*516OPINION.
Murdock:Section 104 is entitled “Accumulation of Surplus to Evade Surtaxes.” The provisions of the section impose a tax of 50 percent of the net income of the corporation. That tax is in addition to the tax imposed by section 13, and the net income includes divi-*517(lends and interest oil certain obligations of the United States, which items are not normally taxed to corporations but are subject to tax in the hands of an individual owner. The following quotations are from paragraphs (a) and (b) of the section:
(a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, * * *
(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.
The Commissioner has held that the petitioner is liable under section 104. In such cases he sometimes makes a categorical determination under (b). Here he has not made a categorical determination that the petitioner is a mere holding or investment company, or that its gains or profits have been permitted to accumulate beyond the reasonable needs of the business. Nevertheless, we shall consider whether or not (b) applies. The facts show conclusively that the petitioner was not a mere holding or investment company. It regularly carried on a business. It did nothing else. The character of the business was quite different from that of a mere holding or investment company. Furthermore, the fact that the gains or profits were not permitted to accumulate beyond the reasonable needs of the business is clear from the record. The Commissioner has made his determination on the basis of conditions as they existed at the close of the taxable year. The books of the corporation at the close of 1932 showed a surplus of $318.12. The corporation, in computing that surplus, valued its securities and fixed assets at market. The Commissioner does not contend that the values used by the petitioner were other than the correct fair market values of the assets in question. It had followed the practice of inventorying those assets at market during its entire existence, and for all purposes other than the computation of its taxable net income. However, it was not allowed to use inventories of those assets in computing its taxable net income and it did not use the inventories for that purpose, but used cost. Sec. 22 (c); ^Regulation 77, art. 105. The Commissioner, by using the cost of the securities and the cost less depreciation of the fixed assets, has computed a surplus of somewhat more than $2,00(3,000 at the close of 1932. It is unnecessary, for the purpose of paragraph (b), to determine whether or not a surplus of that amount was “beyond the reasonable needs of the business”, since no such surplus was available for the needs of the business. The paragraph sets up a practical test rather than a theoretical one. Was there an accumulation “beyond the reasonable needs of the business ?” The assets would *518be useful to tbe business only to tbe extent of their actual market values. The fact that they cost a greater amount would not benefit tbe business. Thus the surplus based upon cost, as computed by the Commissioner, was not available for the reasonable needs of the business. It did not actually exist and could not have been used in the business. Business men and bankers, worthy of those names, would not have regarded it as a surplus. The accumulation of surplus which the petitioner actually had for use in the business amounted to only $318.12. That small surplus did not represent an accumulation of gains or profits beyond the reasonable needs of the business within the meaning of paragraph (b).
Nevertheless the Commissioner has determined that section 104 applies. He has wiped out the net loss for the year by adding dividends and a relatively small amount of interest from Government obligations, which are only taxable to the petitioner in case section 104 applies. The Board must decide whether or not the petitioner was formed or availed of in 1932 for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains or profits to accumulate instead of being divided or distributed. The determination of the Commissioner is presumed to be correct, and the petitioner was required “to show its hand.” United Business Corporation of America v. Commissioner, 62 Fed. (2d) 754; certiorari denied, 290 U. S. 635. It has made what appears to be a complete disclosure of the facts. The test is the state of mind of those persons responsible for the formation and operation of the petitioner. United Business Corporation of America v. Commissioner, supra. Even though the effect of the formation and operation of the corporation may have been to avoid surtaxes, still section 104 does not apply unless the purpose, the intention of the participants, was to prevent the imposition of surtaxes upon themselves by permitting the gains and profits of the corporation to accumulate instead of distributing them. Cecil B. De Mille, 31 B. T. A. 1161; affd., 90 Fed. (2d) 12; certiorari denied, 302 U. S. 713.
Counsel for the respondent argue in brief that this corporation was formed for the purpose mentioned in section 104 (a). In order to reach that conclusion they have to argue that the testimony of the principal witness should be disbelieved. They point to the fact that the two partners paid in dividend-bearing securities, and to certain other circumstances. Self-serving declarations of interested witnesses are not necessarily determinative. Yet such testimony can not be waved aside merely because of its character. If it comes from witnesses who are impressive, if it is reasonable, if it is not inconsistent with other evidence) in the case, and if it is corroborated by other evidence, it is important evidence. The reasons for the incor*519poration. of this petitioner at the close of 1920 are clear from the testimony of Kienbusch, and they were wholly unrelated to a purpose of preventing the imposition of a surtax upon shareholders.
