25 T.C. 387">*387 The respondent determined deficiencies in the Federal income taxes of the petitioners as follows:

By amended answer, respondent asserted that the taxable income of the petitioner William C. Baird should have been reduced in the amount of $ 1,000 in the taxable year 1948 and increased in a like 25 T.C. 387">*388 amount in the taxable year 1949; and conversely that the taxable income of petitioners Harold J. Baird and Louise R. Baird should have been increased in the amount of $ 1,000 in the taxable year 1948 and reduced1955 U.S. Tax Ct. LEXIS 35">*37 in a like amount in the taxable year 1949.

In conformity with section 272 (e), Internal Revenue Code of 1939, at the hearing respondent asserted increased deficiencies in income taxes resulting therefrom for the taxable years as follows:

The issues presented for our consideration are (1) whether certain individual and joint withdrawals by the Baird brothers (from Baird and Company, a corporation in which they were stockholders and officers), during each of the taxable years 1947 to 1951, inclusive, constituted informal dividends or loans, and (2) whether the statute of limitations bars assessment and collection of the deficiencies involved herein for the years 1947 and 1948. The last issue will depend on the resolution of the first issue since respondent is relying in this regard on section 275 (c) of the Internal Revenue Code of 1939. Certain minor adjustments have not been challenged by petitioners, and will be reflected in the Rule 50 computation.

FINDINGS OF FACT.

The facts are partly stipulated and, to the extent so stipulated, 1955 U.S. Tax Ct. LEXIS 35">*38 are incorporated herein by reference.

Petitioner William C. Baird, an individual residing in Nashville, Tennessee, filed his separate Federal tax returns for the taxable years 1947 to 1951, inclusive, and petitioners Harold J. Baird and Louise R. Baird, husband and wife, also residing in Nashville, Tennessee, filed joint individual income tax returns for the taxable years 1948 to 1951, inclusive, with the then collector of internal revenue for the district of Tennessee.

Prior to June 20, 1928, petitioners William C. Baird and Harold J. Baird, who are brothers, engaged as partners in the operation of a merchandise brokerage business known as Baird Bros. & Moore, with offices in Nashville, Tennessee. On June 20, 1928, the State of Tennessee granted a corporate charter to Baird Brokerage Company, Inc., Nashville, Tennessee, with an authorized capital of 200 shares of no-par-value stock at a minimum capitalized value of $ 1,000, authorizing said corporation to engage in the merchandise brokerage business. On 25 T.C. 387">*389 June 21, 1928, petitioners transferred all the assets of their partnership, including personal property, office equipment, accounts receivable, contracts, and goodwill1955 U.S. Tax Ct. LEXIS 35">*39 to Baird Brokerage Company, Inc., for a consideration of $ 1,000. The same day, the entire authorized capital stock was issued at a declared value of $ 5 per share or an aggregate declared value of $ 1,000 to petitioners and their respective wives. From that time to December 31, 1951, inclusive, petitioners and their respective wives were the sole stockholders of record. Each of the brothers held 1 share of stock, and the wives, Dorothy G. Baird and Louise R. Baird, each held 99 shares of stock in the corporation. No additional capital has been contributed to the corporation from June 21, 1928, to December 31, 1951.

On August 18, 1947, the name of Baird Brokerage Company, Inc., was changed to Baird & Company by amendment to its corporate charter. Baird & Company engaged principally in the flour brokerage business, representing mills throughout the wheat-producing States on a commission basis, and at times would act as principal rather than agent in the flour trade.

