31 | Accrued interest | 1,149.39 |
| 1924 | ||
| Jan. 1 | Balance | 82,795.74 |
| Feb. 11 | Cash | 80,000.00 |
| Apr. 2 | do | 35,000.00 |
| June 30 | Accrued interest | 5,226.66 |
| A.J.S. salary account | 21,632.65 | |
| July 1 | Balance | 224,655.05 |
| Dec. 31 | Accrued interest | 6,739.65 |
| 1925 | ||
| Jan. 1 | Balance | 231,394.70 |
| Apr. 14 | Cash | 75,000.00 |
| June 30 | Accrued interest | 6,101.01 |
| July 1 | Balance | 213,651.05 |
| Dec. 31 | Accrued interest | 6,409.53 |
| Salary | 1,275.25 | |
| Rugs | 1,100.00 | |
| S. Lindeman | 100.00 | |
| National Association Credit Men. | 1,000.00 |
It is not possible to determine from the corporate books whether any of the debit entries in the above account represent withdrawals of principal*2394 or payments of interest.
Petitioner acquired a controlling interest in the stock of the Sullivan-Smythfield Co. on June 28, 1923. He has been treasurer and chairman of the board of directors of the corporation since its organization. The question of whether accrued interest on sums advanced by petitioner could be paid without embarrassment to the corporation was never discussed at directors' meetings. The decision of whether the making of such payments would or would not embarrass the corporation rested entirely with the petitioner.
The balance sheets of the Sullivan-Smythfield Co. for the fiscal years ended June 30, 1923, June 30, 1924, June 30, 1925, and June 30, 1926, disclose the following:
| June 30, 1923 | June 30, 1924 | |
| ASSETS | ||
| Cash | $127,428.47 | $150,425.94 |
| Bills and accounts | ||
| receivable | 888,171.11 | 806,597.75 |
| Inventories | 1,302,213.40 | 1,333,179.62 |
| Accrued interest | 132.87 | 199.85 |
| Sub. to preferred | ||
| stock | 28,940.00 | 24,700.00 |
| Stock | ||
| Participation cert- | ||
| Sesquicentennial | ||
| Exposition Assoc. | ||
| Advances on | ||
| Purchases | 8,033.62 | |
| Second mortgage | 2,450.00 | |
| Deferred items | 19,835.05 | 37,837.62 |
| Guarantee deposit | 15.00 | |
| Real estate, building, equipment, machinery, | ||
| furniture, and fixtures, less mortgage | 150,000.00 | 184,005.07 |
| Motor trucks, less reserve for depreciation | 5,521.54 | 4,351.08 |
| Equities in salesmen's automobiles, less | ||
| reserve for depreciation | 1,574.48 | 1,046.67 |
| Franchise | 1.00 | 1.00 |
| Treasury stock | ||
| 2,523,818.92 | 2,552,843.22 | |
| LIABILITIES | ||
| Bills and accounts payable | 934,377.91 | 797,457.86 |
| Loans payable, A. J. Sullivan | 21,323.43 | 224,655.05 |
| Dividends payable in July | 11,706.78 | 44,629.50 |
| Accrued items | 19,359.37 | 21,933.13 |
| Provision for Federal income tax | 23,600.00 | 4,728.00 |
| Florence W. McCarthy Co | 35,080.58 | |
| Deferred interest income | 9.00 | |
| Reserve for parcel post losses | ||
| Final liquidating dividend - Young, Smythe, | ||
| Field Co | ||
| Reserve for expenses, Young, Smythe, Field Co | ||
| Capital stock | 1,432,500.00 | 1,429,000.00 |
| Surplus | 45,861.85 | 30,439.68 |
| 2,523,818.92 | 2,552,843.22 |
| June 30, 1925 | June 30, 1926 | |
| ASSETS | ||
| Cash | $174,138.24 | $224,246.91 |
| Bills and accounts | ||
| receivable | 849,468.72 | 928,470.10 |
| Inventories | 1,139,904.50 | 1,006,900.51 |
| Accrued interest | 639.39 | 1,198.95 |
| Sub. to preferred | ||
| stock | 24,700.00 | |
| Stock | 480.00 | 480.00 |
| Participation cert- | ||
| Sesquicentennial | ||
| Exposition Assoc. | 1,000.00 | |
| Advances on | ||
| Purchases | 10,495.98 | 2,302.56 |
| Second mortgage | 3,220.51 | 1,676.72 |
| Deferred items | 28,814.74 | 37,740.53 |
| Guarantee deposit | 15.00 | 15.00 |
| Real estate, building, equipment, machinery, | ||
| furniture, and fixtures, less mortgage | 207,132.53 | 204,497.45 |
| Motor trucks, less reserve for depreciation | 2,235.29 | 2,062.50 |
| Equities in salesmen's automobiles, less | ||
| reserve for depreciation | 494.01 | 5,482.38 |
| Franchise | 1.00 | 1.00 |
| Treasury stock | 850,000.00 | |
| 2,441,739.91 | 3,266,074.61 | |
| LIABILITIES | ||
| Bills and accounts payable | 689,097.70 | 1,019,083.01 |
| Loans payable, A. J. Sullivan | 213,651.05 | 223,932.20 |
| Dividends payable in July | 44,629.50 | |
| Accrued items | 27,020.09 | 31,241.48 |
| Provision for Federal income tax | 8,109.00 | |
| Florence W. McCarthy Co | ||
