Hudson v. Commissioner of Internal Revenue
99 F.2d 630
6th Cir.
1938
Check Treatment

*1 IN- OF COMMISSIONER HUDSON TERNAL REVENUE.

No. 7495. Appeals, Circuit. Sixth

Circuit Court 12, 1938. Nov.

HAMILTON, Judge, dissent- ing. Memphis, Taylor, Tenn. Hillsman Tenn., Memphis, Taylor, W.

(Hillsman *2 Rock, Ark., 1925, F. Holmes, 1, and E. period January During the from H. Ilagler, Memphis, Little of brief), Tenn., 15, petitioner’s on March withdraw- corporation from als petitioner. for left a balance due $16,271.96. During practically the same Rothschild, Washington, Morton K. period Marie Hudson withdrew certain Key, Morris, and (James Sewall D. C. Morton K. W. aggregate amounts which left her debit Washington, Rothschild, all of balance as of March $2,089.64. C., respondent. brief), for D. on the Upon March shown the cor- as ALLEN, HAM- HICKS, Before and porate minutes, up the directors took ILTON, Judges. Circuit question of debit balances the stock- holders, adopted following and resolu- ALLEN, Judge. tion: review an order Petition to “Be It Resolved overdrafts Appeals determining a defi Board of Hudson, shown the accounts of Charles $5,127.99 ciency for in tax of income Hudson, Administrator, Galvin Mrs. year 1929.1 34 B.T.A. 155. Charles Hudson and Miss Hudson stipulated, facts, and found be cleared as out of the assets of the Hudson Board, follows: Dugger Company and by charging as them surplus, and each of them to being Hudson, deceased, was the Charles sense of this resolution and so understood president principal and stockholder by all that the accounts above set Company, Dugger a Tennessee Hudson and Hudson corporation, of the owning 6731J4 Dugger Company owns still shares, 768%, capital stock, remaining therein; that at such time as be con- son, being by his Galvin Hudson. owned appropriate venient and widow of Charles Petitioner is the son, company made to the Hudson, also for Marie is trustee such account.” daughter. At death their Hudson, Galvin, on December The various charged overdrafts were equally shared Hudson Kate and Marie on the books of the & Dugger his estate. profits, to undivided and the ac- years Hudson for number counts of debtors were Charles credited with equal from his withdrawn amounts to the prior to death debt balances shown money respective various sums accounts. the which Petitioner charged to his ac- does not contend surplus were that the personal corporate of his death ac- was not that time pay- At the time at sufficient for count. ment of debt to the dividends in the amounts count amount $43,910.19. appear Charles Hudson overdraft. Neither does ap- represented intestate, Galvin Hudson was items died the overdrafts was returned for taxation drawers in the pointed administrator. individual respective years when the administrator, Galvin Hudson with- As were withdrawals made. None corporation sufficient funds from the drew (cid:127) amounts was taken as a deduction for expenses and administra- pay funeral purposes by corpora- come tax either the fees, up estate. wind and to tion These tion the estate. In at a meet- on the were amounts stockholders, president ing of the account books corporation suggested, since there was administrator, Hudson, and aft- Galvin controversy between the stockholders and being certain credits reduced which er corporation, and also with the federal itemized, the balance he due need government with reference to these ac- $58,768.81. corporation was In the by counts, company that stock be sur- Shelby order of the Probate Court of debtors, rendered each of the and can- Tennessee, the County, administrator dis- corporation approved sug- celed. stock of tributed gestion, and a surrender was estate, belonging one-third each tion petitioner, actually both in her individually, and to her to trustee right trustee for daughter. and as own Hudson, for Marie and to himself individually. determining against peti- deficiencies respectively. By agreement year Hudson, Deficiencies the same vin against Kate determined trus in this will bind the decision case against parties. tee for Marie Gal other two its stockholders constitute dividends in the Hudson Marie tioner son, year during which the Commissioner decided canceling or tion was taken such off had received a dividend of *3 surplus. against The sum accounts reso- $102.679.04, latter the one-third just lution of March authorized being the debts aggregate of Hudson, such action that taken the Cohen ad- Galvin Charles Hudson following per- The ministrator, corporation. He Case. accounts of owing to the credited, actually $16,- sons were accordance sum of further 'determined that the action, following con- that petitioner’s account