Kienbusch had been active in the business for a number of years. He had become an equal partner with Spitzner. A large part of the responsibility for the successful conduct of the business rested upon him. His entire fortune of about $1,000,000 was risked in the business as long as the partnership continued. He wanted to limit his liability from the business. He was apprehensive about the health of his partner. That partner had contributed about two-thirds of the capital of the partnership. Kienbusch realized that in case of Spitzner’s death his personal representatives, in a proper administration of his estate, would probably withdraw his property from the hazardous business of the partnership. Kienbusch, having all of these things in mind, sought to organize the corporation. Spitzner opposed the change, largely for sentimental reasons, but finally succumbed to his partner’s persistent urging. The petitioner was formed and thus the purposes which Kienbusch had in mind were accomplished, i. e., to limit his liability and to remove the danger of liquidation which might result from the death of Spitzner. Kienbusch testified that tax benefits were not considered or discussed and the evidence corroborates his statement. Therefore, we have no hesitation in concluding that section 104 may not be invoked by reason of the purpose leading to the formation of the petitioner.
A somewhat more difficult question is whether the petitioner was mailed of during the year 1982 for the purpose described in section 104. Although the petitioner sustained a loss from the operation of its business in that year, it had gains and profits in the form of dividends and interest from its securities, and it permitted those to accumulate, instead of dividing or distributing them. Had the individual stockholders owned those securities during 1932, those gains would have been subject to surtaxes in their hands and, obviously, the intervention of the corporation prevented the imposition of surtaxes upon the shareholders. But the same would be true of any corporation which received any dividends. Yet Congress did not intend to impose the severe penalty of section 104 upon all such corporations. For example, the provisions of that section were never intended to apply to a corporation which limited its activities to some branch of agriculture, manufacture, or merchandising and made normal distributions. United Business Corporation of America, 19 B. T. A. 809; affd., 62 Fed. (2d) 754. However, the stockholders of that kind of a corporation might bring their corporation under the lash of section 104 by diverting it from its normal business activities and intentionally using it during any taxable year for the purpose of *520preventing the imposition of surtax upon themselves through the medium of permitting its gains and profits to accumulate instead of being divided. The question here narrows to this, Does the fact that the petitioner accumulated its tax exempt gains from dividends and interest, instead of distributing them, show a purpose on the part of its shareholders to prevent the imposition of the surtax upon themselves ?
The incorporators of the petitioner believed, when they organized it, that it would need capital of at least $4,000,000 to successfully conduct its tobacco business. Kienbusch contributed as much as he could. Although their interests in the partnership had been equal, and although Kienbusch wanted his interest in the corporation to be as near a 50 percent interest as he could make it, nevertheless Spitzner also contributed over $100,000 to the business just before the formation of the corporation. The property contributed by Kienbusch had previously been held as collateral for a loan used in the business. Earnings of the first year were capitalized in order to give the corporation $4,000,000 capital. These and other circumstances indicate that the stockholders believed that $4,000,000 was needed in the business. That amount was used during 1922. The actual capital available for use in the business in 1932 was still approximately $4,000,000.
The business of the corporation in 1932 was not what it had been in 1922. It had fallen off very badly. But the petitioner never slackened its efforts to make a success of the tobacco business. Kien-busch, in his testimony, gave what he regarded as the principal reasons for the decline in sales and profits. The factors upon which he blamed the slump were of a temporary character, and he expressed confidence that the business would recover, would again have gross sales of $3,000,000, and would again need all of its available funds. The opinions which he expressed as to the future possibilities and needs of the business were honestly held by him and were not unreasonable. The respondent says he was an “incorrigible optimist.” He may have been, but, if so, his optimism rather negatives the purpose described in section 104. All of the assets, including all gains and profits accumulated up to the end of 1982, woxdd bo necessary and desirable for the successful conduct of the business in case it should again expand to a volume equivalent’ to that of 1922.
Certainly there was good reason for the failure of the corporation to declare any dividend in 1932. Operations were conducted at a loss in that year and in prior years. The value of the assets had materially declined. The officers hoped and expected to continue in business. Capital available for business purposes would have been impaired by any distribution at that time. The financial standing *521of the petitioner during the trying times through which it was passing was precarious. The addition of any avoidable strain would have been unwise. The failure to declare dividends in 1932 may not fairly be taken as an indication of a purpose on the part of the shareholders to avoid surtaxes.
