Georgia Eng'g Co. v. Commissioner , 21 B.T.A. 532 ( 1930 )

GEORGIA ENGINEERING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Georgia Eng'g Co. v. Commissioner

Docket No. 28143.

United States Board of Tax Appeals

21 B.T.A. 532; 1930 BTA LEXIS 1838;

December 3, 1930, Promulgated

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1. Held that certain distributions authorized by the formal action of the petitioner's directors and credited to the accounts of the respective stockholders were dividends, and that the unpaid portion of such dividends was properly excluded from petitioner's invested capital.

2. Certain indebtedness owing to the petitioner and charged off in 1921 held not to have been ascertained to be worthless in that year; held, further, that the debt was ascertained to be worthless in 1923 and the previous charge-off remaining on the books is sufficient to entitle petitioner to the deduction in 1923.

Lawrence A. Baker, Esq., and Henry Ravenel, Esq., for the petitioner.

P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of deficiencies in income and profits tax of $1,611.73 and $3,263.71 for 1920 and 1921 and in income tax of $9,313.12 and $3,594.52 for 1922 and 1923, respectively. The matters in controversy are the respondent's action (1) in reducing invested capital for 1920 and 1921 by the amount of an unpaid distribution authorized by the petitioner's directors and (2) in denying a deduction for 1921 of $115,000 for bad debts. The petitioner contends that should be respondent's action in disallowing the deduction of the $115,000 in 1921 as a bad debt be held to be correct, a deduction of the same amount should be allowed as a loss in 1923. The disallowance of the deduction for a bad debt in 1921 resulted in the elimination of deductions taken by the petitioner in its returns for 1922 and 1923 for a net loss in 1921.

FINDINGS OF FACT.

The petitioner is a Georgia corporation organized in 1905 and has its principal office at Augusta. Its business is that of contracting and laying pavement for municipal and county roads, and doing other municipal work.

Prior to 1917 it was not the practice of the petitioner's directors to declare formal dividends, but the stockholders were allowed to withdraw money from the corporation in proportion to their stock holdings. Such withdrawals were charged to the accounts of the respective stockholders and carried as accounts receivable on the books of the petitioner.

At December 31, 1916, the petitioner's books showed a surplus of $341,619.42. Believing that under the Federal tax laws then in force the petitioner would be assessed a tax on the surplus held by it, and thinking that it might have some difficulties with the Federal Government on account of taxes if a dividend were not declared, the directors of the petitioner adopted the following resolution on January 24, 1917:

Upon motion of Mr. D. F. Jack, duly seconded and carried, the Treasurer was instructed to apportion the earnings of the Company to December 31st, 1916, as shown by the ledger, and to enter on the Company's ledger, to the credit of each stockholder, such proportionate amount of these earnings, as his holdings, appearing on December 31st, 1916, would entitle him to receive. Each amount so credited to be paid, as collections made or securities sold will warrant.

On January 28, 1919, the directors of the petitioner adopted the following resolution:

Upon motion of Mr. J. Clark Jack, duly seconded and carried, the Treasurer was instructed to charge to profit and loss the sum of $20,042.50, and to enter on the company's ledger to the credit of each stockholder such proportionate amount of this sum as his or her holdings as of Dec. 31, 1918, would entitle him or her to receive; such amounts so credited to be paid as securities sold or collections made will warrant.

Pursuant to the resolution of January 24, 1917, the stockholders' accounts were credited with amounts totaling $341,619.42, or the amount of the surplus at December 31, 1916. Pursuant to the resolution of January 28, 1919, the accounts of the stockholders were credited with amounts totaling $20,042.50, or 17 cents less than the amount of surplus shown by the petitioner's books at December 31, 1918. The credit balances of the stockholders' accounts remaining after offsetting withdrawals were carried on the petitioner's books and shown in its financial statements as liabilities, whereas prior to the resolution of January 24, 1917, the withdrawals were treated as assets of the petitioner.

Deducting prior withdrawals, there were credits in favor of the stockholders on the petitioner's books of the following amounts on the dates indicated:

January 1, 1920	$189,950.98
January 1, 1921	178,450.98
December 29, 1921	178,450.98

Of the six stockholders during the years 1919 through 1921, only one withdrew the total amount credited to his account and his total withdrawals were in excess of the amount credited to him.

