Before SCHNACKENBERG, CASTLE and SWYGERT, Circuit Judges.
This is an appeal from a judgment dismissing two consolidated actions by taxpayer, Charter Wire, Inc., for refunds of income tax for the years 1952 through 1955. During this period taxpayer paid to noteholders, who were also its sole shareholders, a total of $15,489.38 and deducted the payments as interest on its tax returns.The Commissioner of Internal Revenue determined that the payments represented dividend distributions rather than interest on "indebtedness" as contemplated by Section 23(b) of the Internal Revenue Code of 1939*fn1 and Section 163(a) of the Internal Revenue Code of 1954. The District Court, in dismissing the actions sustained the determination.
Taxpayer, a Wisconsin corporation, is engaged in the business of drawing and rolling wire. It was formed in 1946 to take over the assets and business of a partnership composed of Alfred W. Mellowes, Charles N. Mellowes, and William L. Scheller. At the time of incorporation, the partnership had a book value net worth of $66,805.74, and a going concern value of $240,000. The original capital of the partnership was $3,822.65. The average annual earnings of the partnership during the last five years of its existence were $62,476.29.
The partnership assets were transferred to the corporation in exchange for six per cent promissory notes in the amount of $66,805.74. The notes were issued to the former partners in the following proportions:
Amount of Note Percentage
Alfred W. Mellowes $29,473.12 44.1%
Charles N. Mellowes 29,473.12 44.1%
William L. Scheller 7,859.50 11.8%
In exchange for $680, one dollar par value stock was issued to the former partners in the following proportions:
Amount Contributed Number of Shares Issued ...