*1362OPINION.
Milliken:The first issue for consideration is whether the respondent was justified in reducing petitioner’s earned surplus for invested capital purposes, by $87,425, because of an alleged overvaluation of its assets in 1914 when a new system of accounts was installed and new books of account opened. The petitioner commenced business in or about the year 1906, in a small plant at Bantam, Conn., with a total paid-in capital of $7,250. By 1912, the business had so increased as to necessitate the construction of a larger plant in and the removal of operations to Bridgeport, Conn. During this period and until January, 1914, the books of account were maintained upon the single entry basis, and were crude in their make-up and poorly kept. In January, 1914, a double entry system of bookkeeping was installed and new books of account opened under the new system of accounts. The first entries in the new books recorded the assets at an aggregate value of $342,964.01, the liabilities in the total sum of $104,761.83, and the net worth (capital and surplus) in *1363the amount of $288,202.18. Thus, if the opening entries in the new books correctly reflected the facts, the business had grown, in approximately seven years, from one with a net worth in 1906 of $7,250 to one having a net worth at the beginning of 1914 of $238,-202.18, an increase of approximately $231,000. It is this very substantial increase in the net worth of the business which respondent questions, in view of the showing made by the petitioner in its excise and income-tax returns for the years 1909 to 1913, inclusive.
Each of the excise-tax returns which this petitioner filed for the years 1909 to 1912, inclusive, show a net income of less than $5,000, while the income-tax return which it filed for the year 1913 shows a net income of $11,200. Eespondent, taking into consideration the fact that the business was begun in 1906 with a paid-in capital of but $7,250, coupled with the low earnings shown in the returns for five of the seven years intervening between 1906 and J anuary, 1914, when the new books of account were opened, concluded that the increase of $231,000 in the net worth of the business, as shown by the opening entries in the new books, could not be accounted for by earnings, and that the asset values taken up on the new books of account must have included substantial appreciation or that the liabilities recorded thereon must have been substantially understated. Eespondent, therefore, arbitrarily fixed the earnings of the period from the date business was commenced to January, 1914, at $15,000 per annum, the total of which is $87,425 less than the increase in the net worth for the same period as shown by the opening entries in the new books of account, and, accordingly, reduced the earned surplus for invested capital purposes by the said sum of $87,425.
We do not know what occasioned the substantial growth in the net worth of the business between 1906 and January, 1914. It may have been brought about entirely through earnings, though seemingly quite improbable, or in part through substantial contributions of capital. There is no evidence which sheds any light on that feature of the case. However, we do not think that is an important feature, since the evidence conclusively proves that the cost of assets set up on the new books of account in J anuary, 1914, with the single exception of the estimated value of $10,000 assigned to the abandoned property at Bantam, Conn., may be properly recognized and accepted for invested capital purposes. Excepting the value assigned to the abandoned property, and probably the value of the merchandise inventory, the asset values entered in the new books of account were based upon actual costs; and the liabilities recorded therein represented all of the outstanding liabilities, no additional ones having been subsequently discovered. As to the value assigned to the merchandise inventory in 1914, relating to invested capital, we need have no concern, since whatever discrepancy it may have contained, either *1364understatement or-overstatement, was offset by á-compensating overstatement or understatement in the earnings of the preceding year.
We are satisfied that the amount of surplus shown was substantially correct, excepting the amount of $10,000 allowed for the abandoned plant, and are of the opinion that there is no warrant for a reduction to an amount greater than $10,000 of invested capital for 1917 and 1919, attributable to overvaluation in 1914 of earned surplus and undivided profits. Accordingly, the respondent is sustained for $10,000 and reversed for $77,425.
As to the second issue, there is no evidence of the cost of the inventories taken June 30, 1916, and June 30, 1917, and the respondent is sustained.
Judgment will l>e entered on 15 days’ notice, under Rule 50.