*1504 A corporation declared a dividend payable on the last day of its fiscal year. The resolution provided that in the event funds were not available the aliquot portions of the dividend should be credited to the drawing account of the stockholders. Such credits were made. The resolution also provided that charges might be made to the drawing accounts "whenever in the opinion of the directors the finances of the company warranted payment in full of partial settlement." The cash position of the company was such that payment of the dividend during the fiscal year would probably have required it to borrow additional funds. The evidence also established the fact it was the policy of the company and its officers to leave as much as possible of their salaries and dividends with the company in order to keep its credit in good condition. Under the facts it is held that the mere crediting of the dividends to the drawing accounts of the stockholders did not constitute payment, and petitioner is not entitled to a "dividends paid" credit under section 27(a) of the Revenue Act of 1936.
*447 The Commissioner determined a deficiency in petitioner's income tax for the fiscal year ended July 31, 1937, in the amount of $1,162.08, and excess profits tax in the amount of $51.21. The sole question is whether or not petitioner is entitled to a dividends paid credit under section 27(a) of the Revenue Act of 1936.
FINDINGS OF FACT.
Petitioner is a corporation, engaged in the business of structural steel jobbers and construction engineers. Its principal place of business is in Minneapolis, Minnesota. Its income tax return was filed with the collector of internal revenue for the district of Minnesota.
Petitioner's outstanding stock is, and during all of the time material to this proceeding was, held equally by Andrew P. Hustad, John C. Hustad, and Herman Kesting. Andrew was president, John secretary-treasurer, and Kesting vice president, and the three officers constituted the board of directors. Petitioner's books are kept, and its returns of income are made, on the accrual basis. The fiscal year in issue ended July 31, 1937.
During the fiscal year petitioner had a gross profit of $45,468.88 and a net profit of $9,564.31. At a*1506 meeting of its board of directors on July 16, 1937, the following resolution was adopted:
Resolved that a dividend of $9,000,00 be declared and paid on the Capital stock on or before July 31, and in the event funds were [sic ] not available the same to be credited to the drawing accounts of the stockholders and that charges be made thereto whenever in the opinion of the directors the finances of the company warranted payment in full or partial settlement.
Petitioner's capital ($70,500) is small in comparison with its business. Most of it is tied up in inventory and accounts receivable. The practice has been followed of crediting, on July 31 of each year, to drawing accounts of its officers, the salaries agreed upon and such dividends as may be declared. Andrew P. and John C. Hustad are the only salaried officers. It was their custom to withdraw *448 such sums as should be required for their personal needs or to cause the corporation to pay their personal obligations, charging such amounts to their drawing accounts.
After the adoption of the resolution set out above and on July 31, 1937, there was credited to the account of each of the officers $3,000 as a dividend. *1507 Kesting withdrew nothing during the year 1937. The following schedules show a summary of the withdrawals made by Andrew and John during the fiscal year and the credits as they actually appear upon their drawing accounts.
| ANDREW P. HUSTAD | |||
| Debits | Credits | ||
| Aug. 1, 1936, balance | $5,248.42 | ||
| [sic] | 6,450.00 | ||
| 3,000.00 | |||
| Aggregate amount | $2,468.36 | Total | $14,698.42 |
| Balance | 12,230.06 | ||
| $14,698.42 | $14,698.42 | ||
| JOHN C. HUSTAD | |||
| Debits | Credits | ||
| Aug. 1, 1936, balance | $5,316.47 | ||
| 31, [sic] | 6,250.00 | ||
| 31 | 3,000.00 | ||
| Aggregate amount | $2,464.90 | Total | $14,566.47 |
| Balance | 12,101.57 | ||
| $14,566.47 | $14,566.47 | ||
The charges made against Andrew's drawing account during the calendar year 1937 aggregated $3,764.69, and those against John's account aggregated $2,536.53.
The credit to Andrew's account of $6,450 and the credit to John's account of $6,250 represent their respective salaries for the fiscal year. The $3,000 credit represents the dividend.
Kesting included the $3,000 dividend in his personal return of income for the calendar year 1937. Andrew and John included in their personal returns of income*1508 the salary which had been credited to their accounts; but neither included any portion of the $3,000 dividend.
Petitioner had a line of credit of $20,000 with a minneapolis bank. At the end of the fiscal year it owed the bank $10,000. As of July 31, 1937, petitioner had current assets of $79,481.83 and total assets of $97,822.90. Among its liabilities were the following:
| Bank overdraft | $1,863.06 | |
| Notes payable (Midland National Bank & Trust Co.) | 10,000.00 | |
| Accounts payable | 4,623.46 | |
| Due officers: | ||
| A. P. Hustad | $11,630.06 | |
| J. C. Hustad | 12,701.57 | |
| Herman Kesting | 3,000.00 | |
| 27,331.63 |
*449 The balance sheet of petitioner shows a surplus of $641.65 at the end of the fiscal period, as follows:
| Deficit, Aug. 1, 1936 | $613.64 |
| Net profit for year ended July 31, 1937 | 9,564.31 |
| Increase in cash value life insurance | 690.98 |
| 9,641.65 | |
| Less: Dividends paid | 9,000.00Surplus July 31, 1937 |
| 641.65 |
OPINION.
