Opinion
No. M-413.
December 3, 1934.
J. Robert Sherrod, of Washington, D.C. (Henry F. Wolff, of New York City, on the brief), for plaintiff.
Elizabeth B. Davis, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by William H. Jacobus against the United States.
Judgment in favor of the defendant.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a Commissioner, makes the following special findings of fact:
I. On or about March 12, 1925, plaintiff, a citizen of the United States and resident of the city of New York, state of New York, filed with the appropriate collector of internal revenue his income tax return for the calendar year 1924, indicating thereon a tax of $8,938.10, which was assessed, and by the plaintiff paid in quarterly installments, $2,234.53 each on March 17, June 15, and September 15, 1925, and $2,234.51 on December 18, 1925. Included in said return as income was an item of $28,863.13, being salary, dividend, and interest, hereinafter referred to at greater length.
On or about June 12, 1929, plaintiff filed with the collector a claim for refund of $6,294.28 of the tax so paid for 1924, on the following ground: "Because the taxpayer, who kept his accounts and made his income-tax returns, including his return for the taxable year 1924, on the cash basis, erroneously included as taxable income in his income-tax return for the calendar year 1924 the amount of $28,863.13, which was credited to his account on the books of The Jacobus Company as of December 31, 1924, as for compensation, dividend, and interest, no part of which he received in that year, either actually or constructively, he is entitled to a refund of not less than the amount of $6,294.28 with interest."
This claim was rejected by the Commissioner of Internal Revenue November 8, 1929, on the ground that the item involved was an account in the nature of a loan, the same as a bank account, and could be withdrawn at any time upon demand.
II. On or about March 13, 1926, plaintiff filed with the collector his income tax return for 1925, indicating thereon a tax of $8,843.16, which was assessed, and by the plaintiff paid in equal quarterly installments March 16, June 15, September 15, and December 15, 1926. Included in said return as income was an amount of $12,840.92, representing salary, interest, and dividend, which will be further referred to and described.
On June 13, 1929, plaintiff filed a claim for refund of $2,514.84 on the tax so paid for 1925, on the same ground as stated in the claim for 1924, with appropriate changes in dates and amounts, the credit being $12,840.92 entered as of December 31, 1925.
This claim was disallowed by the Commissioner on a schedule dated November 21, 1929.
III. On or about March 10, 1927, plaintiff filed with the collector his income tax return for 1926, indicating thereon a tax of $3,523.65, which was assessed, and by the plaintiff paid, $880.91 each on March 14, June 15, September 15, 1927, and $880.92 December 16, 1927. Included therein as income was an item of $16,481.91, interest, dividend, and salary, which will be again referred to.
June 27, 1929, plaintiff filed a claim for refund of $1,857.13 of the tax paid for 1926, on the same ground set forth in the claim for 1924, with appropriate changes in years and amounts, the credit item amounting to $16,481.91, entered as of December 31, 1926.
This claim was disallowed by the Commissioner on a schedule dated November 21, 1929.
IV. On or about March 12, 1928, plaintiff filed with the collector his income tax return for 1927, indicating thereon a tax of $2,996.71, which was assessed, and by the plaintiff paid in three several amounts of $749.18, March 17, June 16, and September 15, 1928, with the balance of $749.17, December 15, 1928. Included therein as income was an amount of $37,800.88, interest, dividend, and salary, more particularly described hereinafter.
On or about June 14, 1929, plaintiff filed a claim for refund of the entire tax paid for 1927, on the same ground given in the claim for 1924, with appropriate years and amounts, the credit being $37,800.88, entered as of December 31, 1927.
This claim was rejected by the Commissioner November 8, 1929, for the same reason as given in his rejection of the claim for 1924.
V. On or about March 11, 1929, plaintiff filed with the collector his income tax return for 1928, indicating thereon a tax of $2,721.62 which was assessed, and by the plaintiff paid in three several amounts of $680.41 March 13, June 15, and September 16, 1929, and $680.39 December 16, 1929. Included therein as income was an amount of $44,579.20, interest, dividend, and salary, more fully described hereinafter.