When they adopted the above resolutions the directors of the petitioner did not expect that the distributions would be paid out at once, or soon. On January 24, 1917, the petitioner could not have paid the distribution authorized on that day, since it did not have sufficient cash for that purpose, or securities which could be turned into cash. Nor could the accounts receivable and notes receivable have been collected for the payment of such distribution. At no time between December 31, 1916, and December 31, 1921, could the entire distribution have been paid. The paying out of the cash the petitioner had at the time of the authorization of the distribution would have jeopardized the petitioner's business operations and any attempt to have paid such distribution would have necessitated a winding up of the affairs and a liquidation of the petitioner.

The petitioner's balance sheet at December 31, 1916, is as follows:

ASSETS
Cash C. & S. Bank	$6,798.60
C. Nat. Bank	15,504.63
Commercial Trust Co	34,310.77
Am. Bank & Trust Co	9,886.50
Certified Check	10,000.00
		$76,500.50
ACCOUNTS RECEIVABLE
Rockmart Brick & Slate Co	58,733.03
F. R. Clark	55,135.88
D. F. Jack	84,642.10
C. E. Clark	16,730.08
City of St. Petersburg	82,376.36
City of Tampa	30,922.65
St. Pete. Ind	1,165.95
W. D. Whitaker	100.00
J. D. Reese	30.00
Clearwater, Ind	$182.40
City of Florence	927.54
City of Sumter	8.05
Putnam County	9,645.39
Tampa Individuals	174.20
Craven County	656.15
Y. Briddell	15.00
		$341,444.78
SECURITIES
Rockmart B. & S. Bnds	7,000.00
Tampa Pav. Cert	7,925.29
Tampa Sewer Certs	1,297.66
St. Pete. Pav. Certs	10,665.87
		26,888.82
Equipment	10,943.73
Furniture & Fixtures	270.32
		11,214.05
Notes Receivable		87,043.83
		543,091.98
LIABILITIES
Capital stock		25,000.00
Surplus		341,619.42
ACCOUNTS PAYABLE
Georgia Vit. Brick & C. Co	1,066.20
Sundry	161,084.02
Y. Briddell	122.63
R. L. Saylor	75.10
J. T. Cathey	481.62
City of Clearwater	493.05
Baird Const. Co	370.15
J. P. Realty Co	778.34
Luten Bridge Co	999.40
Hamilton Johnson	1,002.05
		166,472.56
Notes payable C. & S. Bank		10,000.00
		543,091.98

After having been advised by counsel for the petitioner that the distribution provided for in the resolution of January 24, 1917, was illegal and after authorizing the charging off of a certain large indebtedness owing to the petitioner by the Rockmart Brick & Slate Co., hereinafter referred to more fully, the directors of the petitioner on December 29, 1921, adopted the following resolution:

Whereas the charging off of the amount of $179,660.07 on the books of this Company, this amount being the total of notes due by the Rockmart Brick and Slate Company and for monies advanced on open account, would not only absorb the amount standing to the credit of surplus account on our ledger, but would also create a large deficit:

Be it resolved: That the Treasurer be instructed, and he is hereby instructed to debit to the accounts of the individual Stockholders the amounts previously declared as dividends and now standing to their respective credit, and to credit to Surplus account, an even amount, that this account should show a proper credit.

The directions contained in the foregoing resolution were carried out, the stockholders' accounts being debited with amounts totaling $178,450.98 and the petitioner's surplus being credited with a like amount.

In determining the deficiencies for 1920 and 1921 the respondent has not included in the petitioner's invested capital the amount of the distributions which were not withdrawn and which were restored to surplus on December 29, 1921.

At the time of the organization of the petitioner in 1905 its stockholders were Frank R. Clark, D. F. Jack, Clarence E. Clark, E. H. Callaway and F. B. Pope. Frank R. Clark and D. F. Jack were brothers-in-law. At some date subsequent to the organization of the petitioner D. F. Jack, through a friend, John McKenzie, became interested in the Rockmart Brick & Slate Co., hereinafter referred to as the Rockmart Co., which had its plant at Rockmart, Ga. D. F. Jack interested Frank R. Clark in the company and in 1911 they together with McKenzie and W. W. Moseley purchased the stock of the Rockmart Co., with the understanding that each was to have a one-fourth interest, the interests of McKenzie and Moseley to be paid for out of their proportion of the earnings of the company. As McKenzie and Moseley were not able to pay for their stock, D. F. Jack and Frank R. Clark purchased their interests after some years. D. F. Jack died during 1917 and in 1918 his holdings in the Rockmart Co., as well as in the petitioner, were transferred to his heirs, J. C. Jack, Anna C. Jack, and Effie Jack Chadwick. With the exception of the transfer of the holdings of D. F. Jack to his heirs in 1918, the stock of the petitioner and the Rockmart Co. was held as follows from 1916 to December 31, 1921:

