*2528 1. Premiums paid in on capital stock may be included in invested capital.
2. Oversubscriptions to capital stock and commissions paid on the sale of capital stock held to have been improperly included in invested capital.
*763 Proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921 in the respective amounts of $2,988.88 and $1,859.76, or a total of $4,848.64. Only a part, approximately $3,675, of the total is in controversy.
The error alleged by petitioner is that respondent failed to include in invested capital the full amount actually paid in on capital stock.
At the hearing counsel for respondent amended his answer by alleging that the invested capital as determined for each of the years should be decreased in an amount equal to the oversubscriptions to petitioner's stock, and to the extent of commissions paid for the sale of stock. The parties have stipulated that invested capital, as computed by respondent, should be increased by $155,783.33 for 1920 and $15,375 for*2529 1921, representing the average amounts paid in for stock during those years.
FINDINGS OF FACT.
Petitioner is a corporation with principal office at Boston, Mass.
Petitioner's balance sheets at the close of the taxable years were as follows:
| December 21, 1920 | December 31, 1921 | |
| ASSETS | ||
| Cash | $36,028.65 | $77,005.52 |
| Bank stocks | 61,882.35 | 65,203.50 |
| Loans on real estate | 338,600.00 | 448,650.00 |
| Notes discounted | 510,264.48 | 316,590.92 |
| Receivable on subscriptions | 152,295.80 | 78,341.91 |
| Underwriting contracts | 199,850.00 | 199,850.00 |
| Organization expense | ||
| Bonds | 102,263.53 | 147,017.00 |
| Repossessed cars | 14,772.71 | 11,339.67 |
| Furniture and fixtures | 1,431.89 | 1,484.35 |
| Suspense | 87.00 | |
| 1,417,476.41 | 1,345.482.87 |
| December 21, 1920 | December 31, 1921 | |
| LIABILITIES AND CAPITAL | ||
| Common capital stock | $200,000.00 | $200,000.00 |
| Preferred stock outstanding | 696,800.00 | 735,500.00 |
| Preferred stock subscribed | 216,150.00 | 101,250.00 |
| Uncompleted loans | 113,400.00 | 139,208.00 |
| Accounts payable | 18,418.35 | 2,968.97 |
| Notes payable | 145,000.00 | 120,000.00 |
| Reserve for losses | 11,900.57 | |
| Reserve for depreciation | 125.00 | |
| Suspense | 1,942.65 | |
| Reserve for taxes (part of surplus) | 5,529.00 | 11,604.16 |
| Surplus | 22,053.20 | 21,108.52 |
| 1,417,476.41 | 1,345,482.87 |
*2530 *764 In the taxable years petitioner had in use subscription agreements. The following is a copy of the face of a typical subscription ageement:
SUBSCRIPTION AGREEMENT
FINANCE CORPORATION OF NEW ENGLAND
Agreement by and between the FINANCE CORPORATION OF NEW ENGLAND incorporated under the laws of Massachusetts, having its home office in Boston, Mass., and
George H. Coates of Worcester, Mass. hereinafter called the "Subscriber."
WITNESSETH. The said FINANCE CORPORATION OF NEW ENGLAND hereby sells to the Subscriber, and the Subscriber hereby purchases, subject to conditions contained on the reverse side hereof, Fifty Shares of the Preferred Stock of said FINANCE CORPORATION OF NEW ENGLAND of he par value of Fifty Dollars ( $50) each, fully paid and non-assessable, at and for the sum of One Thousand Dollars, the receipt whereof is hereby acknowledged, and the balance in notes amounting to Twenty five hundred Dollars and it is agreed that the FINANCE CORPORATION OF NEW ENGLAND may attach the said shares of stock when issued in due course to the said notes as collateral and deposit the same in the hands of the said FINANCE CORPORATION OF NEW ENGLAND.
WHEN the Subscriber*2531 has paid all the notes aforesaid, according to the tenor thereof, the said FINANCE CORPORATION OF NEW ENGLAND agrees that it will deliver to said Subscriber or his or her heirs, or assigns, certificate or certificates of said Preferred Stock, so paid for, together with Six & 1/4 shares of Common Stock.
In Witness whereof, the parties hereto have caused the same to be executed in duplicate and have thereto set their hands and seals this 7th day of November, 1919.
