Conford, Freund and Sullivan. The opinion of the court was delivered by Freund, J.A.D.
This is an appeal by the executrix of the estate of Morris H. Fogelson from a judgment of $18,389.49, the amount shown on plaintiff's corporate books as loans made to Fogelson during his lifetime which are still unpaid.
Plaintiff, incorporated in 1936, owns a motion picture theater and certain store premises in Denville, N.J. Its 150 shares of capital stock were held as follows: Morris H. Fogelson, 70 shares; Michael C. Gallo, 60 shares; Mary Gallo, his wife, 10 shares; Edith Gallo Wade, his daughter, 10 shares. Fogelson, an accountant by profession, was secretary-treasurer of the corporation from its inception until his death in 1960. In this capacity he was responsible for preparing the financial reports, and the corporate books were at all times here relevant in his possession. Fogelson was also the only stockholder actively engaged in managing the business.
It is undisputed that the corporation's financial report of December 31, 1959, which was prepared personally by the decedent, contained the following entry:
M. H. Fogelson, $18,389.49 $36,778.98"
Appellant denies this ostensible indebtedness. She contends that the moneys advanced to her decedent were in fact payments of salary or dividends, alleging that Michael Gallo and decedent had mutually agreed to withdraw funds as needed but to have the transactions recorded for accounting purposes as loans, or, upon the dissolution of the corporation or the death of one of them, to treat the sums advanced as part of the distribution of corporate assets.
There was evidence capable of raising inferences that this was so. There were no corporate resolutions authorizing loans to officers; no evidences of indebtedness were held by the corporation; by December 31, 1959 the loans outstanding to Gallo and decedent were to the penny the same. As part of his report for the year ending December 31, 1945 decedent recommended that the corporation be given notes for the balances due it from the officers, because "for Federal Income Tax purposes the government might contend that the above advances to Michael C. Gallo and Morris H. Fogelson [$10,257.29 and $8,341.11, respectively] shall be taxable to the individuals as dividend income." As noted above, however, no notes were actually ever given.
But merely because there is a basis to suspect that these withdrawals were taken in the form of loans in order to avoid the impact of personal income taxation does not mean that these transactions are not to be considered legal loan obligations to the corporation. The test is the existence of a mutual intent for repayment. Did Gallo and decedent actually regard these advances as loans? There was evidence that they did. Gallo testified that they had discussed these loans on several occasions, and although they never set a specific date for repayment, there was a definite understanding that the moneys would be repaid. The loans first made to Gallo were in response to his request for funds he needed for another business of his own. Small salaries were paid, and dividends were distributed on occasion. For several years the amounts advanced to Gallo and the decedent were substantially disparate. And, of course, there is the fact that Fogelson himself
characterized these transactions as loans when he prepared the ...