Petitions by William H. Jackson, by Edward W. Crellin, and by Amy H. Crellin to review a decision of the Board of Tax Appeals, opposed by the Commissioner of Internal Revenue.
Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
These cases come up upon petitions for review of the decision of the Board of Tax Appeals entered in proceedings for the redetermination of deficiencies in income taxes assessed by the Commissioner of Internal Revenue for the year 1917. The cases of William H. Jackson and Edward W. Crellin were consolidated for hearing, and decision by the Board, and it was stipulated that the decisions in those cases should control the decision in the case of Amy H. Crellin.
The question for decision is whether, under the facts found by the Board of Tax Appeals, dividends declared by the Pittsburgh-Des Moines Company in January, 1917, and in August, 1917, and paid by checks to the petitioners and indorsed back to the company, and stock issued therefor, were taxable as cash dividends under the provisions of the Revenue Act of 1917, § 31(a) of section 1211 of that act (40 Stat. 337), or were stock dividends and not taxable in accordance with the decisions in Peabody v. Eisner, 247 U.S. 347, 38 S. Ct. 546, 62 L. Ed. 1152, and Eisner v. Macomber, 252 U.S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A.L.R. 1570.
The Board of Tax Appeals found the following facts:
"The petitioners are individuals residing at Pittsburgh, Pennsylvania. The petitioner Amy H. Crellin is the wife of the petitioner Edward W. Crellin.
Prior to March, 1900, the petitioners Edward W. Crellin and William H. Jackson formed a partnership with one Berkley N. Moss, each owning a one-third interest therein, to carry on the business of manufacturing structural steel for bridges, water tanks, and other purposes. In March, 1900, they organized the Des Moines Bridge and Iron Works, hereinafter called the Des Moines Company, under the laws of Iowa, which succeeded to the assets and business of the partnership. Each of the three former partners owned an equal number of shares of the capital stock of this corporation, and there was an oral agreement that their interests would remain equal. In 1911 Moss sold his stock in the corporation to Crellin and Jackson, and from that date Crellin and Jackson, and their families, owned in equal amounts the greater part of the shares of the corporation. There was an oral understanding between Jackson and Crellin that they would continue to own the capital stock of the corporation in equal shares, it being understood that the shares held by their respective families would be considered their shares for the purposes of the agreement.
In the year 1907 the Des Moines Company established a branch office at Pittsburgh, Pennsylvania. Within a few years this branch became more important than the main office, and in the year 1916 it was incorporated as the Pittsburgh-Des Moines Company under the laws of Pennsylvania. Crellin and Jackson owned practically all of the Pittsburgh Company's stock in equal proportions, and they had an oral agreement that they would keep their interests and those of their families equal. The original capital of the Pittsburgh Company was paid in as follows: The Des Moines Company issued dividend checks to Crellin and Jackson; they endorsed the checks back to the company, and it in turn transferred the amount of the checks to the Pittsburgh Company, which issued its stock therefor.
The Pittsburgh Company was created in order to escape the Pennsylvania tax on foreign corporations doing business in that State. No change was made in the manner of conducting the business; separate books were kept, but the Des Moines Company and the Pittsburgh Company were thought of, and referred to by the officers and employees thereof, as the Des Moines branch and the Pittsburgh branch.The two corporations worked as a unit. Tools, material, workmen and orders were freely shifted from Des Moines to Pittsburgh, and vice versa, as the needs of the moment required. The salaries paid to Crellin and Jackson were made up by the corporations in practically equal amounts.
Beginning in 1902 certain of the more valued employees of the Des Moines Company were given the opportunity to purchase stock in that corporation at par, an beginning some time in 1917 the employees of the Pittsburgh Company were given the opportunity to purchase stock of that corporation at par. The shares so issued constituted a special class of common stock, known as 'Employees Stock', which differed from the common stock issued to Crellin and Jackson, and their families, in that the employee could not sell or transfer his stock to any other person, and upon leaving the employ of the company he was required to return his stock to the company, which bound itself to take the stock at par. Employees owning stock could cash their dividend checks or turn them back to the company for more stock, as they wished. If the employees elected to turn back their dividend checks and take stock, they were given the privilege of taking stock in either of the companies.
From March, 1900, to the end of the year 1917 only small amounts were drawn by Crellin and Jackson as salary, and all the profits of the two corporations were turned back into the business, except as hereinafter noted.
In the years prior to 1908 the surplus of the Des Moines Company was capitalized at the end of each year by transferring it by means of entries debiting the shop accounts, or gain and loss account, and crediting the capital stock account. Beginning in 1908 checks were drawn when the directors authorized a dividend, and these checks were endorsed and returned to the company by Crellin and Jackson and stock issued to them for the amount of the checks. There was always an understanding between Crellin and Jackson that this would be done. Moss was also a party to this arrangement until his retirement in 1911. Except in the years 1911, 1913, and 1914, the total amounts of the dividend checks largely exceeded the amount of the cash on hand, the surplus of the corporation being represented principally by materials and supplies on hand, and buildings and equipment.
During the year 1917 the officers of the Des Moines Company and the Pittsburgh Company were E. W. Crellin, president; W. H. Jackson, secretary-treasurer, and G. A. Smith, vice-president.
On January 22, 1917, the directors of the Des Moines Company declared a 37 percent. dividend by the following resolution:
The Secretary and Treasurer made the financial report of the Corporation as of December 31, 1916, showing surplus of $206,442.33, and reported that after paying the dividends on the Preferred Stock due January 15, 1917, and providing for the Government Income Taxes, the general taxes and bonuses on Capital Stock, that a dividend of 37 per cent. might be paid on the Common Capital Stock moved that such dividend be paid upon such stock for the pro-rata portion of the year 1916. Seconded by G. A. Smith, the motion carried and a dividend of 37 per cent. on the Common Stock was ordered paid in accordance with the schedule appearing on the following page. * * *
A check for the amount of the dividend due each stockholder, pursuant to the foregoing resolution, was drawn by the company and actually delivered to the stockholder. The Crellin family received dividend checks in the total amount of $73,260, and the Jackson family received checks in the total amount of $73,260, and the stockholders received checks in the total amount of $50,678.16. All of the checks received by the Jackson family, and all of the checks received by the Crellin family, excepting two checks in the amount of $629, were endorsed back to the Des Moines Company.
When these dividend checks were endorsed back to the Des Moines Company the amounts thereof were credited to the Pittsburgh Company by the following entry on the books of the Des Moines Company:
January 26, 1917. Debit to Cash.
Cr. Pgh. D. M. Co. (Per a Amy H. Crellin) ...