Petitions to Review Decisions of the Tax Court of the United States.
Before L. HAND, SWAN, and CHASE, Circuit Judges.
These proceedings involve the income tax liability for the years 1936 to 1940, inclusive, of four brothers, Mortimer, Isaac, Melville and Jerome Regensburg, who were the principal shareholders of E. Regensburg & Sons, a New York corporation, during the tax years in suit. Jerome Regensburg died on October 31, 1941 and his estate is represented by his executrix. Sophy P. Regensburg is the wife of Melville, with whom she filed a joint return for the year 1940, and she joins in his petition with respect to that year.
E. Regensburg & Sons was organized in 1903 to manufacture and deal in tobacco products. It took over the business of a family partnership which had already prospered in that filed; its business career has been remarkably successful. The corporation had a capital stock of 1,000 shares of par value of $100 each. This capitalization has remained unchanged, and the shares have never been held outside the Regensburg family. The holdings of the brothers who are petitioners here are shown in the following tabulation:
Mortimer 230 264 281 1/2 281 1/2
Isaac 230 264 264 268 3/8
Jerome 140 174 174 178 3/8
Melville 50 114 114 118 3/8
Ever since the business was incorporated the brothers have maintained individual open accounts in which withdrawals were debited and salaries, dividends, interest and other items were credited. Withdrawals were made at will, and have not been proportionate to their stockholdings. Smaller shareholders who were not officers or directors made no withdrawals, receiving only such funds as were paid in the form of declared dividends. Between 1903 and 1935 dividends totalling $2,270,000 were authorized. None has been declared during the tax years in suit, and the corporation shows an operating loss for each of said years, although the surplus on January 1, 1936 was some $4,850,000 and remained more than $4,000,000 on December 31, 1940.
During all the tax years in question, with one exception,*fn* the petitioners made withdrawals in excess of the credits to their open accounts and did not report them as income. The commissioner treated such net withdrawals as dividend distributions within the meaning of section 115(a) and (b) of the Revenue Acts 1936 and 1938, Int.Rev. Code, § 115, 26 U.S.C.A.Int.Rev. Code, § 115. The tax court sustained his ruling. This resulted in the deficiency assessments of which the petitioners complain. The principal question is whether the tax court's finding that the withdrawals were dividend distributions rather than loans is supportable. The facts are not in dispute; only the inferences to be drawn from them.
Except in a few early years and in 1939 as already noted, withdrawals by each taxpayer have exceeded credits to him so that the debit balance of each has mounted steadily. The total of their debits and credits from 1903 to the end of 1940 ...