*614 The respondent has determined an overassessment of income and profits taxes of $5,470.98 and a deficiency of $13,777.11 for the fiscal years ended March 31, 1920 and 1921, respectively, and petitioner brings this proceeding for the redetermination of its income and profits-tax liability for those years, alleging errors in respondent's determination as follows: (1) Disallowance of a paid-in surplus of $177,371.17 and $174,391.17 as invested capital for the fiscal years 1920 and 1921, respectively; (2) refusing to allow a deduction of $2,980 for each of the years on appeal on account of depreciation of the properties which are the subject of the claim for a paid-in surplus; (3) reduction of invested capital by $31,172.63 on account of alleged inadequate depreciation charged off in prior years; (4) reduction of invested capital for the fiscal year 1920 by $27,726.78 on account of an operating deficit of that amount at the beginning of the fiscal year, and by $7,043.81 on account of income and profits taxes of prior years; and (5) reduction of income of both years*4069 by an allowance for depreciation of motor delivery equipment in excess of a reasonable allowance. Respondent, having determined an overassessment for 1920, moved at the hearing to dismiss the appeal as to that year, to which motion the petitioner agreed, it being understood that the Board would consider such facts with relation to the taxes for 1920 as may be necessary correctly to redetermine the deficiency, if any, for the fiscal year 1921.
*615 FINDINGS OF FACT.
Petitioner, a Nebraska corporation with its principal office at Omaha, was incorporated in 1893 and is engaged in the business of selling, at wholesale and retail, building materials, coal, coke and wood.
In 1907 petitioner's authorized capital stock was increased to a total par value of $100,000. All of the outstanding capital stock, except certain qualifying shares, is owned by C. W. Hull.
In connection with its business, petitioner operates three yards in Omaha known as the South yard, West yard, and North yard, where it receives, stores, and disposes of the commodities in which it deals, and at which it maintains stables and garages.
The South yard is located at 24th and Spring Streets. The land*4070 comprising this yard, with its then improvements, was acquired by C. W. Hull in 1905 and 1906, in seventeen transactions at a total cost of $42,035.86. In or about 1909, Hull caused to be constructed on this property improvements consisting of reenforced concrete coal pockets, retaining walls, concrete and brick and stone pavings, frame brick sheds, coal bins, concrete sand docks, and a brick office building, at a total cost estimated by petitioner to have been $132,100. The cost of constructing these improvements was defrayed by Hull out of funds he withdrew from petitioner and which was charged to his account on petitioner's books.
The West yard is located at 46th and Dodge Streets. The land comprising this yard, with its then improvements, was acquired by C. W. Hull in 1912 at a total cost of $27,754.32.
North yard No. 1 is located at 20th and Izard Streets, and North yard No. 2 is located at 22nd and Izard Streets. A part of the land comprising these yards, with its then improvements, was acquired by the father of C. W. Hull in 1901 at a total cost of $15,952.91; and this part of the land came into Hull's possession, through inheritance, part of the land came into Hull's*4071 possession, through inheritance, at his father's death. In 1908 and 1910, Hull made further additions and improvements at a total cost of $8,018.08.
The stables and garages occupied by the petitioner are located at 2501 Cummings Street. This property was acquired by C. W. Hull in 1916 at a total cost of $9,425.
These three yards, together with all improvements thereon, and the stables and garages have been occupied and used, at all times since acquisition by Hull and/or his father, exclusively by petitioner in the conduct of its business. None of these properties have ever been conveyed by Hull to the petitioner and the title thereto vested in Hull throughout the taxable years on appeal. The petitioner did not pay to Hull any rent for the use and occupancy of these properties; but it did pay all taxes, regular and special, assessed *616 against these properties, and all interest on funds borrowed by Hull for the use of the petitioner for which these properties were made security.
In the course of respondent's examination and audit of its returns, petitioner made claim for additional invested capital of $177,371.17 for the fiscal year 1920, and of $174,391.17 for*4072 the fiscal year 1921, as a paid-in surplus, which appears to have been based on equitable grounds - that the properties aforementioned were used exclusively in petitioner's business. The additional invested capital claimed was disallowed by respondent. Petitioner also made claim for a deduction from income of both years, in the amount of $2,980, for depreciation of these properties, which respondent refused.
