*1295 Petitioners owned stock in a corporation which had an earned surplus on March 1, 1913. Losses which occurred thereafter greater than undistributed earnings of years previous to such losses should be charged to and reduce such earned surplus, but not subsequent earnings. Earnings subsequent to losses so treated are the most recently accumulated earnings, and dividends paid to petitioners therefrom are taxable to them. Helvering v. Canfield,291 U.S. 163">291 U.S. 163.
*628 The income tax deficiencies in controversy are for the year 1928, in the case of Robert S. Farrell, Docket No. 54294, being $2,263.84, and in the case of G. A. Olson, Docket No. 54295, being $139.40 The errors assigned are that the respondent added to the income of Farrell, subject to surtax, $18,769.18, and to the income of Olson, subject to surtax, $13,666.87, which amounts were distributions paid petitioners on December 28, 1928, by the Deep River Logging Co., of which corporation they were stockholders. The proceedings were consolidated for hearing and report. The*1296 facts are stipulated.
FINDINGS OF FACT.
The petitioners are residents of the city of Portland, Oregon.
The Deep River Logging Co., a Washington corporation, was organized long prior to March 1, 1913, and was engaged in the "business of owning, holding, buying, selling, and logging timber lands in the State of Washington." The company had a capital of $30,000, consisting of 300 shares of common stock of the par value of $100 per share, of which petitioner Farrell owned 103 shares and petitioner Olson owned 75 shares. The total amount of depletion sustained during the calendar year 1928 through the sale or other disposition of timber by said company was $112,958.45, of which amount $40,123.65 was depletion of timber owned at and prior to March 1, 1913.
On December 28, 1928, the Deep River Logging Co. made distribution to its stockholders of $75,000, of which Farrell received $25,750 and Olson received $18,750.
The earned surplus of the Deep River Logging Co. as at March 1, 1913, and the credits to said surplus account from earnings and from timber appreciation from March 1, 1913, to and including December 31, 1928, together with the debits to the surplus account during*1297 the same period and the debits resulting from dividends and Federal taxes paid, are stipulated, the credits and debits being summarized and the surplus account analyzed, as follows:
| Summary | |||
| Surplus balance March 1, 1913 | $605,534.28 | ||
| Credits: | |||
| From profits | $655,727.44 | ||
| From timber appreciation | 610,152.30 | ||
| Total credits | $1,265,879.74 | ||
| Debits: | |||
| Federal taxes | $209,826.07 | ||
| Dividends | 1,182,000.00 | ||
| Total debits | $1,391,826.07 | ||
| Net reduction of surplus | $125,946.33 | ||
| Balance surplus December 31, 1927 | $479,587.95 |
*629 The credits to surplus in the form of "timber appreciation," as above and hereinafter referred to, are in fact realized appreciation, caused by the allowance of timber depletion on the basis of March 1, 1913, value in excess of cost.
*630 In auditing the 1928 returns of the petitioners the respondent determined that 72.89 percent of the distrubutions received by them during that year represented taxable dividends. The taxable percentage of 72.89 was determined as follows:
| Net earnings for 1928 | $55,273.03 |
| Net earnings from January 1 to date dividend was paid, december 28, 1928 | 54,667.50 |
| Dividend payment | 75,000.00 |
*1298 Percentage of available earnings to dividends paid, $54,667.50 divided by $75,000, equals 72.89%.
OPINION.
SEAWELL: The record shows that the petitioners, Robert S. Farrell and G. A. Olson, as stockholders in the Deep River Logging Co., received on December 28, 1928, as distributions from the company, $25,750 and $18,750, respectively. It is contended by petitioner Farrell that the respondent erroneously added to his income for 1928, subject to surtax, $18,769.18, and petitioner Olson insists respondent *631 likewise erroneously added to his taxable income for that year $13,666.87.
It is argued on behalf of the petitioners that no portion of the sums of $18,769.18 and $13,666.87 added to the 1928 incomes of Farrell and Olson, respectively, is taxable to them, because the distributions, it is insisted, were not from earnings or profits accumulated after February 28, 1913, but out of the earnings prior to March 1, 1913.
In our opinion, under the applicable law the contention of the petitioners is not sustained by the record, as the following brief computation made therefrom shows, bearing in mind that the "timber appreciation" is, as stated in our findings of fact, *1299 a "realized appreciation."
| March 1, 1913, surplus | $605,534.28 |
| December 31, 1915, in paying the dividend of $144,000, the Deep River Logging Co. used all its earnings (including "timber appreciation") accumulated since February 28, 1913, and in addition thereto the amount of | 70,894.00 |
| Balance March 1, 1913, surplus | 534,640.28 |
| December 31, 1926, necessary to take care of losses for that year | 25,904.41 |
| Balance March 1, 1913, surplus | 508,735.87 |
| December 31, 1927, all losses for 1927 | 29,147.92 |
| Balance March 1, 1913, surplus on hand on December 31, 1927 | 479,587.95 |
It is apparent from the foregoing and the record that all that the company had with which to pay the dividend of $75,000 on December 28, 1928, was the above balance of March 1, 1913, surplus, and the current 1928 earnings of $54,667.50, from which it is evident that 72.89 percent of the $75,000 distribution, as determined by the respondent, would be taxable as a dividend and the balance or 27.11 percent would be paid from March 1, 1913, surplus and would be nontaxable. We are, therefore, of the opinion and hold that the respondent did not err in adding to the 1928 incomes of petitioners Farrell and*1300 Olson, subject to surtax, $18,769.18 and $13,666.87, respectively, those sums being 72.89 percent of the $25,750 and the $18,750 received by petitioners, respectively, from the $75,000 distribution made to stockholders on December 28, 1928, by the Deep River Logging Co.
Our determination herein is in accord with and controlled by the principle enunciated in . Cf. , and .
Judgment will be entered in favor of respondent in each of the dockets.