dissenting: I respectfully dissent from the majority opinion. Certain agreed facts, together with detailed schedules of the financial history of the petitioner corporation from 1922 to 1932, inclusive, have been filed in this proceeding and provide the ground for the dissenting opinion.
The petitioner reported, for the year 1932, no income tax liability. It had realized a net loss from its tobacco business in 1932 in the amount of $56,089.29. It had received net income from investments in the amount of $255,043.43, but it appears that, dividends being deductible under section 23 (p) of the Revenue Act of 1932 and interest on obligations of the United States being not taxable, these were not in-cludable in taxable net income under ordinary circumstances. The Commissioner, pursuant to the provisions of section 104 (c), has determined that the petitioner had a net income for the year 1932 since, under subsection (c), dividends and interest would be includable in the net income of a corporation which came within the other provisions of section 104. In his notice of deficiency the Commissioner states:
After careful consideration of your Federal income tax return and all other available information, the Bureau holds that your corporation is subject to taxation under the provisions of section 104 of the Revenue Act of 1982.
From the notice of deficiency it is evident that the Commissioner based his determination upon the conclusion that the petitioner had run afoul of the provisions of section 104 generally, although the determination was not based upon section 104 (b) specifically. After the hearing in this proceeding the respondent asked that this Board find as a fact that the petitioner had violated section 104 (b); namely, that its gains and profits were permitted to accumulate beyond the *524reasonable needs of tbe business in .(he taxable year. The respondent contends that petitioner was formed for the purpose of escaping surtax on its shareholders; that the petitioner was availed of to escape surtax of its shareholders; and that gains and profits of petitioner were permitted to accumulate beyond the reasonable needs of its business. There is, therefore, the question in this proceeding whether the facts show that in the taxable year 1932 the petitioner permitted its gains or profits to accumulate beyond the reasonable needs of the business. This question is a fact question. If the facts show such circumstance as is covered by subsection (b), the statute regards this as prima facie evidence of a purpose to escape surtax and the burden is upon the petitioner to introduce evidence to overcome such prima facie evidence. The majority view concludes that the evidence does not show a state of mind in the two chief stockholders of petitioner to operate their corporation so as to prevent the imposition of surtaxes upon themselves. It is always difficult to obtain the admission of the interdicted purpose, but the facts relating to the financial history of the corporation in question, the fair needs of the business, and the conduct of its officers may disclose the interdicted purpose.
There are several questions, one of which is, Were the gains and profits of petitioner permitted to accumulate beyond the reasonable needs of the business in 1932 and does the evidence show that petitioner has overcome the prima facie evidence of a purpose to escape surtax? It is the view of this dissenting opinion that the evidence shows that the gains and profits of petitioner were permitted to accumulate beyond the reasonable needs of its tobacco business and that there is not sufficient evidence to overcome the prima facie evidence of a purpose to escape surtax. The following discussion of the evidence is believed to support this conclusion.
At the close of 1932 the petitioner had the following assets, excluding investments in securities: Cash, $434,102.75; notes and loans receivable, $186,481.11; accounts receivable, $206,826.40; inventories, $258,994.82; advances to agents and farmers, $29,061.70; investments in stock of tobacco companies, $676,803. Its only current liability was accounts payable in the amount of $219,952.16. Petitioner had followed a practice of “writing down” the asset values of investments to the current market prices at the end of the fiscal year, so that at the end of 1932 securities and mortgages which had a cost value of $4,936,586.26, had a book value of $2,237,068. On the basis of the book value of the petitioner’s investments, petitioner showed a surplus of only $318.12. There is no evidence, other than the book value adopted by petitioner, of the value of securities in the taxable year. It has not been found as a fact that the value of the securities in 1932 was the book value. It is petitioner’s contention that no divi*525dend could have been declared in 1932 because there was no substantial surplus upon its books, so that to have paid a dividend would have impaired capital. It is a question of fact whether payment of a dividend in the taxable yéar would have impaired capital. In effect petitioner argues that its earnings were “impounded” on account of the shrinkage of its security values at the end of the taxable year. This argument of petitioner must be weighed against the financial record of the company, which shows that in over 10 years the petitioner accumulated $2,577,759.63 from dividends, net income from operations of the tobacco business, and net profit from the sales of securities. This amount is a net amount excluding a total of $660,000 dividends declared and paid by petitioner over the 10-year period. It appears that these accumulated earnings were invested from year to year in the purchase of more dividend-producing securities, for the cost value of petitioner’s investments increased over the 10 years in the amount of $3,663,483.15. The following schedule shows this.
19%2-198%, inclusive.
Dividends from investments_$2, 389,116.93
Net income from operations, less losses_ 671,419. 61
Net profit from the sales of securities, less losses- 177,223. 09
Total_ 3,237,759.63
Less: Dividends paid hy petitioner_ 660,000.00
Net earnings and gains_ 2, 577,759.63
Cost of investments, end of 1932_ 4, 936, 586.26
Cost of investments, end of 1922_ 1,273,103.11
Increase in investments, 10 years_ 3,663,483.15
The following schedule from comparative balance sheets of petitioner, excluding a stock dividend paid in 1922 in the amount of $290,000, shows that the petitioner had an earned surplus at the end of 1932 in the amount of $2,107,845.88.
