*3593 1. Certain amounts invested by a corporation in outside enterprises held not to have been advances to stockholders and are therefore restored to invested capital.
2. Certain withdrawals by stockholders of a corporation held to be loans and therefore are not income to such stockholders and are accounts receivable and should be included in the invested capital of such corporation.
*104 The respondent has asserted deficiencies in income tax for the years 1920 and 1921 as to D. Bruce Forrester, W. S. Forrester and Bruce E. Nace in the respective amounts of $3,118.35, $1,405.64; $424.76, $370.91; and $505.42 and $2,102.32; and as to Forrester-Nace Box Co., for the fiscal years ended January 31, 1921, and January 31, 1922, in the amounts of $2,918.05 and $5,814.89. The parties have agreed that the proceedings may be consolidated for hearing and decision. The issue as to the individual petitioners is whether certain net debits to their accounts on the books of the corporation petitioner at the end of each of the taxable*3594 years were income for such years in the nature of dividends or loans made to them by the corporation. As to the corporation, the only question is whether the debits to its shareholders, the individual petitioners here, were loans or advancements of such a nature that the amounts thereof should be included in invested capital for the fiscal years ended January 31, 1921, and January 31, 1922, respectively. The petitioners in the first three proceedings will be referred to hereinafter as the individuals and in the fourth as the corporation.
FINDINGS OF FACT.
The corporation was organized January 7, 1901, under the laws of Missouri, with its principal office at Kansas City. Its original authorized capital was $30,000, but this was increased in 1914 to *105 $100,000, all outstanding and owned by D. Bruce Forrester, W. S. Forrester and Bruce E. Nace, in the proportions of 25, 25 and 50 per cent, respectively. During all the years here involved its officers were Bruce E. Nace, president, W. S. Forrester, vice president, and D. Bruce Forrester, general manager. Its principal business was the manufacture and sale of wooden boxes. It owned its own plant and equipment. For*3595 the fiscal years ended January 31, 1920, and January 31, 1921, the books indicate a surplus in the respective amounts of $107,233.19 and $117,305.36. No dividends were declared for either of the taxable years.
Each of the individuals had a regular personal account with the corporation. From the date of its organization until and throughout the taxable years the corporation made advances to its officers and charged the amounts thereof to such personal accounts. These accounts were also credited with unpaid salaries and unpaid dividends and any cash payments made to the corporation. The debits to these personal accounts represented withdrawals by and personal obligations paid for the officers by the corporation. Many payments were credited to and many withdrawals were charged to such accounts during the calendar and fiscal years involved in these proceedings. The net personal withdrawals, exclusive of salaries in the fiscal years ended January 31, 1920, 1921, and 1922 were:
| Individual | 1920 | 1921 | 1922 |
| D. Bruce Forrester | $16,371.53 | $1,750.00 | |
| W. S. Forrester | $3,780.27 | 5,103.61 | 3,800.04 |
| Bruce E. Nace | 22,628.69 | 16,875.00 |
The debit balances*3596 in the personal accounts of the individuals on the books of the corporation at the close of the fiscal years ended respectively January 31, 1920, 1921, and 1922, were as follows:
| Individual | 1920 | 1921 | 1922 |
| D. Bruce Forrester | $12,854.15 | $11,104.15 | |
| W. S. Forrester | $3,780.27 | 8,883.88 | 12,683.92 |
| Bruce E. Nace | 5,106.72 | 27,735.41 | 44,611.25 |
In the latter part of the year 1919 the corporation acquired one-third of the capital stock of the Lassen Logging Co., a California corporation, for a consideration of $20,500, and prior to January 31, 1920, made advances to such company in the amount of $71,500. During the same period it received payments on account of such investment and advances in the total amount of $49,340, leaving a net debit balance on account thereof at January 31, 1920, in the amount of $43,032.22. Prior to January 31, 1920, the attorney of the corporation *106 advised that its charter did not authorize investments of this nature and that this account should be closed and the balance thereof transferred to and carried in the name of the officers of the corporation. Pursuant to such advice an account under the caption of "B. E. Nace*3597 & D. Bruce Forrester-Lassen Logging Company" was opened on the books of the corporation and the amount of $43,032.22 was charged thereto.
During the period from January 31, 1920, to January 31, 1922, additional advances were made on account of the investment in the Lassen Logging Co. in the amount of $39,211 and charged to the account of "B. E. Nace & D. Bruce Forrester-Lassen Logging Company." During the same period this account was credited with cash payments of principal and interest in the respective amounts of $15,000 and $2,723.45. In 1921 the officers of the corporation obtained notes from the Lassen Logging Co. in the aggregate amount of $95,000, and immediately assigned such notes to the corporation to be credited to their account. Subsequently such notes were paid in full. At January 31, 1922, this account showed a credit balance in the amount of $30,472.17.
During the period from January 31, 1920, to January 31, 1922, the corporation had on its books an account under the caption "B. E. Nace and D. Bruce Forrester-Empire Development Company." Debits to this account represent purchase price of stock of the Empire Development Co., advances to provide working capital*3598 therefor and the assumption of sundry obligations of such company, which was a Kansas corporation engaged in the operation of a mining lease and concentration plant. As a result of such investment and advances the debit balances of the account at January 31, 1921, and January 31, 1922, were $73,733.16 and $81,233.16, respectively.
The net result of the investments and advances made by the corporation as set forth above was that at January 31, 1921, and January 31, 1922, the "B. E. Nace and D. Bruce Forrester-Lassen Logging Company" account showed a net credit balance in the amount of $30,472.17, and the similar account with the Empire Development Co. showed the debit balances set forth above. All the moneys advanced on account of the Lassen Logging Co. had been repaid and a profit of $30,472.17 had been realized from that investment. Nothing had been realized from the total advances in the amount of $81,233.16 on account of the Empire Development Co.
