*2165 1. The evidence is insufficient to establish the actual cash value of stock purchase contracts and the respondent's refusal to allow any value for them in invested capital is approved.
2. The evidence is insufficient to support respondent's allegation that he erred in failing to reduce invested capital on account of purchases by petitioner of its own stock.
*1222 Petitioner alleges that, in determining a deficiency in income and profits taxes in the amount of $7,215.52 for the calendar year 1921, the respondent erred in failing to include in invested capital for 1920 and 1921 the amounts of common stock sold to employees.
Respondent denies that he erred as alleged by petitioner, but alleges that he erred in failing to reduce invested capital on account of purchases by petitioner of its own stock during the year 1921.
The facts were stipulated.
FINDINGS OF FACT.
Petitioner is an Illinois corporation, organized in January, 1902, for the purpose of dealing in tea, coffee, butter, and other merchandise. Its*2166 original capital in the amount of $10,000 consisted of 100 shares of the par value of $100 each. The capital stock was increased from time to time as follows:
September, 1903, increased to $30,000 (cash).
April, 1910, increased to $50,000 (cash).
July, 1917, increased to $200,000 (stock dividend of $150,000).
The George Rasmussen Co. was incorporated under the laws of Illinois on March 4, 1910, for the purpose of carrying on a wholesale grocery business. Its original capital stock amounted to $60,000 of a par value of $100 per share, which was increased to $500,000 in 1917 by a stock dividend of $440,000.
*1223 The India Tea Co. was organized under the laws of Illinois on July 18, 1894, for the purpose of selling coffee, tea, and butter. Its original capital stock amounted to $20,000. The assets of this company were purchased by the petitioner for cash on January 29, 1916, and its capital stock kept outstanding to protect its trade names until 1919, when a consolidation took place as hereinafter related.
On or about August 16, 1919, petitioner was authorized to and did change its capitalization from 2,000 shares of the par value of $100, each, to 20,000*2167 shares of no par common and 15,000 shares of 7 per cent cumulative preferred stock of $100 par value. Of the preferred stock authorized, 10,000 shares were to be sold at public auction as Class C security or better under the Illinois Securities Law. The preferred stock was redeemable at $110 per share plus accumulated dividends. Petitioner was authorized to and did issue its 20,000 shares of new no par common stock as follows:
10,000 shares in exchange for the 2,000 shares of its old $100 par common on the basis of 5 for 1.
10,000 shares in exchange for the 5,000 shares of $100 par value stock of the George Rasmussen Co. on the basis of 2 for 1.
As a part of this consolidation the outstanding stock of the India Tea Co. was turned in to petitioner.
The stockholders of the several companies before the exchange of stock and holders of petitioner's common stock after the exchange were as follows:
| Stockholder | Petitioner, shares of old stock | Rasmussen Co., shares of old stock | India Tea, shares of old stock | Petitioner shares of new stock |
| George Rasmussen | 1,735 | 4,360 | 174 | 17,395 |
| T. Rasmussen | 5 | 5 | 135 | |
| W. Matthiessen | 250 | 625 | 25 | 2,400 |
| A. W. Smith | 5 | 5 | 35 | |
| F. H. Massman | 5 | 5 | 1 | 35 |
| 2,000 | 5,000 | 200 | 20,000 |
*2168 The minutes of the meeting of petitioner's directors dated August 7, 1919, as far as they are in evidence, read as follows:
* * * The amount of the increase capital stock which is proposed to issue at once is as follows:
10,000 shares have par value of $100 per share is $1,000,000.00
20,000 shares having no par value is $1,543,182.70.
Amount of increase capital stock which is proposed to issue at once for the property, and appraised value thereof is as follows:
Shares having a par value of $ per share is $ .
20,000 shares having no par value is $1,543,182.70.
The location and a general description of such property is as follows: 10,000 shares of no par value are to be issued in exchange for and upon cancellation and surrender of the present authorized issue of $2,000 shares of the *1224 par value of $100 each of this company, 10,000 shares having no par of 100 each of the George Rasmussen Co., such company being valued as of June 30, 1919, at $687,139.20 and the said National Tea Company having a net worth as of June 30, 1919, of $856,043.50.