271.96 credited to $2,- her, amounts: and that stituted a dividend to Marie 089.64 the account credited to Hudson..........$16,271.96 Mrs. Charles her. The Board a Hudson was dividend to of Tax 2,089.64 Marie Hudson ............... Commission- Appeals sustained 43,910.19 58,768.81 Charles Hudson.............. er. Hudson, Galvin administrator.. Petitioner contends: ele an But introduced the resolution was 1. dividend declared That no by specifying ambiguity that ment corporation, and that the amount being forgiven. far as debts were not So not does constitute the withdrawals know, accounting practice provides we come. way charged against items sur in which against the 2. That claims administrar plus may be on the books as “not carried Hudson, when against Charles tor and forgiven.” aware that cer being We are distribu- off, dividends charged to are not entries, while tain hold book decisions that estate; and tees value, of evidential not determinative are corporation That the claim liability. Helvering tax Cf. v. Midland at the had been outlawed against the estate Co., U.S. 57 Life Mut. Ins. off, charged that was time the account therefore they 81 L.Ed. S.Ct. 108 A.L.R. 436. debts, even if amount the book But in this case acts done entries reflect the canceled, a dividend to was not were corporation. The individ not this We do consider the distributees. given uals were in fact credit for question was not contention, because that they charged were off Appeals Board of Tax before the raised surplus. clarify book The entries decided it. nor vague and indefinite reservation of the proof presented whether resolution. The question is burden of was on main The corporation in to show the. that the Commis petitioner action taken 1929; erred created a sioner in his determination. Cohen of March resolution Commissioner, supra. definition in This within taxable dividend .the burden it 1928, 45 Revenue Act of 115(a) of the did not sustain. While Cohen Case § 115(a), which 791, 26 was off formal U.S.C.A. the debt resolu § Stat. thing ‘dividend’ when provides tion, term case same that “The the instant ** n * accomplished by [chapter] title resolution and book used in corpo- conformity distribution made a made in resolu means Commissioner, shareholders, whether in mon- Cf. Wiese v. ration to its tion. princi ey property, earnings or in other out of its 921. We conclude that the 93 F.2d February 28, profits Cohen v. ple accumulated after announced profits, 1913.” a distribution of that there was time, at that income-accrued con urges that as Petitioner trols. the debts states that tion’s charge-off forgiven, the did corporation by peti The release dividend, especially as the constitute shares of of sufficient stock at tioner par $100 paid by alleged to have been debts pay one-third of the value transferring some not affect debts does the conclusion. which stock shares show The record does not these fallacy argument of this is inherited. released when substantial shares from nature acts done apparent resulted no loss value. effects thereof.. amounted to no more petitioner, and than among of shares re-allotment a .minor held in v. Com This court has Cohen was a clos shareholders. missioner, Cir., cash F.2d one, three members of one owned by ed from a withdrawals balances of surplus, Hudson stockholders was canceled family. The turned is as outstanding material of which value of the book and the over- so- reality follows: “Be resolved that changed. mere- drafts shown on the accounts repayment the withdrawals called ly Administrator, fewer number fact resulted Mrs. Charles Hudson and Miss held in they existed, but of shares son be pre- cleared out of the assets proportions as practically the same charging them Dugger Companyby quantum son and same represented the viously, and surplus, being of them to worth. of net so sense this resolution and understood question is principal The second *4 by all set out are that the accounts above in was correct the Commissioner whether not Dugger Company and and that Hudson the of that one-third determination his its there- still owns aggregate constituting the ; in as be that at convenient withdrawals, the and sum of the deceased’s and settlement be appropriate the to represents income expenses, estate by the of to the 1929, 3, the Up March petitioner. to such account.” of books the on carried been amount On March was of form as an asset surplus petitioner to and credited to receivable. accounts by journal $16,271.96; Marie Tennessee of Code 8336 of the Under § 1929, son, $2,089.64; May 31, and