The Bairds and their respective wives have been the directors of Baird & Company from January 17, 1931, to December 31, 1951, inclusive. From June 21, 1928, until March 10, 1944, petitioner Harold J. Baird was president, 1955 U.S. Tax Ct. LEXIS 35">*40 and William C. Baird was secretary-treasurer of the corporation; and from March 10, 1944, through December 31, 1951, the latter was president and the former was secretary-treasurer. Their wives alternately held the position of vice president of Baird & Company from June 21, 1928, through December 31, 1951. Except for acting as directors, for which they received no compensation, the wives rendered no services to said corporation from the inception of the corporation through December 31, 1951. Each of the petitioners William C. Baird and Harold J. Baird devoted virtually all of his time and services to the management of the corporate affairs of Baird & Company from June 21, 1928, through December 31, 1951. During the years involved herein Harold J. Baird served as commissioner of public works for the city of Nashville, Tennessee, and William C. Baird assumed the presidency of Baird & Company.

Since the year 1931, the surplus account on the books of Baird & Company has reflected no dividend payment. Throughout the corporate existence of Baird & Company, including the taxable years here involved, petitioners have maintained individual open accounts to which withdrawals were debited, 1955 U.S. Tax Ct. LEXIS 35">*41 and at the end of each year annual salaries were credited. In addition thereto, and during the taxable 25 T.C. 387">*390 years 1948 and 1949, petitioners made joint withdrawals of corporate funds, debits and credits being made to an account in the cash journal entitled "Other Accounts" and transferred to an account entitled "Notes Receivable" in the general ledger of Baird & Company. Both the individual and joint withdrawals of the Baird brothers were made by them at will for their own benefit and with the knowledge and acquiescence of their respective wives. Except for their joint withdrawals, petitioners' withdrawals have not been in proportion to their corporate stockholdings, but the total withdrawals of each were approximately the same as of December 31, 1951. On December 31, 1946, the individual withdrawals of the brothers show debit balances of $ 12,702.24 to "W. C. Baird" and $ 21,503.90 to "H. J. Baird," and on December 31, 1951, these accounts show debit balances of $ 49,322.93 and $ 48,768.95, respectively.

In December 1948, the brothers withdrew $ 2,000, and in March 1949, $ 13,463 from the corporation for the joint purchase of a parcel of real estate on Peabody Street, Nashville, 1955 U.S. Tax Ct. LEXIS 35">*42 Tennessee, the full purchase price of $ 15,463.49 having been charged to the account of William C. Baird. In December 1951, one-half of said amount, or $ 7,731.75, was transferred to the account of Harold J. Baird, to reflect correctly the amount of said purchase attributable to each of the brothers. In making the adjustment, they did not correct the debit account of William C. Baird to reflect a decrease or credit of $ 1,000 in the taxable year 1948 (because the total sum of $ 2,000 had been debited to his account for the earnest money) and a corresponding $ 1,000 increase to his account in the taxable year 1949. Similarly, they did not adjust the individual account of Harold J. Baird to show a $ 1,000 increase in the taxable year 1948 and a corresponding decrease in the taxable year 1949. On August 24, 1951, the brothers received the sum of $ 29,000 from the sale of the real estate and the proceeds were deposited to their joint personal account. Each of them realized a net profit from this real estate transaction in the amount of $ 5,785.08. Petitioners have not at any time reimbursed Baird & Company for the cost of said real estate nor have they at any time applied any part1955 U.S. Tax Ct. LEXIS 35">*43 of the proceeds derived from the sale thereof as a credit to their accounts on the corporate books.

Prior to and during each of the taxable years involved herein, the Baird brothers made withdrawals in excess of the credits to their accounts so that the debit balance of each has mounted steadily. The total of their debits, credits, and net debit balances for the taxable years 1946 to 1951, inclusive, reflecting certain adjustments on the individual accounts of the brothers are indicated as follows: 25 T.C. 387">*391

The totals of the debits, credits, and net debit balances for the taxable years 1948 to 1951, inclusive, reflecting certain adjustments, shown on the corporate books as joint accounts of the brothers are as follows:

The excess of withdrawals over credits by each brother during the taxable years 1947 to 1951, inclusive, which was not reported as income on their income tax returns are indicated as follows:

25 T.C. 387">*392 The foregoing amounts were carried on the corporate books of Baird & Company as "Accounts Receivable" and "Notes Receivable," and are reflected in its statements of surplus. Petitioners did not, at any time prior to the beginning of the audit of their returns by the revenue agent, pay or agree to pay interest on their individual or joint withdrawal of company funds. No promissory1955 U.S. Tax Ct. LEXIS 35">*46 notes or other evidences of indebtedness were executed prior to the year 1953 by the brothers to Baird & Company for the joint cash withdrawals in the amount of $ 50,000 from the corporate funds (made during the period August 27, 1948 and April 16, 1949) and carried on the corporate books as joint notes-receivable account. The corporate books disclose that the brothers repaid these cash withdrawals to the extent of $ 30,000 between September 9, 1948, and January 31, 1949. After an uncontested adjustment was made (in the amount of $ 2,460) there remained a debit balance of $ 17,540 in their joint notes-receivable account on April 16, 1949. On February 2, 1953, after the revenue agent had examined petitioners' returns, and by direction of their attorney, a note was executed by the brothers to Baird & Company for the balance of $ 17,540. At the hearing each of the brothers also executed notes for the first time for the debit balances, as of December 31, 1951, shown on the books of the corporation in their individual open accounts. The brothers carry life insurance policies in the face amount of $ 20,000 payable on death to Baird & Company.

The corporate books disclose under an account1955 U.S. Tax Ct. LEXIS 35">*47 entitled "Notes Payable" that on September 10, 1946, the brothers loaned the company $ 5,000 which was repaid on November 30, 1946; and that on February 27, 1947, they loaned the company $ 10,000 which was repaid on April 1, 1947.

The books of Baird & Company disclose a net operating profit or loss (before and after Federal income taxes) and earned surplus as follows:

Other than current accrued Federal income, social security, and withholding taxes, the books and financial statements of Baird & Company disclose no liabilities for the taxable years 1947 to 1951, inclusive.

25 T.C. 387">*393 Petitioners filed their returns for the taxable year 1947 on April 15, 1948, with the collector of internal revenue1955 U.S. Tax Ct. LEXIS 35">*48 for the district of Tennessee, having received an extension of time to that date. For the taxable year 1948 petitioners filed their returns on March 15, 1949, with the collector of internal revenue for the district of Tennessee. In their tax returns for the taxable years 1947 and 1948, petitioners reported gross income as follows:

The statutory notice of deficiency was mailed to each of the petitioners on January 28, 1953.

The brothers' individual and joint withdrawals in excess of credits thereto from the Baird & Company corporation constituted, in reality, dividend distributions rather than loans to each of them during the taxable years involved herein.

OPINION.

The principal issue presented for decision is whether the withdrawals by petitioners William C. Baird and Harold J. Baird from their family-owned corporation, of which they were officers and stockholders in the years prior to 1951, constituted a disguised distribution of dividends taxable to them as income for the years involved herein, as determined by respondent, or were bona fide loans, 1955 U.S. Tax Ct. LEXIS 35">*49 as contended by petitioners.

We are of the opinion, upon consideration of the entire record, that the withdrawals in question by the Baird brothers, respectively, in excess of salary credits were distributions out of earnings and profits of the corporation made to them as shareholders within the meaning of section 115 (a) of the Internal Revenue Code of 1939, and that such distributions were dividends rather than loans.

The primary issue is one of fact to be determined upon consideration of the particular circumstances in each case. It is necessary, therefore, to examine all of the attendant facts to discern the true nature of the transactions involved between the withdrawers and Baird & Company. Since the corporation was wholly owned by petitioners and their respective wives, the family control invites careful scrutiny. Ben R. Meyer, 45 B. T. A. 228 (1941).

