The amount of $30,000 was transferred from the surplus account to the capital account at the time the 300 new shares of common stock were issued. At all times at which payments were made by the corporation under the stock purchase agreement it had accumulated earnings and profits or earnings and profits for the year in an amount sufficient to cover the payments made. OPINION. The first question is whether the payments made by the corporation under the stock purchase agreement were dividends to the petitioner under the provisions of section 115 (a) of the Internal Revenue Code of 1939 or section 316(a) of the Internal Revenue Code of 1954. Both of these sections provide that a dividend means a distribution by a corporation to its shareholders out of accumulated earnings and profits or earnings and profits for the current year. The respondent contends that the payments made to the petitioner by the corporation were made either in redemption of stock already owned by the petitioner or made in discharge of an obligation of the petitioner under the stock purchase agreement. The petitioner, on the other hand, contends that the payments made by the corporation were made to discharge the corporate obligation to purchase its stock from Dorothy. We agree with the respondent. At the time Dorothy became obligated to transfer her stock to the trustee, the petitioner became the beneficial owner of it. At that time. the petitioner acquired the voting rights and management, subject only to his continued performance of the terms of the agreement. Further, he was entitled to all dividends declared so long as he was not in default. Finally, the choice was his whether to take title to the stock or have it transferred to the corporation. Dorothy retained only an interest in the shares as a security device and certain other power to assure proper performance of the agreement. Frithiof T. Christensen, 33 T.C. 500 (1959). However, even if the petitioner did not become the owner of the stock at the time it was to be transferred to the trustee, the net effect of the transaction was a purchase of all of the corporation's stock by the petitioner. The contract was between the petitioner and Dorothy; the corporation was not a party. Prior to the sales agreement, Dorothy owned legally or equitably the entire common stock of the corporation which amounted to 350 shares. Under the terms of the agreement, after all the provisions of the agreement had been complied with, the petitioner would own all of the common stock, which would amount to at least 335 shares. Although much of Dorothy's stock could have been redeemed under the agreement, 300 new shares of stock were to be issued by the corporation which the trustee was to turn over to the petitioner at the termination of the agreement. For these reasons, the sales transaction constituted a purchase of the stock by the petitioner and the payments made by the corporation were therefore made in payment of the purchase price of the stock purchased by him. Since this is so, the payments were distributions to the petitioner. Ruphane B. Iverson, 29 B.T.A. 863 (1934); Wall v. United States, 164 F. 2d 462 (C.A. 4, 1947); and Louis H. Zipp, 28 T.C. 314 (1957), affd. 259 F. 2d 119 (C.A. 6, 1958), certiorari denied 359 U.S. 934 (1959). The petitioner has also contended that in purchasing the corporation's stock he should be considered as acting as the agent of the corporation and thus not chargeable with the receipt of a dividend. A result of this nature was reached in Fox v. Harrison, 145 F. 2d 521 (C.A. 7, 1944), wherein the Court of Appeals found as a fact. that the taxpayer acted as the agent of the corporation. We have, however, found as a fact that the petitioner was not acting as the agent of the corporation in acquiring its stock. Although there is evidence in the record that the corporation would benefit by reason of the petitioner's acquisition of control, it is clear that the primary purpose of the agreement covering the sale of the stock was to transfer ownership of the corporation to the petitioner and not to sell stock to the corporation. The second question is whether the corporation had sufficient earnings and profits to cover the payments made by the corporation under the agreement. Most of the items concerning earnings and profits are stipulated. The parties have indicated that only three types of items are in dispute. The first item is the $30,000 removed from the surplus account of the corporation and added to the capital account upon the issuance of the 300 new shares of common stock pursuant to the agreement. Although the stipulation indicates that this item is in dispute, the petitioner does not contend on brief that this transfer would reduce the amount of earnings and profits of the corporation. Clearly it would not. John K. Beretta, 1 T.C. 86 (1942), affd. 141 F. 2d 452 (C.A. 5, 1944). The second item is a deficiency in income taxes which was determined against the corporation for the year 1954 but not paid until 1958. A deficiency in income taxes, even though not paid, is properly taken into account in determining earnings and profits in the year for which the deficiency is determined. Estate of Esther M. Stein, 25 T.C. 940, 965 (1956), affirmed per curiam 250 F. 2d 798 (C.A. 2, 1958). The third type of item is the increase in earnings and profits brought about by refunds of Federal income taxes which arose by reason of a net operating loss carryback. There appears to be no case directly in point on the question of when this type of refund is to be considered in determining earnings and profits. Income tax liability is taken into account in the year to which the tax relates in the case of an accrual basis taxpayer, even where the parties are not aware of the correct tax liability. Estate of Esther M. Stein, supra; Rose v. Dobbs, 36 F. 2d 464 (C.A. 5, 1929). In the year in which the net operating loss occurs, the right to a refund for prior years is as fixed and its amount as determinable as in the case of the obligation to pay