52 T.C. 671">*671 The Commissioner determined a deficiency in petitioners' 1961 income tax in the amount of $ 13,029.91. The only issue is whether $ 24,665.40 received by petitioner George R. Tollefsen during 1961 from Tollefsen Manufacturing Corp., a corporation controlled by him, 52 T.C. 671">*672 is taxable to petitioners as a dividend under sections 301 and 316, I.R.C. 1954.

FINDINGS OF FACT

Some of the facts are stipulated and are incorporated herein by reference.

The petitioners, George R. Tollefsen and Margaret A. Tollefsen, are husband and wife. They resided in Brooklyn, N.Y., at the time of the filing of their petition herein. They filed a joint income tax return for the calendar year 1961 with the district director of internal revenue, at Brooklyn, N.Y.

From 1933 to the date of the hearing herein petitioner George R. Tollefsen (Tollefsen) has been engaged in the organization and operation of a number of corporations in which he was the sole or principal shareholder or over which he maintained control. To date, he has organized approximately 25 different corporations and he has served as an officer and director of such corporations1969 U.S. Tax Ct. LEXIS 89">*91 during the periods of their existence. On the average, 6 to 10 of Tollefsen's corporations have been in existence every year since 1933.

Tollefsen at times made interest-free personal loans to some of his corporations. As of December 31, 1961, he had made advances to six of his corporations in the aggregate amount of about $ 170,000 which were characterized as "loans." Tollefsen rarely borrowed from his corporations.

During 1961 Tollefsen alone, or in conjunction with his wife, owned all, or at least 50 percent of the stock of six corporations. One of these corporations was Tollefsen Bros., Inc. (Tollefsen Bros.), which was incorporated on October 19, 1933, under the laws of the State of New York. From 1940 to the date of the hearing in this case Tollefsen and his wife owned all of the stock of Tollefsen Bros. He also was president of that corporation, and was paid a salary for his services in that capacity. Tollefsen Bros. is essentially a holding company, though it owns and operates certain real estate and machinery. For its taxable year ended December 31, 1961, it reported total income of $ 9,486.66 from rents, dividends, and capital gains and taxable income of $ 1,259.06. 1969 U.S. Tax Ct. LEXIS 89">*92 As of that date, it had "earned surplus and undivided profits" in the amount of $ 72,019.48. It has not paid a dividend, at least from 1956 to the date of the hearing herein, and the record does not disclose that it ever paid a dividend.

From sometime in 1950 to December 19, 1955, Tollefsen Bros. had an exclusive contract with Baldwin Hill Co. (Baldwin), a manufacturer of mineral shot and grit products used as abrasive materials in the cleaning of ships and tanks, for the sale and distribution of these products throughout the world. In 1955 Baldwin discontinued its manufacturing operations and sold its fixed assets to Tollefsen Bros. On December 19, 1955 Tollefsen Manufacturing Corp. (Tollefsen 52 T.C. 671">*673 Manufacturing), a New York corporation, was organized for the purpose of carrying on the foregoing business of manufacturing and producing mineral shot and grit. Tollefsen became the president of Tollefsen Manufacturing. Tollefsen Sales Corp. (Tollefsen Sales) was also organized at the same time to carry on the sales activities of Tollefsen Manufacturing.

On January 30, 1956, Tollefsen Manufacturing issued 68 shares of its common stock, without par value, to Tollefsen Bros., 1969 U.S. Tax Ct. LEXIS 89">*93 at a fixed value of $ 200 per share, and for which shares Tollefsen Bros. paid $ 13,600. These 68 shares represented 80 percent of all the stock in Tollefsen Manufacturing. The remaining 20 percent was purchased by a Mr. Hellerman, a former salesman of Tollefsen Bros. Tollefsen Bros. and Hellerman held the same proportionate share of the stock of Tollefsen Sales. The record does not disclose how the fixed assets of the manufacturing business found their way into the hands of Tollefsen Manufacturing, or whether such assets were accounted for in the $ 13,600 purchase price of the 68 shares of stock.