Financial statistics of the several companies are as follows:
| Petitioner | India Tea | Rasmussen Co. | Consolidated | |
| Surplus, Dec. 31, 1917 | $499,231.57 | |||
| Surplus reserve, Dec. 31, 1917 | 188,518.43 | |||
| Income, 1918 | $180,050.91 | $16,541.77 | $122,952.00 | 319,544.68 |
| Surplus, Dec. 31, 1918 | 102,388.38 | 659,380.54 | ||
| Surplus reserve, Dec. 31, 1918 | 206,749.22 | |||
| Income, 1919 | 163,834.12 | 45,312.89 | 175,327.75 | 384.489.96 |
| Surplus, June 30, 1919 | 187,139.20 |
*2169 Consolidated net earnings for the year 1921, as determined by the respondent, were $737,283.16. Dividends in the amount of $50,000 on petitioner's common stock were paid in 1921.
Petitioner entered into contracts dated June 29, 1920, with certain of its officers and employees for the sale to the latter of its common stock at $97.50 per share, to be paid for on the installment plan. These officers and employees and the amounts of stock they agreed to buy are as follows:
| Name and position | Number of shares |
| Thor Rasmussen, secretary | 565 |
| F. H. Massman, vice president | 500 |
| H. G. Wolf, supervisor | 300 |
| A. V. Smith, supervisor | 300 |
| C. Lafeber, supervisor | 125 |
| C. B. Dempster, supervisor | 100 |
| M. H. Otteson, supervisor | 50 |
| M. G. Berens, head bookkeeper | 30 |
| W. Laing, comptroller | 175 |
| H. Kamp, superintendent | 100 |
| F. J. Gruman, buyer | 50 |
| J. F. Monahan, buyer | 40 |
| Wm. Block, manager egg department | 40 |
| J. R. W. Cooper, general counsel | 25 |
| 2,400 |
The contracts all have the same date and were the same in all respects except for the name of the purchaser, the number of shares, and date of allotment. The following, omitting signatures, is a copy of one of the*2170 contracts:
WHEREAS, The National Tea Co., an Illinois Corporation, has sold and delivered to M. Grant Berens of the City of Chicago, County of Cook and State of Illinois, certain shares of the Common Stock of the National Tea Co., of no par value, to be delivered under the dates and in allotments below mentioned, said stock being sold for the sum of Ninety-Seven and 50/100 ($97.50) per share to wit, to be paid by the said M. Grant Berens in pursuance of the authority of the Board of Directors of said Corporation, as evidenced by the resolution adopted on the 20th day of June, A.D. 1920.
| Number of shares | Date allotted | Total amount |
| 2 | July 1, 1920 | $195.00 |
| 5 | Sept. 1, 1920 | 487.50 |
| 2 | Dec. 1, 1920 | 195.00 |
| 10 | Mar. 1, 1921 | $975.00 |
| 11 | June 1, 1921 | 1,072.50 |
*1225 It is agreed between the said National Tea Co. and the said M. Grant Berens that said sale shall be upon the following terms and conditions.
1. That the said M. Grant Gerens shall pay for said stock in sixty (60) monthly installments; said installments to begin one month from the date of the sale and delivery of each allotment of stock as above set forth.
2. M. Grant Berens*2171 shall pay the said National Tea Co. interest at the rate of six per cent (6%) per annum on all unpaid balances, but no interest shall be computed or charged until from and after the date when the first dividend on said Common Stock shall have been declared and paid, the interest to be computed monthly and all payments made in pursuance of this agreement shall first be applied either in whole or in part upon the interest then due.
3. It is further agreed between the parties hereto that the said common stock sold in accordance with this agreement shall be issued and delivered by the said National Tea Co., as the same shall be alloted as provided herein, to M. Grant Berens and thereupon be endorsed and returned by M. Grant Berens to said National Tea Co., to be held as collateral security for all unpaid balances, each individual allotment, however, to be delivered when fully paid.
4. It is understood and agreed between the parties hereto, that this agreement shall be in full force, effect and binding on the heirs, executors, administrators, successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals this 29th day of*2172 June, A.D., 1920.
