The opinion
HENRY F. MICHELL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Henry F. Michell Co. v. Commissioner
Docket No. 20492.
United States Board of Tax Appeals
16 B.T.A. 1297 ; 1929 BTA LEXIS 2422 ;
June 29, 1929 , Promulgated
*2422 1. Profits of petitioner for the fiscal years ending June 30, 1917, and June 30, 1918, credited to the personal drawing accounts of its principal stockholders, were distributions of corporate assets and can not be included in invested capital.
2. Special assessment denied.
Andrew S. Wilson, Esq., for the petitioner.
James L. Backstrom, Esq., for the respondent.
ARUNDELL
*1297 In this proceeding, involving the redetermination of a deficiency of $5,387.86 in income and excess-profits taxes for the year 1921, petitioner questions respondent's disallowance of $230,019.49 as invested sapital and his refusal to grant special assessment.
FINDINGS OF FACT.
The petitioner, a Delaware corporation, was organized in 1903 as the successor of a partnership composed of Henry F. Michell and Frederick J. Michell, brothers. In the fiscal years ending June 30, 1917, and June 30, 1918, its capital stock of $150,000, divided into 1,500 shares, par value $100, was held as follows: Shares
Henry F. Michell 757
Frederick J. Michell 555
Paul F. Richter 140
F. J. Michell, Jr 30
C. Fred Schermerhorn 15
Mary A. Michell 3
Richter *2423 was an employee of petitioner; F. J. Michell, Jr., is a son, and Schermerhorn a son-in-law of Frederick J. Michell, and Mary A. Michell is a sister of Henry F. Michell.
On June 30, 1917, and June 30, 1918, the total net profits of petitioner for the years ending on those dates, totaling $230,019.49, were credited to the personal drawing accounts of Henry F. Michell and Frederick J. Michell, in accordance with a practice established at the time the corporation was organized to divide the profits of the corporation 60 per cent to the former and 40 per cent to the latter, *1298 the same as the profits of the partnership had been distributed. None of the other stockholders received any of the profits of petitioner for those years and no dividends were ever credited or paid to any of the stockholders under resolutions adopted by petitioner's board of directors July 5, 1917, and July 5, 1918, declaring a 6 per cent dividend, payable at once.
The drawing accounts of Henry F. Michell and Frederick J. Michell were balanced at the close of the year. If the withdrawals during the year exceeded the credits made to the accounts, the balance was carried over into the succeeding year, *2424 and if vice versa, the balance was paid by the corporation.
During the taxable year petitioner maintained its principal place of business at 516-518 Market Street, Philadelphia. The property located at 518 Market Street was leased from Henry F. Michell and Frederick J. Michell at an annual rental of $8,400. The assessed value of this property was $112,000.
During the taxable year petitioner's gross sales were $1,438,719.04, gross profit, $536,678.20, and net income, $78,046.86. In 1917, 1918, and 1921, the salaries paid to Henry F. Michell and Frederick J. Michell were: Year Henry F. Michell Frederick J. Michell
1917 $10,000 $9,000
1918 12,800 12,000
1921 15,600 15,000
OPINION.
ARUNDELL: The petitioner is contending that the sums credited to the personal drawing accounts of its principal stockholders at the close of the fiscal years ending June 30, 1917, and June 30, 1918, were not payments of dividends, as determined by respondent, but advances, and should be included in invested capital as accounts receivable.
Commencing in 1903 and yearly thereafter until subsequent to 1918, petitioner credited all of its profits to the personal drawing *2425 accounts of Henry F. Michell and Frederick J. Michell, on the basis of 60 per cent to the former and 40 per cent to the latter. The accounts were balanced at the close of every year. If the withdrawals during the year exceeded the credits, the debit balance was carried over into the next year, and if the credits exceeded the withdrawals, the balance was paid by petitioner. The amounts which it seeks to have included in invested capital were either actually withdrawn during or paid at the close of the year. There is no evidence of record to show that the stockholders regarded themselves as being *1299 indebted to the corporation for the amounts in question. The sums were never carried on the corporate books as assets and the facts show that both the petitioner and the stockholders treated the credits as dividend payments.
The petitioner is asking us to hold as a matter of law that the amounts paid by it as dividends should be included in invested capital on the ground that the distribution ignored the rights of minority stockholders. Dividends may be paid on a basis other than stock holdings. See *2426 . The record does not disclose that the minority stockholders have ever objected to the manner in which the profits for the fiscal years ending in 1917 and 1918 were distributed, or that the petitioner has ever attempted or intends to recover all or any part of the dividends alleged to have been erroneously or illegally paid. No part of the amount in question represents earned surplus or undivided profits within the meaning of section 326(a)(3) of the Revenue Act of 1921. It is evident that the sum can not be included in invested capital under any of the other provisions of section 326(a). The respondent's action is sustained. See Feist & Bachrach, inc., , and .
Petitioner is claiming the right to special assessment on the ground that the rent paid to its principal stockholders for the use of the premises located at 518 Market Street was less than a fair rental and that the salaries paid to the Michell brothers were inadequate. There has been no proof of a reasonable rental for the property or that the salaries paid to the stockholders were low *2427 for the services performed. From the evidence before us we are unable to say that the rent and salaries paid create such an abnormality as to justify special assessment. See , and .
Judgment will be entered for the respondent.