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*526From this we believe that the amount of $318.12 which petitioner contends was its true surplus, was not the true surplus available for dividends, but that the actual earned surplus available for dividends was $2,107,845.88. The securities and fixed assets which petitioner “wrote-down” were owned by petitioner at the end of the taxable year and no actual reduction in'earned surplus was effected during the taxable year, for the assets were not disposed of. Cf. R. & L., Inc., 33 B. T. A. 857; affd., 84 Fed. (2d) 721; certiorari denied, 299 U. S. 588; A. D. Saenger, Inc. v. Commissioner, 84 Fed. (2d) 23, affirming 33 B. T. A. 135; certiorari denied, 299 U. S. 578; Rands, Inc., 34 B. T. A. 1094; Nipoch Corporation, 36 B. T. A. 662.
The net income of petitioner for 1932 was $198,954.14. From this fact it is extremely doubtful that petitioner would have had to sell any securities to pay dividends in 1932, as petitioner contends. This income was derived from dividends and interest on investments totaling $255,043.43, from which is deducted the year’s loss from the tobacco business of $56,089.29. Since the investments which produced the income represent in themselves accumulated earnings and gains of prior years, it is obvious that the earnings for the taxable year were earnings from accumulated surplus. It is also apparent that the petitioner corporation from the time of its organization in 1922 did not require in its tobacco business any of the earned surplus or any of the invested capital which it kept in dividend and interest-bearing securities, the cost value of which steadily increased from year to year. There is no evidence that petitioner sold any substantial amount of its securities so as to put its earned surplus in liquid, usable form. A smaller and smaller portion of its capital was used each year for operating expenses and the amount of capital invested in securities increased. It is this evident nonuse of capital invested so largely in securities that gives rise to respondent’s claim that petitioner was a holding company and gives importance to the circumstance that the two chief stockholders, Spitzner and Kienbusch, contributed to the partnership, just prior to the incorporation of petitioner, stocks and bonds of values of $109,750 and $606,133.04, respectively, increasing investments in securities and real estate to $1,546,236, compared to the amount of about $500,000 which the partnership previously carried. Kienbusch’s contribution represented his entire wealth with the exception of property valued at about $120,000. These contributions relieved the two individuals of surtax liabilities on income from dividends thereafter paid to and accumulated by petitioner. Cf. Keck Investment Co., 29 B. T. A. 143; affd., 77 Fed. (2d) 244; certiorari denied, 296 U. S. 633.
Petitioner claims that the transfer of securities to it by its two chief stockholders, at the end of 1921, was necessary to provide additional capital for the tobacco business. The evidence shows that in *5271922, when petitioner did its largest business, the cost of sales of tobacco was in the sum of $2,423,590, which is approximately only two-thirds of the capital of petitioner. Thus, in 1922 there was no evident need for capital in excess of $3,710,000, which would have been the capital of petitioner if the chief stockholders had not made a contribution of securities in the amount of $608,133. Further, the record shows that in 1922 petitioner had more liquid capital than it needed in carrying on the tobacco business in the year of its largest business. Petitioner at the end of 1922 had loaned $800,000 to a concern, S. Rupin, Inc., a corporation in which petitioner owned 50 percent of the outstanding stock. The explanation of loans to tobacco concerns is that such loans were effective in developing and maintaining petitioner’s business. However, the record shows that from 1922 to 1932 petitioner made no sales of tobacco to S. Rupin, Inc. Therefore, it is a fair conclusion that the Rupin loan was not made to develop petitioner’s business, but as investment in an associated company of a surplus of capital which petitioner did not need in its own tobacco business. It also indicates that petitioner did not need the additional income-producing capital at the date of the formation of petitioner out of the assets of the chief stockholders. The transfer of income-producing securities to a corporation, without proof of the need of such additional assets in the conduct of business, is proof of a purpose on the part of the transferors to use the corporation to avoid payment of surtaxes on their own income. Cf. United Business Corporation of American v. Commissioner, 62 Fed. (2d) 754; certiorari denied, 290 U. S. 635. Further, in the period 1922 to 1932 the petitioner loaned funds to one of its chief stockholders, Kienbusch, in the years when petitioner paid no dividends, which is further indication that the petitioner was accumulating earnings and gains beyond its reasonable needs.
The following schedule shows the steady increase of investments in stocks and bonds from accumulated earnings and gains:
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The explanation given by one of petitioner’s chief stockholders for the steady accumulation of earnings is that it was conserving its working capital for use at such time as improved and increased tobacco business would require; that it was hoped and expected that the petitioner’s tobacco business would eventually return to an annual *528volume of $3,000,000, which would require working capital of about $4,000,000. This explanation is also an argument advanced against the respondent’s contention that the petitioner corporation had become a holding company even though it engaged in a tobacco business.
