Ruckman Coal Co. v. Commissioner

*535OPINION.

There are three questions involved in this appeal, all of which affect invested capital. The first is whether invested capital should be reduced by excluding a note given by F. Y. Ruckman to the Highland Coal Co. in the amount of $43,000. The second is whether the amount of indebtedness of $12,235.52, alleged to be owing by D. J. Ruckman to the Ruckman Coal Co., should be excluded from invested capital; and the third question is whether the earned surplus of the Ruckman Coal Co. and the Highland Mining Co. should be reduced by the operating deficit of the Clover Creek Coal Co. to the extent that it exceeds the earned surplus of that company.

In determining whether the note of F. Y. Ruckman to the Highland Coal Co, and the account set up on the books as an indebtedness of D. J. Ruckman to the Ruckman Coal Co. were actual assets of the respective companies or were withdrawals of earnings and profits or payments to those individuals, we must look to and consider all the facts and circumstances in connection therewith.

The amount of the note given by F. Y. Ruckman represented substantially all the profits of the Highland Coal Co. F. Y. Ruck-man, however, did not own in excess of one-third of the stock of *536that company. The record does not disclose the exact amount of stock owned by him. The other stockholders did not receive any portion of the profits. If it were not intended that the said Ruckman should repay the amounts secured by him from the corporation for which the note was given, the other stockholders who owned at least two-thirds of the stock would receive practically nothing on their investment in the corporation. The corporation listed the note among its assets and included it as a note receivable which was reflected in its invested capital.

It also appears that D. J. Ruckman made withdrawals from the Ruckman Coal Co. in excess of his salary over a period of years. On January 1, 1918, the amount received from the company by D. J. Ruckman amounted to $34,030.85. From time to time he made payments thereon to the corporation so that on January 1, 1920, according to the books of the company, he owed it $12,235.52. The Ruckman Coal Co. at all times carried the amounts on its books as accounts receivable. While the record does not disclose the exact stock ownership of all the stockholders or the total capital stock outstanding, it does appear that D. J. Ruckman did not own as much as one-third of the stock. The fact that he had paid something on the account and had reduced it by continually making payments thereon, indicates that both he and the company treated it as an actual liability and not as withdrawals of profits or as payment for services.

The circumstances surrounding the account of D. J. Ruckman should be taken into consideration in connection with the note of F. Y. Ruckman. It would seem unreasonable that D. J. Ruckman would be permitted to make withdrawals from the Ruclonan Coal Co. and be required to repay the same if F. Y. Ruckman were not required to repay the amounts withdrawn by him. If D. J. Ruck-man was actually indebted to the corporation for his withdrawals, the same situation would seem to exist with respect to F. Y. Ruck-man. F. Y. Ruckman owned more stock in the Ruckman Coal Co. than D. J. Ruckman, and D. J. Ruckman owned more stock in the Highland Mining Co. than F. Y. Ruckman. Both of the transactions should be considered together. It would seem unreasonable that other stockholders would permit a stockholder in a corporation to withdraw earnings and profits in which they did not participate, especially when the other stockholders owned more stock than the individuals receiving from the corporation the amounts referred to.

It also appears from the evidence that both of the Ruckmans took out life insurance on their lives for the purpose of making provision for liquidating any indebtedness that might exist at the time of their death.

*537The facts and circumstances lead us to believe that the note and the account receivable given to the respective corporations were actual existing obligations for the respective amounts during the years involved.

This leads us to the remaining question, that is, whether the earned surplus of two of the affiliated companies should be reduced by the operating deficit of the other affiliated company in excess of its own earned surplus. There is no evidence before the Board as to when the deficit occurred or whether the corporations were affiliated during the period of operation in which it was sustained. The Commissioner has reduced the earned surplus of the entire group of corporations by the deficit of one company in excess of its own earned surplus.

In the absence of any evidence as to when the deficit occurred, or whether the corporations were affiliated during the period when it was incurred, we are not called upon to determine whether in every case an operating deficit of one of a group of affiliated companies must be set off against the earned surplus of other corporations in the group. We are clearly of the opinion that any operating deficit in excess of its earned surplus, incurred by one corporation during the years when the corporations were required to file a consolidated return, is to be deducted from the earned surplus of any corporation in the group. See Appeal of Valdosta Grocery Co., 2 B. T. A. 727. If this were not true, one of the principal purposes of consolidated returns would be defeated and the invested capital could be manipulated within the group of corporations in such a way as artificially to increase the invested capital. We express no opinion as to what would be the result if the deficit had been shown to have occurred when the corporations were not required or permitted to file a consolidated return.

Judgment will he entered on 10 days' notice, under Bule 50.