During 1955 and 1956 Tollefsen, personally, made advances to and on behalf of Tollefsen Manufacturing in the total amount of $ 1,790.54. These advances were recorded on the books of Tollefsen Manufacturing as an account payable. Tollefsen was repaid for these advances by Tollefsen Manufacturing in January of 1957.

Tollefsen Manufacturing operated as a manufacturer of mineral shot and grit products until March 8, 1960. At that time, it sold for $ 65,000 its machinery, equipment, and other fixed assets, together with all its rights to manufacture mineral shot and grit, to Anchor Abrasive1969 U.S. Tax Ct. LEXIS 89">*94 Corp., a corporation organized by Hellerman for the purpose of purchasing such assets. At the same time, Hellerman sold to Tollefsen Bros. his 20-percent stock interest in Tollefsen Manufacturing, which resulted in making Tollefsen Bros. the sole owner of the stock of Tollefsen Manufacturing. Also, as part of the sales agreement, Tollefsen, Tollefsen Manufacturing, and Tollefsen Sales agreed "not to manufacture and/or sell abrasive blasting materials or to be or become in anywise interested in any entity engaging in such activity" in the continental United States for a period of 5 years.

After the above sale had been completed Tollefsen Manufacturing became inactive. On its income tax return for the fiscal year ended November 30, 1961, it reported no operating income and claimed a loss of $ 204.84; it was a personal holding company for that year. Tollefsen considered liquidating Tollefsen Manufacturing into its parent, Tollefsen Bros., but decided instead that Tollefsen Manufacturing should retain its corporate form at least until the end of the 5-year period during which its activities were restricted.

Tollefsen began making cash withdrawals from Tollefsen Manufacturing during1969 U.S. Tax Ct. LEXIS 89">*95 1960, after the completion of the above sale and after 52 T.C. 671">*674 Tollefsen Bros. became the owner of all the stock in Tollefsen Manufacturing. The payable and receivable accounts of Tollefsen Manufacturing showed the following cash withdrawals by Tollefsen during 1960:

After certain credits (including accrued salary as of November 30, 1959, in the amount of $ 6,143.18), the net amount withdrawn by Tollefsen during 1960 totaled $ 27,810.97.

During 1961, Tollefsen made cash withdrawals from Tollefsen Manufacturing in the net amount of $ 24,665.40, as follows:

The net debit balance against Tollefsen as of January 1, 1962, was $ 52,476.37.

The amounts withdrawn by Tollefsen during 1960 and 1961 were reflected on the books of Tollefsen Manufacturing as loans receivable, 1969 U.S. Tax Ct. LEXIS 89">*96 and Tollefsen issued promissory notes in respect of his withdrawals from that corporation, dated and in the amounts as follows:

These notes were payable on demand to Tollefsen Manufacturing and bore no interest. No interest was paid at any time by Tollefsen in respect of the above cash withdrawals.

Tollefsen Manufacturing has not paid a dividend from the time of its incorporation to the date of the hearing herein. As of November 30, 1961, it had "earned surplus and undivided profits" in the amount of $ 38,357.29.

52 T.C. 671">*675 As of December 31, 1961, Tollefsen and his wife had substantial personal assets, including marketable securities having a net market value of approximately $ 160,000, savings bank accounts with deposits of approximately $ 26,000, two homes having a value of approximately $ 105,000, and an insurance policy having a net cash value of approximately $ 38,000. Other than Tollefsen's purported obligation1969 U.S. Tax Ct. LEXIS 89">*97 with respect to the cash withdrawals from Tollefsen Manufacturing, noted above, Tollefsen had outstanding debts and obligations (not reflected in the net value of any of the foregoing assets) in the aggregate amount of approximately $ 23,500. The net book value of petitioners' corporations was in excess of $ 200,000, and the fair market value thereof was in excess of book value.

The funds withdrawn by Tollefsen from Tollefsen Manufacturing during 1960 and 1961 were used by him as follows:

(a) From $ 5,000 to $ 10,000 was expended by him in trips to Norway to investigate new methods of producing abrasive blasting materials.