It is contended that since each of the Baird brothers owned only 1 share of stock in Baird & Company, they were not in a position to control the corporation's affairs or distribute its earnings. The record is clear, however, that the brothers, although minority stockholders, were in fact in control1955 U.S. Tax Ct. LEXIS 35">*50 of the corporation, and that such control was 25 T.C. 387">*394 not in any way affected for practical purposes by the fact that each of their wives was a director and owned 99 shares of the stock of the corporation. As a result of the family relationship, petitioner husbands, throughout the corporate existence, have dealt with corporate affairs with a free hand, and have withdrawn the company's earnings and profits at their own discretion, for their own personal use, without objection or restraint by the majority stockholders, who received no part of the withdrawals.

The intention of the parties in interest is controlling. Carl L. White, 17 T.C. 1563, 1568 (1952). The complete dominion of the corporation's affairs by the Baird brothers is a factor reflecting upon that intent. It is our view that the conduct of the parties clearly supports the inference that the Baird brothers intended to siphon off corporate earnings for their own personal use without any plan of reimbursement. Prior to as well as during each of the taxable years 1947 to 1951, petitioners made substantial withdrawals in excess of the credits to their individual accounts so that the total1955 U.S. Tax Ct. LEXIS 35">*51 net debit balances of each has steadily increased from year to year. The fact that the individual debit balances were allowed to mount steadily each year without any substantial repayment thereon for more than 20 years until they reached a total net withdrawal balance of approximately $ 98,000 is inconsistent with an intent to borrow and repay. C. W. Murchison, 32 B. T. A. 32, 35 (1935). The tax saving which would result, if petitioners' techniques were approved, is obvious, and the motive is by the same token apparent. See Ben R. Meyer, supra.

We think it is clear that the unpaid joint withdrawals in the taxable year 1949 in the amount of $ 17,540 shown in the corporate books as an account labeled "Notes Receivable" (the sum of $ 8,770 debited to each petitioner in the taxable year 1949), occupy the same position and character as the individual open accounts, and are, therefore, also distributions of earnings. Separate treatment of the joint accounts on the books is not sufficient to support a contrary view in the light of all of the surrounding circumstances, and the $ 17,540 debit from the cash journal to "Notes 1955 U.S. Tax Ct. LEXIS 35">*52 Receivable" account was simply a shift from one account to another. There is nothing here to indicate a plan or intention to repay, and the conduct of the parties over a period of years supports a contrary view.

Nor do we regard the giving of demand notes dated February 2, 1953, to Baird & Company (in face amounts equal to the individual balances in their account as of December 31, 1951, and the debit balance in their joint account as of April 16, 1949) of any significance as indicating that petitioners' withdrawals constituted debts, since this was done only after the revenue agent took the position that the "loans" were in fact disguised dividends. To us, it is incredible that 25 T.C. 387">*395 the Baird brothers would have waited more than 6 years to execute a note for the $ 17,540 if they had intended to do so in the first place. It seems obvious that the execution of the notes was a mere afterthought directed to an effort to give the withdrawals a character which they did not have during the years when they were made. While it is true that the absence of the notes and the failure to charge or pay interest are not alone conclusive on the basic issue, it is equally true that the treatment1955 U.S. Tax Ct. LEXIS 35">*53 of petitioners' withdrawals on the corporate books as "Notes Receivable" is not controlling, since it is well settled that book entries may not be used to conceal realities as a means of relieving the taxpayer from liability for income taxes. Ben R. Meyer, supra, and cases cited therein. We are aware of the fact that petitioners made withdrawals on two different occasions in 1949 and repaid the corporation within a month. We do not think, however, that these two payments are sufficient to counterbalance the other strong indicia of an intentional distribution of earnings with respect to the withdrawals in dispute.

As further indication that the withdrawals were intended to be permanent in character is the withdrawal by the brothers of corporate funds in 1948 and 1949 to finance their entire joint purchase of a parcel of real estate. Although they sold the property in 1951, for a net profit of $ 5,785.08 each, at no time have they applied any part of the proceeds derived therefrom to the payment of their withdrawals.