Stockholder	Georgia	Rockmart
	Engineer-	Brick &
	ing Co.	Slate Co.
	Shares	Shares
Olive Hill Fire Brick Co		14
J. C. Jack	53	308
Anna C. Jack	53	308
Effie Jack Chadwick	53	308
John H. McKenzie		1
W. W. Moseley		1
Frank R. Clark	89	305
John M. Clark	1	1
E. E. Clark	1
Unissued		3
Total	250	1,249

The petitioner began doing business with the Rockmart Co. about 1911, purchasing paving brick from it and taking about 85 per cent of its output. From about 1911 until 1915 the petitioner made advances to the Rockmart Co., for which notes were taken. These advances were made by checks of the petitioner for various amounts as the current needs of the Rockmart Co. required. The notes given by the Rockmart Co. bore interest and in January, 1915, the petitioner, out of a desire to aid that company in getting "on their feet," discontinued taking notes for advances, thereafter making advances on open account on which no interest was charged.

Advances made by the petitioner to the Rockmart Co. on notes prior to January 1, 1916, amounted to $84,435.98. Against this indebtedness the Rockmart Co. made cash payments of $790.33 and $396.34 on December 30, 1916, and October 31, 1918, respectively, leaving an amount of $83,249.31 unpaid on the notes at the end of 1921. No other payments were even made on the notes nor was any shipment of brick ever credited on them. Advances made by the petitioner to the Rockmart Co. on open account were as follows:

Year	Amount
1915	$46,572.46
1916	12,160.57
1917	12,201.44
1918	9,213.30
1919	250.00
1920	10,800.30
1921	11,800.00
Total	102,998.07

In addition to the foregoing advances the petitioner from October 14, 1919, until December 29, 1919, made cash advances totaling $19,500 to the Rockmart Co. against shipments of brick from that company to the petitioner. Shipments of brick against which the advances were made amounted to only $14,874.80, thereby making a net amount of $4,625.20 so advanced in 1919 in excess of shipments of brick. Adding the $4,625.20 to the $102,998.07 shown above gives $107,623.27. From October 31, 1918, until December 31 of the same year the Rockmart Co. made cash payments totaling $11,203.46 on the advances made to it by the petitioner on open account. On December 20, 1919, a further cash payment of $9.05 was made, thereby making the total payments $11,212.51 on open account. Subtracting that amount from $107,623.27 leaves $96,410.76 as the net amount owing the petitioner on open account. The last amount advanced by the petitioner to the Rockmart Co. was on November 19, 1921, when it advanced cash of $4,000.

A meeting of the board of directors of the petitioner was held on November 21, 1921, for the purpose of determining what action should be taken with respect to the indebtedness of the Rockmart Co. to the petitioner. After the treasurer had presented a report showing that the Rockmart Co. owed the petitioner $96,410.76 on open account and $83,249.31 on demand notes, or a total of $179,660.07, the following resolution was adopted:

Resolved: That in as much as the Rockmart Brick & Slate Co. is without means of reducing any of its obligations to this Company, and believing that the amounts advanced by us on open account, and on notes held by us, are uncollectible, resolved that the Treasurer be, and is hereby instructed to refuse to advance any additional money or make any farther loans to the Rockmart Brick & Slate Co.

The indebtedness of the Rockmart Co. to the petitioner was again considered by the directors at a meeting held on December 29, 1921. After the president of the petitioner corporation stated that it was his belief that the Rockmart Co. was insolvent and not in a position to reduce its indebtedness to the petitioner either on notes or for money advanced on open account, the following resolution was adopted:

Whereas, the Rockmart Brick and Slate Company is indebted to this Company in the amount of $179,660.07, and, whereas the past due and unpaid bonds of the Rockmart Brick and Slate Company * * * have a priority over the indebtedness to this Company, and whereas, on account of the business depression existing, and consequent inability of the management of the Rockmart Brick and Slate Company, to sell the plant and property of the Company;

Be it resolved: That the Board of Directors of this Company determine the said indebtedness of the Rockmart Brick and Slate Company amounting to $179,660.07 to be a total loss and the Treasurer be instructed and he is hereby instructed to charge off on the books of this Company all notes of the Rockmart Brick and Slate Company, and all cash advances made to them, on open account.

