*3778 1. Amount of depreciation deductible in 1921 determined.
2. Cash advances were made to the petitioner in varying amounts from October, 1920, to May, 1922, in which latter month its capital stock was issued therefor. Held, it appearing from the evidence adduced that the amounts advanced were regarded as mere loans up to the time when capital stock was issued therefor, the balance of advances shown in the books of account at December 31, 1921, should not be included in invested capital for that year.
*514 This proceeding is for the redetermination of a deficiency in income and profits taxes of $1,078.86 for the taxable year 1921.
The allegations of error urged by the petitioner are:
(1) That deductible depreciation for the year 1921 has been improperly determined by the respondent; and
(2) That the respondent improperly disregarded the sum of $39,300 in the computation of invested capital for that year.
FINDINGS OF FACT.
During the period October 15, 1920, to December 31, 1921, the petitioner received cash from*3779 John Gerosa, president of the petitioner, aggregating in amount $33,650, of which sum he withdrew $14,000 in 1921, leaving a balance to the credit of an account carried in his name at the end of 1921 of $19,650. The petitioner also received during the period January to May, 1922, sums of money aggregating $30,350, against which there were no withdrawals, leaving a balance to the credit of said Gerosa on May 5, 1922, of $50,000.
During the period October 15, 1920, to December 31, 1921, the petitioner received from Anthony Gerosa sums of money aggregating $33,650, against which sum he withdrew $14,000, leaving a balance to his credit at the end of 1921 of $19,650. The petitioner received between the period January to May, 1922, sums of money aggregating $30,350, against which there were no withdrawals, leaving a balance to his credit on May 5, 1922, of $50,000.
The foregoing amounts as received by the petitioner were credited to accounts in the names of Anthony and John Gerosa, respectively, *515 and the withdrawals were properly charged against those accounts. No interest was ever paid by the petitioner on the balances shown therein.
The amounts so advanced to the*3780 petitioner were used by it in construction work and in acquiring other properties.
On May 5, 1922, the following entries were made in the petitioner's books of account:
| Dr. John Gerosa | $50,000 | |
| Dr. Anthony Gerosa | $50,000 | |
| Cr. To Subscriptions | $100,000 | |
| To record payment of stocks subscribed by John Gerosa 500 | ||
| shares, anthony Gerosa 500 shares, in payment of | ||
| loan due them by Company per minutes May 5, 1922. |
In the computation of net income for 1921, the petitioner deducted depreciation amounting to $10,629.92, of which sum the respondent disallowed $2,752.09.
OPINION.
MORRIS: At the hearing of this proceeding the respondent's counsel conceded that the petitioner was entitled to a further depreciation deduction of $2,593.31, which is substantially the entire amount originally disallowed by him. Since no appearance was made for the petitioner at this hearing, and no evidence was offered in justification of a further amount, the adjustment conceded by the respondent is approved.
The second allegation of error urged by the petitioner is that the respondent incorrectly disregarded the sum of $39,300 standing to the credit of John and Anthony Gerosa*3781 in its books of account at December 31, 1921, in the computation of invested capital. The petitioner urges the inclusion of that amount in its invested capital for the taxable period under consideration on the ground that it represented advance payments on its capital stock issued in May, 1922.
The question of including sums similar to those here under consideration in the computation of invested capital has been many times considered and passed upon by this Board, and certain definitely settled principles have been evolved. In , the Board adduced the following rules from , and : (1) That where advances are made to a corporation for which stock is later issued, without other evidence, they become invested capital only from the time the stock is issued therefor; and (2) that where advances are made with the express understanding that they are *516 to be additions to capital for which stock is to be issued, they become invested capital from the time paid in.
*3782 Therefore, in order for the petitioner to prevail in its contention, there must have been an express understanding at or about the time these advances were made that they were to be additions to capital, and that stock would, in fact, be issued therefor.
We find in the deposition that the amount in question was actually advanced to the petitioner and was used in its business, but we find nowhere in the record evidence of an express, or even tacit, understanding between the petitioner and John and Anthony Gerosa that said advances were to be additions to capital for which stock was to be issued.
The petitioner's witness was asked how the sums in question were considered by the petitioner, and he replied, "It was considered as capital * * * as advance on account of capital stock to be subscribed on a later date." The explanation accompanying the book entry of May 5, 1922, recording the subscription to the petitioner's stock by John and Anthony Gerosa, reads, "To record payment on stocks subscribed by John Gerosa, 500 shares, anthony Gerosa 500 shares, in payment of loan due them by Company per minutes May 5, 1922."
Notwithstanding no interest was paid the Gerosas on*3783 the balances of their accounts, in the light of the testimony of the petitioner's witness, that the amounts advanced were for stock "to be subscribed on a later date," and the word "loan" as used in the book entry of May 5, 1922, recording the subscription of stock, we are constrained to Believe that the amount of $39,300 was considered by all concerned as a loan to the petitioner up to December 31, 1921.
The petitioner relies strongly upon We believe, however, that the two cases are clearly distinguishable in that there the Board found that the evidence "conclusively" proved that the taxpayer had planned to increase its plant and that the company advanced the funds for the purpose of purchasing the property to be acquired and, furthermore, that "it was understood and agreed by all parties in interest that the funds so advanced should be an addition to the capital of the taxpayer company, and that immediately thereafter the necessary steps were taken which authorized the issuance of additional capital stock." We believe, therefore, that the instant case is entirely different.
We are of the opinion that the respondent*3784 correctly disregarded the amount of $39,300 in the determination of invested capital for 1921.
Judgment will be entered on 15 days' notice, under Rule 50.