A. D. Saenger Inc. v. Commissioner of Internal Revenue

The Commissioner, affirmed by the Board of Tax Appeals, assessed on the 1929 income of the taxpayer, A. D. Saenger, Inc., the 50 per cent. extra tax imposed by section 104 of the Revenue Act of 1928 (26 U.S.C.A. § 104 note) on corporations formed or availed of for the purpose of preventing the imposition of surtax on their shareholders. A. D. Saenger and J. H. Saenger were brothers who on March 1, 1927, sold all their assets and business to a corporation, A. & J., Inc., for equal parts of its capital stock of $1,500,000. In February, 1929, that corporation declared a dividend of $150,000, and paid it. On August 7, 1929, each of the brothers created a corporation owned wholly by himself to take over and hold his half of the stock of A. & J., Inc. The taxpayer corporation is that owned by A. D. Saenger. On October 31, 1929, A. & J., Inc., declared another dividend of $262,500, and appropriated that sum to pay it, and directed notices to stockholders of it, and that it be put to their several credits to be drawn out as the stockholders desired. Accordingly, $131,250 was put to the credit of taxpayer on the books of A. & J., Inc., and was charged to that company on the books of taxpayer. Thus by mutual consent it became a debt owing to taxpayer. Only $22,204 of it was paid over in cash during 1929. A. D. Saenger got approximately that sum from taxpayer, giving his note for it. Taxpayer, though on a cash receipts basis, returned as income for 1929 the whole $131,250 and showed a net income of $131,616. Taxpayer continued to function during 1930 and 1931, but never declared a dividend, though A. D. Saenger took from it as loans sums that finally came to about $378,000. The three family corporations were merged into one in 1933. The market crash in October and November, 1929, greatly reduced the market value of stocks held by A. & J., Inc., and impaired the value of the stock of A. & J., Inc., held by taxpayer A. D. Saenger, Inc., but no losses appear to have been realized by sales. Neither company had much cash on hand, but the stocks held by A. & J., Inc., even at their reduced values could have been easily sold for enough to pay all liabilities, including the declared dividend, without greatly impairing the capital stock. A. D. Saenger, Inc., appears to have borrowed some $90,000 during the fall of 1929, and invested it in stocks.