*4134 Invested capital as determined by the respondent approved.
*287 This is a proceeding for the redetermination of a deficiency in income and profits tax of $286.97 for the fiscal year ended July 31, 1921.
While the petitioner alleges in its petition that it does not understand the statement of the Commissioner in reference to the addition *288 and deduction of $293.50 and $273.02, respectively, the sole issue raised by the pleadings is with respect to the reduction in the amount of $6,344.67 of the petitioner's invested capital.
FINDINGS OF FACT.
The petitioner is a corporation organized and incorporated under the laws of the State of South Dakota, with its principal office at Flandreau.
It had been the practice of the petitioner for a number of years, even prior to its incorporation in 1916, to determine its profits and to credit the amount thereof to the individual partners or stockholders in its books of account, it being understood and agreed by said partners or stockholders that such profits should remain in the business as working capital, if*4135 necessary.
For the period ended July 31, 1921, the petitioner took its inventories, calculated its net profits, and credited said profits to the individual stockholders in proportion to their stockholdings. While it is not clear whether a formal meeting of the board of directors was held for the purpose of dividing the profits of the business, it is clear that the action of H. G. Temte, secretary and treasurer of the company, in making these credits to the stockholders, met with the approval of the directors.
The petitioner prepared and duly filed a corporation income and profits-tax return for the period August 1, 1920, to July 31, 1921, showing capital, surplus, and undivided profits at the beginning of the taxable period of $26,408.85, to which sum it added an amount of $6,344.67, making the invested capital for the fiscal year, $32,753.52. The amount of $6,344.67 is explained in the return by a note reading as follows: "Balance of dividends which credited to stockholders' personal accounts for fiscal year 1918-1919 and 1919-1920, but not paid for want of funds, therefore, remaining in the business and hence a part of necessary capital."
The respondent has redetermined*4136 the invested capital of the petitioner for the period in controversy as follows:
| Capital stock and surplus at beginning of year by balance sheet | $26,408.85 |
| Less: | |
| 1. 1920 income tax prorated | 293.50 |
| 26,115.35 | |
| 2. 1919 overassessment | 273.02 |
| Correct invested capital | 26,388.37 |
The addition and deduction used for adjusting the capital stock and surplus at the beginning of the year are explained in the respondent's deficiency notice: "Income taxes are deemed to have been paid *289 from earnings of the year for which paid. Invested capital has, therefore, been adjusted as of the dates the taxes were due and payable."
OPINION.
MORRIS: The sole question presented for consideration is whether the respondent erred in reducing the petitioner's invested capital by the amount of $6,344.67, representing amounts credited to individual stockholders' accounts but not having been actually paid to them. The petitioner contends that because these amounts were not paid and because the funds remained in the business they should be included in invested capital.
In the *4137 , the petitioner, a corporation, had never declared dividends out of profits by formal corporate action. At the end of each fiscal period it distributed its entire net earnings to the personal accounts of its stockholders on its books of account in proportion to their stockholdings. The stockholders had the right to and did draw against such surplus accounts or funds for their personal use. In computing its invested capital the petitioner there, as in the instant case, included the sums credited to the accounts of its stockholders in its invested capital, which amounts were disallowed by the respondent. The action of the respondent in disallowing those sums as invested capital was approved by this Board.
That a formal resolution is not essential to the declaration of a dividend is well settled. .
Where a dividend has been duly declared, whether by the directors themselves or someone else in authority, and approved by them, there is created a relationship of debtor and creditor between the corporation and its stockholders and the amounts credited to their accounts*4138 can not be included in the computation of invested capital. . See also .
The action of the respondent in reducing the invested capital of the petitioner by the amount of $6,344.67 is, therefore, sustained.
Judgment will be entered for the respondent.