*3239 Invested capital of the petitioner was determined by the respondent at the beginning of the year without making any deduction for a deficit caused by operating losses. Before any dividends were paid during the taxable year the earnings were more than adequate to compensate for the operating deficit. Dividends were thereafter declared and paid during the taxable year, the earnings being more than sufficient to pay such dividends. Held, that the invested capital as computed at the beginning of the year should not be further reduced by reason of the payment of such dividends.
*501 Petitioner appeals from the determination by the respondent of a deficiency of $24,044.04 in income and profits tax for 1920. In the petition numerous errors are alleged, all but three of which have been abandoned.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of California, with its principal office at San Francisco. The petitioner was incorporated on February 25, 1899, and since that time has been engaged in growing sugar*3240 cane in the Territory of Hawaii and manufacturing such cane into raw sugar. The Territory of Hawaii imposes a territorial income tax upon the net income received during the calendar year by a corporation. On December 31, 1920, the petitioner accrued upon its books, as such tax upon its 1920 earnings, $13,717.96. The tax was later fixed at $13,719.20 and paid in two equal installments in May and November, 1921. In the years previous to 1920, petitioner had not accrued such taxes but had deducted them from income when paid. In 1920 it paid $3,110.70 as territorial income tax upon its 1919 income. In computing its net income for 1920 subject to Federal income tax it deducted the territorial income tax paid in 1920 on 1919 income and the territorial income tax on its 1920 income. The Commissioner allowed as a deduction only the amount paid in 1920 for tax on 1919 income.
The net income of the petitioner for 1920 was determined by the Commissioner in the deficiency notice to be $485,532.22. At the beginning of the year 1920 petitioner had a deficit of $125,719.12 due to losses in operating its business. It had a capital stock of the par value of $2,000,000. The Commissioner*3241 determined the invested capital to be $1,750,270.46 before making any adjustment for inadmissible assets and $1,743,395.40 after deducting such inadmissible assets. In determining each of these amounts the Commissioner did not deduct the deficit due to operations. During 1920 petitioner paid dividends as follows:
| July 6th | $15,000 |
| August 5th | 15,000 |
| September 9th | 15,000 |
| October 7th | $15,000 |
| November 15th | 15,000 |
| December 4th | 15,000 |
The Commissioner reduced the invested capital of the petitioner by the amount of such dividends, prorated from the date of payment.
OPINION.
PHILLIPS: We need not repeat here the facts with respect to territorial income taxes. At the hearing it was conceded by both parties that the Commissioner was in error in refusing to allow as a deduction the amount which had accrued as taxes upon 1920 income. *502 While the stipulation of the parties involves a conclusion of law, we are without any evidence of the basic facts upon which its accuracy might be tested and therefore assume that the conclusion reached is justified by the facts.
The Commissioner contended that he was likewise in error in permitting the deduction*3242 in 1920 of the tax imposed upon 1919 income but paid in 1920. Here, also, we are without any evidence upon which to determine whether that which the Commissioner did in this respect was or was not correct. Except for the admissions in the pleadings that certain expenditures relating to the crops of future years were charged to a crop account and deducted when the crop was harvested, no evidence has been supplied as to the method of accounting in 1919 or in 1920 other than with respect to this one item of taxes. Whether there was a change in the original method of accounting and, if so, whether such a change was with the consent of the Commissioner, does not appear. Nor are there other facts from which we may determine what should properly be done with the item in question. Since the burden was on the respondent to show that he was in error in allowing the deduction and this has not been done, his determination with respect to this item must be followed.
The Commissioner determined the invested capital of the petitioner at the beginning of the year to be $1,750,270.46. The petitioner had an operating deficit of $125,719.12 which was not deducted in computing this invested capital. *3243 . The earnings during the first six months were sufficient to make good this deficit, even after making provision for taxes. No dividends were paid during those months. It therefore appears that before any dividends were paid, petitioner had fully restored the amount of invested capital which the Commissioner determined existed at the beginning of the year. During the last six months of the year petitioner paid dividends, but the earnings of these last six months were sufficient to pay such dividends and still leave petitioner with the full amount of invested capital which had been allowed it at the beginning of the year. Such dividends were paid from earnings of the year and they did not serve to reduce the invested capital beyond the point to which it had already been reduced at the beginning of the year.
At the hearing it was stipulated that in computing the deficiency invested capital had been erroneously reduced by $2,510.70, the cost of an easement acquired in 1899. Proper adjustment should be made for this item in recomputing the deficiency.
Decision will be entered under Rule 50.