of the Commissioner's finding that enforceable loans were not intended.
Having determined that the withdrawals during the years may reasonably be denied characterization as loans, we reach the further question whether they should be treated as dividends. For purposes of income tax upon the recipient of corporate distributions, 'dividend' is defined in 26 U.S.C. § 316(a) as 'any distribution of property made by a corporation to its shareholders -- (1) out of its earnings and profits accumulated after February 28, 1913, or (2) out of its earnings and profits of the taxable year * * *, without regard to the amount of the earnings and profits at the time the distribution was made.' The taxpayer submits two arguments in this regard: (1) there were never any formal dividend declarations and (2) if the payments in question are dividends, the remainder of the $ 48,992.95, withdrawn in prior years, must be similarly considered, and such earlier dividends would have depleted the corporation's previous earnings and profits to such an extent that, since income during fiscal 1957 was nominal, there would have been no 'earnings and profits' from which the corporation could pay 'dividends' in fiscal 1957 or 1958.
The first argument is met and disposed of by the reasoning behind the following statement in the Makransky case, supra, 321 F.2d 598, at p. 601:
'* * * The Internal Revenue Code defines 'dividend' in language requiring the satisfaction of four criteria: There must be (1) a 'distribution' of property (2) 'made by a corporation' (3) 'to its shareholders' (4) 'out of its earnings and profits.' * * * It should be observed that these criteria do not include a requirement that the distribution be made pursuant to a formal declaration of a dividend. Informal withdrawals and distributions, although characterized by the parties as other than dividends, must be taxed as dividends if the statutory criteria are met.' (Emphasis supplied.)
The taxpayer's second argument is found in his insistence that the Government must treat the corporate payments made in the years 1947 to 1956 inclusive in the same manner as those in the year 1957. This argument falls because it subsumes that the previous treatment of the withdrawals as loans precludes the proper taxation of withdrawals made in later years. Only the character of the payments that occurred during the corporation's 1957 and 1958 tax years is presently in issue, and the cumulative fact of non-repayment of the so-called loans in prior years may have been considered by the Commissioner in determining the status of the withdrawals during the years here in question. The same circumstances, by their persistence, may constitute a factual basis different from that upon which the Government reached its earlier determination. Furthermore, in the Regensburg case, supra, 144 F.2d 41, the Commissioner was held justified in treating as dividends certain payments which he had previously characterized as loans in valuing the corporation's stock held in the estates of two deceased stockholders.
To the extent that the taxpayer's argument asserts estoppel, it is well established that the failure of the Commissioner to question withdrawals by the taxpayer from his corporation during other tax years can work no estoppel against the defendant in this case. Burnet v. Porter, 1931, 283 U.S. 230, 51 S. Ct. 416, 75 L. Ed. 996; Sherwin v. United States, 9 Cir. 1963, 320 F.2d 137, cert. den. 1964, 375 U.S. 964, 84 S. Ct. 481, 11 L. Ed. 2d 420, reh. den. 1964, 376 U.S. 946, 84 S. Ct. 796, 11 L. Ed. 2d 771; Broadhead v. C.I.R., 5 Cir. 1958, 254 F.2d 169.
Taxpayer's final argument, however, is valid. The $ 1,000 payment that the Commissioner asserts was received by the taxpayer in his 1958 tax year (calendar year 1958) appears in fact to have been received by the taxpayer in 1957. The evidence clearly indicates that the $ 1,000 payment was made early in the corporation's 1958 tax year (fiscal (1958) but still in calendar year 1957, the plaintiffs' 1957 tax year. The Commissioner relies only upon the otherwise unsupported report of the revenue agent to rebut the evidence adduced upon the trial.
I find that the plaintiffs in this case have received the challenged withdrawals, aggregating $ 8,500, in 1957, but they have failed to discharge the burden cast upon them of overcoming, by the preponderance of the evidence, the presumptively correct determination of the Commissioner that the withdrawals received by taxpayer during the corporation's 1957 and 1958 tax years were taxable to plaintiffs as dividends for their 1957 tax year.
Judgment consistent with the above findings will be entered in favor of the defendant, the United States of America, and against the plaintiffs, William N. Gurtman and Ida Gurtman, dismissing the complaint with prejudice, and with costs. Submit order accordingly.
© 1992-2004 VersusLaw Inc.