241 F. 2d 508 - Lengsfield v. Commissioner of Internal Revenue

This appeal involves deficiencies in income tax determined by the Commissioner against the taxpayers for the calendar years 1947 to 1950, and sustained by the Tax Court in findings of fact1 and an opinion not officially reported.

The sole question presented is whether the Tax Court erred in holding that monthly payments received by taxpayers from a corporation in which the held stock constituted distributions of corporate earnings taxable to the recipients as dividends rather than non-taxable gratuities.

In support of its ultimate conclusion, that the monthly payments received by the petitioners were distributions of profits taxable to the recipients as dividends, the Tax Court pointed to the undisputed facts: (1) that the recipients, owning 63 percent of the stock, were majority stockholders; (2) that most of the others were close relatives; (3) that two were drawing large salaries from the corporation; and (4) that there was a distribution of corporate profits to the majority stockholders, the remaining family members raising no objection to this distribution out of corporate earnings of an amount which is effect increased the widows' dividends.

Pointing, too, to the statutory language, Internal Revenue Code, Sec. 115, 26 U.S.C.A. § 115, 'Distributions by corporations':

'The term 'dividend' when used in this chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after Feb. 28, 1913, or (2) out of the earnings or profits of the taxable year * * *'

and to the fact that there were earnings and profits available which were consequently the source of distributions, the Tax Court declared, 'We cannot escape the conclusion that by legislative definition they were 'dividends".

The petitioners, specifying three grounds of error,2 insist: that the amounts paid were designated by the corporation as, an without dispute in the evidence were, gratuities paid with donative intent within the language and meaning of the applicable authorities;3 and that to tax them as dividends is to go contrary to the intention of donor and donees, as disclosed by the undisputed testimony of record.

We do not think so. Whether or not a corporate distribution is a dividend or something else, such as a gift, compensation for services, repayment of a loan, interest on a loan, or payment for property purchased, presents a question of fact to be determined in each case. John Kelley Co. v. Commissioner, 326 U.S. 521, 698, 66 S.Ct. 299, 90 L.Ed. 278; Bogardus v. Commissioner, 302 U.S. 34, 58 S.Ct. 61, 82 L.Ed. 32; Limericks, Inc., v. Commissioner, 5 Cir., 165 F.2d 483; Paramount-Richards Theatres v. Commissioner, 5 Cir., 153 F.2d 602; Wilson v. Commissioner, 5 Cir., 219 F.2d 126; Greenspun v. Commissioner, 5 Cir., 156 F.2d 917, 921. To weigh the evidence, draw inferences from the facts, and to choose between conflicting inferences is, of course, the function of the Tax Court, and its determination is not to be disturbed unless clearly erroneous. Regensburg v. Commissioner, 2 Cir., 144 F.2d 41, certiorari denied 323 U.S. 783, 65 S.Ct. 272, 89 L.Ed. 625; Limericks, Inc., v. Commissioner, supra; Thomas v. Commissioner, 5 Cir., 135 F.2d 378; United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746, rehearing denied 333 U.S. 869, 68 S.Ct. 788, 92 L.Ed. 1147.

Here, the Tax Court, recognizing that the 'pattern of family solidarity' which was evident throughout the years lent 'considerable force' to taxpayers' characterization of the payments as between the stockholders who did and those who did not receive them as gratuities, nevertheless, after a full consideration of the facts, found that, as between the corporation and the recipients, the payments, were distributions of profits taxable to the recipients as dividends.

We think the record supports, indeed requires, this conclusion. There were substantial earnings and profits available during the taxable years as a source for making the payments and, when made, they were charged on the corporation's books to the surplus account. The taxpayers were all shareholders of the corporation at the time they received the payments in question. The payments to taxpayers Ruth and Coralie Lengsfield were consented to by all the shareholders prior to the adoption of the resolutions whereby the payments were voted, and no question has ever been raised by any shareholder of the corporation as to the authority of the board to make the payments. Moreover, the taxpayers-recipients were, as the Tax Court found, majority (63 percent) shareholders, most of the others were close relatives, and two were drawing large salaries from the corporation. We think that, under these circumstances, the payments in question directly respond to the definition of a taxable dividend contained in the Treasury Regulations 111. The fact that the resolutions authorizing the payments characterized them as a 'gratuity' for past services is not determinative of the nature of the distribution. Thomas v. Commissioner, supra. Furthermore, there is no requirement that a particular distribution be termed a dividend, or that there be a formal dividend declaration, or that all stockholders share in dividend distributions. Paramount-Richard Theatres v. Commissioner, supra; Regensburg v. Commissioner, supra; Phelps v. Commissioner, 7 Cir., 54 F.2d 289, certiorari denied 285 U.S. 558, 52 S.Ct. 458, 76 L.Ed. 946; Fitch v. Helvering, 8 Cir., 70 F.2d 583; Chattanooga Sav. Bank v. Brewer, 6 Cir., 17 F.2d 79; Christopher v. Burnet, 60 App.D.C. 365, 55 F.2d 527; Lincoln Nat. Bank v. Burnet, 61 App.D.C. 354, 63 F.2d 131.

In the latter case, the court said at page 133:

'It is true that the directors considered it in part as a gift and not as a dividend, but this is not determinative of the nature of the distribution, nor is the fact that the distribution was to some of the shareholders only and not to others, nor that it was divided among the stockholders in proportions other than their respective holdings of stock in the corporation. The other shareholders have not complained of this inequality, and must therefore in this proceeding be deemed to have ratified the distribution. The character of the distribution as a division of profits was not changed by the manner in which it was accomplished, nor by the personal motives which induced the respective stockholders or directors to approve of such action, for it nevertheless remained in contemplation of law a distribution of dividends. It was made from the earnings or profits of the distributing corporation, and was divided among the stockholders of the distributing company in such proportion as was satisfactory to its directors and stockholders.'

The judgment was right. It is affirmed.