*1078OPINION.
Our problem in this case is to decide whether the $297,500, or any part thereof, carried in this “Paid-in surplus, special ” account should go into statutory invested capital as paid-in surplus for either of the years involved and, if it should go in, the date on which it should go in.
The circumstances surrounding the two payments by Geoghegan, one of $65,000 and one of $35,000, do not lead us to believe that either amount constituted paid-in surplus and therefore invested capital within the meaning of section 326 of the Eevenue Act of 1918. He paid the amounts to the corporation and the corporation “refunded” the total amount to him. He testified that he paid in the money for and on account of all of the stockholders except Mr. and Mrs. Coate, that the corporation needed working capital, that it was having difficulty borrowing from banks, and that interest on it was waived when it was repaid. There is no evidence of what agreement or understanding, if any, existed between Geoghegan *1079. and the corporation in regard to this money. It was credited to a special paid-in surplus account, whatever that may have been. It was only to remain with the corporation temporarily. Mr. and Mrs. Coate were never to share in a repayment or distribution of this money. Apparently no stock was issued, no notes or other security given, and on the other hand no credit was entered to Geoghegan on the books on account of it and no interest was paid for the use of it. Nevertheless, in this corporation the stock was closely held and there is nothing to convince us that this was not a loan and therefore borrowed capital as determined by the Commissioner and as defined in section 325(a) of the Revenue Act of 1918. We affirm the Commissioner on this point.
The evidence does not disclose the stock holdings for any date other than April 20, 1916. On that date, C. B. Coate and M. B. Coate, husband and wife, together held 125 shares, or one-fourth of the stock of the corporation. The N. O. Export Co. held another 125 shares. We are not informed as to what this company was or why its stock was divided among C. Monsted, II. Guldmann, and A. Q. Petersen, as set out in the findings of fact. In any event six other stockholders owned the remaining 250 shares, or one-half of the stock, and on April 12, 1916, they entered into an agreement in regard to prospective dividends to be declared on their stock. It is argued that because of this agreement something was invested capital within the meaning of section 326 of the Revenue Act of 1918, which otherwise admittedly would not have been suck invested capital. See Appeal of Wm. H. Davidow Sons Co., 1 B. T. A. 1215, and W. E. Caldwell Co. v. Commissioner, 6 B. T. A. 47.
We held in the Davidow case, supra, that where a dividend is 'declared and payable, but is permitted to remain in the business, it constitutes borrowed capital and can not be included in invested capital. In that case the agreement to leave the money in the business was subsequent to the date of the declaration of the dividends and also to the date on which they were payable. All of the stockholders in that corporation were parties to that agreement. Is this agreement entered into by only a part of the stockholders any more effective merely because it antedated the declaration of dividends?
Before we consider the merits of the petitioner’s contention there are certain features of the evidence which we want to mention. The petitioner offered and there were received in evidence two auditor’s reports, one purporting to be an audit of the corporation’s books as of May 31,1918, and the other an audit as of May 31, 1919. The first included a balance sheet which showed “ Paid-in surplus, $297,500,” and the second a balance sheet which showed “Paid-in surplus, special — $297,500.” On each this item appeared under liabilities and there appeared among the assets certain “Accounts *1080Receivable ” in substantial amounts. Each report contained a de-\ tailed statement of the “Accounts Receivable ” in which we find the ' following items:
1918 Audit.
Mr. and Mrs. A. D. Geoghegan, special_$98,750.00
H. Guldman, special_ 39, 500. 00
Chas. Monsted, special_ 35, 500.00
Mrs. Chas. Monsted, special_ 3,950.00
A. Q. Petersen, special_ 19, 750. 00
1919 Audit.
Mr. and Mrs. A. D. Geoghegan_ 98, 750. 00
Mr. and Mrs. Chas. Monsted_ 39, 500. 00
Mr. H. Gnldxaan, special_ 39, 500.00
Mr. A. Q. Petersen- 19, 750. 00
These items are unexplained by the record. We note that in each instance they are in the exact amount of the dividends supposed to have been left in the business in accordance with the agreement of the six stockholders named. We do not understand why these amounts would be due from the respective stockholders if in fact their dividends had been left in the business to create the “ Paid-in surplus, special ” credit balance as the petitioner has contended, and as it attempted to prove by sheets of paper purporting to be copies from the books of the corporation offered in evidence by agreement of counsel. We have stated in our findings of fact the various entries shown by these sheets. If, as a matter of fact, all of these stockholders had withdrawn their dividends in cash when declared and the credit balance to the “ Paid-in surplus, special ” account then had been entered it would have been necessary to have balanced it on the books with an asset, and if this was done we can readily understand why these amounts appear in accounts receivable as owned by these six stockholders.
If the credit balance in the “ Paid-in surplus, special ” account was thus created by entering as an asset accounts receivable from each of these six stockholders in the amount of their dividends, we are unable to see how payment of the dividends was deferred in accordance with the proof offered and in accordance with the alleged purpose of the agreement.
These same audits do not show any part of the $100,000 paid in by Geoghegan as accounts receivable. No witness testified that these dividends were not drawn in cash or that they were actually left in the business. Judging by the balance sheets in evidence, the undivided profits account was always larger than the amount of dividends declared.
