*2645 1. The Commissioner was in error in computing a tentative tax in determining the amount of current earnings available for payment of dividends.
2. Invested capital should be reduced as of the date of the declaration of cash dividends.
*216 This is a proceeding for the redetermination of income and profits taxes for the years 1919, 1920, and 1921 in the amounts of $5,408.42, $2,800.27, and $3,166.77, respectively.
The petitioner alleges the following errors: That invested capital for each of the years 1919, 1920, and 1921 has been improperly reduced by the respondent as follows: (1) Invested capital at the beginning of each year should not be reduced by accrual of taxes for prior years; (2) invested capital at the beginning of each year should not be reduced by an arbitrary inclusion of a tentative tax in arriving at the amount of earnings available for dividends.
At the hearing the petition was amended as follows:
Invested capital for each of the years 1919, 1920 and 1921 has been determined by the Commissioner without regard to the effect*2646 of the decision of the *217 Board on a prior appeal of the same taxpayer, being Docket No. 10454, dated April 26, 1927.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation with its principal office at Philadelphia. During the years involved the directors passed the following resolutions:
PHILADELPHIA, February 4th, 1919.
On Motion of Mr. Hirsh, a dividend of 18% or $9. per share on the Common Stock of the Company was declared; 8% to be in U.S. 4 1/2% Bonds due in 1938 at 96 flat and 10% in cash; payable February 15th, 1919 to stockholders of record on that date.
* * *
PHILADELPHIA, February 24th, 1920.
On Motion of Mr. Hirsh a dividend of 10% or $5.00 per share on the Common Stock of the Company was declared payable March 2d, 1920 to stockholders of record on that date.
* * *
PHILADELPHIA, March 1st, 1921.
On Motion of Mr. Hirsh, a dividend of 1 3/4% was declared on the Preferred Stock of the Company, payable April 1st, 1921, to stockholders of record of that date.
On Motion of Mr. Hirsh, a dividend of 2% was declared on the Common Stock of the Company payable May 16th, 1921 to stockholders of record on that date.
The respondent*2647 reduced invested capital at the beginning of each of the years involved on account of taxes for prior years and also reduced invested capital at the beginning of each year by the computation of a tentative tax upon income for the year in arriving at the amount of current earnings available for dividends.
OPINION.
TRAMMELL: With respect to the reduction of invested capital on account of taxes for prior years, it appears that the action of the respondent is in accordance with section 1207 of the Revenue Act of 1926. His action in that regard is, therefore, approved.
The question of the computation of a tentative tax upon the income for the year in the determination of the amount of current earnings available for dividends has heretofore been determined adversely to the respondent. .
It was contended by the respondent that under section 201 of the Revenue Act of 1918 any distribution by a corporation to its stockholders made during the first 60 days of any taxable year is deemed to have been made from earnings from profits accumulated during prior taxable years and that the surplus must be decreased by the *218 amount*2648 of such distributions as from the respective dates of such distributions. We agree with the respondent's contention.
In , we said that a "cash dividend declared on February 1, 1918, payable on April 1, 1918, creates a debt due from the corporation to the stockholders immediately from the date of declaration, and under section 201(e) of the Revenue Act of 1918, the distribution must be deemed to have come out of prior years' earnings. * * * Invested capital should be reduced by the amount of the dividend as of the date of declaration, in accordance with section 326(d) of the same Act, without being affected by any earnings of the taxable year available for dividend purposes."
In determining invested capital for the years involved consideration should be given to the amount of tax due for the previous year as determined by the Board in the case of .
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by MORRIS, MURDOCK, and SIEFKIN.