MELLOTT: The sole issue is: Did the respondent err in denying petitioner a dividend paid credit of $9,000? The applicable statute is section 27(a) of the Revenue Act of 1936. 1 It is part of the act imposing a surtax on*1509 corporations in an amount measured by the undistributed net income (section 14) which is defined (section 14(a)(2)) as the adjusted net income minus the dividends paid credit (section 27(a), supra ) and the credit provided in section 26(c) relating to contracts restricting the payment of dividends.
Petitioner insists that the dividend was paid during the fiscal year. Quoting article 42-2 of Regulations 94, dealing with income not reduced to possession and requiring the taxpayer to include in gross income amounts credited or set apart to him "without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made", it urges that its stockholders constructively received the amounts credited to their accounts. Though it does not say so in so many words, inferentially it argues it made a constructive payment of the same amounts. The force of this argument is weakened by the fact that petitioner's active*1510 officers, owners of two-thirds of its stock, did not include the amounts in their gross income. While the respondent places considerable stress upon this circumstance, we think it is relatively unimportant. Constructive receipt by a stockholder does not imply, as a correlative, constructive payment by the corporation, , even if we are justified in assuming, contrary *450 to the language of the statute, that Congress intended to grant the credit if a constructive payment be shown. Cf. ; .
In the recent proceeding of , a corporation on December 30, 1936, declared a dividend payable on that day and credited the amount thereof upon its books to accounts carried in the names of its stockholders without any restrictions as to withdrawals. It was held that the object of the statute had been satisfied and that the corporation should be given the dividends paid credit. *1511 , was cited, it being pointed out that the "only difference between the situation in the two cases is the fact that no checks were issued" in the Atlantic Land Co. case, though checks had been issued in the cited case, which were not cashed until several months later.
The Department in its regulations (art. 27-1(b), Regulations 94) recognizes that a corporation may become entitled to the dividend paid credit by crediting the account of the shareholder on the books of the corporation with the amount of the dividend. It states that such credit "will not be allowed unless it is shown to the satisfaction of the Commissioner that such crediting constituted payment of the dividend to the shareholder within the taxable year." It has been said that this provision "leaves the problem where it finds it" , and it manifestly furnishes but slight aid in solving the present problem. The question is, not whether crediting the amounts of the dividend to the accounts of the stockholders may constitute the payment of a dividend, but whether the crediting to the accounts of the*1512 stockholders in the manner and under the circumstances shown in this record constituted payment of a dividend. We are of the opinion that it did not.
It will be noted that the resolution does not make the amount of the dividend available to the stockholders at any time they should see fit to withdraw it. While the respective amounts were "to be credited to the drawing accounts", charges could not be made against them unless "in the opinion of the directors the finances of the company warranted payment in full or partial settlement." The company was no doubt solvent; but its cash position was such that it probably would have been necessary for it to borrow additional funds in order to make the payment. This may have been one of the reasons for requiring subsequent action of the board of directors as a condition precedent to withdrawing the amounts credited. But there is another equally cogent reason why the credit can not be allowed. The evidence clearly indicates that petitioner's officers did *451 not intend that a dividend should be "paid during the taxable year." Its president, testifying as a witness, said: "We like to keep the money in our business as much as we*1513 can, and we use that money to keep our credit in good condition, and we don't want to use any more money than we can get along with. Our business is not a very big business, and we need all the cash we can [sic], therefore, we draw it as we need it." In answer to the question: "In other words, because of the cash position of the company, you neither actually pay salary nor dividends, except to the extent that the officers need the money?" the witness responded: "Well, if you take it that way, I think that is about what it would be, yes." The same thought was again expressed by the witness when he stated that he had told the revenue agent "that we try to keep our salaries and commissions in the corporation as long as we can to take care of our business." This was probably a sound business practice; but it must be kept in mind that Congress, in enacting the undistributed profits tax, deliberately chose to fix the rate corporations should pay "in accordance with the proportion of net income undistributed." 2 It limited the credit, which may be allowed under section 27(a), supra, to "dividends paid during the taxable year", and we can do no less.
*1514 Petitioner has failed to show that it paid any dividend during the taxable year and the Commissioner's determination of a deficiency must be, and it is, approved.
Decision will be entered for the respondent.