Pursuant to the resolution of December 29, 1921, the treasurer of the petitioner charged off to surplus the indebtedness of the Rockmart Co. of $179,660.07, crediting accounts receivable and notes receivable in a like amount. The petitioner held no collateral or security of any kind for the payment of this indebtedness of $179,660.07 so charged off, nor has the petitioner ever received from the Rockmart Co. a payment of any part of such indebtedness.

The past due and unpaid bonds of the Rockmart Co. referred to in the resolution adopted by the petitioner's directors on December 29, 1921, were part of an issue of 7 per cent bonds amounting to $40,000 due January 1, 1919, and secured by a deed of trust executed January 1, 1909, on all the Rockmart Co.'s property, consisting of real estate, machinery and equipment, brick plant, kilns, tram track, etc. On January 1, 1919, the time of the maturity of the bonds, there were outstanding bonds in the amount of $35,000, which were owned as follows:

Georgia Engineering Co	$11,500
Frank R. Clark	3,500
Anna C. Jack	7,000
J. C. Jack	6,500
Effie Jack Chadwick	6,500

All of these with the exception of the petitioner were stockholders in both the petitioner and the Rockmart Co.

The Rockmart Co. failed to pay the bonds when they came due on January 1, 1919, and thereafter continued in default of payment of the bonds, as well as the interest accruing thereon after that date. The original trustee named in the deed of trust having resigned, John M. Clark on October 5, 1922, was appointed trustee under the deed of trust by the above mentioned bondholders. In the fall of 1922 Frank R. Clark, at the instance of the other bondholders, began acting as trustee for the bondholders and continued in that capacity until the summer of 1924.

After having been duly advertised for sale for the benefit of the bondholders, the property of the Rockmart Co. was sold at public sale on January 3, 1923, to Frank R. Clark, representing the owners of the bonds, and being the only bidder. The selling price of the property was $44,800, $35,000 of which represented the amount of the bonds and $9,800 represented accrued interest thereon. Nothing was received for the property in excess of the amount of the bonds and accrued interest and after the sale the Rockmart Co. had no assets of any kind for the satisfaction of its general creditors or for its stockholders.

In 1924 the bondholders who bought in the property of the Rockmart Co. organized the Monarch Brick Co. and transferred to it the Rockmart property they had bought in, and, with the exception of the petitioner, received in exchange therefor stock of the new company in proportion to their holdings of bonds of the Rockmart Co. Prior to the organization of the Monarch Brick Co. it was agreed among the organizers that the company would assume responsibility for the amount of the bonds of the Rockmart Co. which the petitioner had owned. Although the Monarch Brick Co. has assumed that liability, the amount has never been paid, but is still carried as a running account on the books of the petitioner.

In 1920 the directors of the petitioner had informal discussions as to whether it would be worth while to advance any more money to the Rockmart Co. with a view to obtaining repayment in brick from that company. Advances were continued however until November 19, 1921, after which date no further advances were made. The directors of the petitioner having found that their efforts at running and experimenting to make the business of the Rockmart Co. profitable were meeting with poor success and that the longer they continued the greater were the losses, and being aware of the fact that they had advanced to the Rockmart Co. all of the petitioner's money that they could afford to advance, and realizing that it was not possible for the $179,660.07 which had already been advanced to be repaid at that time, they decided it would be better to sacrifice what they had advanced rather than lose any further amount. Consequently, they adopted the resolution of November 21, 1921, instructing the treasurer not to make any further advances to the Rockmart Co. In view of the continued losses of the Rockmart Co., together with the fact that further cash advances would impair the capital and surplus of the petitioner, and not seeing how collection could be had of the advances previously made, the directors of the petitioner accordingly adopted the resolution of December 29, 1921, pursuant to which the indebtedness of the Rockmart Co. was charged off.

Prior to 1921 a discontinuance of the business of the Rockmart Co. had not been contemplated, as the petitioner's directors were trying to work the company out of debt and were going forward with a hope of overcoming obstacles and turning the company into a successful enterprise. They continued to entertain this hope until just before they took action shutting off further advances to the Rockmart Co. There had been no material changes in the company's assets since 1911. There was nothing in the condition of the Rockmart Co. in 1921 that impressed the petitioner's directors as being unusual except that its debt to the petitioner increased as the years went by and conditions were such that the petitioner abandoned the hope of working it out successfully.