D. Bruce Forrester, in his income-tax returns for the years 1920 and 1921, reported no amounts representing his net cash personal withdrawals from the corporation in such years, nor any amounts charged to him in connection with*3599 the Lassen Logging Co. and the Empire Development Co. The respondent has increased the income *107 so reported by adding the excess of withdrawals over payments shown by the petitioner's personal account and also by one-half the increase in the debit balances of the "B. E. Nace & D. Bruce Forrester-Lassen Logging Company" and "B. E. Nace & Bruce Forrester-Empire Development Company" accounts for such years. The net result of the adjustments so made was to increase the income of this petitioner for the taxable years in the respective amounts of $18,517 and $11,213.54, which the respondent determined were paid by the corporation to the petitioner as or in lieu of dividends.
The deficiency as to Bruce E. Nace was arrived at in manner outlined above, and results from adjustments increasing this petitioner's income for the years 1920 and 1921 in the respective amounts of $4,013.88 and $17,321.70. Based solely on the excess of withdrawals over payments, as shown by the personal account of W. S. Forrester, the respondent increased the income of such petitioner for the taxable years in the respective amounts of $3,788.47 and $5,103.61.
In its income and profits-tax return for*3600 the fiscal years ended respectively January 31, 1921, and January 31, 1922, the petitioner corporation included in the computation of its invested capital the net debit balances of the personal accounts of D. Bruce Forrester, Bruce E. Nace and W. S. Forrester, and also the net debit balances of the two investment accounts above described. The respondent allowed such inclusions only in the amount of $8,893.17, for each of the fiscal years, which was the sum of the net personal withdrawals of the individuals at January 31, 1921.
OPINION.
LANSDON: The issues here relate to the facts as reflected by the accounting methods of the petitioner corporation and the effect of such methods on the tax liability of each of the several petitioners. Were the cash advances, other than salary payments, made to the individual petitioners loans or dividends? Were the amounts debited to certain accounts advances made by the corporation to its stockholders or investments? If the withdrawals of the stockholders were loans, they were not income to the individuals, the book records thereof are accounts receivable, and the amounts should be included in invested capital. If the amounts debited to*3601 Lassen Logging Co. and Empire Development Co. accounts were investments of corporation funds, they are parts of the corporate assets segregated only for the purpose of complying with the letter of the law restricting the powers of corporations within charter limits.
There is nothing in the record to indicate that the amounts advanced on account of the Lassen Logging Co. and the Empire *108 Development Co. were not investments of corporate funds. The two special accounts were opened and maintained for the sole purpose of avoiding charter restrictions. Although their names were used and the several amounts were charged to them jointly, neither D. Bruce Forrester nor Bruce E. Nace, as between themselves and the corporation, were personally benefited or obligated by the transactions reflected in such accounts. The evidence shows that advances made to, or for the accounts of the Lassen Logging Co. and the Empire Development Co. were made for the purpose of acquiring capital stock in those companies, to provide them with working capital, and for the payment of such of their obligations as were assumed by petitioner. The purpose in carrying the advances to those companies against*3602 the corporate officers was clearly to meet the objections and comply with the advice of the corporation's attorney. Funds advanced to the officers by the corporation, for the afore-mentioned companies, as well as funds received from those companies for the corporation, were impressed with the character of a trusteeship. The officers merely acted as a conduit through which these funds passed; all purposely planned to circumvent what the petitioner corporation had been advised was the law relating to investments of this character. We are of the opinion that the invested capital of the corporation to the extent to which it was entitled to have earned surplus included therein was in no way affected by the fact that the entries involved were made to the special investment accounts.
Having reached the conclusion set forth above, it remains of determine what amounts should be restored to the invested capital of the corporation at January 31, 1920, and January 31, 1921, as factors in the computation of its excess-profits-tax liability for the fiscal years ended January 31, 1921, and January 31, 1922. As to the Lassen Logging Co., it is established by the evidence that the net advances*3603 on account thereof at January 31, 1920, amounted to $43,032.22. This amount should be included in the invested capital of the corporation for the fiscal years ended January 31, 1921, and January 31, 1922, respectively. In the fiscal year ending January 31, 1922, this account was closed out and at the close thereof showed a credit balance in the amount of $30,472.17, which was profit to the corporation and can not be included in earned surplus as a factor in the computation of invested capital for that year.
At January 31, 1921, and January 31, 1922, the corporation had investments in the Empire Development Co. in the respective amounts of $73,733.16 and $81,233.16. We are convinced by the evidence that at such dates there were no reasons to doubt that such investments *109 would return substantial profits to the corporation, and therefore had not decreased its earned surplus at either of such dates. We are of the opinion that the amounts set out herein should be included in the invested capital of the corporation for the fiscal years ended respectively January 31, 1921, and January 31, 1922.
The evidence is convincing that from its inception it was the practice of*3604 the corporation to make substantial cash advances to its stockholders in excess of the amounts due them on account of salaries and dividends regularly declared, and that from time to time the stockholders made substantial payments to the corporation on account of such advances. Apparently the stockholders borrowed money from the corporation rather than from banks when they needed funds for personal use in other ventures or to meet obligations which they had incurred in their several individual capacities. The corporation and the stockholders, being all the parties in interest, regarded such withdrawals as loans. We are of the opinion, therefore, that the debit balances of the personal accounts of the individuals at the end of the fiscal years 1921 and 1922 were accounts receivable and should be included in the invested capital of the corporation for such years. Having so determined, it follows that the net withdrawals of the individuals in the calendar years 1920 and 1921 were not income and are not taxable as such to the several individual petitioners. *3605 ; .
Reviewed by the Board.
Judgment will be entered under Rule 50.