*246 Decision will be entered for the respondent.
Petitioner's wholly owned subsidiary incorporated in Canada undertook contracts in Canada in 1937 and 1938 from which a profit resulted. Petitioner advanced initial funds and supplied services of its officers and employees, charging these to the subsidiary, and withdrew funds from the subsidiary in 1938, 1939, and 1940. After September 1938 and until July 1940 the books of the two corporations showed the petitioner as indebted to the subsidiary. The latter then declared a dividend in the amount so shown. Held, the funds withdrawn by the petitioner in 1938 and 1939 were not dividends in those years for purposes of computing excess profits tax base period net income, credit, and carry-over from 1940 to 1941.
*436 This case involves a proposed deficiency of $ 224,947.92 in excess profits tax for 1941. The sole issue is whether amounts withdrawn from a subsidiary of the taxpayer in 1938 and 1939 were dividends paid by the subsidiary in the years in which withdrawn, or in 1940, when a dividend was declared. *247 The stipulated facts are so found. Other facts are found from the evidence presented.
FINDINGS OF FACT.
Petitioner is a corporation, organized under the laws of the State of Maine, with its principal office in New York, New York, and is engaged in the business of designing and constructing byproduct coke oven plants and related apparatus. Its income and excess profits tax returns for the calendar year 1941 were filed with the collector of internal revenue for the second district of New York. During the years 1937, 1938, and 1939 and until July 22, 1940, all of petitioner's capital stock was owned by Louis N. Wilputte.
In 1926 petitioner caused to be incorporated, under the laws of the Dominion of Canada, the "Coke Oven Company of Canada, Limited," hereinafter referred to as the Canadian subsidiary, to carry on in Canada the line of business carried on by petitioner in the United States. The Canadian subsidiary has at all times been a wholly owned subsidiary of petitioner. From the time of its incorporation through the year 1941, all the officers and directors of the Canadian subsidiary were officers of petitioner. None received any compensation from the Canadian subsidiary.
*248 Prior to 1937 the Canadian subsidiary issued no capital stock, had no property, and carried on no activities. In 1937 it issued to petitioner for cash $ 2,000 of its capital stock, constituting all of its capital stock which has ever been issued.
The first activity of the Canadian subsidiary was the construction of byproduct coke ovens for Algoma Steel Co. at Sault Ste. Marie, Ontario, Canada. The contract therefor was executed and performance begun in 1937. Performance was completed and final payment received in 1938. The price received was $ 829,000 and the cost was $ 625,170. The next activity of the Canadian subsidiary was the construction of a benzol plant for Steel Co. of Canada, at Hamilton, Ontario, Canada. This contract was executed and performed and payment received in 1938. The price received was $ 309,046 and the cost was $ 291,875. The total profit on the two jobs, before deduction of income taxes, was approximately $ 221,000. After 1938 the Canadian subsidiary was available to perform construction work in Canada if the occasion arose.
The only organization for securing and carrying out coke oven construction *437 work for either petitioner or the Canadian*249 subsidiary was that maintained by petitioner itself in New York. All the work of negotiating the two Canadian contracts of 1937-1938, including engineering surveys, the preparation of cost estimates, plans, and specifications, and the submission of bids, was done by the permanent personnel of petitioner in New York. Direct supervision of construction work at the site was done by two of petitioner's permanent employees, who were sent to Canada for the duration of the two contracts. All purchases of material (excepting small items purchased at the construction sites) were handled by petitioner's own organization in New York. All supervision of the technical aspects of the construction work and all general administration was done by the officers and employees of petitioner at New York.
The costs and expenses in connection with the work performed by petitioner's own personnel on the Canadian contracts were charged by petitioner to the Canadian subsidiary. Petitioner also made cash advances to the subsidiary to cover construction costs during the initial stages of the first job. Under each contract the Canadian subsidiary received from the owner monthly payments proportionate to *250 the amount of work performed during each month; when the job reached the point where the monthly progress payments could be expected to cover the remaining costs and expenses, further advances by the petitioner were not necessary.
Payments of the contract price were made in Canadian funds up to the estimated amount of costs and expenses to be incurred in Canada. The balance, representing costs incurred in the United States and the overhead and profits on the jobs, was paid in the United States funds.