Our view is not altered by the insurance policy in the lesser sum of $ 20,000 which the brothers took out in favor of Baird & Company. 1955 U.S. Tax Ct. LEXIS 35">*54 There is no evidence that the policy was intended as security for the repayment of the withdrawals. By contrast, in Al Goodman, Inc., 23 T.C. 288, 301 (1954), cited by petitioners, the withdrawal which we there characterized as a loan, was secured by collateral worth more than twice the amount of the withdrawal, and at all times the taxpayer had personal assets of considerable value in addition to the collateral which could have been resorted to in order to repay the loan. See M. Jackson Crispin, 32 B. T. A. 151, 155 (1935).

Petitioners argue that the withdrawals did not constitute a dividend distribution since they received the entire amount in controversy for their own personal use, whereas they each owned only 1 share out of the total 200 shares issued by Baird & Company, and no distribution was made to the other shareholders. The law is well settled that the disbursement of corporate earnings serving the ends of some shareholders may constitute a dividend to such stockholders notwithstanding that the formalities of a dividend declaration are not observed; that it is not in proportion to stockholdings; or that some1955 U.S. Tax Ct. LEXIS 35">*55 of the stockholders do not participate in its benefits; E. T. Schuler, 29 B. T. A. 415 (1933); Paramount-Richards Theatre v. Commissioner, 153 F.2d 602, 60425 T.C. 387">*396 (C. A. 5, 1946). See also 1 Mertens, Law of Federal Income Taxation sec. 9.11 (1942), p. 440, and 1954 Cumulative Pocket Supplement sec. 9.11 and 9.12. This principle is especially applicable where, as here, the record does not disclose that the wives, who were the nonparticipating stockholders, complained of this inequality, and must, under the circumstances, be deemed to have ratified the distribution. Lincoln National Bank v. Burnet, 63 F.2d 131 (C. A., D. C., 1933), affirming Lincoln National Bank, Executor, 23 B. T. A. 1304 (1931). It is significant, also, that as of December 31, 1951, the debit balances on the corporate books in the petitioners' individual accounts were $ 49,322.93 to William C. Baird and $ 48,768.95 to Harold J. Baird, a difference of $ 553.98 over a period of more than 20 years of withdrawals. Moreover, the joint account debit balance as of the same date in1955 U.S. Tax Ct. LEXIS 35">*56 an account labeled "Notes Receivable" was equal.

It is also significant that there was no apparent ceiling for such withdrawals, nor did the brothers have ready resources available with which to reimburse the company. Moreover, there was no arrangement to repay the ever-increasing balances on call or at a definite time in the future. While of lesser importance, we think it appropriate to refer to the testimony of petitioner Louise R. Baird, a corporate director, to the effect that she would not have required the corporation to sue her husband if he failed to pay the "loans," thus lending further corroboration to our finding that petitioners' wives did not contemplate acting independently or contrary to the wishes of their husbands by enforcement of the company's rights as a bona fide creditor.

Since the year 1931 the surplus account in the corporate books has never reflected a dividend payment. Other than current Federal taxes, the corporate statements reveal no liabilities for the taxable years 1944 to 1951. Instead, the records disclose a large corporate profit for 1947 and the earned surplus at the end of the years involved herein, without reflecting petitioners' withdrawals1955 U.S. Tax Ct. LEXIS 35">*57 therefrom, were substantial. It is clear therefore that adequate earnings and profits were available from which an ordinary dividend distribution could have been made within the meaning of 115 (a), supra.

The respondent's determination is, of course, presumptively correct and it is incumbent upon the petitioners by a preponderance of evidence to establish that the advances in question were not dividends, but rather loans, as they contend. We think it is clear that this burden has not been sustained.

In the light of all the facts and the record as a whole, we are convinced that petitioners' withdrawals during the taxable years 1947 to 1951, inclusive, were not intended to be bona fide loans, but were, in reality, informal dividend distributions within the intendment of section 115 (a), supra. W. T. Wilson, 10 T.C. 251 (1948); Regensburg 25 T.C. 387">*397 v. Commissioner, 144 F.2d 41 (C. A. 2, 1944) affirming a Memorandum Opinion of this Court, April 1943, certiorari denied 323 U.S. 783">323 U.S. 783; C. W. Murchison, supra.

