Edward McRoskey Mattress Co. v. Franchise Tax Board

VAN DYKE, J. Respondent corporation was, during the period with which we are here concerned, a domestic corporation doing business within the state. As such it was subject to franchise taxes imposed by the Bank and Corporation [479]Franchise Tax Act [Deering’s Gen. Laws, Act 8488], For the taxable year ending December 31, 1941, it reported to the Franchise Tax Commissioner its net income and paid a tax thereon. On August 10, 1943, proceedings were begun to assess an additional tax, based upon a revision of respondent’s net income as so reported. Administrative proceedings followed, as a final result of which respondent was compelled to pay an additional tax of $637.24, with interest. This it paid under protest and, having exhausted its administrative remedies, it brought this action to recover the money so exacted. The situation which the commissioner claims justified the additional tax may be briefly stated as follows:

For a long time prior to the incidents which are about to be related, Edward L. McBoskey was the owner of approximately 77 per cent of the corporation’s issued stock and was also the managing head of the corporation. With the exception of a few qualifying shares his two sons owned the balance of the issued stock. McBoskey was entitled to receive a salary of $1,000 per month and was credited with that amount upon the books of the corporation regularly as the same accrued, but did not receive payment in full. The account was carried on the books of the corporation as a “drawing account,” and as time passed the amount unpaid grew until over $7,000 was owing to McBoskey. Then $7,000 was taken from the “drawing account” and was transferred to another liability account of the corporation entitled “Notes Payable.” The balance owing McBoskey in the drawing account continued to accumulate until on December 31, 1940, the amount owing him in both accounts totaled nearly $30,000. On that date the corporation was solvent and had money on deposit in bank in excess of $15,000. McBoskey instructed the secretary of the plaintiff to charge the balance to his credit in the account “Notes Payable,” to the extent of $7,375, and to charge his drawing account with $8,000, and to credit the total, $15,375, to an account entitled “Donated Surplus.” These instructions were carried out and the respondent’s books have at all times since reflected said transaction, without change.

McBoskey testified, when asked to explain in his own words what took place, that a new excess profit tax had been enacted and the secretary of the corporation had told him the corporation could not get credit for the amount of accrued salary money that it had been using unless he, McBoskey, “deeded that money to the corporation.” So, said McBoskey, “since