Beginning in September 1937, the Canadian subsidiary made cash payments to petitioner at intervals varying from a week to a month and, in the majority of cases, in amounts which were multiples of a thousand dollars. These payments continued until May 1940, by which time the subsidiary's entire cash had been paid out, except for a balance of approximately $ 2,300 in a Canadian bank. Until October 1938 the aggregate of these payments was less than the indebtedness from the Canadian subsidiary to petitioner on account of the cash advances by petitioner and charges by petitioner for services performed in connection with the Canadian job. Beginning in October 1938, the aggregate cash payments*251 to petitioner exceeded the indebtedness of the Canadian subsidiary to petitioner, and such excess continued to increase until by the end of May 1940 it amounted to $ 185,221.41.
In June 1937 an account was opened on the books of each of the *438 two companies, in which were subsequently entered all cash payments and all charges and credits for transactions between the companies. The two accounts were identical as to the items recorded therein and the treatment of such items (except for the necessary reversal of debits and credits). The account on petitioner's books was headed "Coke Oven Company of Canada, Ltd., -- Advances" and the account on the Canadian subsidiary's books was headed "Wilputte Coke Oven Corporation -- Loan Acct." A summary of the account on the Canadian subsidiary's books is as follows:
| 1937 | 1938 | 1939 | 1940 | |
| Balance, Jan. 1: | ||||
| Credit | $ 58,538.43 | |||
| Cash payments by petitioner | $ 25,000.00 | 10,000.00 | ||
| Costs and expenses pertaining | ||||
| to contracts paid by | ||||
| petitioner | 77,538.43 | 52,000.74 | $ 2,628.65 | |
| Dividend declared by subsidiary | $ 183,221.41 | |||
| Other credit | 2,000.00 | |||
| Total | 102,538.43 | 120,539.17 | 2,628.65 | 185,221.41 |
| Balance, Jan. 1: | ||||
| Debit | 20,565.83 | 159,937.18 | ||
| Cash payments by subsidiary | 44,000.00 | 141,105.00 | 142,000.00 | 25,284.23 |
| Total | 44,000.00 | 141,105.00 | 162,565.83 | 185,221.41 |
| Balance, Dec. 31: | ||||
| Debit | 58,538.43 | |||
| Credit | 20,565.83 | 159,937.18 |
*252 No note or other evidence of indebtedness was given for any of the above items, and no interest was charged thereon.
The balance sheets of petitioner at December 31, 1938 and 1939, in accordance with its books, were as follows:
| 1938 | 1939 | |
| ASSETS | ||
| Cash | $ 6,944.78 | $ 10,570.94 |
| Notes and accounts receivable, less reserve | 4,842.76 | 7,903.42 |
| Loans receivable -- Louis Wilputte | 3,581.34 | 23,349.58 |
| Stock of Coke Oven Co. of Canada, Ltd | 2,000.00 | 2,000.00 |
| Capital assets | 3,070.65 | 3,070.65 |
| Patents, processes, trade-marks, good will, etc | 5,023.59 | 5,559.73 |
| Deferred charges | 4.70 | 1.51 |
| Prospect expenditures (engineering expenses | ||
| incurred in connection with preparing bids, making | ||
| cost estimates, etc., on prospective jobs, charged | ||
| off in 1940) | 51,934.72 | |
| Total | 25,467.82 | 104,390.55 |
| LIABILITIES AND CAPITAL | ||
| Accounts payable | 42,227.78 | 33,173.82 |
| Coke Oven Co. of Canada, Ltd | 20,565.83 | 159,937.18 |
| Billings on uncompleted contracts | 37,618.07 | |
| Reserves -- depreciation and obsolescence | 1,873.66 | 2,507.77 |
| Capital stock | 170,000.00 | 170,000.00 |
| Deficit | (246,817.52) | (261,228.22) |
| Total | 25,467.82 | 104,390.55 |
*439 The balance sheets of*253 the Canadian subsidiary at December 31, 1937, through 1940, in accordance with its books, were as follows:
| 1937 | 1938 | 1939 | 1940 | |
| ASSETS | ||||
| Investments | $ 76,523.50 | $ 14,614.00 | ||
| Cash | $ 80,088.46 | 102,904.24 | 13,339.61 | |
| Accounts receivable | 178,466.43 | 131.52 | 131.52 | |
| Wilputte Coke Oven Corporation | 20,565.83 | 159,937.18 | $ 2,000.00 | |
| Uncompleted contracts | 2,374.73 | |||
| Incorporation expense | 433.15 | 433.15 | 433.15 | |
| Total | 261,362.77 | 200,558.24 | 188,455.46 | 2,000.00 |
| LIABILITIES AND CAPITAL | ||||
| Accounts payable | 18,006.46 | 579.34 | (403.71) | |
| Wilputte Coke Oven Corporation | 58,538.43 | |||
| Capital stock | 2,000.00 | 2,000.00 | 2,000.00 | 2,000.00 |
| Surplus | 182,817.88 | 197,978.90 | 186,859.17 | |
| Total | 261,362.77 | 200,558.24 | 188,455.46 | 2,000.00 |
The Canadian subsidiary had no assets, issued no stock, and carried on no business until June 1937.