Counsel for petitioner William C. Baird argues, in1955 U.S. Tax Ct. LEXIS 35">*58 the alternative, that even assuming the withdrawals are deemed to be dividends, $ 4,800 in each of the taxable years involved herein is not chargeable to him, but should have been included in the gross income of his wife, Dorothy G. Baird, who owned almost half of the outstanding capital stock and who filed a separate income tax return. The record is devoid of any reliable evidence upon which we may base such a finding. As already noted in deciding the primary issue, it is immaterial that all shareholders did not participate in the dividend distribution. Lincoln National Bank v. Burnet, supra.The burden was upon petitioner William C. Baird to present facts, if there were any, upon which we might determine that $ 4,800 of the total amount charged to him by respondent in each taxable year was income attributable to his wife. The wife, as a member of the family, may well have benefited from the withdrawals, but there is no evidence that petitioner William C. Baird was acting as agent for his wife in withdrawing and using the funds in question or that the wife ever asserted any right thereto in whole or in part. We hold, accordingly, that no part1955 U.S. Tax Ct. LEXIS 35">*59 of the dividend involved herein is to be attributed to Dorothy G. Baird. We think the facts before us differ materially from those presented in United Mercantile Agencies, Inc., 23 T.C. 1105, 1113 (1955).

We come next to the question of respondent's request for increased deficiencies in income taxes by amended answer at the hearing. The real estate transaction in December 1948 and March 1949 which gave rise to respondent's assertion of increased deficiencies is discussed in detail in our Findings of Fact. In essence, respondent asserted that the taxable income of petitioner William C. Baird should have been reduced in the amount of $ 1,000 in the taxable year 1948 and increased in a like amount in the taxable year 1949 (since all of the earnest money in the amount of $ 2,000 was paid in December 1948 and debited on his account); and conversely that the taxable income of petitioners Harold J. Baird and Louise R. Baird should have been increased in the amount of $ 1,000 in the taxable year 1948 and reduced in a like amount in the taxable year 1949. Respondent, on brief, submits that through mistake his answer to the amended petition filed herein sets1955 U.S. Tax Ct. LEXIS 35">*60 forth a claim for an increased deficiency due by the petitioner William C. Baird for the taxable year 1948, when the increased deficiency is in fact due for the taxable year 1949 and urges that the error be corrected to reflect the proper increased deficiency asserted for the taxable year 1949. Petitioners offer no objection to the correction of the error in respondent's amended answer and contend only that the withdrawals for the realty transaction were "loans." Since a further 25 T.C. 387">*398 amendment of the answer to correct the error would still be timely ( Helvering v. Edison Securities Corporation, 78 F.2d 85; C. A. 4, 1935) and since petitioners do not object to such correction, we think it proper, in order to avoid delay, to accept the statements in respondent's brief as an informal additional amendment to his answer. Respondent has produced affirmative evidence establishing the asserted additional deficiencies, and we hold that he has sustained his burden of proof in this respect.

Finally, petitioners resist the determination of deficiencies for the years 1947 and 1948 on the ground that it is barred by the 3-year statute of limitations. As1955 U.S. Tax Ct. LEXIS 35">*61 the distributions which are now held to be taxable income, and which were omitted from petitioners' respective returns, are in each instance in excess of 25 per cent of the gross income disclosed on the returns for 1947 and 1948, the provisions of section 275 (c) of the Internal Revenue Code of 1939 are here applicable, extending the period of limitations from 3 years to 5. It is clear from our Findings of Fact that the statutory notices of deficiency transmitted to petitioners for years including 1947 and 1948 were mailed within 5 years after the returns for said years were filed.

Decisions will be entered under Rule 50.