
    A. B. Spencer Lumber Co. et al., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7639.
    Promulgated February 1, 1928.
    
      F. G. Rodgers, G. P. A., for the petitioners.
    
      Bruce A. Low, Esq., for the respondent.
   Milliken :

This proceeding arises from the determination by the respondent of deficiencies in income and profits taxes for the years 1920 and 1921, against the A. B. Spencer Lumber Co., the Stockton Lumber Co., and the Kowalik Lumber Co., in the amounts of $1,444.62, $984.61, and $1,051.14, respectively. The sole issue raised by the pleadings is the reduction by respondent of consolidated invested capital by $21,989.64, alleged by respondent to be the investment of the A. B. Spencer Lumber Co. in the capital stock of the two other affiliated companies.

FINDINGS OF FACT.

The A. B. Spencer Lumber Co. is a Texas corporation, with its principal office at San Antonio, and is engaged in the wholesale lumber business. The stockholders of this petitioner are A. B. Spencer, H. Spencer, and C. B. Sherrill.

Sometime prior to 1920, and at a time when the businesses of the Stockton Lumber Co. (organized under the name of the Quin Lumber Co.) and the Kowalik Lumber Co. were being conducted as sole proprietorships, the owners of these businesses became indebted to the A. B. Spencer Lumber Co. for lumber purchased from the latter. To protect the A. B. Spencer Lumber Co. from losses on these accounts, its stockholders, A. B., and II. Spencer, and C. B. Sherrill, acquired either a part or an entire interest in both businesses, assumed the indebtedness of the sole proprietorships to the A. B. Spencer Lumber Co., and incorporated the two businesses under the respective names of the Quin Lumber Co. (later changed to the Stockton Lumber Co.) and the Kowalik Lumber Co. The capital stock of the Quin Lumber Co. and the Kowalik Lumber Co. was issued to the incor-porators of the two businesses.

On December 31, 1919, the A. B. Spencer Lumber Co. carried, among others, two assets on its books of account, the captions and amounts of which are as follows:

Stockton Lumber Company “ Stock”_$13,089. 64
Kowalik Lumber Company “ Stock ”_ 8, 900.00

Bespondent eliminated both of these assets from the consolidated invested capital on the ground that they were investments by the A. B. Spencer Lumber Co. in the capital stock of its affiliated companies.

The A. B. Spencer Lumber Co. did not own, during 1920 and 1921 or at any time prior thereto, any of the capital stock of the Stockton Lumber Co. and the Kowalik Lumber Co.; and the captions of the two asset accounts, as recorded on the books, are misnomers. Both of these asset accounts were valid accounts receivable due the A. B. Spencer Lumber Co. by its stockholders, A. B., and H. Spencer, and C. B. Sherrill, and represented the indebtedness of the predecessor owners of the businesses now conducted by the Stockton Lumber Co. and the Kowalik Lumber Co. to the A. B. Spencer Lumber Co., which those stockholders assumed at the time they acquired an interest in the businesses. Subsequent to the years 1920 and 1921, the so-called Stockton Lumber Co. “ Stock ” account was paid in full, while the so-called Kowalik Lumber Co. “ Stock ” account had been about two-thirds paid at the date of the hearing. The accounts receivable in the sum of $21,989.64 should be included in invested capital for both years.

Judgment will ~be entered on 15 days'1 notice, wider Rule 50.  