The Canadian subsidiary's gains and profits, after all deductions except Canadian income taxes with respect thereto, and net income for 1937 and 1938 were:
| 1937 | 1938 | |
| Profits before income taxes | $ 182,817.88 | $ 40,011.48 |
| Canadian income taxes | 27,422.68 | 5,992.70 |
| Net income | 155,395.20 | 34,018.78 |
The Canadian subsidiary*254 had the following gross income, deductions, and net losses for 1939 and 1940:
| 1939 | 1940 | |
| Gross income (from dividends) | $ 1,906.25 | $ 140.00 |
| Deductions: | ||
| Salaries | 2,301.39 | |
| Project expense | 2,225.16 | |
| Loss on securities | 1,930.04 | 633.79 |
| Bad debts | 403.71 | |
| Incorporation expense written off | 433.15 | |
| Other | 305.86 | 5.72 |
| 4,461.06 | 3,777.76 | |
| Net loss | (2,554.81) | (3,637.76) |
Following completion of the 1937-38 contracts, the Canadian subsidiary carried on no business activities until 1946. It had no employees and no office or other place of business. Some small replacement jobs which were secured in Canada during this period were handled by petitioner itself.
No formal dividend was declared by the Canadian subsidiary prior to 1940.
*440 On July 22, 1940, Louis N. Wilputte sold all of the capital stock of petitioner to Semet-Solvay Co. of New York, New York. During the negotiations for the sale of the stock, representatives of the purchaser ascertained that the books showed an indebtedness from petitioner to the Canadian subsidiary and objected to buying the stock of a company whose books showed an indebtedness to a subsidiary located*255 in a foreign country then at war. To meet this objection, there was included in the contract for the sale of the stock a warranty that on the closing date petitioner and the Canadian subsidiary, respectively, had no liabilities other than those shown on the following balance sheets:
| WILPUTTE COKE OVEN CORPORATION | |||
| Assets: | |||
| Coke Oven Co. of Canada, Ltd | $ 0.00 | ||
| Furniture and fixtures | $ 16,739.04 | ||
| Less reserve for depreciation | 14,898.43 | ||
| 1,840.61 | |||
| Patents -- net book value | 18,406.30 | ||
| Deferred charges -- project expense not yet written off | 63,898.36 | ||
| Total | 84,145.27 | ||
| Liabilities and capital: | |||
| Liabilities | None | ||
| Capital | $ 170,000.00 | ||
| Deficit | (85,854.73) | ||
| Total | 84,145.27 |
| COKE OVEN CO. OF CANADA, LTD. | ||
| Assets | None | |
| Liabilities and capital: | ||
| Capital stock | $ 2,000.00 | |
| Deficit | (2,000.00) | |
| Total | 0.00 |
In order to comply with these conditions with respect to the indebtedness from petitioner to the Canadian subsidiary shown on the books of the companies, the directors of the Canadian subsidiary, on the date of the sale of the stock, adopted the following resolution:
Resolved that a dividend of $ 183,221.41*256 be and it hereby is declared on the capital stock of the company, said dividend to be paid forthwith to Wilputte Coke Oven Corporation, holder of all of the outstanding capital stock of the company.
In accordance with such resolution, the above amount was credited to petitioner on the Canadian subsidiary's books.
In petitioner's Federal income tax returns for 1938 and 1939 no amount was included in income as dividends from the Canadian subsidiary. *441 In petitioner's Federal income tax return (Form 1120) for 1940 the amount of $ 183,221.41 was shown as a dividend from the Canadian subsidiary. No tax was shown to be due on such return, after application of the credit for foreign taxes deemed to have been paid in respect to such dividend. No excess profits tax return for 1940 was filed by petitioner, as its excess profits net income computed in conformity with net income shown in its income tax return was not over $ 5,000.