Stock was allotted to the above listed employees on the dates and in total amounts as follows:
| Year 1920 | Year 1921 | ||
| Date | Shares | Date | Shares |
| July 1 | 300 | Jan. 1 | 200 |
| Aug. 1 | 210 | Feb. 1 | 200 |
| Sept. 1 | 90 | Mar. 1 | 200 |
| Oct. 1 | 100 | Apr. 1 | 200 |
| Nov. 1 | 100 | May 1 | 200 |
| Dec. 1 | 100 | June 1 | 200 |
| July 1 | 200 | ||
| Aug. 1 | 100 | ||
| Total | 900 | Total | 1,500 |
Upon allotment of stock being made, certificates therefor were delivered to the allottees who immediately endorsed them in blank and turned them over to the petitioner to be held until the purchase price was paid in full. Accounts to record the allotments were carried in petitioner's books, which were designated "Stockholders Account" and "Employees, liability on Stock Purchases" amount. These accounts contained charges for the purchase price of stock allotted and credits for payments thereon and showed debits and credits at various dates as follows:
| Debits | Credits | ||
| Dec. 10, 1920 | $87,750.00 | $24,532.27 | |
| Dec. 31, 1920 | Balance | 63,217.73 | |
| 87,750.00 | 87,750.00 | ||
| December, 1921 | 209,467.73 | 10,142.83 | |
| Dec. 31, 1921 | Balance | 199,324.00 | |
| 209,467.73 | 209,467.73 | ||
| Sept. 1, 1922 | 199,424.90 | 11,493.49 | |
| Dec. 31, 1922 | 175.00 | Balance | 188,106.41 |
| 199,599.90 | 199,599.90 | ||
| Dec. 31, 1923 | 188,106.41 | 36,527.82 | |
| Balance | 151,578.59 | ||
| 188,106.41 | 188,106.41 | ||
| June 1, 1924 | 151,578.59 | 151,169.34 | |
| Sept. 30, 1924 | 4,411.02 | ||
| Dec. 31, 1924 | Balance | 4,820.27 | |
| 155,989.61 | 155,989.61 | ||
| Jan. 1, 1925 | 4,875.00 | 4,875.00 |
*2173 *1226 The following list shows the approximate annual salaries of the officers and employees to whom stock was allotted under the above agreements:
| Name | Salary |
| Thor Rasmussen | $20,850.00 |
| F. H. Massman | 20,850.00 |
| H. G. Wolf | 6,000.00 |
| A. V. Smith | 4,700.00 |
| C. Lafeber | 3,760.45 |
| C. B. Dempster | 3,238.75 |
| M. H. Otteson | 3,750.00 |
| M. G. Berens | $2,830.00 |
| W. Laing | 6,000.00 |
| H. Kamp | 3,480.00 |
| F. J. Gruman | 6,050.00 |
| J. F. Monahan | 3,700.00 |
| Wm. Block | 2,801.85 |
In addition to the stock allotted under the agreements of June 29, 1920, F. H. Massman owned in 1921 approximately 2,000 shares of petitioner's common stock, Thor Rasmussen owned approximately 1,739 shares, and A. V. Smith owned approximately 37 shares.
The officers and employees received the dividends on the stock allotted and issued to them, and they were charged interest on the unpaid balances of their accounts.
Of the $87,750 subscription price of stock allotted in 1920, the respondent included in petitioner's invested capital for 1921 only the amount of $3,470.51 which represented the actual payments made by the allottees prorated from the dates of payment. The capital stock allotted and*2174 delivered in 1921 has not been included by respondent in invested capital for 1921.
*1227 During the year 1921 petitioner purchased its own capital stock from Walter Matthiessen as follows:
| Date | Stock | Amount paid |
| Jan. 3 | Common | $19,500.00 |
| Feb. 1 | do | 19,500.00 |
| Feb. 28 | do | 19,500.00 |
| Mar. 2 | Preferred | 891.00 |
| Mar. 11 | do | 2,673.00 |
| Mar. 24 | do | 8,350.00 |
| Apr. 4 | do | 6,375.00 |
| Do | Common | 19,500.00 |
| May 1 | do | 19,500.00 |
| June 1 | do | 19,500.00 |
| Do | Preferred | 8,300.00 |
| Do | do | 4,150.00 |
| June 6 | do | 830.00 |
| June 14 | do | 415.00 |
| June 15 | do | 2,050.00 |
| June 20 | do | 4,150.00 |
| June 22 | do | 415,00 |
| June 23 | Preferred | $581.00 |
| June 29 | do | 3,320.00 |
| June 30 | do | 11,505.00 |
| Do | do | 25,500.00 |
| July 1 | Common | 19,500.00 |
| July 7 | Preferred | 1,680.00 |
| July 11 | do | 830.00 |
| Aug. 1 | Common | 9,750.00 |
| Aug. 17 | Preferred | 1,660.00 |
| Oct. 4 | do | 3,042.00 |
| Oct. 7 | do | 1,700.00 |
| Oct. 17 | do | 595.00 |
| Oct. 21 | do | 470.00 |
| Nov. 3 | do | 85.00 |
| Nov. 22 | do | 510.00 |
| Nov. 29 | do | 252.75 |
The common stock so purchased in 1921, amounting to 1,500 shares at $97.50 per share, was immediately issued to officers and employees of petitioner under the agreements above mentioned.
*2175 Matthiessen, in his personal income-tax return for 1921, reported a profit from the sale of his common stock in the amount of $33,750, this amount being the difference between the sales price of $97.50 per share and $75 per share.