(b) $ 8,000 was expended to acquire an interest in Nordic Ship Blasting, Inc., A.S., a Norwegian corporation. The record does not disclose the extent of the interest acquired, or the nature of the business conducted by this corporation. Title to the stock thus acquired was in petitioner's name.

(c) An amount estimated from $ 8,000 to $ 10,000 was expended for an interest in Hose-McCann Electronics Corp., a corporation engaged in electronics activities relating to the maritime industry. Title to this stock was in Tollefsen's name.

(d) $ 20,000 was expended for1969 U.S. Tax Ct. LEXIS 89">*98 a 50-percent stock interest in Port O'Call Corp., a corporation which operated a marina. Title to this stock was in Tollefsen's name.

(e) The remainder was subsequently utilized to purchase the remaining 50-percent stock interest in Port O'Call Corp.

Tollefsen also made loans of additional amounts to Port O'Call Corp.

Title to none of the foregoing business interests or stock therein has ever been assigned to Tollefsen Manufacturing.

To the date of the present hearing, Tollefsen has made no formal repayments to Tollefsen Manufacturing in respect of the amounts withdrawn during 1960 and 1961, though certain amounts were credited to his account on the books of the corporation. These credits appear in the following schedule stipulated by the parties as "a transcript of the loan account with George R. Tollefsen on the books of Tollefsen Manufacturing Corp. setting forth the advances made" by Tollefsen to the corporation and by the corporation to Tollefsen from January 1, 1962, to the date of the hearing herein: 52 T.C. 671">*676

Pellets Processing, the company referred to in the above schedule, was organized by Tollefsen in 1967 to produce a new type of mineral shot.

52 T.C. 671">*677 The amounts so credited were sufficient to offset in full the first two notes issued by Tollefsen to Tollefsen Manufacturing during 1960, and those notes were marked so as to indicate their repayment. As of the date of the hearing herein no repayments have been made in respect of the 1961 withdrawals.

During 1964 and 1965 Tollefsen made assignments of his interest in Port O'Call Corp. and other "claims" to Tollefsen Bros. These assignments are reflected in the following schedule, which the parties have stipulated to be "a transcript of the loan account with George R. Tollefsen on the books of Tollefsen Bros., Inc. setting forth the advances made" by Tollefsen to that corporation and by it to Tollefsen from January 1, 1961, to the date of the hearing herein:

52 T.C. 671">*678 No evidence was presented to establish the fair market value of these "claims" nor was any evidence presented to establish that the assignments reflected in these book entries were intended as repayments in respect of Tollefsen's withdrawals from Tollefsen Manufacturing.

An audit of the books of Tollefsen Manufacturing was commenced by an agent of the Internal Revenue Service on or about June 4, 1964.

The Commissioner explained his determination of deficiency against petitioners for 1961 as follows: "It has been determined that your net withdrawals of $ 24,665.40 from the Tollefsen Manufacturing Corp. during the taxable year ended December 31, 1961 constitute a dividend to you."

OPINION

The sole issue is whether the net withdrawals made by petitioner George R. Tollefsen from Tollefsen Manufacturing during 1961 constituted loans, as contended by the petitioners, or distributions of dividends, as contended by the Commissioner. Resolution of this issue requires us to determine first whether Tollefsen's withdrawals were intended as bona fide loans to him, or as permanent withdrawals. If the withdrawals were intended1969 U.S. Tax Ct. LEXIS 89">*101 to be permanent, we must further determine whether petitioners received dividends notwithstanding they were not record owners of stock in Tollefsen Manufacturing.

Essential to our first inquiry is the determination of whether repayment of the advances was in fact contemplated by the parties at the time the withdrawals were made. See Leach Corporation, 30 T.C. 563">30 T.C. 563, 30 T.C. 563">579; Hoguet Real Estate Corporation, 30 T.C. 580">30 T.C. 580, 30 T.C. 580">598; 2554-58 Creston Corp., 40 T.C. 932">40 T.C. 932, 40 T.C. 932">936-937; Jacob M. Kaplan, 43 T.C. 580">43 T.C. 580; Wiese v. Commissioner, 93 F.2d 921, 923 (C.A. 8), certiorari denied 304 U.S. 562">304 U.S. 562; Carl L. White, 17 T.C. 1562">17 T.C. 1562, 17 T.C. 1562">1568.

