Case Name: Appeals of The Pictorial Review Co.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-11-10
Citations: 5 B.T.A. 416
Docket Number: Docket Nos. 4487, 6661, 11303
Parties: Appeals of The Pictorial Review Co.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 5
Pages: 416–422

Head Matter:
Appeals of The Pictorial Review Co.
Docket Nos. 4487, 6661, 11303.
Decided November 10, 1926.
Nelson T. Hartson, Esq., for the petitioner.
Benjamin H. Saunders, Esq., for the Commissioner.

Opinion:
OPINION.
SteRNhagen:
The Commissioner has reduced the petitioner's invested capital for 1918 and 1919 by excluding three items, (1) promissory notes of three stockholders and directors given for cash withdrawals, (2) promissory notes of all stockholders given in November, 1917, by way of rescinding a dividend paid in March, 1917, and (3) the amount of Federal taxes paid in each year upon the previous year's income.
1. The Commissioner's position in respect of the first item is in our opinion clearly unsound. That notes and accounts receivable are properly within a taxpayer's invested capital is clear from the statute itself, which in section 325 (a) defines tangible property to include " notes, and other evidences of indebtedness, bills and accounts receivable," and in section 326 (a) defines invested capital to include actual cash value of tangible property paid in for stock or shares and paid in or earned surplus and undivided profits. Notes paid in for stock or shares have been held to be within invested capital. Hewitt Rubber Co., 1 B. T. A. 424; American Steel Co., 1 B. T. A. 839; Cross Mountain Coal Co., 2 B. T. A. 587; Stamey-Mackey Construction Co., 4 B. T. A. 383. From the evidence it is entirely clear that the makers of the notes were solvent and that the corporation's receivables due from these three persons were worth no less than their face value, and they appeared upon the corporation's books and balance sheets as assets in this amount. The facts that the debtors were large stockholders and that they were, as directors and officers of the corporation, in a position to influence the corporation in making the loans, do not change the character of the accounts receivable or make them in this respect different from what they would have been had the debtors been otherwise related to the corporation. The bona ftdes of the loans or the liability of the debtors for their full repayment is upon this record beyond question. There is likewise nothing from which we could decide that the value of the accounts was less than it appeared to be upon the books. Not only were the debtors solvent and prosperous, with no history of impaired or doubtful credit, but in addition the payment of the accounts of Ahnelt was secured by the deposit of stock endorsed in blank.
There are of course situations where a full consideration of all of the attendant circumstances requires that a withdrawal from the assets of a corporation by a stockholder should serve to reduce invested capital because there is in fact no genuine asset left or intended to be left in the corporation. The bona fides, the intention as disclosed from the direct and circumstantial evidence, and the value of the alleged debtors' credit are matters to be considered. In the instant case the petitioner has so thoroughly marshaled its evidence'in these respects as fully to support its claim. We therefore hold that the amounts of $742,815.86 in 1918 and $656,109.90 in 1919 due from Ahnelt, Nelson, and Trumbull were properly within the petitioner's invested capital for- those years.
2. We are likewise compelled by the evidence to hold that the Commissioner erroneously excluded from invested capital the amounts of notes received from the stockholders in November, 1917, in an attempted rescission of the earlier dividend. The Commissioner argues that after the dividend was declared and paid in March, when it very properly served to reduce invested capital, it could not be rescinded because it had vested in the stockholders. Whether this be true or not, the real question before us is whether the receipt by the corporation in 1917 of the notes of the stockholders served to increase its invested capital. The notes were on their face valid. They were voluntarily given by the stockholders with full knowledge of all of the circumstances and considerations upon which they were based. The corporation received them, included them in its assets, and persuaded third parties to finance it upon the strength of these notes. No one has attempted to repudiate the notes and so far as the record shows there is no circumstance to impair their value or validity. Union Bank of Brooklyn v. Sullivan, 214 N. Y. 332; 108 N. E. 558. Just as the preceding dividend had served to diminish surplus, so the receipt of valuable accounts receivable must serve to increase the surplus to the extent of their value. The value of demand notes of a solvent maker is no less than its face merely because the payee does not choose to demand. So far as this record discloses, demand would be met by the payment promised. We can not assume otherwise. As has been said in respect of the previous point, a case might well be imagined where the circumstances would overcome the presumption of bona fides and disclose that the notes were not in truth valid or perhaps not assets at all. But this is not such a case. We hold that the amount of the notes in question, together with the $80 not covered by notes, should be included within the petitioner's invested capital for 1918 and 1919.
3. The petitioner's contention that the previous year's taxes should not serve to reduce invested capital is met by the Board's decision to the contrary in Russel Wheel & Foundry Co., 3 B. T. A. 1168, and upon the authority of this decision we sustain the Commissioner.
Judgment in accordance with the foregoing opinion will be entered on 15 days' notice, wnder Rule 50.