The balance sheet of the Rockmart Co. at December 31, 1921, is as follows:

Assets	Amount	Liabilities	Amount
Cash	$1,847.87	Capital stock	$125,000.00
Deficit	132,021.26	Bond issue	40,000.00
Real estate and plant	80,650.00	Notes payable	83,249.31
Machinery	56,774.97	Accounts payable	12.30
Supply	498.14	Georgia Engineering Co	96,410.76
Office furniture and fixtures	285.20	Georgia Vitrified Brick	3,767.99
		& Clay Co.
Rockmart office furniture and	404.40	Interest on bond issue	7,350.00
fixtures		matured
Buildings and kilns	78,128.09
Frank R. Clark, Jr., manager	36.68
Atlantic Steel Corporation	210.00
Merchandise inventory	4,933.75
	355,790.36		355,790.36

Other than the shipments of brick heretofore referred to, the petitioner never at any time made demand for the payment of the indebtedness owing to it by the Rockmart Co., for the reason that the president of the petitioner, Frank R. Clark, was also president of the Rockmart Co., and John M. Clark, secretary and treasurer of petitioner, was also an officer of the Rockmart Co., and, being conversant with the affairs of that company, they knew it was useless to make such demand. For several years prior to 1921 any attempt by the petitioner to enforce collection would have thrown the Rockmart Co. into bankruptcy and the consequent destruction of the company through the sale of its assets.

In its income-tax return for 1921 the petitioner took as a deduction for bad debts the amount of $179,660.07 representing the indebtedness of $96,410.76 owing to it by the Rockmart Co. on open account and $83,249.31 owing on notes. In determining the deficiency here involved for 1921 the respondent allowed $64,660.07 of the deduction taken and disallowed the remainder, $115,000.

During the years here involved the petitioner and the Rockmart Co. filed separate returns and in determining the deficiencies for the respective years the respondent has not considered that the two companies were affiliated.

OPINION.

TRAMMELL: The issues involved in this proceeding are (1) whether the petitioner is entitled to have included in its invested capital for 1920 and 1921 the amount of the unpaid distributions which had been credited to the stockholders' accounts but which, pursuant to the resolution of December 29, 1921, were credited back to surplus; (2) whether the petitioner is entitled to a deduction for 1921 of $115,000 representing the portion of the Rockmart Co.'s indebtedness that was disallowed by the respondent as a deduction for bad debts and (3) if the $115,000 is not an allowable deduction for bad debts in 1921 whether the amount is allowable in 1923. While the facts relating to the amount of $115,000 which was disallowed by the respondent are equally applicable to the remaining portion of the indebtedness, $64,660.07, the respondent has allowed the latter amount as a deduction. Although the respondent admits in his brief that the allowance of $64,660.07 was erroneous, our consideration of the deduction will be limited to the amount of $115,000, since he did not move at or before the hearing to increase the deficiency for 1921 because of such erroneous allowance.

The petitioner contends that the respondent should have included in its invested capital for 1920 and 1921 the amount of $177,228.78 representing an amount credited to stockholders pursuant to the resolution of January 24, 1917, but restored to surplus pursuant to the resolution of December 29, 1921. In this connection we have found the unpaid distributions remaining to the credit of the stockholders to be $178,450.98 on December 29, 1921, the amount contended for by the petitioner being $1,222.20 less than what we have found. The petitioner apparently arrives at the amount contended for by taking into consideration a withdrawal of $1,222.20 made by one stockholder in excess of the total distributions credited to his account. This amount in our opinion represents an account receivable in the hands of the corporation and should in any event remain in invested capital.

The first question is whether the amount of surplus of the petitioner credited to the stockholders and not drawn by them or offset by debts of the stockholders and subsequently by action of the directors restored to surplus by bookkeeping entries is a part of the petitioner's invested capital for the years involved. If such amount was distributed to the stockholders as a dividend it should come out of invested capital. The directors of the corporation by proper action directed the treasurer to apportion the earnings of the company to December 31, 1916, and to enter on the company's ledger to the credit of each stockholder his proportionate share thereof. Such amounts so credited were, however, to be paid as collections were made or securities sold would warrant. Of the total amount of the surplus credited to the stockholders, which amounted to $341,619.42, the stockholders actually received the benefit by offsetting their accounts or by actually withdrawing to a substantial amount, leaving on the books on January 1, 1920, $189,950.98, on January 1, 1921, $178,450.98, on December 29, 1921, $178,450.98, credited to the stockholders but which had not been drawn by them or which had not been used to offset their indebtedness to the corporation. If the expression "distribution of the earnings or profits" means the actual receipt thereof by the stockholders, then it is our opinion that these amounts should not be considered as distributions. The stockholders did not actually receive these amounts. In fact, they were not payable to the stockholders except as the collections were made or the sale of securities would warrant, and there is no evidence to show that such conditions warranted the actual payment of these undrawn amounts, although the corporation had sufficient surplus to have paid them.