March 11, 1931, plaintiff filed a claim for refund of the entire tax paid for 1928, on the following ground:
"The taxpayer has kept his accounts and made his income-tax returns, including his return for the taxable year 1928, on a cash basis. In his income-tax return for the calendar year, the taxpayer erroneously included the amount of $44,579.20 which was credited to his account in January 1929, on the books of the Jacobus Company.
"Since no part of this amount was actually or constructively received in 1928, the taxpayer is entitled to a refund of not less than the amount of $2,721.62, with interest."
This claim has not been acted upon by the Commissioner.
VI. The Jacobus Company, so referred to in the aforesaid claims for refund, was, in 1923, organized under the laws of the state of Delaware as a corporation, with an authorized capital stock of 150 shares no par value. The stock interests were held as follows:
Number of Stockholder: shares
William H. Jacobus ............... 60 Abraham Jacobus .................. 45 Rebecca Jacobus .................. 25 Mignon J. Levy ................... 20 ___ 150
William H. Jacobus, plaintiff herein, Abraham Jacobus, and Eugene Jocobus (hereinafter referred to) were brothers. Rebecca Jacobus was the wife of plaintiff, and Mignon J. Levy was his daughter. The shares were in a voting trust agreement, of which William H. Jacobus and Abraham Jacobus were the voting trustees. The directors of the corporation were William H. Jacobus, Abraham Jacobus, and Rebecca Jacobus. The president was William H. Jacobus, and Abraham Jacobus was secretary and treasurer.
The Jacobus Company conducted an investment business and kept its accounts and made its tax returns on an accrual basis. Plaintiff kept his books and made his tax returns on a cash receipts and disbursement basis. The corporation purchased and sold securities only for itself or for the account of the three brothers and the wife and daughter of plaintiff. Its assets consisted of stocks, bonds, and real estate.
The stockholders and Eugene Jacobus from time to time deposited their income with the Jacobus Company, and these deposits were invested by the company in income-producing securities. The president, William H. Jacobus, and the secretary and treasurer, Abraham Jacobus, were allowed as salaries the company's net earnings after deduction of taxes, expenses, interest, and dividends for the calendar year. During the calendar year the stockholders and depositors made, or caused to be made, numerous withdrawals. Shortly after the end of the years here in question, usually in January or February, the books of the company were audited and determination was made of salaries, dividends, and interest, which were credited on the company's books to the stockholders and depositors as of December 31 of the audited year in proportion to their several shares, their offices, and their individual balances.
This procedure was agreed to and known by all the interested parties.
VII. As of December 31, 1923, plaintiff had a net credit on the books of the company of $20,922.16.
The following table shows, for the years indicated, in column A, the total receipts for plaintiff's account currently credited to him on the company's books; in columns B, C, D, and E, respectively, the items of interest, dividends, salary, and expenses credited on his account ascertained in the succeeding year and entered on the company's books as of December 31 of the year to which related; in column F, the total payments made by the company to him or for his account, which were currently charged to him; and in column G, the cumulative credit balance after such interest, dividends, salary, and expenses had been credited:
=============================================================================================================== | A | B | C | D | E | F | G | | | | | | | | | | | | | | (Credit | (Receipts) | (Interest) | (Dividends) | (Salary) | (Expenses) | (Payments) | balance) -------------------|-------------|------------|-------------|------------|------------|------------|----------- 1923 ............. | ($20,922.16)| .......... | ........... | .......... | .......... | .......... | $20,922.16 1924 ............. | 55,136.79 | $1,548.94 | $7,200.00 | $20,114.19 | .......... | $62,296.85 | 42,625.23 1925 ............. | 101,334.12 | 4,733.58 | 7,200.00 | 907.34 | .......... | 55,534.74 | 101,265.53 1926 ............. | 49,575.54 | 6,095.04 | 7,200.00 | 3,186.87 | .......... | 58,430.71 | 108,892.27 1927 ............. | 12,692.55 | 5,600.88 | 7,200.00 | 25,000.00 | $1,526.68 | 54,916.90 | 105,995.48 1928 ............. | 26,159.50 | 5,379.20 | 7,200.00 | 32,000.00 | 1,784.24 | 100,115.56 | 78,402.86 |-------------|------------|-------------|------------|------------|------------|----------- Total ........ | 265,820.66 | 23,357.64 | 36,000.00 | 81,208.40 | 3,310.92 | 331,294.76 | 78,402.86 | | | | | | | ---------------------------------------------------------------------------------------------------------------VIII. At the time the aforesaid interest, dividend, salary, and expense items were ascertained and credited to plaintiff, there were also ascertained and credited to Abraham Jacobus, secretary and treasurer, corresponding interest, dividend, salary, and expense items, and to their brother, Eugene Jacobus, interest items, as follows:
======================================================================================================= | | | | Abraham Jacobus | Eugene | | | Jacobus | As of December 31 — | | | Total |-----------------------------------------------------------------| | Interest | Dividends | Salary | Expenses | Interest | -------------------------|------------|------------|------------|-------------|------------|----------- 1924 ................... | $6,182.30 | $5,400.00 | $20,114.19 | ........... | $10,763.42 | $42,459.91 1925 ................... | 7,381.26 | 5,400.00 | 907.34 | ........... | 14,186.56 | 27,875.16 1926 ................... | 5,045.21 | 5,400.00 | 3,186.87 | ........... | 10,648.20 | 24,280.28 1927 ................... | 4,730.14 | 5,400.00 | 25,000.00 | $1,526.67 | 12,348.84 | 49,005.65 1928 ................... | 5,816.24 | 5,400.00 | 32,000.00 | 1,784.23 | 13,856.88 | 58,857.35 |------------|------------|------------|-------------|------------|----------- Total ............ | 29,155.15 | 27,000.00 | 81,208.40 | 3,310.90 | 61,803.90 | 202,478.35 ------------------------------------------------------------------------------------------------------- IX. The cash balances of the company at the dates indicated were as follows:
December 31, 1924 .................. $10,564.08 " " 1925 .................. 19,473.62 " " 1926 .................. 331.32 " " 1927 .................. 14,123.07 " " 1928 .................. 3,514.63
X. A comparative table of the combined credits to William H. Jacobus, Abraham Jacobus, and Eugene Jacobus as of December 31 of the years indicated for interest, dividends, and salaries, as the case may be, and the company's cash balances, on those dates, is as follows:
-------------------------------------------------- Year | Credits | Cash balances ---------------------|-------------|-------------- 1924 ............... | $71,323.04 | $10,564.08 1925 ............... | 40,716.08 | 19,473.62 1926 ............... | 40,762.19 | 331.32 1927 ............... | 85,279.86 | 14,123.07 1928 ............... | 101,652.32 | 3,514.63 | | --------------------------------------------------
XI. The management of the Jacobus Company was in the hands of William H. Jacobus and Abraham Jacobus and whether withdrawals, as to amount or time, could be made, was determined by them.
An individual account was maintained on the company's books in plaintiff's name wherein he was (1) credited with his investments in the company and his deposits therewith, together with the interest, salary, expenses, and dividends entered as hereinabove described as of the 31st of December of each year, and (2) charged with payments made to him or for his account. This constituted the account from which all his withdrawals were made, and the interest, salary, and dividends, so credited to plaintiff, were merged and absorbed in the resulting credit balance which was then, in the following months, subjected to withdrawals without respect to the several items entering into its calculation.
XII. All items of interest and salary credited, as hereinabove related, to William H. Jacobus, Abraham Jacobus, and Eugene Jacobus on the books of the Jacobus Company were by that company deducted from its gross income for the year in which they were credited. They were so returned to the collector of internal revenue and the company's tax was accordingly reduced on account thereof.
The plaintiff brings this suit to recover the sum of $16,430.10 paid as income taxes for the years 1924 to 1928, inclusive.
It appears from the findings made by the court that the Jacobus Company was incorporated in 1923, and that the entire stock of the company was owned by the Jacobus family. The plaintiff was the owner of 60 shares, his wife 25 shares, his daughter 20 shares, and his brother, Abraham Jacobus, 45 shares. The plaintiff, his wife, and his brother, Abraham, composed the board of directors. The plaintiff was president, and his brother was secretary and treasurer; however, the evidence shows that the books were kept by the president. All the shares of stock were placed in a voting trust and the plaintiff and his brother were the voting trustees. These two trustees had sole management and control of the business. After the payment of 6 per centum as a dividend on the stock and the other expenses of the company had been paid, the net profits of the corporation were divided equally between these two officers, the plaintiff and Abraham Jacobus, as salaries for the conduct of the business of the corporation.