In its Federal income tax return for 1941 petitioner deducted, in computing net income, a net loss in respect of the year 1940 computed by including in 1940 income as dividends from the Canadian subsidiary only the amount of the cash payments received from*257 such subsidiary in 1940; and in its Federal excess profits tax return for 1941 petitioner claimed an excess profits credit under section 713, computed by including as income for 1938 and 1939 the amounts of $ 20,565.83 and $ 139,371.35, respectively, representing as to each year the net cash withdrawals by petitioner. The excess profits credit claimed included a carry-over of unused credit.
Respondent, in his audit of petitioner's 1941 returns, disallowed such net loss deduction and excess profits credit under section 713. Respondent determined that petitioner's excess profits credit, based either on invested capital or on income, was zero.
The net income and excess profits net income of petitioner for the respective base period years, determined without the inclusion of any amounts as dividends from the Canadian subsidiary, was:
| 1936 | 1937 | 1938 | 1939 | |
| Net Income | $ 460.25 | $ 4,688.97 | ||
| Net loss | $ 16,078.56 | $ 13,824.58 |
The net cash withdrawals made in 1938 and 1939 by the petitioner from its Canadian subsidiary were not dividends in those years when received.
OPINION.
The petitioner contends that the net amounts it withdrew in 1938 and 1939 from its wholly owned*258 subsidiary were dividends when withdrawn. The respondent contends that the withdrawals were loans and that the declaration of a dividend in 1940 had the effect of canceling the loans and making the amount of the declared dividend income in that year, as the character of the withdrawals was then changed from loans to dividends.
We are not concerned with the adjustment of the petitioner's tax liability for 1938 and 1939, but with the computation of the petitioner's excess profits tax for 1941, which involves the question whether the *442 excess profits credit under section 713 of the Internal Revenue Code is to be computed by including or excluding these withdrawals as income when withdrawn in 1938 and 1939, and with the net loss, if any, for 1940 deductible from 1941 income. If the withdrawals were not dividends, and therefore not income in 1938 and 1939, the petitioner's base period net income is zero, as determined by the respondent. If the withdrawals were dividends, and therefore income to the petitioner, a base period net income would result for purposes of excess profits credit, augmented by the growth formula under section 713 (f) of the Internal Revenue Code, and also*259 a net operating loss for 1940 to be carried over into 1941. The issue is whether the net amounts withdrawn in 1938 and 1939 were income to the petitioner in those respective years, or in 1940.
The principles of law applicable in this type of case are stated in Wiese v. Commissioner, 93 Fed. (2d) 921; certiorari denied, 304 U.S. 562">304 U.S. 562, affirming 35 B. T. A. 701:
* * * When the principal shareholder of a corporation makes a permanent withdrawal of funds from the company, he is deemed to have received income at the time of withdrawal, although the formalities of a dividend distribution have not been observed and the payment is recorded on the books of the company as a loan. * * *
But if the stockholder borrows money from the company and subsequently the company cancels the debt, income accrues to the stockholder at the time when the character of the withdrawal changes from a loan to a distribution of profits. * * *
In that case the taxpayer was the sole stockholder of a corporation and made withdrawals over a period of six years, charging the amounts to his open account. The taxpayer did not at the*260 time report the withdrawals as dividends on his tax returns. Later, the open account was charged to surplus and the taxpayer filed amended returns for the past years reporting the withdrawals as dividends and paying the additional taxes resulting. The Commissioner determined that the charge to surplus amounted to a dividend at the time thereof, concluding that the withdrawals were loans when made and until charged off. This determination was sustained by the Board of Tax Appeals and by the Circuit Court. The conduct of the taxpayer and the corporation with respect to book entries and tax returns was regarded as demonstrating the intentions at the time of the withdrawals.
