Before MOORE, FRIENDLY and SMITH, Circuit Judges.
LEONARD P. MOORE, Circuit Judge.
The taxpayer, R. Gsell & Co. Inc., petitions to review an order of the Tax Court of the United States, assessing a penalty under Section 102(a) (failure to declare dividends)*fn1 of the Internal Revenue Code of 1939, as amended, 26 U.S.C.A. § 102(a) against the taxpayer for its fiscal years 1947 through 1950 and 1952. The findings and opinion below are reported in 34 T.C. 41. The returns for the tax years involved having been filed for all years except 1952 at the office of the Collector of Internal Revenue for the Third District, New York, and the 1952 return having been filed at the Upper Manhattan District, New York, the petition for review is properly before this court. (26 U.S.C.A. § 7482.)
Taxpayer is a New York corporation, organized in 1922, and is engaged in the business of purchasing, assembling and selling Swiss watches and movements. During the tax years in question, Roland Gsell, President of taxpayer, together with his wife, owned substantially all of the stock of the corporation.
Taxpayer's business during the relevant years was divided into two departments - a merchandising department and a commission department with an interrelationship between the two. The merchandising inventory enabled taxpayer to supply commission customers with watches in the event they underestimated their needs; the experience gained in merchandising watches made it possible for taxpayer to keep abreast of the market trends and to give commission customers style advice. Furthermore, the merchandising business if on a profitable basis would enable the taxpayer to survive if any or all of its commission customers decided to use another broker or to import directly from the Swiss watch manufacturers.*fn2 At one time, taxpayer's chief business was the merchandising of watches. However, during the years in issue the merchandising of expensive watches had become unprofitable whereas taxpayer flourished as a broker for commission customers.
In the merchandising department, orders for watch movements were placed with Swiss factories. These factories would not contract for a fixed delivery date. In accordance with practices of the Swiss watch cartel, the Swiss factories would cable a buyer such as taxpayer that its watch movements were being shipped.Taxpayer then had to pay for the watches within 8 days of the day of shipment in order to gain the 5 per cent discount necessary to the successful operation of taxpayer's competitive business. Under the practices of the cartel, once a buyer had placed an order with a factory it was not cancelable; indeed, early in the manufacturing process the watch plates were stamped with taxpayer's United States Customs and brand marks.
During the years 1947 and 1948, deliveries from the Swiss factories took from 11 to 24 months after an order was placed. During later years, as a depression adversely affected the watch business, the time span decreased to as low as 8 months, but exact prediction of the delivery period was impossible and the factories might at their discretion have filled all of taxpayer's pending orders and then demanded immediate payment.
Because of the time gap in waiting for orders to be filled, commitments for movements were always high in relation to present sales. Taxpayer's open commitments for watch movements, duties, cases, boxes and attachments amounted to $397,643 as of June 30, 1947, and as of December 31st of the following years they amounted to: 1948, $457,537; 1949, $239,085; 1950, $148,548; 1951, $115,815; 1952, $244,717. Although outstanding orders were never shipped all at one time, they might have been at the discretion of the Swiss factories.
When the movements arrived in this country, taxpayer was required to pay the United States Customs duty thereon in cash. The amount of the duty during the tax years at issue varied from 60 to 80 per cent of the value of the movements.
Petitioner's business had experienced its ups and downs. It was moderately successful from 1922 to 1929, but it lost money during eight of the ten years from 1930 through 1939, and it did not erase its capital deficit incurred during the depression years until World War II created a seller's market. As a result of more than twenty years of operation, the taxpayer closed its 1944 fiscal year with a capital surplus of only $7,676.
The first tax year at issue (1947) was taxpayer's most successful year in its history; both the commission and the merchandising departments were profitable. However, during all other years in issue, the commission department "carried" the merchandising department which lost money. Nevertheless, taxpayer had achieved a capital surplus of slightly more than $116,000 by the end of 1947 and this amount increased to $168,157 by the end of 1952.
During the depression years, taxpayer had made repeated efforts to finance its buying through bank loans. However, it experienced little success in obtaining loans. When successful, the loan was for a very limited time and was often called upon short notice. Because of these difficulties, taxpayer decided to forego the use of bank credit in its business and determined to use its own resources to finance operations. However, it did borrow some funds from the Mt. Vernon Watch Company, a company controlled by Roland Gsell, during 1945, 1946 and 1947.
During the late 1940's and the early 1950's, the watch business experienced a sharp recession. Sales dropped and were made on credit. During this recession, taxpayer's merchandising business lost money. Because taxpayer reduced its inventory, its cash position accordingly increased as it weathered the recession. During this period, taxpayer also looked for a new line of watches to strengthen its merchandising business. In 1952 taxpayer arranged to sell pinlever watches, which were less expensive than the jewel-lever watches which it had previously sold. The first sales of the pin-lever type watch took place in 1953 and sales thereof increased steadily through 1956; correspondingly, taxpayer's cash on hand and outside investments decreased as it increased its inventory. Taxpayer paid a dividend of $5,000 in 1951 and one of $7,000 in 1952.
Taxpayer has made only one loan to a stockholder since its incorporation. In 1945 taxpayer loaned Mr. Gsell $9,000. The money was repaid a ...