Petitioner's books of account show depreciation to have been credited against the asset accounts during the fiscal years 1911 to 1916, inclusive, as follows:
| Year ended Mar. 31 | Buildings | Delivery equipment | Furniture and fixtures | Soliciting equipment | Yard utensils | Total |
| 1911 | $8,308.31 | $16.59 | $3,712.00 | $12,036.90 | ||
| 1912 | None. | |||||
| 1913 | 5,206.57 | $487.19 | 5,693.76 | |||
| 1914 | $175.00 | 1,109.74 | 284.84 | 1,569.58 | ||
| 1915 | 1,891.31 | 1,342.71 | 264.63 | 3,498.65 | ||
| 1916 | 1,402.64 | 309.82 | 1,712.46 | |||
| Total | 175.00 | 17,918.57 | 1,669.12 | 3,712.00 | 1,036.66 | 24,511.35 |
The books also show the following sums expended for yard repairs during the fiscal years 1911 to 1916, inclusive:
| Year ended Mar. 31 | North yard | South yard | West yard | Total |
| 1911 | $1,012.92 | $703.64 | $1,716.56 | |
| 1912 | 414.35 | 71.56 | 485.91 | |
| 1913 | 74.40 | 8.69 | 83.09 | |
| 1914 | 419.24 | 144.74 | $8.47 | 572.45 |
| 1915 | 118.27 | 89.39 | 53.51 | 261.17 |
| 1916 | 192.02 | .90 | 60.89 | 253.81 |
| Total | 2,231.20 | 1,018.92 | 122.87 | 3,372.99 |
*4073 The depreciation on delivery equipment was determined by the manager of the delivery department, who annually made an inventory of the estimated value of all such equipment. Respondent held that the depreciation charged off on the books to December 31, 1916, was insufficient by $31,172.63 to cover the actual depreciation sustained to that date, and, accordingly, reduced the invested capital as shown by petitioner's books of account by $31,172.63.
The allowances for depreciation of motor delivery equipment which respondent has allowed as deductions from income of the two years on appeal, are based upon an average life of 3 years.
*617 Respondent reduced petitioner's invested capital for the fiscal year 1920 by $27,726.78 because of an operating deficit of that amount at the beginning of the year, and by $7,043.81 on account of income and profits taxes of prior years.
OPINION.
GREEN: Petitioner alleges error in respondent's disallowance of a paid-in surplus of $177,471.17 and $174,391.17, as invested capital for the fiscal years 1920 and 1921, respectively. The amounts claimed as a paid-in surplus represent the estimated depreciated cost to C. W. Hull and his father*4074 of the three yards, stables, and garages, and the improvements thereon, operated by petitioner in the conduct of its business.
This contention is based upon the theory that the title to the property in question was acquired by the petitioner through adverse possession. C. W. Hull as an individual acquired the real estate upon which the yards and stables were located. Upon these properties with his own funds, he constructed the improvements necessary for the conduct of the business of the petitioner. At the time of its construction, the property was fenced and advertising signs of the petitioner placed thereon.
Title by adverse possession under the laws of the State of Nebraska may be acquired within 10 years. See chapter 2, section 8507, Compiled Statutes of Nebraska.
In the case of , the rule in regard to adverse possession is stated as follows:
A person who enters upon the land of another with the intention of occupying the same as his own and carries that intention into effect by open, notorious, exclusive, adverse possession of the premises for ten years, thereby disseises the owner, and this is so whether*4075 the entry and possession are contrary to the right of the owner or not, if the occupant denies the owner's title and claims the land as his own.
In Thompson on real property, at section 2515, the rule in regard to adverse possession is stated as follows:
Adverse possession of real estate is possession thereof inconsistent with the right of the true owner and when such possession is accompanied by certain acts and circumstances, the title will vest in the possessor. The possession must be hostile, actual, exclusive, notorious, continuous, and under a claim of title, during the time necessary to create a bar under the statute of limitations. The absence of any of these elements or others required by statute will prevent the acquisition of title by adverse possession.
There is nothing in the record to show that the petitioner entered upon the property in question other than with the consent of the owner, Hull, the sole stockholder of C. W. Hull Co. Hull testified that he was daily present upon the premises at the time the buildings were constructed and that he was a frequent visitor thereafter. It is *618 true that the properties were fenced and that they bore the sign*4076 of the petitioner. Both the fencing and the painting of signs upon the premises was a usual and customary incident in carrying on business of this nature. Neither these facts nor the payment of the taxes and interest on mortgages by the petitioner are sufficient in themselves to show possession hostile to that of the owner of the land. The facts show that the original entry was permissive and with the entire consent of the owner of the property. A tenancy was created and nothing has happened in the ensuing years to alter this situation. Mr. Hull was in peculiar control of the situation. He, and he alone, would have known of an adverse intent on the part of the corporation. It appears that the only way that the corporation could have acquired title would have been by gift or purchase and the records do not bear this out. Accordingly, it is held that the Commissioner properly refused to include the value of the coal yards in question in the invested capital of the petitioner.