After consideration of all the evidence, we conclude that at the time of the withdrawals here in issue Tollefsen did not intend to repay such amounts to Tollefsen Manufacturing.

Tollefsen Manufacturing became inactive upon the sale of its assets and manufacturing rights to Anchor Abrasive Corp. in March of 1960. Shortly thereafter, Tollefsen began making systematic cash withdrawals from that1969 U.S. Tax Ct. LEXIS 89">*102 corporation which, by the end of 1961, left the corporation virtually without any assets other than the "notes" given it by him in respect of the withdrawals. These "notes" were non-interest-bearing 52 T.C. 671">*679 and no interest was at any time paid by Tollefsen to the corporation for the use of the funds withdrawn.

Tollefsen attempted to explain his withdrawals by arguing that it was necessary for him to effect "loans" from his corporation in order to "carry on" its interest during the period in which its activities were restricted by the terms of the sales agreement entered into with Anchor Abrasive Corp. But it is clear from the terms of the sales agreement that Tollefsen himself was personally bound by the identical limitations to which Tollefsen Manufacturing was subject during the 5-year period, and so far as those limitations were concerned he had no greater right or freedom to "carry on" its business interests in his personal capacity than as its agent using its own funds on its behalf without withdrawing them as loans to himself. His explanation that he withdrew the funds because of those contractual restrictions was completely spurious, and greatly shook our confidence in1969 U.S. Tax Ct. LEXIS 89">*103 his testimony. We simply did not believe it to the extent that it sought to establish an intention to repay the funds withdrawn.

Moreover, rather than using these funds to "carry on" the business interests of Tollefsen Manufacturing, Tollefsen expended most of the funds withdrawn in his own behalf to acquire personal interests in various business ventures. Tollefsen did not assign any of these interests to Tollefsen Manufacturing nor is there any convincing evidence that he intended to do so. While some amounts were spent by him for trips to Norway to explore new methods of synthesizing mineral shot -- an activity of interest to Tollefsen Manufacturing -- it is notable that the only tangible result of these trips was Tollefsen's acquisition of a personal interest in Nordic Ship Blasting, Inc., A.S. The nature of the business of this corporation does not appear in this record, and the interest therein purchased by Tollefsen has never been assigned to Tollefsen Manufacturing.

Our finding that Tollefsen did not intend to repay the amounts withdrawn is further supported by the fact that as of the date of the hearing herein he has made no formal repayments in respect of the amounts1969 U.S. Tax Ct. LEXIS 89">*104 allegedly "borrowed" during 1960 and 1961. Those credits (aggregating $ 11,916.80) to Tollefsen's account on the books of Tollefsen Manufacturing which were treated as repayments in respect to Tollefsen's withdrawals (as further indicated by the cancellation of two notes given by Tollefsen with respect to withdrawals made in 1960) were unimpressive in light of the much larger net amounts withdrawn from the corporation ($ 52,476.37) during 1960 and 1961 and the period 52 T.C. 671">*680 of time within which Tollefsen has had the unrestricted use of these funds. Moreover, these credits on the books of Tollefsen Manufacturing, beginning November 30, 1964, were made after the petitioners had notice of an audit by the Internal Revenue Service, which audit actually began on or about June 4, 1964 -- a circumstance that goes far to weaken these "repayments" as persuasive evidence of a preexisting intention to repay the amounts withdrawn. Cf. Atlanta Biltmore Hotel Corp. v. Commissioner, 349 F.2d 677, 680 (C.A. 5).

Tollefsen has argued that his intention to repay the advances in issue is evidenced by the fact that he was at all times financially able to repay1969 U.S. Tax Ct. LEXIS 89">*105 the withdrawals. The short answer to this contention is that he offered no credible explanation of why he did not make such repayment. No evidence was presented to show a plan of repayment and little other than Tollefsen's own self-serving testimony suggested that at the time of withdrawal he intended to repay the advances, testimony that we did not find convincing.

