*1166OPINION.
Green: The taxpayer contends that the remainder of the purchase price, $41,296.57, standing to the credit of the stockholders on its books, is in fact a paid-in surplus and as such should be included in *1167its invested capital. The Commissioner contends that such amount should, in the computation of invested capital, be treated as borrowed money. The taxpayer calls our attention to the provision of the contract by which such credit to the stockholders is expressly made subject .to the claims of the general creditors. It cites the case of Eaton v. English & Mersick Co., 7 Fed. (2d) 54, and contends that the rule therein announced is contrary to the rule announced by this Board in the Appeal of Kelly-Buckley Co., 1 B. T. A. 1154. In the English & Mersick case the court said:
These accounts did not bear interest, and were not understood by the stockholders (except for salary items) to be an indebtedness of the corporation to them.
The court held that the crediting of the accounts with their proportionate part of the surplus was not a dividend. It also said:
As the plaintiff employed its surplus in its business, it must have been either as “invested capital” or as “borrowed capital.” The surplus having never been distributed but during the entire period was retained in its own treasury, it could not have constituted “ borrowed capital.” The corporation could not borrow its own funds. And the shareholders could not loan what they at no time owned or had received.
The facts in this appeal are not parallel to those in the Mersiek case. The accounts here were understood to be an indebtedness of the corporation to the stockholders. Upon what other theory could the stock of the par value of $90,000 have been issued to them? There is and can be no question of dividends in this case. Nor do we have an earned surplus. True, as pointed out by the taxpayer, the partnership had a surplus over the original investment, but that did not become, on the transfer of the assets to the corporation, a corporate surplus. The corporation acquired net tangible assets of the value of $111,296.57 and good will of the value of $20,000, a total of $131,296.57, for which it agreed to pay $131,296.57 to the partnership. Such a transaction does not give rise to a corporate surplus, unless the promise to pay meant nothing and the transaction was in fact a gift. This is refuted by the subsequent issue of stock of the par value of $90,000.
This appeal is in its essentials the same as the Appeal of Kelly-Buckley Co., supra, and the rule there announced is controlling here.
The deficiency is $5,758.98. Order will ~be entered accordingly.