income taxes and their amount. Therefore, we hold that in the case of an accrual basis taxpayer an income tax refund arising from a net operating loss carryback should be taken into account in determining earnings and profits as of the close of the taxable year in which the net operating loss occurred. When these adjustments are taken into account, the corporation had earnings and profits in excess of the payments made to the trustee at the time that each of the payments was made. These payments, therefore, were dividends to the petitioner. The third question is whether the statute of limitations had run on the assessment of the tax for 1951 and 1952 at the time the taxpayer and the respondent agreed to extend the period. These agreements were made within 5 years of the date of filing of the returns for the years in issue. They would therefore be timely under section 275 (c) of the Internal Revenue Code of 1939 if gross income was understated by 25 percent. These returns showed gross income of $10,140 for 1951 and $9,030 for 1952. We have found that the petitioner had additional income of $16,800 for 1951 and $12,600 for 1952. Thus, section 275 (c) is applicable and the agreements extending the period for assessment were timely. Decision will be entered for the respondent. ANCEL GREENE AND COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 85184. Filed April 23, 1962. Petitioner agreed in contracts entered into with the Federal National Mortgage Association (FNMA) to sell mortgages thereto that FNMA could deduct from the purchase price of the mortgages a certain percentage of the outstanding principal balances thereof and retain such amounts as subscriptions to FNMA's capital stock. FNMA required that anyone from whom it purchased a mortgage enter into such a contract with it. Petitioner was issued a share of FNMA $100-par stock for each $100 so withheld by FNMA but this stock had a fair market value considerably less than $100 per share at the date of its issue to petitioner. Petitioner kept the stock for periods ranging from a few months to over 22 years and received dividends thereon. Petitioner sold some of the stock. Held: 1. Petitioner received payment for its mortgages in cash and stock and the amount includible in its income from receipt of stock is the fair market value of the stock at the date of its issue. 2. The stock sold by petitioner was a capital asset with a basis to petitioner of its fair market value at the date it was issued to petitioner. Edith DeBusk, Esq., for the petitioner. Charles B. Sklar, Esq., for the respondent. OPINION. SCOTT, Judge: Respondent determined deficiencies in petitioner's income tax for its fiscal years ended March 31, 1956, 1957, and 1958, in the amounts of $1,647.66, $643.99, and $1,075.06, respectively. For its fiscal years ended March 31, 1956, and March 31, 1957, petitioner claims overpayments in the amounts of $595.55 and $420.63, respectively. The issues for decision are: (1) Whether any portion of the amounts withheld in the taxable years here involved by the Federal National Mortgage Association from the purchase prices of mortgages sold to it by petitioner and applied as a subscription to capital stock of that association in accordance with its requirements and its contracts with petitioner is not includible in or is deductible from petitioner's income. (2) Whether the shares of common stock in the Federal National Mortgage Association received by petitioner from that association in accordance with the contracts requiring subscriptions to the stock upon purchase by the association of mortgages were capital assets at the time of petitioner's sale thereof, and if so, the amount of capital gain or loss in the year of sale. All of the facts have been stipulated and are found accordingly. Petitioner is and at all times pertinent hereto has been a corporation organized and existing under the laws of the State of Texas with its principal place of business in Waco, Texas. It keeps regular books of account on a cash basis and prepares its Federal income tax returns on the basis of a fiscal year ended March 31. Its returns for the fiscal years ended March 31, 1956, 1957, and 1958, were timely filed with the district director of internal revenue at Austin, Texas. During the years here involved petitioner was at all times engaged in the business of buying, selling, and servicing mortgages on real estate. During these taxable years it sold to the Federal National Mortgage Association (hereinafter referred to as FNMA) mortgages with total unpaid balances of $366,227.48, $421,237.91, and $669,909.94, respectively. The contracts pursuant to which these sales were made provided in part as follows: [1] 2. The purchase price shall be an amount equal to percent of the outstanding principal balance of the mortgage at the end of the day immediately preceding that of the date of the voucher * 4. The Seller shall pay to the Purchaser at the time of disbursement, and hereby authorizes the Purchaser at that time to deduct from the amount to be disbursed by reason of the payment of the purchase price, the following: (a) A purchase and marketing fee in the amount of percent of the outstanding principal balance of the mortgage at the cut-off time, and (b) A subscription to the capital stock of the Purchaser in the amount of 3% of the outstanding principal balance of the mortgage at the cut-off time. [1] FNMA as presently constituted was created by Act of Congress on July 1, 1948 (ch. 784, sec. 1, 62 Stat. 1207), and rechartered on August 2, 1954 (ch. 649, title II, sec. 201, 68 Stat. 612, 12 U.S.C. sec. 1716), to establish in the Federal Government a secondary market facility for home mortgages. It is authorized to make commitments to purchase and to purchase home mortgages which are insured under the National Housing Act, as amended, or which are guaranteed under the Servicemen's Readjustment Act of 1944, as amended, subject to certain conditions, limitations, and restrictions. 1 The percentage amounts varied from contract to contract. |