Tollefsen has also argued that his withdrawals were "in effect" repaid in full prior to his notice of investigation by the Internal Revenue Service when, during early 1964, he made assignments of his interests in Port O'Call Corp. and other "claims" to Tollefsen Bros., the parent of Tollefsen Manufacturing. He argues that since these claims were in excess of the amounts allegedly due on the withdrawals from Tollefsen Manufacturing his "loans" were in effect repaid. This argument is completely without merit. The assignments made to Tollefsen Bros., no matter how voluntary or timely with respect to investigations of the Internal Revenue Service, were not intended to discharge Tollefsen's alleged obligation to Tollefsen Manufacturing, a separate corporation, and the parties did not in any way treat the assignments as1969 U.S. Tax Ct. LEXIS 89">*106 such. At best this argument suggests that Tollefsen could have made repayments to Tollefsen Manufacturing had he intended to do so; that he did not, however, is further indication that he did not in fact intend to repay the advances in issue.

Tollefsen attempts to make much out of the fact that he had made advances of some $ 170,000 to six of his corporations, thereby suggesting a pattern of bona fide reciprocal loans to and from his corporations. The difficulty with this contention is that there was no showing of any such pattern of reciprocal loans of consequence to this corporation, Tollefsen Manufacturing, particularly in the light of the fact that the so-called loans by this corporation to him in effect merely drained this corporation of its funds after it had become inactive 52 T.C. 671">*681 when there was no convincing evidence that it would ever become active again. ¹

1969 U.S. Tax Ct. LEXIS 89">*107 Having determined that Tollefsen's withdrawals from Tollefsen Manufacturing were not loans, we conclude that the amounts withdrawn from that corporation were in effect dividends from Tollefsen Bros., petitioners' wholly owned corporation. It is clear that Tollefsen exercised complete control over Tollefsen Manufacturing through the ownership of all the stock in its parent company Tollefsen Bros. He was able to siphon off the assets of Tollefsen Manufacturing only because petitioners owned 100 percent of the stock of Tollefsen Bros. and the latter owned 100 percent of the stock of Tollefsen Manufacturing. In every real sense the funds in question came to him through Tollefsen Bros., notwithstanding that two steps (a transfer from Tollefsen Manufacturing to its parent, followed by a transfer from the parent to Tollefsen) were compressed into a single step, the transfer of funds directly to Tollefsen. We find, therefore, that the withdrawals in issue were in substance distributions to Tollefsen Bros. from its subsidiary Tollefsen Manufacturing, with a resulting constructive dividend to petitioners, the sole shareholders of Tollefsen Bros. Cf. Ben R. Meyer, 45 B.T.A. 228">45 B.T.A. 228;1969 U.S. Tax Ct. LEXIS 89">*108 Jacob M. Kaplan, 43 T.C. 580">43 T.C. 580; Sidney L. Olson, 48 T.C. 855">48 T.C. 855, 48 T.C. 855">870-871, and supplemental opinion 49 T.C. 84">49 T.C. 84; but cf. Howard M. Taylor et al., 14 B.T.A. 863">14 B.T.A. 863.

Finally, Tollefsen argues that since the Commissioner accepted his treatment of the 1960 withdrawals as "loans" the Government is now estopped or otherwise precluded from claiming that the 1961 withdrawals were dividends. We disagree. Regardless of whether the Commissioner had the opportunity to treat the withdrawals in both years in the same manner it is well established that the Commissioner is not subject to any estoppel or similar disability if he does not do so. Dixon v. United States, 381 U.S. 68">381 U.S. 68; Automobile Club v. Commissioner, 353 U.S. 180">353 U.S. 180; Caldwell v. Commissioner, 202 F.2d 112, 115 (C.A. 2); Chester Farrara, 44 T.C. 189">44 T.C. 189, 44 T.C. 189">191. The mere fact that petitioners may have obtained a windfall in 1960 does not entitle them to like treatment in 1961.

Decision will be entered1969 U.S. Tax Ct. LEXIS 89">*109 for the respondent.