FINANCE CORPORATION OF NEW ENGLAND
H. O. ROBB, INC.Fiscal Agent
(Signed) GEORGE H. COATES
Subscriber
235 Chandler St.
Address (St. and No.)
Worcester, Mass.
City and State
Valid only when countersigned by:
Witness:
(Signed) J. C. AVERY, Jr.,
Salesman
*765 The following is a copy of the note executed in connection with the subscription agreements and is typical of the notes in use by petitioner:
$2,500.00
2376 WORCESTER, MASS.
Nov. 7, 1919.
Ten months after date, for value received, I, the undersigned, hereby promise to pay to FINANCE CORPORATION OF NEW ENGLAND, or order, at the office of the said corporation, 35 Congress Street, Boston, Mass.
| Twenty five hundred | Dollars |
*2532 payable $250.00 monthly from date until fully paid and do hereby agree that said corporation may attach hereto as general collateral
50 SHARES FINANCE CORPORATION OF NEW ENGLAND - PREFERRED
6 1/4 SHARES FINANCE CORPORATION OF NEW ENGLAND - COMMON
and I do hereby give to the holder hereof full power and authority, upon the non-payment of this instrument or any part payment when due, sell, assign, transfer and deliver at any time thereafter the whole or any part of said collateral at public or private sale after due notice and advertisement thereof, at the option of the holder hereof.
(Signed) GEO. H. COATES.
In invested capital as computed in the deficiency letter there is included $53,237.46 for 1920 and $63,854.20 for 1921 which had been paid in on account of subscriptions to preferred stock at par plus premiums and which were later refunded because the stock had been oversubscribed.
In invested capital as computed in the deficiency letter there is included $54,697.60 for 1920 and $70,872.00 for 1921 which represents part but not all of the premiums that had been paid in by stockholders and in turn paid out by petitioner as commissions to the agents through whom he*2533 stock had been sold. These amounts were 10 per cent on the average amount of stock outstanding and were allowed by the Commissioner as a fair commission for selling the stock.
Prior to January 1, 1920, there had been paid in on stock which was outstanding during the years 1920 and 1921 at least $130,991.23 in premiums in excess of the par value of the stock, and the full amount of these premiums had been paid to the agents as commissions for the sale of the stock. In invested capital as computed in the deficiency letter there is excluded $76,293.63 of this amount, on the ground that it represented the balance of the commissions paid to agents for he sale of stock in excess of the amount allowed by the Commissioner.
Petitioner's earned surplus was $15,849.66 at the beginning of 1920 and $27,583.06 at the beginning of 1921, and these amounts were included in invested capital for the respective years.
*766 OPINION.
ARUNDELL: The petitioner seeks to have included in its invested capital the full amount of premiums paid in on stock by its stockholders. The total amount so paid in prior to 1920 was $130,991.23, of which the respondent has allowed as "commissions," $54,697.60*2534 for 1920 and $70,872 for 1921. Premiums received on the sale of capital stock constitute paid-in surplus and should be included in invested capital. . However, where commissions are paid by a corporation for the sale of its stock the amount of the commissions must be deducted from the corporation's earned surplus to the extent of such surplus. . In this case the amount of earned surplus at the beginning of each of the taxable years is stipulated, the amount for each year being less than the commissions paid. Accordingly, on recomputation, the premiums of $130,991.23 should be included in invested capital for each year instead of the lesser amounts allowed by respondent and which he allowed as "commissions," and there should be deducted the earned surplus of $15,849.66 at the beginning of 1920 and $27,583.06 at the beginning of 1921.
The Commissioner asserts that he erred in not reducing invested capital by the amounts of oversubscriptions to petitioner's stock and by the amount of commissions paid.
We think there can be no doubt but that amounts paid in on oversubscriptions may*2535 not be included in invested capital. Such amounts were not received by the corporation for stock as it had no stock to issue for them. When oversubscriptions were received there was a liability on the part of he corporation to refund the amounts paid thereon, and if such amounts were used as capital they could amount to nothing more than borrowed capital which is excluded by the taxing statute from invested capital.
As to the other point raised by the respondent, it is settled by , that commissions paid by a corporation on the sale of its capital stock can never serve to increase invested capital. Cf. . The amounts of $54,697.60 and $70,872 which were allowed by the respondent for the years 1920 and 1921, respectively, and which were a part of the premiums paid for stock, should accordingly be excluded from invested capital on recomputation.
Judgment will be entered under Rule 50.