*4186 INVESTED CAPITAL. - Petitioner issued $60,000 additional capital stock and there was actually and bona fide paid in therefor demand promissory notes aggregating a face value of $60,000. The makers of the notes were solvent and at all times fully able to pay the amount of their respective notes which were subsequently fully paid in cash. Held, that the said notes should be included in petitioner's invested capital at their face value.
*113 Petitioner complains of a deficiency in income and profits taxes in the amount of $3,021.15 as asserted by the respondent for the calendar year 1919 and alleges that respondent erred in excluding from its invested capital notes receivable aggregating $60,000.
FINDINGS OF FACT.
Petitioner is a Pennsylvania corporation with its principal office at 617 Penn Ave., Turtle Creek.
On March 20, 1918, the authorized capital stock of petitioner was increased from $40,000, par value to $100,000 par value, in accordance with the procedure required for such increase under the corporation laws of the Commonwealth*4187 of Pennsylvania. On the same date, J. S. Cunningham, R. H. Cunningham, R. J. Cunningham, and J. S. McFeatters each purchased $15,000 par value of the petitioner's stock at par and each gave his demand note for $15,000 to petitioner.
Under date of March 20, 1918, an entry was made on Folio 59 of petitioner's journal as follows:
| Notes receivable | $60,000 | ||
| J. S. Cunningham | $15,000 | ||
| R. H. Cunningham | 15,000 | ||
| R. J. Cunningham | 15,000 | ||
| J. S. McFeatters | 15,000 | ||
| To Capital Stock | $60,000 |
*114 That entry was posted to the debit of "Notes Receivable" account on Folio 124 of petitioner's ledger.
Petitioner issued stock certificates for the said purchases of its additional capital stock, as follows:
| Certificate No. | Date | Number of shares | |
| J. S. Cunningham | 4 | May 1, 1918 | 150 |
| R. H. Cunningham | 2 | do | 150 |
| R. J. Cunningham | 6 | do | 150 |
| J. S. McFeatters | 8 | do | 150 |
The notes were payable on demand, were given in good faith in payment for the stock and accepted by petitioner at their face value. Petitioner included the notes at their aggregate face value, namely $60,000, in all of its financial statements and thereby increased*4188 its credit. Petitioner never tried to discount any of the notes but held them without interest and they were paid, in full, in cash on December 31, 1920, and entered on petitioner's cash book, Folio 88, accordingly.
J. S. Cunningham owned the following property on March 20, 1918:
| Value | |
| Real estate: | |
| In Patton Township | $15,000 |
| On Lynn Ave., Turtle Creek, one-third interest | 200 |
| On Lynn Ave., Turtle Creek, one-third interest | 4,000 |
| On Airbrake Ave., Turtle Creek, one-third interest | 6,667 |
| In North Versailles Township, one-third interest | 1,667 |
| On Lennox Ave., Ardmore, one-third interest | 2,000 |
| In Edgewood Acres, one-third interest | 100 |
| On Monroeville Road, Turtle Creek, one-third interest | 5,000 |
| Stock, one-fourth of petitioner's original stock issue | 10,000 |
| Stock in Westinghouse Garage & Supply Co | 5,000 |
| Liberty bonds and securities, value not given | |
| Total | 49,634 |
There were no encumbrances on the property and J. S. Cunningham had no outstanding obligations except as one of the four individual endorsers on petitioner's note, in the amount of $18,000 to a bank.
R. H. Cunningham owned the following property on March 20, 1918:
| Value | |
| Real estate: | |
| On Lynn Ave., Turtle Creek, one-third interest | $200 |
| On Lynn Ave., Turtle Creek, one-third interest | 4,000 |
| On Airbrake Ave., Turtle Creek, one-third interest | 6,667 |
| In North Versailles Township, one-third interest | 1,667 |
| On Lennox Ave., Ardmore, one-third interest | 2,000 |
| In Edgewood Acres, one-third interest | $100 |
| On Monroeville Road, Turtle Creek, one-third interest | 5,000 |
| On Shaw Ave., Turtle Creek | 30,000 |
| On McMasters Ave., Turtle Creek | 7,500 |
| On Osborne Ave., Turtle Creek | 7,500 |
| Stock, one-fourth of petitioner's original stock issue | 10,000 |
| Stock in Westinghouse Garage & Supply Co | 5,000 |
| Total | 79,634 |
R. H. Cunningham was one of four endorsers on petitioner's note, in the amount of $18,000.
R. J. Cunningham owned the following property on March 20, 1918:
| Value | |
| Real estate: | |
| On Lynn Ave., Turtle Creek, one-third interest | $200 |
| On Lynn Ave., Turtle Creek, one-third interest | 4,000 |
| On Airbrake Ave., Turtle Creek, one-third interest | 6,666 |
| In North Versailles Township, one-third interest | 1,666 |
| On Lennox Ave., Ardmore, one-third interest | 2,000 |
| In Edgewood Acres, one-third interest | 100 |
| On Monroeville Road, Turtle Creek, one-third interest | 5,000 |
| On Maple Ave | 7,000 |
| Stock, one-fourth of petitioner's original stock issue | 10,000 |
| Stock in Westinghouse Garage & Supply Co | 5,000 |
| Liberty bonds and stock, no value given | |
| Total | 44,432 |
There were no encumbrances against any of the*4190 said property and R. J. Cunningham's only outstanding obligation was as indorser on petitioner's note for $18,000.
Joseph S. McFeatters owned the following property on March 20, 1918:
| Value | |
| Real estate on Franklin Ave., Turtle Creek, value $9,000, with outstanding mortgage of $3,000 | $6,000 |
| Coal, sand and gravel business at Turtle Creek, net worth approximately | 40,000 |
| Stock in Westinghouse Garage & Supply Co | 5,000 |
| Stock, one-fourth of petitioner's original stock issue | 10,000 |
| Total | 61,000 |
The accounts payable and expenses of the coal, sand and gravel business were paid regularly each month and the assets consisted of materials on hand and accounts receivable. J. S. McFeatters was one of the endorsers on petitioner's note for $18,000.
The respondent in this computation of petitioner's tax liability for the year 1919, excluded from its invested capital notes receivable aggregating $60,000 paid in for petitioner's additional stock issue, the said action resulting in the deficiency in question.
*116 OPINION.
TRUSSELL: The demand promissory notes actually and bona fide paid in for petitioner's additional stock issue constitute invested capital*4191 of petitioner under section 326(a) of the Revenue Act of 1918, at the time paid in and during the time such notes were held by petitioner, to the extent of their actual cash value. ; ; ; .
The evidence establishes that each of the makers of the notes in question was entirely solvent and fully able at all times to pay the amount of his respective note upon demand and that each of the notes was fully paid in cash. The four notes were actually and bona fide paid in for stock, the actual cash value thereof was equal to their face value, namely $60,000, and in computing petitioner's invested capital, the said notes should be included therein at their face value.
Judgment will be entered on 15 days' notice, pursuant to Rule 50.