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Where a taxpayer withdraws funds from a corporation which he fully intends to repay and which he expects with reasonable certainty he will be able to repay, where he believes that his withdrawals will be approved by the corporation, and where he makes a prompt assignment of assets sufficient to secure the amount owed, he does not realize income on the withdrawals.
Appellant Edward M. Gilbert sought review of a determination by the tax court that held that his unauthorized withdrawals from the E. L. Bruce Company, Inc. were taxable income to him. Appellant was the president, principal stockholder, and a director of the E. L. Bruce Company, Inc., a company he desired to merge with Celotex Corporation in order to benefit E.L. Bruce. To facilitate the merger, appellant had purchased shares of Celotex’s stock, and when he was unable to meet a margin call, he withdrew funds from E.L. Bruce. Appellant testified that he had every intention of repaying and that the withdrawals were not only for his benefit, but for the benefit of the company, and that he had executed secured promissory notes to the company in excess of what was owed.
By making certain unauthorized withdrawals of corporate funds, did the appellant realize taxable income?
The court reversed the decision of the tax court and held that appellant did not owe tax on the unauthorized withdrawals he had made from his corporation. The court held that where a taxpayer withdrew funds from a corporation which he fully intended to repay and which he expected with reasonable certainty he would have been able to repay, and where he made a prompt assignment of assets sufficient to secure the amount owed, he did not realize income on the withdrawals. The court held that by signing immediately payable promissory notes secured by most of his assets, appellant's clear intent was to ensure that the company would obtain full restitution. The court held that appellant's net accretion in real wealth on the transaction was zero as he gave the company control of assets more valuable than the debt.