obligated personally 1932, petitioner Hudson, $43,910.10; Charles Hudson, and Galvin to estate, proportion in for of the debts administrator, $58,768.81. Gal- Amer- share. distributive of her the value ican reported in vin his individual 575, Grace, 151 Tenn. Surety Co. v. 1925,$10,000 come tax return for adminis- March of The resolution 271 S.W. 739. fees, corpora- trator’s withdrawn from the corporate action 1, 1929, was the first tion. It the withdrawals. to regard with taken prop- In the Hudsons owned no to debts charging off the provided for except erty the stock of the Hudson the accounts profits. When undivided Dugger Company and the of indebtedness of the the amount with were credited of each them the could have charge-off was made debts and by only subjection. been collected resolution, the action cordance was tantamount September, controversy after a Wiese v. to cancellation. had arisen between the Hudsons and petitioner, the supra. toAs Bureau, Revenue concerning Internal their an increase either charge-off constituted year 1929, income taxes for the calendar relinquishment her inherited company stockholders of the declared property. inherited on her a lien of by no resolution that there was under- received that petitioner conclude We standing company between the and the dividends, of sum one-third as they Hudsons one of $102,679.04. The withdraw- additional of them should be relieved of ness indebted- petitioner’s ac- $16,271.96 credited als of withdrawals, their reason of course, in view of the of must count intestate, of or those their Charles in view of our considerations above agreed They son. then the other Commissioner, supra, in Cohen v. holding $43,- company of stockholders that the as income in regarded 910.19 Charles due Hudson at the date Ap- Board order of the $58,768.81 of his death and the due Gal- peals is affirmed. Hudson, Administrator, vin be settled surrendering 340.27 company HAMILTON, Judge (dissent- capital par stock shares of its value $100 ing). share, by per surrendering surrendering 343.26 shares and as trustee opinion I concur unable to am Hudson, 343.26 Marie shares. Court. president company March the directors was au- On negotiate suggestion peti- further with corporation, of the com- thorized at the tioner, individually, accountant, in order to for avoid an trustee pany’s company’s of their indebtedness balance overstatement $16,271.96 $2,089.64 company assets, adopted provid- a resolution re- sheet and on March spectively petition- all debit ing for If surrendering er settled debts these resolution of March 1st shares, company subsequent 20.90 and 162.72 debiting surplus crediting respectively.' formal There was the accounts of the Hudson declaration' resulted cancelling of a dividend their corporation, tion. indebtedness to the each of them received a taxable dividend. If the Reve- Commissioner of Internal effect postpone resolution nue, .basing his decision on the no dividend was of the directors books of the com- and the received. The resolution is not free from pany, peti- found and, ambiguity considering we must tioner, individually, and as trustee so give reconcile conflicts as to effect to received all it. $34,226.33 year dividend for 1929 of It was stated in the resolution that receipt reason of the each of them in purpose charge-off was because 1926 of one-third of appears probability “there to be little belonging their intes- the Company realizing on these accounts tate, liability from the arose for at least some time to come” and “that charge-off of the indebtedness to the cor- *5 may be no overstatement of poration of Charles Hudson and ad- Company’s assets in its balance sheet.” It ministrator, Galvin He Hudson. further was also set out that these so-called “as- re- found that had in addition Company sets” are to be cleared out ceived taxable dividend of a. “by them, them, and each of charged-off amount of indebtedness surplus.” This was followed a state- 1929 and Marie dividend of Hudson a ment that not to be understood $2,089.64. Appeals of Tax sus- Board parties “that the accounts tained the Commissioner. above set out are ' 115(a) Section of the Revenue Act of Dugger & Hudson still owns its 115(a), 26 U.S.C.A. makes taxable § therein.” was further It stated “that at as a dividend distribution a cor- may appro- such time as be convenient and poration stockholders, money to its or priate, proper be made to property, earnings profits other or Company by parties February accumulated after 1913. count.” money a This statute taxes distribution phrase appropri- “convenient and equivalent though single or even its to a adapted easy ate” means suitable or well Bank, stockholder. Lincoln National Ex- synony- action is or It not performance. Burnet, ecutor, App. v. 61 forgiveness mous or cancellation. 