*2828 Profits of a corporate taxpayer distributed to so-called stockholders' surplus accounts, and subject to withdrawal by stockholders, are a corporate liability, and for Federal income tax purposes may not be included as elements of invested capital.
*658 Before GRAUPNER, LANSDON, and LITTLETON.
At the hearing of this appeal a stipulation was filed and the tax payer offered in evidence an income-tax memorandum, the Commissioner's *659 deficiency letter, and the report of a revenue agent, dated September 13, 1922. From the stipulation and the documentary evidence the Board makes the following
FINDINGS OF FACT.
The taxpayer, incorporated under the laws of Wisconsin on March 10, 1907, is an electrical contractor and dealer in electrical supplies, with its principal place of business in Madison, Wis. Its issued capital stock, having a par value of $5,000, was all owned during the years in question by L. W. Burch, Mrs. L. W. Burch, and A. L. Payne.
No dividends out of profits have ever been paid or declared*2829 by formal corporate action. At the end of each fiscal year the taxpayer distributes its entire net earnings to the personal accounts of its stockholders on its books of account in proportion to their stockholdings, and styles such personal accounts "stockholders' or individual surplus accounts." The several stockholders have the right to and did draw against such surplus accounts for funds for personal use, and also to pay into the same amounts obtained by them from sources not connected with the operation of the taxpayer's business. The totals of such surplus accounts, so far as the evidence disclosed, were as follows: February 28, 1916, $21,080.75; February 28, 1917, $27,903.25; February 28, 1918, $31,815.45.
In computing its invested capital for Federal income tax purposes the taxpayer included the sums credited to the surplus accounts of its stockholders. Upon audit of the taxpayer's income-tax returns for the years 1917, 1918, 1919, 1920, and 1921, the Commissioner disallowed the amounts credited to shareholders' surplus accounts as invested capital. Such disallowances resulted in additional tax liability of $359.89 for the year 1919, with a penalty for the same year of*2830 $89.97 and of $64.69 for the year 1921. The audit also disclosed overassessments of $62.78 for 1917 and $368.02 for the year 1918. By applying such overassessments, amounting to $430.80, to additional tax liability, the Commissioner determined a net deficiency of $83.75 in the tax liability of the taxpayer and so notified it in a deficiency letter dated October 11, 1924.
DECISION.
The determination of the Commissioner is approved.