The company conducted an investment business, the buying and selling of stocks and bonds and real estate. However, its business activities were confined solely to its own account and that of the Jacobus family. No other accounts were accepted. Besides conducting the business of an investment corporation, it permitted and accepted deposits of sums from its stockholders and from a brother who held no stock in the corporation, and on these deposits interest was allowed. Its books were kept on the accrual basis. Plaintiff was on the cash receipts and disbursements basis.
Shortly after the end of each of these calendar years the books of the company were audited and the amounts of interest, dividends, and net profits determined, and the interest on the amount standing to the credit of plaintiff was placed to his account; so also were the dividends on his stock. The one-half share of the net earnings of the company was credited to his account as salary paid by the company to him for services rendered. The same method was applied to the interest, dividends, and salary of the brother, Abraham.
The Jacobus Company took as deductions on its income tax returns the amount of interest credited and the full amount of salary applied to each account. The plaintiff and his brother, Abraham, made withdrawals whenever needed or desired. The time and amounts of these withdrawals were generally agreed upon between them. The company conducted a most prosperous and successful business. After paying all dividends, interest, and other expenses during the years in controversy, the plaintiff had placed to his credit as salary, which meant one-half of the net profits, the sum of $81,208.40, and during this same period dividends of $36,000 and interest of $23,357.64. During these years plaintiff withdrew large sums ranging from $62,296.85 in 1924 to $100,115.56 in 1928 — in the five years, $331,294.76, or $190,728.72 more than was credited to him for his salary, interest, and dividends. The plaintiff and his family used the company as a banking institution and deposited money from time to time, which was invested for them and on which they were allowed interest.
The testimony fails to disclose that more than one account was kept in plaintiff's name and deposits for investment, deposits made as loans to the company, dividends, and interest on balances, together with salaries, were all placed to the same account. The books of original entry which were kept by plaintiff were not introduced in evidence. No assignment of a reason for this retention has been given. From the case, as presented, it is clearly apparent that sums placed to the credit of the plaintiff were always subject to his demand, and, as the record shows, they were freely and largely drawn upon. There is nothing in the evidence to substantiate the claim of the plaintiff that, although these amounts were placed to his credit, they were not received by him actually, or constructively, because the cash balance of the company at the end of each year was not sufficient to pay the amounts credited to him. The cash in bank is only a part of the assets of a corporation. Many other items enter into its capital and surplus. The company conducted an investment business, and in so doing invested its money in stock, bonds, and real estate, and the policy in the conduct of the business was to carry only a small amount in cash. But the answer to the ability to pay, and the solvent condition of the company to meet all obligations, is the fact that each year a dividend was declared and the net earnings, aggregating large amounts, were divided between the plaintiff and his brother and charged to the company as salary allowances. Both the substance and from of these transactions show that the amounts credited to the account of the plaintiff were treated by him and the company as actual payments because interest was paid on these accounts by the company. In addition, there was no inhibition upon plaintiff not to withdraw whatever amount he desired, and the actual withdrawals show that he exercised a free hand. The contention that, because the amounts were placed to plaintiff's credit account and not physically paid over to him by the company, they were therefore not actually received by him, is without merit in fact or law.
As we have shown heretofore, the plaintiff considered that, when the items of salary and interest were placed to his account, they were payments because he charged them on the books for income tax deductions of the company. The business of the company was under plaintiff's and his brother's control, and he kept the books and made all entries therein. The corporation took the deductions on its income tax return each year and to hold that these amounts were simply accruals to the plaintiff would permit him to escape taxation on amounts which were actually used by him, at his demand, and under his control and dominion. It would not be an avoidance, but a clear case of evasion of taxation on a vaporous distinction which when analyzed has no meritorious feature. The Commissioner was correct in holding the plaintiff subject to income taxes on these amounts. See Hadley v. Commissioner, 59 App. D.C. 139, 36 F.2d 543.
The petition is dismissed. It is so ordered.
BOOTH, Chief Justice, and WILLIAMS and GREEN, Judges, concur.
LITTLETON, Judge, concurs in the result.