The second assignment of error is that respondent refused to allow a deduction of $2,980 from the income of each of the years on appeal on account of depreciation of the properties which are the subject*4077 of petitioner's claim for paid-in surplus under the first issue. Petitioner concedes that if it be the determination of the Board that it is not entitled to include the properties referred to in the first issue in invested capital as a paid-in surplus, then the second assignment of error must be resolved in favor of respondent. We think this concession by the petitioner is a proper one. Petitioner has made no capital investment in the properties referred to which may be made the subject of an allowance for depreciation. .
The third assignment of error is that respondent arbitrarily, and without affirmative evidence, reduced invested capital of both years on appeal by $31,172.63 on account of alleged inadequate depreciation charged off to December 31, 1916. In the brief filed after the hearing, petitioner concedes that respondent's action is correct so far as it relates to and includes accrued depreciation on furniture and fixtures, and motor equipment. The evidence is wholly insufficient to show error in respondent's action. Petitioner has contented itself with placing in evidence the amounts of depreciation charged*4078 off and of repairs charged to expense from 1911 to 1916, inclusive. There is nothing to show that respondent did not give consideration to the facts relating to the depreciation provided for on the books, in arriving at his determination that the amount provided for was inadequate to take care of the depreciation actually sustained. There is no proof as to the adequacy of the depreciation provided for on the books, and the prima facie correctness of respondent's determination is not overcome.
*619 The fourth assignment of error is that respondent erroneously reduced invested capital for the fiscal year 1920 by $27,726.78 because of an operating deficit at the beginning of the taxable year, and by the further sum of $7,043.81 on account of income and profits taxes of prior years. Our jurisdiction on this issue is confined solely to the consideration of such facts with relation to the taxes for 1920 as may be necessary correctly to redetermine the deficiency for the fiscal year 1921.
The following allegation appears in the petition:
(e) In computing invested capital for the fiscal year ending March 31, 1920, the Commissioner reduced the outstanding capital stock by*4079 the aggregate amount of $34,770.59 for a deficit, when such a deficit was an operating deficit.
In the respondent's answer apppears the following which relates to the allegation of the petition above quoted:
Admits that the other adjustments as alleged in paragraphs 4, (b), (c), (d) and (e) were made by the Commissioner.
The petitioner has thus alleged that the respondent reduced the capital stock by the amount of certain operating deficits. This action on the part of the respondent is admitted by the answer. It is of course conceded by the respondent that operating deficits may not be applied against amounts paid in to the corporation for stock or shares. We have held in a succession of cases based upon the , that a capitalization by stock dividend of earned surplus does not translate such earned surplus into paid in capital so that it may not be reduced by an operating deficit.
No proof was introduced from which we can determine whether this petitioner has declared a stock dividend, but from its brief it appears that such a dividend in the amount of $900,000 was declared on August 12, 1907. The brief also*4080 sets forth as of the same date a debit of cash in the amount of $25,000 and a credit in the amount of $750,000 on account of good will. The respondent, on July 16, 1923, wrote the petitioner with reference to its taxes for the years here involved and in such letter set out the following computation of invested capital:
| Capital Stock | $1,000,000.00 | |
| Less: Deficit | 27,726.78 | |
| Balance | 972,273.22 | |
| Good Will | $750,000.00 | |
| Add: Tax (1918) | 918.42 | |
| 750,918.42 | ||
| Balance | 221,354.80 |
It thus appears that the respondent has reduced invested capital by the amount of $750,000. This reduction is less in amount than was *620 the stock dividend and it seems clear that the respondent has allowed a capitalization of earned surplus in the amount of $150,000.
From the information before us (and it is grossly inadequate and wholly insufficient for an accurate determination of the question) we conclude that the respondent has applied the operating deficits in reduction of a capitalized earned surplus. Under such circumstances we can not hold that the respondent erred when he reduced "outstanding capital stock" by the amount of the operating deficits.
The*4081 fifth assignment of error is that respondent has understated the income of 1920 and 1921 by the allowance of a deduction for each year for depreciation of motor delivery equipment in excess of a reasonable allowance. Respondent denied the allegation, and petitioner submitted no proof. Respondent sustained on this issue.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.