The account between the petitioner here and its subsidiary was an open account, orginally recording a loan to the subsidiary and later showing a balance in favor of the petitioner. The balance sheets of the two corporations at the end of 1938 and 1939 showed the balance as an asset of the subsidiary and a liability of the petitioner. The tax returns of the petitioner, sworn to by its officers, did not show the receipt of any dividend from the subsidiary until 1940, and then *443 showed the full amount of*261 the declared dividend as income. These are the sole documentary evidences in the record of the intention of the petitioner's officers at that time, and show that they did not treat the withdrawals as dividends in 1938 and 1939. Evidently the withdrawals were not considered dividends in those years, or they would have been reported as such in the returns. That the withdrawals were not considered dividends until a resolution to that effect was adopted on July 22, 1940, is shown by petitioner's return for the year 1940. The dividend declaration of that year included the withdrawals for 1938 and 1939. It was not until the 1941 return was filed in 1942 that petitioner, realizing that its former treatment would result in an increased tax liability, shifted its position and for the first time treated the withdrawals in 1938 and 1939 as dividends, notwithstanding there was no declaration of a dividend until 1940. We think petitioner's treatment of the amounts in question in the ordinary course of its business and before it was confronted with an increased tax liability reflects the true intent at the time the withdrawls were made -- that is, they were not intended to be and were not*262 dividends at the time withdrawn. Although the petitioner's president testified that repayment of the withdrawals was not intended, he also said that the subsidiary was available after 1938 to perform other contracts in Canada if any were procured. The only purpose of maintaining the existence of the subsidiary was to undertake future Canadian contracts. The petitioner did not know when such a contract might be procured and it might become necessary to restore the funds withdrawn, or some part thereof, to finance the contract. The retention by the subsidiary of its funds, or of the right to repayment thereof, was entirely consistent with the possibility of its obtaining other contracts. The evidence thus supports the respondent's determination.
The facts here are not distinguishable from those in the Wiese case, supra, and we think the decision is controlled thereby. To the same effect, see Cohen v. Commissioner, 77 Fed. (2d) 184, affirming 28 B. T. A. 190; certiorari denied, 296 U.S. 610">296 U.S. 610; Allen v. Commissioner, 117 Fed. (2d) 364, affirming B. T. *263 A. memorandum opinion; Commissioner v. Cohen, 121 Fed. (2d) 348, affirming on this issue B. T. A. memorandum opinion; and Jas. J. Gravley, 44 B. T. A. 722. As pointed out in Commissioner v. Cohen, supra, if no dividend had been declared and the subsidiary had become insolvent, the payments would have been recoverable by its creditors.
The petitioner relies upon certain cases in which withdrawals made by a controlling stockholder were held to be dividends. Chattanooga Savings Bank v. Brewer, 17 Fed. (2d) 79; certiorari denied, 274 U.S. 751">274 U.S. 751; Christopher v. Burnet, 55 Fed. (2d) 527, affirming 13 B. T. A. 729; Anketell Lumber & Coal Co. v. United States, 1 Fed. Supp. 724; *444 and George P. Marshall, 32 B. T. A. 956. In each of these cases the Commissioner determined that the withdrawals were dividends when withdrawn and the taxpayer was unable to convince the Board or the Court that this determination*264 was erroneous. In the Chattanooga Savings Bank case, supra, the charter forbade loans to stockholders. In the Anketell Lumber & Coal Co. case, supra, the corporation was in liquidation and the issue was whether the alleged loans were includible in invested capital. In the Marshall case, supra, amounts withdrawn by the sole stockholder were used for personal purposes and the Board concluded from all the evidence, and particularly the testimony of the petitioner, that, contrary to his contentions, he had no intention of repaying the amounts withdrawn. Also, there was no occasion for a repayment. In the Christopher case, supra, there was no evidence of intent to repay the withdrawals and no occasion for it. Here the acquisition of a new contract by the subsidiary would probably result in a repayment of at least a part of the amounts withdrawn. The intention in 1938 and 1939 may well have been that the amounts would be repaid if needed for such a purpose, otherwise not. There is no such finality to withdrawals under these conditions as to characterize them as dividends. The respondent accepted the petitioner's original treatment of the transaction*265 as truly representing its character. The petitioner has the burden of showing error in the respondent's determination, and in doing so it must deny its own treatment of the matter. We think this burden has not been met. It may be observed that the petitioner had it in its power to cause the subsidiary to declare dividends whenever that suited the petitioner's purpose and it did not choose to do this in 1938 or 1939. In the Wiese case, supra, the Circuit Court observed (at page 923):
* * * It is important that courts do not go too far in relieving the taxpayer of his burden of proof in cases such as this, where both the facts and the evidence are peculiarly subject to the control and knowledge of the taxpayer. If individuals should be allowed to take advantage of the government's inability to recognize their unexpressed intentions the way would be open for one to say in retrospect when his income accrued, according to his own advantage.
The petitioner chose to use a subsidiary corporation for its own purposes. It could originally have treated the withdrawals as dividends, but did not choose to do so. If its recorded treatment of the transactions between the corporations*266 leads to adverse tax consequences, it may not justly complain when its own records are accepted as truly showing its intent.
Decision will be entered for the respondent.