For the purposes of section 31(b) of the Revenue Act of 1917, the United States Supreme Court has held that the distribution there referred to meant distributions actually received by the stockholders. See , and ; but section 31(b) of the Revenue Act of 1917 referred to the taxation of distributions "received" by the stockholders and the tax was on that part of the annual income of the distributee for the year in which received. In view of this language in the statute, the Supreme Court held that distribution there meant actual receipt of the distribution by the stockholder.

There is a material difference between the statute which provides that a distribution shall be a part of the annual income of the distributee for the year in which received and shall be taxed at such rates and the question of law as to whether the invested capital of the corporation shall be reduced by a deduction of a dividend not presently payable to the stockholders. On the question of the invested capital, it seems to us to be immaterial when the distribution was actually paid to or received by the stockholders. The question here is was the surplus of the corporation reduced by the action of the directors during the years involved, regardless of when, if ever, the stockholders actually received the distribution.

In the case of , we had occasion to consider and discuss the effect on invested capital of the declaration of a dividend, and held that, since such a declaration created the relationship of debtor and creditor, the amount thereof should not be included in invested capital. We see no reason to repeat here what was there said.

In our opinion this case on its facts is somewhat similar to (although a stronger case) that presented in , which was affirmed by the . In this case both the stockholders and the corporation considered that the declaration of the dividend or distributions of profits pursuant to the resolution of the directors created an indebtedness by the corporation to the stockholders, and, in fact, to the extent that the stockholders owed the corporation, there was an effective offset of accounts. Some stockholders withdrew additional amounts. We think that the amounts not withdrawn and not offset were just as much obligations or indebtedness of the corporation as those which were withdrawn or offset. There was no question as to the impairment of the capital stock at the time when the distributions were ordered. It may well be true that the directors had no authority to declare a dividend which would impair the capital stock. But the distributions here did not have that effect. See .

The petitioner has cited the cases of ; ; ; and . In our opinion this case is distinguishable from those cases on the facts, and comes within the principle of the Zenith Milling Co., case, supra. The facts in this case show a formal declaration of the dividend. Under the authorities, we think this constitutes a sufficient segregation of the surplus on hand in a sufficient amount to have paid the dividend. The fact that it was only to be paid when collections were made or securities were sold affects only the date of payment. In any event the accounts of the stockholders were credited with the amount of the surplus on the books. Their accounts due the corporation were offset. Some actually withdrew the amounts credited to them - one withdrew an amount in excess thereof. Thus a portion of this dividend declared was actually paid. The only authority for the crediting of the accounts and withdrawing thereof in part was the declaration of the board of directors.

We do not think that any further action in the way of a declaration of a dividend was necessary in order to warrant further distribution of surplus - a further drawing against the amounts credited to stockholders of the surplus. The corporation actually had the securities which it would have sold at any time, and the accounts receivable were principally from stockholders representing previous withdrawals and also accounts due from municipalities. We think, under such circumstances, the provision as to actual payment of the dividends declared contemplated a payment within a reasonable time in the future, rather than any uncertainty as to whether they would ever be paid at all. The accounts due from the municipalities are not shown to have been doubtful, nor was the Rockmart indebtedness considered doubtful at the time of the resolution. The resolution, in any event, does not limit the collections to particular debts then owing. Whenever collections were made or securities sold the dividends were to be paid. The securities could doubtless have been sold at any time and the corporation had ample surplus out of what to have made the distribution.

In the case of , the court had a case somewhat similar to the one before us. The court said:

Where the board of directors adopted a resolution "that a dividend of 6 per cent. be declared on the common stock, payable * * * at such time as the finances of the firm will in the judgment of the board of directors warrant," and the stockholders were notified at their annual meeting that such a dividend had been declared, and the company had on hand sufficient undivided profits to pay such dividend, it was held that this amounted to the declaration of a dividend, and that no further action by the directors was necessary in order to segregate the share of each stockholder.

To the same effect see .

