Before HAND, MEDINA and WATERMAN, Circuit Judges.
This case presents a recurrent problem in the income tax field, namely whether advances by a taxpayer to his corporation will be treated as loans for tax purposes.
The facts are fully stated in the findings and opinion of the Tax Court, 15 T.C.M. 688, but the following abbreviated summary will serve as background to the ensuing discussion. The critical question in the case is: what is the principle to be applied by the finder of the facts in determining whether a given advance of money by a shareholder to a closely held corporation is a loan within the meaning of the Internal Revenue Code? As we cannot tell from the record before us what was the principle, or what were the standards, applied by the Tax Court, we are remanding the case for further and more explicit findings.
The taxpayers, husband and wife, filed a joint return for the taxable year 1948, claiming bad debt deductions in the amount of $80,404.25, for advances made by them in the years 1946, 1947 and 1948 to Gilbor, Inc. The Tax Court held the advances made by the husband to be contributions to capital, and hence, as to him, did not reach the subsidiary question of whether such advances were deductible only as nonbusiness bad debts within the meaning of Section 23(k) (4), of the applicable Internal Revenue Code of 1939, 26 U.S.C.A. § 23(k) (4). As to the wife the Tax Court found her advances to be debts but only deductible as nonbusiness bad debts, but this issue and some others decided by the Tax Court in this case are not now in dispute between the parties. Accordingly, the Tax Court affirmed the deficiency assessed by theCommissioner for the year 1948 in the amount of $48,518.65.
Gilbor, Inc. was organized as a New York corporation on June 11, 1946, with an authorized capital stock of $120,000, of which 1,000 shares were preferred stock having a par value of $100, and 20,000 shares were common stock with a par value of $1. Gilbert, the husband petitioner, and one Borden became the principal stockholders and there was an understanding between them that the financing of Gilbor, Inc. "would be generally on about a 50-50 basis." On June 27, 1946 Borden acquired 4000 shares of common stock in exchange for $40,000, of which $4000 was credited to capital stock and $36,000 to capital surplus. On July 1, 1946 Gilbert acquired 4000 shares of common stock in exchange for the assets of a business owned by him, which were valued by the directors of Gilbor, Inc. at $40,000, including $2107.85 cash and good will of $35,000. As in the case of Borden, $4000 was credited to capital stock and $36,000 to capital surplus. One share of common stock was issued for $10 cash to one Richards, and $1 was credited to capital stock and $9 to capital surplus. Both Gilbert and Borden became officers and directors and Gilbert, as president, "actively participated in the business" of Gilbor, Inc.
Most of the available cash was promptly expended in the purchase of the stock of other enterprises which Gilbor, Inc. took over, and Borden loaned the corporation $15,000. From time to time, during the years 1946, 1947 and 1948, until the corporation was liquidated at the end of the taxable year 1948, further advances were made by Gilbert and his wife on the one hand, and Borden on the other. The loans by Gilbert, for which demand promissory notes were issued, and the rates of interest payable thereon were as follows:
Oct.28,1947 $10,000 Demand 31/2% payable semiannually
Dec.9,1947 1,000 Demand 31/2% payable semiannually
Feb.20,1948 6,000 Demand 31/2% payable semiannually
May4,1948 4,800 Demand 31/2% payable semiannually
Aug.25,1948 3,000 Demand 31/2% payable semiannually
Sept.1,1948 1,000 Demand 31/2% payable semiannually
Sept.27,1948 1,000 Demand 31/2%
Oct.28,1948 600 Demand 31/2%
Dec.30,1948 4,000 Demand 31/2%
The advances by Mrs. Gilbert were:
Sept.23,1946 $1,150 Demand -
Nov.1 ,1946 12,000 Demand 5%
Dec.12,1946 10,000 Demand 5% payable semiannually
Jan.6,1948 2,500 Demand 31/2% payable semiannually
Jan.8,1948 5,000 Demand 31/2% payable semiannually
Mar.10,1948 1,000 Demand 31/2% payable ...