Jacob Lederer, Inc. v. Commissioner

*616OPINION.

The petitioner contends that the amounts of the authorized but undrawn salaries of its two principal stockholders which were shown as credits upon their individual accounts at the end of 1919 were properly within the corporation’s invested capital for 1920, because some time in 1919 the indhdduals had in effect turned the amount back to the corporation by forgiving the indebtedness and thus eliminating the accounts payable. The evidence is, however, not sufficient to support the contention. The only witness was the son of the tiyo stockholders in question, who was also secretary of the corporation. lie testified that his parents had told him to tell the bookkeeper to make entries charging their accounts with the amounts of their accrued salaries and “ turn them to surplus.” Nothing, however, was done until, on November 30, 1920, an entry was made in each of the individual accounts balancing the account as of January 1, 1920. The amount of each such balance was carried into a credit entry of January 1, 1921, below the ruling of the account.

This evidence, in our opinion, is not sufficient to establish that the amounts in question were during the year 1920 a part of the corporation’s surplus. The petitioner urges that the failure of the bookkeeper to make the correct entry on or before January 1, 1920, should not preclude' its correct treatment in accordance with the fact of forgiveness of the indebtedness. But the evidence is confusing as to the fact of forgiveness. If the books are not reliable as to the dates of the entry, as petitioner contends, they are likewise not reliable as reflecting the forgiveness at all; and if we put aside the *617books we have nothing left but the statement of the son that his parents instructed the entry to be made. It is quite true that in a close corporation such as this the evidence of corporate action may not always be clearly made or nicely preserved, but the establishment of the forgiveness of an indebtedness requires some clear and direct evidence and not the mere expression of a vague intent by the creditors to a third person. The Commissioner is sustained. The Parisian, 2 B. T. A. 415.

Judgment will be entered on 15 days’ notice, under Rule 50.