There is no material difference between paying a dividend when the finances in the judgment of the directors would warrant and paying a dividend when collections were made or securities sold where there was sufficient surplus on hand and sufficient accounts to meet the payments were not considered doubtful when the declaration was made but merely not due, and aside from the fact that the corporation had securities which it could sell, and also considering the fact that the corporation was carrying on business and making profits and continuing to make collections. The resolution in this case is certainly no more indefinite than the resolution in the Northwestern Marble & Tile Co. case, supra.In either case there might never be an actual payment to stockholders, but this is not the question. The question really is, was a debt created. See also . The fact that title to the distribution may not pass to the stockholder until actual payment in our mind is not important. Here we are dealing not with the stockholder and his income, but the corporation and its surplus as it may be affected by its indebtedness created, whether paid or not within the taxable period.

From a consideration of all the facts in this case we are of the opinion that the corporation by the formal action of its directors segregated and effectively distributed its surplus here involved to its stockholders. It not only ordered the distribution to be made, but actually credited the amounts on the books of the corporation to its stockholders. It may be true that the crediting of the amounts on the books to the stockholders might not have vested title in the stockholders or amounted to a payment to the stockholders until actual payments or until such amounts became unqualifiedly subject to their demands, especially since the amounts thereof were not payable until the collections or sale of securities warranted. This question of payment to the stockholders of the indebtedness created is not necessary to be discussed here. In our opinion, in any event, it was a sufficient distribution and segregation to at least create an indebtedness on the part of the corporation. This is what we are concerned with here. The indebtedness so created reduced the surplus.

With respect to the resolution of January 28, 1919, there is testimony to the effect that the distribution authorized was paid to the stockholders and in the petitioner's brief it is stated that the amount of such distribution was fully withdrawn by the stockholders subsequent to the passing of the resolution. While this is somewhat in conflict with the documentary evidence introduced, we see no similarity between the situation as respects that resolution and the cases cited by the petitioner where the distributions had not been paid or withdrawn. But in any event, whether the entire distribution authorized on January 28, 1919, was paid in full or only in part, we think there was a distribution within the meaning of the statute sufficient to create an indebtedness of the corporation. If we should hold that the distributions authorized on January 24, 1917, and January 28, 1919, were not dividends or distributions, it would follow that all amounts withdrawn by the stockholders subsequent to January 24, 1917, constituted indebtedness of the stockholders to the corporation, a conclusion which the record in nowise supports. Neither the corporation nor the stockholders so considered it. It would also amount to holding that the corporation did not offset the indebtedness to the stockholders to it when in fact it did. We think the established facts warrant us in holding that the surplus was distributed by the declaration of dividends; that the portion thereof which was drawn by the stockholders, or was offset by indebtedness due by stockholders, was actually paid, and the remainder constituted unpaid indebtedness of the corporation.

This question really narrows itself to whether the dividends or distributions ordered to be made by the resolutions of 1917 and 1919 constituted legal dividends; that is, whether there were net profits out of which they could have been declared. In determining whether dividends were lawfully made, the transaction must be viewed in the light of the time of its occurrence, and if net profits or surplus existed at that time the payment of the dividends is not rendered unlawful or illegal by subsequent events, even insolvency of the corporation, and if the assets of the corporation are valued honestly and fairly in view of all the facts known at the time of declaration, the dividend is not rendered unlawful by the fact that such assets subsequently proved to be worth less than the valuation placed upon them at the time of the declaration. ;; ; . It may be conceded, however, that a mere ignorance of the actual facts as to the valuation of the indebtedness at the time of the declaration of the dividend would not make a dividend legal if the facts existing were such that there were insufficient assets or net surplus to warrant the dividend, but here the directors had actual knowledge of all the facts; in fact, they had a most intimate knowledge of all the conditions on account of the intercompany relationship, the interlocking directorship, the common stock ownership, and the business conditions. It may well be true that, if the petitioner in some previous year or years had undertaken to force collection of the indebtedness against the Rockmart Co. it would have resulted in the liquidation of that company. However, this does not mean that indebtedness was not collectible. The fact that by paying the indebtedness it would have left the Rockmart Co. in a more precarious condition and unable to carry on its business is not sufficient to warrant the petitioner in taking the position that the indebtedness could not have been collected. There is no testimony that the indebtedness was worthless in 1917 or 1919. If it be true that the enforced collection thereof would have caused a liquidation of the Rockmart Co. either in those years or any other year, that fact might have resulted in a loss to the stockholders of the Rockmart Co., consisting of most of the stockholders of the petitioner company, but that is a fact with which we are not concerned in this case. All we are concerned with here is, so far as this question is concerned, whether the petitioner had surplus in 1917 and 1919, at the time the distributions were ordered in those years, to pay or out of which such distributions could be declared without impairing the capital stock.