Whether or not the managers of petitioner were optimists, it is evident that a volume of business at $3,000,000 a year was not normal. In one year only, 1922, did gross sales reach that amount. Since the question involved relates to what working capital is necessary for the reasonable needs of the business, the year 1922 is not the normal year to take to test what amount of capital the reasonable needs of the tobacco business requires. The following schedule shows the size of petitioner’s business during its life.
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In the year 1922, when petitioner’s volume of business amounted to $3,000,000, the working capital of the business was $3,490,557.08. From 1927 to 1932 the business of petitioner has never required working capital in excess of $1,900,000. The following table shows the actual working capital in use in each year. It is computed from petitioner’s comparative balance sheets by excluding from total assets the book values of the investments in securities and mortgages.
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From the above, it seems evident that petitioner’s normal business did not require maintaining a surplus of earnings that would assure a working capital of $4,000,000 a year. There is little substance in the argument of petitioner that it was accumulating earnings to meet the anticipated needs of its business. The petitioner had substantially no liabilities. In the 10-year period there is no evidence of efforts to increase business to a size that would require use of the *529large accumulation of earnings. Cf. Almours Securities, Inc,, 35 B. T. A. 61; aff'd., 91 Fed. (2d) 427; certiorari denied, 302 U. S. 765. In the taxable year 1932 there was a substantial accumulation of earnings that had been turned back into income-producing securities, which had increased during 10 years to a cost value of $4,936,586. The petitioner was in a liquid position. No evidence having been introduced to prove the value of securities at less than cost, it should be held that petitioner had an earned surplus of $2,107,845.88. The evidence does not show that there were reasonable needs for any further accumulation of earnings by preserving the entire net earnings of the taxable year. Cf. R. & L., Inc., supra. The earnings for 1932 could as well have been distributed as held for future investment or distribution. Petitioner’s turnover of business has been far below its invested capital.
It should be found as a fact that petitioner permitted its gains to accumulate beyond the reasonable needs of the business in 1932. It should further be held that petitioner has not introduced evidence to overcome the prima facie evidence of a purpose to avoid surtax. The analysis of the surplus account of petitioner gives strong support to respondent’s contention that it had become a holding company. In every year since 1924 net income received from investments has far exceeded net income from operations, and capital used in operations has steadily been less than capital converted into investments. The following schedule shows this fact and greatly weakens petitioner’s argument that the conduct of its operations was solely to further the tobacco business.
Year 1922. 1923. 1924. 1925. 1925 1927. 1928. 1929. 1930. 1931. 1932. Total. Net income from tobacco operations $351,336.38 250,238.59 (loss) 12,082.41 (loss) 46,652.77 45,201.67 59,433.95 101,801.49 87,407.46 (loss) 73,175.77 (loss) 35,999.49 (loss) 56,089.29 671,419.61 Net income other than operations $53,873.81 64,261.13 119,274.83 167,233.44 270,793.73 255,360.59 366.475.61 307,879.41 289,661.33 239.269.62 255,043.43 2,389,116.93 Net income $405,209.99 314,499.72 107,192.42 120,580.67 315,995.40 314,784.54 468,277.10 395,286.87 216,485.56 203.270.13 198.954.14 3,060,536.54 Dividends paid $60,000 80,000 40,000 40,000 80,000 120,000 120,000 80,000 40,000 660,000
Petitioner claims that because of the shrinkage in values of its assets it had no surplus out of which to pay dividends in 1932 and that to do so would have been in violation of section 58 of the New York State Stock Corporation Law and section 164 of the Penal Law. Petitioner relies on certain advice given him by an attorney. This attorney appeared as a witness. His testimony, on cross-examination, shows that his opinion was given without examining *530the books of the corporation and without knowledge of whether payment of a dividend would have impaired capital. He admitted that, where there is a close corporation and no creditors (the petitioner had only $220,000 current liabilities and $484,000 in cash), and the stockholders agree to the distribution, it is inconceivable that there could be “injury” from payment of a dividend and hence no penalty under the New York statute for distributing dividends. There is no evidence in this proceeding that the security assets of petitioner were in fact of the book value in 1932 ascribed to them by petitioner in its own “write-down” of values. Nor is there any evidence that the value of the security investments was less than cost. The surplus of $318.12 for 1932 is a result of bookkeeping and creates nothing. As stated in Sitterding v. Commissioner, 80 Fed. (2d) 939, “mere bookkeeping entries cannot preclude the government from collecting its revenues, nor are such entries conclusive upon the taxpayer.” It is exceedingly doubtful whether payment of a dividend would have impaired capital and consequently doubt that there was any statutory bar against payment of a dividend by petitioner in 1929. In an issue of this kind, claimed shrinkage of values in assets as a bar to paying dividends is a fact to be proved, and that fact apparently has not been proved here.
In conclusion, it is the opinion of this dissenting view that the penalty prescribed by section 104 should be imposed upon the petitioner.