The amount of the investment of this corporation in securities had grown tremendously from its early days up to the period here involved. But the reason for that change is also satisfactorily explained in this record. As the business of the corporation declined, a smaller and smaller portion of its capital was used for operating purposes. Common sense required that the inactive funds be employed as profitably as they might be. So it is not surprising that they were invested in income producing securities. The corporation had to be ready at all times to take full advantage of a good crop and of any increased demand for its products due to a return of better times. The investments were generally in high grade, listed securities. The assets were thus retained in as liquid form as could be, ready for prompt use in the business either as collateral or by conversion into cash when, as, and if the part of that business which had been lost was recovered.
The books of the corporation at the close of 1931 showed a surplus of $179,868.92, and at the close of prior years showed surpluses in much larger amounts. The question of whether or not the corporation was availed of in those years to avoid surtaxes on the shareholders is not the question for decision here. Nevertheless, the situation in those years may be scrutinized in an effort to determine whether or not a purpose of the kind described in section 104 existed in the year 1932. A large part of the book surplus shown in prior years represented the write-up resulting from the annual inventory of securities at market. The surplus in some of those years may have been beyond the reasonable needs of the business. However, the Commissioner never attempted to apply section 104, or its counterpart in earlier acts, to the income of this petitioner for any of those years. Dividends in substantial amounts were paid in most of those years. . The large book surplus of these years had disappeared prior to 1932. Although the facts relating to those prior years do not show that the corporation was never availed of for the purpose of preventing the imposition of the surtax, that circumstance is not important, since the conclusion can not be drawn from those facts that the shareholders in 1932 had a purpose to avail of the petitioner to avoid surtaxes.
The two principal stockholders of the petitioner had been indebted to it at times for small amounts of money. When so indebted, they were charged with and they paid interest on the indebtednesses. But for the most part and in much larger amounts the corporation was *522indebted to those stockholders for advances made by them to meet the needs of the business. Interest was paid on those advances. Thus, this is not a case where the principal stockholders have withdrawn funds of the corporation through loans so that they might have the use of the accumulations and, at the same time, save surtaxes by not receiving the dividends and interest directly.
Kienbusch, the treasurer, was indebted to the corporation in the amount .of $18,000 at the close of 1932. This loan to him was necessitated by conditions in his own finances brought on by the depression. He did not like to be indebted to the corporation and sought legal advice to learn whether or not the corporation might declare a dividend sufficient to enable him to discharge this indebtedness. He was advised that, inasmuch as the books of the corporation showed insufficient surplus, a dividend could not be paid and any distribution would impair capital, rendering the officers and directors liable civilly and criminally for their action. These circumstances have some tendency to negative a purpose to avoid surtaxes.
The explanation of the investments of this petitioner in the stock and securities of other tobacco companies and of its loans to those companies leads inescapably to the conclusion that those investments and loans were incidental to and reasonably necessary in the successful conduct of the tobacco business of the petitioner. Most of the purchases were made by the partnership before the organization of the petitioner. They not only led to sales of tobacco to those particular companies, but they led indirectly to sales to other companies. Some of them were made in the hope of sales and profits which never materialized. But it may not be inferred from that unfortunate circumstance that the investments were unrelated to the business of the petitioner or that they indicate a purpose to evade surtaxes. The loans and the purchases were made to assist customers financially, to promote sales, or for both purposes.
The parties have filed rather lengthy briefs which indicate that they have carefully considered the mass of detailed facts and figures in this record. This discussion would be unduly prolonged were it to include comments on every point made by the parties. But our failure to mention any particular point in this opinion may not be taken as an indication that some point or argument made has not been carefully considered. It does seem proper, however, to make special mention of three of the cases cited by the respondent. The Board held in Rands, Inc., 34 B. T. A. 1094, and in Nipoch Corporation, 36 B. T. A. 662, that the corporation there was availed of within the year for the purpose described in the statute, despite the fact that in each case the corporation would not have had any surplus had its securities been valued at market. The differences between those cases and the present case are marked. Each of those corporations was a mere holding or *523investment company. Neither had any business like that of the petitioner in this case. The activities of those corporations up to and including the taxable year involved were indicative of purposes on the part of the shareholders to avail of the corporations to prevent the imposition of the surtax upon the shareholders. Here the activities of the petitioner for a similar period indicate an absence of such a purpose. Purpose is the test, and those cases are not authority one way or the other for decision of the present proceeding. The facts in the case of National Grocery Co., 35 B. T. A. 163, in some respects parallel the facts in the present case. However, the decision of the Board in that case was reversed, 92 Fed. (2d) 931, and, to the extent that the facts are parallel, that case now supports the contention of the petitioner in this case.
Reviewed by the Board.
Decision will te entered for the petitioner.