54, 63 D.C. F.2d 131. Finch, In the case of Newsam v. 25 formally Dividends need not be de- Barb., N.Y., 175, 177, payment where Chattanooga Savings clared. Bank v. legally note of a before it was Brewer, Cir., 6 17 F.2d and the can-' demandable, in consideration of the time cellation indebtedness of a stock- payment of the balance being for the ex- may payment holder result of a until tended convenient to the maker to- Moses Cohen v. dividend. Commissioner pay said: the court “The effect Revenue, 6 Internal F.2d 184. was, agreement postpone the time for Tennessee, Under the laws of payment the heirs balance after the note personally responsible or devisees become terms, become due should its for such for decedent’s to the extent of period the a as under all the circumstances of value the estate received. American should the case be reasonable.” Surety Company Grace, 151 v. Tenn. In the case of Black Bachelder, v. S.W. appellees Mass. became indebted appellant under an advertising con- December, 1926, when the Hudsons agreed creditor postpone tract and the accepted the stock of the Hudson payment by providing in the contract Dugger distributed out of as convenient.” “payable The court said passed only phrase “can mean that some in- them of his length dulgence as to the of credit was to expenses indebtedness of the ad- the debtors.” be allowed to ministration of his estate which trust was upon impressed all of the Larrimore, In the case of Samuels until these v. obligations discharged. Cal.App. 337, 104 P. the court said1 repaid upon income, Income tax laid money “to be is one who borrows capital. picked receipts When business come to a tax- when ‘when convenient or payer business, ordinary repay reason- up,’ within a course of bound to [is] time, dealing property, they or from hold the bear no able not entitled [is] [Page clearly identifying label them money indefinitely his election.” as income. at Consideration substance 1002.] rather than form alleged out which Woodruff, Wend., In Howes’ Ex’rs arises, is the basic rule to be court, construing N.Y., an applied. The should not dis- Government pay sum with in- agreement certain things collect tort the men do in order to to make “whenever convenient terest it is should conceal taxes and individuals or dealings settlement,” legal effect “The a final said: disguise n their transactions business is, stipulation think, I such a prevent property in order to time. act done within a reasonable shall be cash, imposition. Credits, as well thing shall be It cannot mean A may give credit rise to taxable income. party, for then done on the demand to a stockholder in order to constitute a might immediately, before he demand dividend, finality and be for must have ‘Convenient,’ elapsed. amount, unequivocal and sub- a definite here used such a time as doing must mean contingency. ject When substantial act, circum- as, under all the credits to the case, should be reasonable.” stances company’s surplus in charges to the A resolution must contract integrated with resolution of 1929 are light subject be construed in Directors, alleged divi- Board of surrounding matter and the circumstances. contingent. finality lack dends *6 acts be thereto Ap- of the Board of The decision intent, determining if scrutinized peals should reversed. language or terms of the instrument ambiguous What one or uncertain. intends is best determined what he does. Hudson stockholders sur- Com- rendered a of their stock unequivocably and were relieved of pany their indebtedness not until that complete final and settle- books of the ment. direc- agree corporation do not Surplus tors’ resolution. MAINE v. BOSTON & UNITED STATES cred- and the accounts R. R. ited, which balanced the accounts. No. 3358. accounting in Correct accordance with Appeals, Court First Circuit. required would have Nov. 1938. against surplus and charge a credit to re- Hudson overdrafts. How- serve entries, evidential, ever, though book liability. determinative tax corporation setting minute books resolution of Board of Direc- clearly more true nature of tors reflect bookkeeping than the en- The action ' the Board of Di- tries. is more authentic and carries rectors weight Compare Hel- greater evidence. Life vering Midland v. Mutual Insurance Company, 300 U.S. S.Ct. 436; 612, 108 A.L.R. 81 L.Ed. Eaton v. Company, English & Mersick 54; Taplin Commissioner, Cir., v. Mitchell F.2d 454; Doyle Co., 41 F.2d 247 U.S. Bros. S.Ct. L.Ed.