| Deferred interest income | 57.91 | 57.91 |
| Reserve for parcel post losses | 262.20 | 286.05 |
| Final liquidating dividend - Young, Smythe, | ||
| Field Co | 256,101.92 | |
| Reserve for expenses, Young, Smythe, Field Co | 50,000.00 | |
| Capital stock | 1,429,000.00 | 1,404,300.00 |
| Surplus | 29,912.46 | 281,072.04 |
| 2,441,739.91 | 3,266,074.61 |
*2396 *1349 The petitioner filed his returns on the cash receipts basis. He did not draw all of his salary in the taxable years, but such amounts were reported in his returns as income.
In his determination of the deficiencies in controversy the respondent increased petitioner's income by the amount of interest credited to his drawing account on the books of the corporation, his theory in taking such action being that the amounts so credited were subject to withdrawal at all times during the respective years.
OPINION.
ARUNDELL: The petitioner is not only contending that he did not receive payment of any of the interest, amounting to $4,934.41 in 1923, $11,966.31 in 1924 and $12,479.74 in 1925, but that the financial condition of the Sullivan-Smythfield Co. during the taxable years was such that the amounts credited to his account on the corporate books for interest could not have been withdrawn without violating the agreement under which the principal was advanced.
The personal account of the petitioner on the corporate books contained credits for cash advances, salary, interest and miscellaneous items, and charges for withdrawals. Withdrawals were made from *1350 *2397 time to time by the petitioner without regard to the character of the credits entered in the account. During the year 1923 the charges made in the account exceeded the credits by $5,332.26, and in the year 1925 the debits were $7,858.87 more than the credits.
The respondent argues that if the petitioner did not actually receive the interest during the taxable years, the amounts were available to him and should be included in his income as being constructively received.
The doctrine of constructive receipt is, as we said in , only to be applied in those cases where the facts clearly justify it. The circumstances here, in our opinion, warrant an application of the principle.
The sums were advanced upon condition that neither the principal nor the interest thereon would be withdrawn unless it could be done without embarrassment to the corporation. The petitioner's construction of the understanding had with the debtor's board of directors is, using his language, "If we had made a profit in the successive years then that interest could have been withdrawn from the profit." That the debtor corporation did make a profit in its business*2398 during each of the fiscal years ending in 1923, 1924, 1925, and 1926, and that the profits were large enough to pay the comparatively small amounts in dispute, is evident from the balance sheets introduced in evidence. At the close of each of the fiscal years the corporation's current assets exceeded its liabilities by about $1,000,000; its cash balance was never less than $127,000 in round figures; it paid dividends each year except 1926; it set up a reserve each year for the payment of Federal income tax, and it always had a surplus. Charles B. Bowden, the corporation's president and one of its directors, testified to the effect that the directors were of the opinion that the stockholders were entitled to receive dividends on their stock and that the petitioner was willing to defer collecting interest on his advances to enable the corporation to pay dividends.
The petitioner had the authority to draw the interest whenever in his opinion the finances of the corporation could be burdened with the expenditure. The petitioner, according to his interpretation of the loan agreement, was entitled to receive the interest on his advances whenever the operations of the corporation for*2399 a year showed a profit. The corporation did make a profit every year and could have paid its interest obligations to the petitioner had he elected to receive the money. "This election to give the corporation the temporary use of the money is an exercise by him of its enjoyment, and this is one of the primary attributes of income." The respondent's action is sustained.
Judgment will be entered for the respondent.