In view of the foregoing, it is our opinion that the dividends, having been declared out of surplus, constitute legal dividends and consequently legal indebtedness of the corporation to the stockholders in the amount thereof, and as a consequence the invested capital should be reduced to the extent of the surplus so ordered to be distributed.

The petitioner contends that it is entitled to a deduction in 1921 of $115,000 representing the portion of the Rockmart Co.'s indebtedness that was disallowed by the respondent as a deduction for bad debts. In support of its contention the petitioner urges that the debt owing to it by the Rockmart Co. was ascertained by it to be worthless in 1921 and charged off in that year. While there is no controversy between the parties as to the indebtedness having been charged off in 1921, the respondent contends in his brief that the indebtedness was not ascertained to be worthless in 1921, but had been so ascertained in prior years.

On the question of the indebtedness of the Rockmart Co., evidence was introduced as to the values of assets carried on the books of the company in 1921 and the amount of indebtedness, including that secured by mortgage, was introduced. While there was testimony to the effect that some of the assets were not worth the amounts at which they were carried on the books, the record is silent as to what the values of these assets were. The balance sheet discloses a deficit at the end of 1921 of $132,021.26. In determining this deficit, however, there have been included capital stock liability in the amount of $125,000 and the amount owing to the petitioner of $96,410.76 on open account and notes payable of $83,249.31.

It may well be that the petitioner had an intimate knowledge of all the affairs of the Rockmart Co., including the values of its assets, but it did not supply us with evidence from which we could make a determination as to the value of the assets out of which the petitioner might have collected its indebtedness in 1921. The fact that some of the assets were not worth the amounts at which they were carried on the books is not sufficient evidence to warrant us in saying that they were not worth in excess of $44,800, the amount testified to as being the amount of principal and interest on the bonds in 1921, representing $35,000 principal and $9,800 interest on the bonds. The assets as shown by the books were worth $178,969.10 in excess of the mortgage and interest. It may well be that the assets were not worth this amount, but in order for us to determine that the indebtedness was ascertained to be worthless in 1921, we must know the facts upon which such ascertainment was made, and for this purpose, we must know what assets the petitioner had recourse to. If the petitioner had evidence as to the value of these assets it should have introduced it.

It may well be true, as testified to by the petitioner, that, if it had undertaken to force collection of the indebtedness in the years prior to 1921, it would have resulted in the bankruptcy of the Rockmart Co. This fact is not sufficient, however, to warrant us in determinating that the indebtedness was worthless or that the petitioner could not have collected its indebtedness or a substantial part thereof even if the Rockmart Co. had been placed in bankruptcy. Undoubtedly, such action would have resulted in loss to the stockholders of the Rockmart Co., but we are not concerned with such loss here.

The burden of proof was upon the petitioner to show that the indebtedness was ascertained to be worthless in whole or in part in 1921. The evidence introduced is insufficient to establish this fact. The pleadings put in issue the question as to whether the indebtedness was ascertained to be worthless in 1921. The fact that the respondent argued in his brief that it was ascertained to be worthless in some previous year does not relieve the petitioner of the burden of showing that it was ascertained to be worthless as well as charged off in 1921.

In view of the foregoing, it is our opinion that the petitioner has not shown that it is entitled to the deduction claimed with respect to the indebtedness of the Rockmart Co. as a debt ascertained to be worthless and charged off.

The petitioner contends that, if it is not entitled to a deduction as a bad debt of the indebtedness of the Rockmart Co. in 1921, it is entitled to the deduction in 1923, when the assets of the Rockmart Co. were sold under foreclosure of a mortgage and no amount was left out of which the indebtedness could be paid.

The indebtedness in 1923 was clearly ascertained to be worthless, as demonstrated by the fact that in that year the property was sold under a mortgage foreclosure for an amount just sufficient to pay the mortgage indebtedness, with interest, leaving nothing to the petitioner. The fact that the petitioner claimed that it had ascertained the worthlessness of the debt in 1921 does not deprive it of the deduction in 1923 when the facts show that it was actually worthless in 1923. The ascertainment, that is, the finding our or making certain of the fact, occurred in 1923. The fact also appears that in 1923 the debt had already been charged off and remained charged off. In that year, therefore, the two requirements as to ascertainment of worthlessness and charge-off existed. See .

For the foregoing reasons, we are of the opinion that the petitioner is entitled to a deduction in 1923 on account of such worthless debt.

Reviewed by the Board.

Judgment will be entered under Rule 50.