*3147 1. Where, during prior years the petitioner had losses in excess of its profits, held that its invested capital for the taxable year should be reduced by certain advances made by it to some of its preferred stockholders in lieu of dividends.
2. Respondent's determination as to the amount by which invested capital should be reduced on account of a dividend paid during the taxable year approved for lack of evidence.
*934 This is a proceeding for the redetermination of a deficiency in income and profits taxes of $211.98 for 1920. The deficiency results *935 in part from the respondent's having reduced the petitioner's invested capital by $24,498.96, representing distributions made by it to certain of its preferred stockholders in connection with accrued dividends on preferred stock. The respondent also reduced petitioner's invested capital by $1,901.29, representing the prorated portion of a dividend of $2,096 paid by the petitioner on February 4, 1920.
FINDINGS OF FACT.
The petitioner is a Colorado corporation organized in*3148 1915 with its principal office at Denver. Its business has always been the cutting of timber and the manufacturing of it into lumber and other products.
The petitioner's authorized capital stock is $250,000, divided into $125,000 of common stock and $125,000 of preferred stock. On December 31, 1919, the petitioner had an outstanding capital stock of $241,500, which consisted of $125,000 of preferred stock and $116,500 of common stock, all of which had been paid for in cash at par. The preferred stock was entitled to an 8 per cent dividend payable out of earnings.
On December 31, 1919, the petitioner had a book deficit of $45,616.17, of which $7,309.21 represented an operating deficit and the remainder, or $38,306.96, represented accrued dividends on preferred stock which the petitioner had set up on its books. The dividends accrued on petitioner's books were as follows:
| 1915 | $8,306.96 |
| 1916 | 10,000.00 |
| 1918 | 10,000.00 |
| 1919 | 10,000.00 |
Prior to December 31, 1919, advances amounting to $24,498.96 had been made to some of the preferred stockholders in lieu of dividends, leaving $13,808 which was not paid over or advanced to stockholders.
The petitioner's*3149 operating profits and losses were as follows:
| Year | Profit | Loss |
| 1915 and 1916 | $500.21 | |
| 1917 | $4,907.07 | |
| 1918 | 24,133.17 | |
| 1919 | 12,417.10 |
The respondent in determining the deficiency involved herein determined petitioner's net income for 1920 to be $25,921.05 and its invested capital to be $215,926.18. In determining the invested capital the respondent excluded therefrom the amount of $24,498.96 representing the advances made to some of the preferred stockholders in lieu of dividends. The respondent also excluded from *936 invested capital the amount of $1,901.29 representing the prorated portion of a dividend of $2,096 paid on February 4, 1920.
OPINION.
TRAMMELL: The only issues involved in this proceeding are: (1) Whether the respondent erred in refusing to include in invested capital the amount of $24,498.96 representing advances made from 1915 through 1919 to some of the preferred stockholders in lieu of dividends, and (2) whether he erred in excluding from invested capital the prorated portion of the dividend paid on February 4, 1920.
With respect to the first issue, the petitioner contends that the advances were made to the stockholders*3150 with the understanding that when the petitioner should have earnings sufficient to enable it to pay dividends the advances would be liquidated by such dividends. We can find no evidence in the record in support of this contention, put on the contrary find the following statement appearing on the schedule forming a part of the petitioner's return for 1920: "Dividends paid out of invested capital for years 1915, 1916, 1917, and 1918 prior to January 1, 1920, $24,498.96." To our minds this statement indicates that there was no expectation at the time that the return was prepared that the amounts were to be repaid. There is nothing in the petitioner's balance sheets to indicate that the advances were carried on the books as assets of any kind.
There was in any event no absolute obligation or liability to repay the amounts to the corporation. They were to be paid to the corporation, even if the contention of the petitioner were established, only if and when the corporation had sufficient earnings to pay dividends and actually offset the amounts by dividends. The individuals were in no stronger position to demand or require the distribution of any surplus, when there was any, than*3151 any other stockholder.
To January 1, 1920, the petitioner's losses had exceeded its profits, and $24,498.96 of the amount paid in to the petitioner for its capital stock had been distributed to some of the preferred stockholders and was no longer available to the petitioner for use in its business. Under the circumstances in this case, we think the respondent was correct in refusing to include the amount of $24,498.96 in the petitioner's invested capital.
With respect to the last issue, the respondent determined that the petitioner's net income of $25,921.05 for 1920, when prorated from January 1, 1920, to February 3, 1920, was insufficient to offset the operating deficit of $7,309.21 existing on December 31, 1919, and reduced the petitioner's invested capital by the prorated portion of a dividend of $2,096 paid on February 4, 1920.
*937 In the absence of evidence as to what the petitioner's earnings were from the beginning of 1920 to February 4 of that year, we are not in a position to say that the amount by which the respondent reduced invested capital is incorrect. The action of the respondent is therefore sustained. See *3152 ; ; ; .
Judgment will be entered for the respondent.