Gioe v. Commissioner

*386 This proceeding results from respondent's determination of deficiencies in the amounts of $22,891.97 for the year 1920, and $6,945.87 for the year 1921 in petitioner's income and surtaxes.

Petitioner alleges that respondent erred*2869 in including in his taxable income for the years 1920 and 1921, certain dividends received by him in those years from Brady & Gioe, a corporation. Petitioner alleges that such dividends were paid out of prior year's earnings which were included in his individual tax returns as his income for the years in which earned by the corporation and so reported by petitioner, due to his belief that Brady & Gioe was a personal service corporation.

*387 FINDINGS OF FACT.

Petitioner is a resident of New York, N.Y., and has been engaged in the stevedoring business in that city during the past 47 years.

Prior to 1912 petitioner and J. J. Brady conducted a stevedoring business as partners and in 1921 they incorporated this business under the name of Brady & Gioe, Inc., each acquiring one-half of the capital stock. The two stockholders continued to conduct the business in the same manner as they had prior to incorporation.

Upon advice of counsel Brady & Gioe, Inc., filed tax returns for 1918 to 1921, inclusive, on the basis of its being a personal service corporation with no corporate tax liability, and each of the two stockholders included in their individual returns one-half*2870 of the corporation's net earnings for each taxable year.

The total net income reported by petitioner in his individual tax returns, made upon the cash receipts and disbursements basis, for the years 1918 to 1921, inclusive; one-half of the corporate net earnings included therein; the dividends declared and received but not reported as income by petitioner; and the taxes assessed upon petitioner's income as reported by him, were as follows.

In the corporation accounts the $68,500 of dividends paid in 1918 and $23,461.24 of the dividends declared and paid in 1919 were charged against corporate earnings for the years 1912 to December 31, 1917, inclusive. The balance of the dividends declared and paid in 1919 and all of the dividends declared and paid in 1920 and 1921 were charged against corporate*2871 earnings for the years 1918 to 1920, inclusive.

In the latter part of 1925 the respondent determined that Brady & Gioe, Inc., was not a personal service corporation within the meaning of the applicable revenue acts during the years 1918 to 1921, inclusive, and he determined and assessed against the corporation taxes in the amount of $181,920.21 for those years, which tax liability was settled.

J. J. Brady, owner of one-half of the capital stock of Brady & Gioe, Inc., made and filed his personal returns in the same manner *388 as petitioner, including one-half of the corporation's net earnings as his individual income.

The petitioner has on file with the respondent a claim for refund of any income tax overpaid by him for the year 1919. There is no evidence that any other claim for refund has been filed by petitioner, but up to the date of the hearing on this proceeding petitioner has received no refund or credit for the overpayment, if any, of income taxes for years prior to 1920 and 1921, the two years here in controversy.

For the year 1920 respondent excluded from petitioner's income the reported one-half of the corporate earnings for that year and included the*2872 dividends received by petitioner in that year. For the year 1921 there were no corporate earnings and respondent merely included in petitioner's income for that year the dividends received by him in 1921. The said changes, together with others not here involved, resulted in the deficiencies complained of.

OPINION.

TRUSSELL: Petitioner's contention is that the dividends in question were paid out of the corporation's earnings for the years 1918, 1919, and 1920; that he has included in his individual returns one-half of the corporate net earnings for each of those years; that he has paid on that alleged income a tax which respondent still retains; and that he should not now be compelled to again pay a tax on the same income for the years 1920 and 1921.

For the purposes of a decision of this case we must assume that the corporation of Brady & Gioe, Inc., has been properly and legally held to be not entitled to a personal service classification during any of the years 1918 to 1921, inclusive. It appears that the interested parties, including petitioner, have accepted and do not now question that determination. Under the theory that Brady & Gioe, Inc., was a personal service*2873 corporation petitioner reported his proportionate share of the corporate earnings for the several years and paid both normal and surtax upon the amount so reported. Under the readjustment these amounts must be held to have been erroneously included in petitioner's returns but in place thereof the petitioner should have reported, in each of such years, the amounts of dividends declared and actually received by him. Thus, in the year 1918, petitioner, instead of reporting $78,559.17 as corporate earnings subject to both normal and surtax, should have reported $68,500 dividends declared and received, subject to surtax only. Likewise, in 1919, instead of reporting $85,614.97 as corporate earnings subject to both normal and surtax he should have reported dividends declared and received in the amount of $92,994.96, subject to surtax only. Likewise, in 1920, instead of reporting $38,413.93 as corporate *389 earnings subject to both normal and surtax he should have reported $86,705.45 as dividends declared and received and subject to surtax only. In 1921, when the corporation sustained an operating loss, he should have reported $23,000 as dividends declared and received and subject*2874 to surtax only. These adjustments in petitioner's income tax and surtax liability for the years 1920 and 1921 are now being made as a result of respondent's investigation and deficiency notice. And, so far as it appears from the record, the respondent's adjustments are in accord with the accepted interpretation of the taxing statutes and no error has been found in respondent's accounting.

In the testimony and argument of counsel for petitioner there appears an apparent sense of injury based upon the theory that the respondent is now calling upon petitioner to pay tax upon amounts of income upon which he has already paid a tax. We are of the opinion, however, that this apparent sense of injury will disappear when petitioner realizes that during the four years about which testimony has been given he reported corporate earnings in the amount of $202,588.07, while during those same years he received dividends in the amount of $271,150.41. If the total of dividends received had not exceeded the total of petitioner's share of corporate earnings the readjustment of tax liability would have shown overpayments of taxes in some of these years. *2875 It appears probable that the petitioner has overlooked the fact that in 1918 and 1919 he drew out of the company in dividends $91,961.24, earned by the corporation in years prior to 1918 but taxable to the stockholders as dividends declared and received in the years 1918 and 1919, and subject to the surtax rates of those years. Revenue Act of 1918, section 201(a) and (b). .

Judgment will be entered for the respondent.