After considering ail of the testimony we are in doubt as to just what was done in regard to these dividends and the “ Paid-in sur*1081plus, special” account. It may be that these apparent differences can be reconciled, but they have not been explained in the record. Under such circumstances we would be justified in deciding this case in iavor of the respondent without further discussion. However, we think that even if the money actually remained in the business our decision should be the same and therefore we continue.
Section 325(a) of the Eevenue Act of 1918, defines “borrowed capital ” as “ money or other property borrowed, whether represented by bonds, notes, open accounts, or otherwise.”
Section 326, in addition to stating that invested capital shall not include “borrowed capital,” defines “invested capital” to include “Actual cash bona fide paid in for stock or shares ” and “ Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year.”
In the present case it is contended that a situation was created by a contract whereby holders of 50 per cent of the stock paid in a surplus in which they alone were to share upon its distribution, a surplus which was not theirs individually, but belonged to and was embarked in the business of the corporation. The petitioner, to succeed in this contention, had the duty of proving that the contract was intended to and did accomplish the desired result.
The fourth and fifth recitals clearly show that these dividends were to be preserved for these six stockholders, that they alone were to share in the distribution of them, and that they were to receive 6 per cent per annum on their money. The declaration of a dividend creates a debtor and creditor relation between the corporation and its stockholders as to the amount of the dividend due each stockholder. W. E. Caldwell Co., 6 B. T. A. 47. Therefore, standing alone, the declarations of dividends in this case would have removed from invested capital from the dates of declaration the total amounts of the dividends declared. This would not be changed had the agreement of April 12,1916, served only to defer the payment, of that portion of the dividends due the six contracting stockholders as the last paragraph of the agreement states was its purpose. See Fletcher on Corporations, vol. 6, p. 6066, and cases there cited, especially Wallin v. Johnson City Lumber & Mfg. Co., 136 Tenn. 124; L. R. A. 1917B 323; 188 S. W. 577, and Northwestern Marble & Tile Co. v. Carlson, 116 Minn. 438; 133 N. W. 1014, to the effect that though a dividend is payable upon a day not yet appointed, or at such time as in the opinion of the directors the corporation’s finances justify such payment, nevertheless, the debtor-creditor relation arises upon the date of declaration. The last sentence of this last paragraph of the agreement, if it was intended to indicate that the money was to be invested capital and was to belong to the corporation, is directly in conflict with the sentence immediately preceding it, which merely *1082indicates that the parties consent to the use of their money by the; corporation. \
In the second recital there is the statement, not entirely free from ambiguity, that, “ It is understood between the parties to this Agreement that any subsequent dividends that would ordinarily accrue and be payable to the aforesaid parties of the second part along with other Stockholders is intended to remain in the Treasury of the Southport Mill, Limited, as though no dividend had been declared.” Standing alone this paragraph might have the effect contended for by the petitioner. But considering this statement in the light of the entire contract and considering the entire contract in connection with all of the evidence, we are convinced neither that this money was intended to be, nor that it was embarked in the business. See La Belle Iron Works v. United States, 256 U. S. 377. Therefore, no part of these dividends, or of the amount which they represented, should be included in invested capital after the respective dates on which the dividends were declared.
It might be that as to certain creditors to whom the petitioner furnished balance sheets, such as are in evidence, that the principle of estoppel could be invoked by those creditors and that as to them it could not be. denied that this money belonged to the corporation. However, the principle of estoppel has no place in' this case. It was never demonstrated to what extent such annual statements were published, or held out to customers, banks, or other creditors, and the record does not show the name of any person or firm that was indebted or became indebted to the corporation which received any of the statements introduced. No doubt the object of introducing this evidence was to bring the case within the decision in the case of English & Mersick Co. v. Eaton, 299 Fed. 646, which was affirmed in the Circuit Court of Appeals, 7 Fed. (2d) 54. However, we feel that that decision is not in point. It was there held that a certain resolution of the directors was not a declaration of a dividend. In our case we are convinced that each of the two resolutions was a declaration of a dividend. It would be absurd to hold that the publication of an incorrect financial statement by a corporation in which it included in surplus that which, in fact, was a debt to its stockholders, permits it, as a matter of law, to retain the incorrect amount in its surplus and to include it in its statutory invested capital. Even though such a misstatement by a corporation might make the directors personally liable, and possibly criminally liable, and place the stockholders’ claim in a position secondary to the position of the creditors relying on such misstatement to their harm, providing the stockholders had knowledge of and acquiesced in the misstatement, still it does not extinguish the debt of the corporation to its stockholders, but, at most, makes the stockholders’ rights second*1083ary to the rights of those other creditors. The fact that the debt of the corporation to the stockholders may be secondary to the debts owed general creditors does not change the debt from “borrowed money ” to “ invested capital.” Appeal of I. Unterberg & Co., 2 B. T. A. 274, and Appeal of Webb Press Co., Ltd., 3 B. T. A. 247.
The cases of United States v. Mellon, 281 Fed. 645, and United States v. Davison, 1 Fed. (2d) 465, are not in point, if for no other reasons than that in our case we are not convinced from the evidence that by the agreement the money was or was intended to be embarked in the business nor have we heard any evidence to the effect that but for the agreement no dividend would have been declared. In the two cases above cited, it was held in effect that the amount of the dividend was intended to be and was actually embarked in the business and was the property of the corporation, stock was issued for it and but for the agreement no dividend would have been declared.
Judgment will be entered for the respondent.
Phillips dissents.
Smith concurs in the result only.