Warren-Lamb Lumber Co. v. Commissioner

*787OPINION.

The one issue involved in this appeal is whether the sum of $200,000, advanced to the taxpayer by one of its stockholders and evidenced by outstanding promissory notes but used by the taxpayer continually throughout the calendar year 1917, was, within the meaning of section 207 of the Eevenue Act of 1917, invested capital or money borrowed.

The taxpayer’s contention as set forth in its petition is based upon the claim that, at the time Lamb purchased stock of the taxpayer company, the taxpayer was in pressing need of additional working capital and that Lamb at that time agreed to invest, or cause to be invested, in said company’s business a considerable sum of additional capital, and that such understanding and agreement was made a part of the written agreement entered into at the time he purchased the $83,000 of stock. A portion of this written agreement contains this language:

It is understood that the second party (Lamb) proposes to invest, or cause to be invested, certain capital in the said corporation for the better maintenance of the business in the future.

and the taxpayer alleges that the advances made by Lamb were at the time made intended to be capital invested in the taxpayer’s business. This part of the taxpayer’s petition, however, was not admitted by the Commissioner, and no evidence appears in the record in support of this contention.

Section 207 of the Eevenue Act of 1917 provides that invested capital shall be—

(a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares * * * (3) paid in or earned surplus and undivided profits used or employed in the business, * * *

Said Act further provides that as used in this title invested capital “does not include * * * money or other property borrowed.”

*788It thus appears that even though we should accept the allegations of the taxpayer as evidence that Lamb, at the time when he made these advances, intended that the sum should become part of the invested capital of the business of the taxpayer, such intention was not actually carried out and made effective until the time when the notes, given by the taxpayer as evidence of the advances, were actually exchanged for the preferred stock shares of the taxpayer company, and this exchange not having taken place until after the close of the year 1917 we must necessarily hold that during the year 1917 these advances represented borrowed capital and not invested capital.