Petitioner in its 1919 capital-stock-tax return, on which tax was assessed June 30, 1919, reported the fair value of capital stock as follows:
| National Tea Co. (petitioner) | $743,386.13 |
| George Rasmussen Co | 602,388.35 |
| 1,345,774.51 |
Respondent has made no reduction in invested capital for 1921 on account of petitioner's purchase of its own capital stock except the amount of $16,530.56 representing the cost of stock acquired January 3, 1921, in the amount of $19,500 less earnings available in the amount of $2,878.36 prorated for 363 days. The remaining stock purchases were assumed to have been taken care of out of available earnings.
OPINION.
ARUNDELL: The facts found herein are, with some rearrangement, the facts stipulated by the parties. While we deem some of them immaterial to a disposition of the issues, we have set them out because they were stipulated.
The first issue is whether the allotment agreements under which*2176 stock was issued to officers and employees in 1920 and 1921 may be included in invested capital for the year 1921. No deficiency having been found for 1920, we have no jurisdiction to determine the tax *1228 for that year, but we may properly consider facts pertaining to that year which will affect the tax for 1921. Section 274(g), Revenue Act of 1926. We have heretofore decided that contracts of sale similar to the ones we have here, where the stock was actually issued, may be included in invested capital at their actual value at the time they are paid in for stock, upon the ground that they are "evidences of indebtedness" within the meaning of section 325 of the Revenue Act of 1921. See ; ; . The next question then is that of the value of the agreements. The value at which evidences of indebtedness may be included in invested capital is "actual cash value" (section 326, Revenue Act of 1921) and that value must be inherent in the instruments without reference to the value of the stock deposited as collateral. *2177 ; . On this point there is a lack of evidence which must be fatal to petitioner's claim. There is nothing shown as to the financial responsibility or solvency of the allottees of the stock. We presume that that part of the stipulation showing the annual salaries of the officers and employees was directed to this point. If so, it is insufficient. Merely stating one's annual income is no proof of his solvency or of the value of his obligations. Even if we assume the solvency of each of the debtors, it does not necessarily follow that their obligations had an actual cash value equal to their face value. On the bare figures given it is hardly likely that the contracts could have been sold for cash at their face amounts. For example, Dempster, whose salary was $3,238.75 and Kamp, whose salary was $4,480, each contracted for 100 shares of stock at a total cost to each of $9,750. This amount on the five-year payment plan required an annual outlay of $1,950, exclusive of interest on the unpaid balance. It may be that these purchasers had other means, but there was no*2178 showing made that such was the case. It may also be that the contracts had an actual cash value somewhat less than their face values, but, if so, we are unable to compute it on the state of the record. We, therefore, approve the respondent's determination in excluding the contracts from invested capital.
The next issue, which is raised by affirmative allegations of the respondent, is whether invested capital should be reduced because of the purchases by petitioner of its own stock, both common and preferred, in 1921. The respondent, according to the stipulation, reduced invested capital on account of only one stock purchase - that of January 3, 1921. The subsequent stock purchases made by petitioner, according to the stipulation, "were assumed to have been taken care of out of available earnings * * * as shown in the *1229 notice of deficiency." The notice of deficiency was neither attached to any of the pleadings nor put in evidence, and so we do not know what it shows.
Purchases by a corporation of its own stock serve to reduce invested capital at least by the amount paid in for such stock, regardless of the amount*2179 of current earnings available. ; . It is therefore clear that the respondent erred in attributing the entire amount of purchases to current earnings and that the amount paid in by the stockholders, at least, should have come out of invested capital. The question then is, what was the amount paid in? The burden of proof on this question is on the respondent and he has failed to meet it. In his brief he makes several suggestions as to how we may arrive at the amount by which invested capital should be reduced. One is that we should take the par value of the original stock. It seems to us quite evident that this is not a proper basis because of the subsequent reorganization and consolidation whereby the par value stock of three companies was called in and no-par stock of the petitioner issued. Another suggestion advanced is that we use the figure of $77.16 per share, this amount being the appraised value of assets exchanged for the common stock in the 1919 reorganization. The appraised value as shown in the minutes of the directors' meeting would form a proper basis*2180 only if it represented the actual cash value at which the assets were included in invested capital. Whether these two values were the same is not shown. Attention is also called to the fact that Matthiessen reported a gain on his sale of stock to the petitioner of the difference between $75 and $97.50 per share. It is not shown, however, what the $75 represents and we can not say that it was the amount paid in to the petitioner.
The result of our consideration of the case is to leave the parties where we found them.
Decision will be entered affirming the deficiency determined by the respondent.