evidence having been cured by an agreement between the parties, our decision on this question was reversed and the petitioner was sustained. In its opinion, Hadden v. Commissioner, 49 Fed. (2d) 709, the court said:

Congress did not intend that a corporation should be held to accumulate profits for one tax purpose only and not for another. No earned surplus can be accumulated until the deficit or impairment of paid-in capital has been made good. Dividends paid while there is an operating deficit should be deemed to be paid from capital or paid-in surplus even though there are earnings of the taxable year sufficient to pay the dividend in whole or in part. Operating losses sustained after March 1, 1913 must be deducted from profits realized after that date before there can be a taxable profit on the sale of land and the accumulated profits since March 1, 1913 must necessarily mean the net excess of all profits between March 1, 1913 and the date of distribution, less all losses sustained between the same dates. *

All the authorities above cited unite in support of the petitioner's contention that, for Federal income tax purposes, all the property owned by the Puget Sound Company at March 1, 1913, was capital. To the extent that such property was made up of wasting assets used in its trade or business it was entitled to take depreciation in subsequent years based on the value at that date, entirely regardless of the cost of such assets or the state of the company's balance sheet as to surplus. Wisconsin Nat. Bank, 4 B. T. A. 109; Even Realty Co., 1 B. T. A. 355; Clark & Co., 4 B. T. A. 356. In the event of the sale of assets acquired prior to such date, the basis for determining gain is the cost or fair market value thereat, whichever is higher. Red Wing Linseed Co., 5 B. T. A. 390; Pacific Realty Corp., 5 B. T. A. 1223; A. C. Fraser, 6 B. T. A. 346; First Nat. Bank of Ft. Dodge, 7 B. T. A. 817. It is clear to us that if all March 1, 1913, values are capital for some tax purpose, they must be capital for all such purposes.

In the light of the authorities above cited, and of our conclusion as to the primary contention of the petitioner, little discussion of the divergent views of the parties as to the sense in which the word "accumulated" is used in the applicable statute is required. It seems clear to us that the respondent proposes to read into the law a meaning that is not indicated by the language. Apparently it is his contention that accumulation can be accomplished without regard to losses and in effect he argues that for purposes of the income tax only the time after losses have ceased and profits are being realized should be considered. The man who began business with property worth $100,000 lost $75,000 in the first two years and thereafter earned profits of $75,000 in two succeeding years, would have some difficulty in realizing that he had any accumulation of profits at the close of the four-year period. Counsel for respondent

argues that petitioners propose to insert the word "net" into the law so that it shall read the net profits or earnings accumulated after March 1, 1913. In our opinion no such addition to the language of the statute by interpretation or otherwise is necessary, since the words "accumulated" and "accumulation" connote a net result obtained by combining additions and subtractions over the entire period involved. In any taxable year subsequent to March 1, 1913, accumulated profits or earnings can mean only the difference between losses and gains after that date. Hadden v. Commissioner, supra. Having reached the conclusion that for Federal tax purposes everything owned by a corporation at March 1, 1913, then became capital by operation of law, it follows that in subsequent operations an operating deficit occurs in any year in which losses are sustained in excess of surplus accumulated after March 1, 1913. Regardless of whether the earnings of any given year are sufficient to pay dividends declared in that year, such dividends must be regarded as paid out of capital to the extent that the operating deficit has not been made good from earnings. This principle was recognized by the Treasury in L. O. 942, 1 C. B. 300, which includes the following language:

Dividends paid while there is an operating deficit shall be deemed to be from capital or paid-in surplus even though there are earnings of the taxable years sufficient to pay the dividend in whole or in part.

To like effect are I.T. 2016, III-1 C. B. 29; G.C.M. 1552, VI-1 C. B. 10; G.C.M. 3522, VII-1 C. B. 190; G.C.M. 3532, VII-1 C. B. 190. This Board has also often ruled that a dividend distributed prior to the time that an operating deficit is made good is a return of capital and that in computing invested capital the paid-in capital is to be reduced by the amount of such dividends. Crystal Ice Co., 14 B.T.A. 682; J. L. Washburn, 16 B.T.A. 1091; Lillian G. Shorb, 22 B.T.A. 644; cf. Frank D. Darrow, 8 B.T.A. 276.

Any argument on the theory that the petitioner's contention violates the principle that taxes are imposed and tax liability computed on an annual basis is wholly inconsistent with the facts. In truth the determination of the respondent is much more clearly and definitely a violation of such principle. That Congress has the power to tax distributions from surplus in existence at March 1, 1913, and that this power was exercised under the Revenue Act of 1913, is well established. Lynch v. Hornsby, 247 U. S. 339. Later, however, in the Revenue Act of 1916, that power was abandoned and legislation was enacted which defined dividends as distributions of earnings or profits accumulated since March 1, 1913, and in effect, for Federal tax purposes, classified all property owned at March 1, 1913, as capital. This change was to correct the very defect which the respondent here alleges exists in the conten

tion of the petitioner. To permit the taxation of distributions of surplus existing at March 1, 1913, in subsequent years, would be retroactive legislation and would determine tax liability for any given year not alone on income realized in that year, but also upon receipts from distributions of capital owned at March 1, 1913, which would be an obvious violation of the sound and equitable principle that whenever possible distributions should be taxed at the rates in effect at the time of their accumulation.

In considering the exemptions here in question it must not be overlooked that prior to March 1, 1913, Federal imposts on corporations were slight and distributions to stockholders were subject to very low tax rates. At September 8, 1916, war was imminent and, at the effective date of the Act of 1918, our country was engaged in a great conflict at costs that could be met only in part by the imposition of high and unwelcome taxes. The current rates during the taxable years now under review were so high that it was only fair that Congress should provide for their payment on and out of current incomes which were largely produced by war activities. To have done otherwise would have worked a virtual sequestration of property that had been accumulated when the country was at peace and taxes were low. It is equally inconsistent to argue that our conclusion herein results in inequitable advantages to taxpayers who acquired corporate stock after March 1, 1913, and thereby succeeded to the right to receive distributions free from tax in the circumstances berein. The purchaser of corporation stock succeeds to all rights theretofore enjoyed and owned by the seller. If stock sold after March 1, 1913, represents values in existence at that date which are subject to subsequent distribution exempt from tax, it must be presumed that the transfer price covered such values and privilege and that the purchaser profits no more from the exemption than would the criginal owner. In fact, his actual advantage may be much less, since his investment covers the entire value at March 1, 1913, much of which may have been profit or appreciation in the hands of the original owner. In any event, equitable considerations can not be regarded as controlling in our treatment of tax problems. We are required to base all our decisions upon the laws as enacted by Congress and interpreted by the courts. Congress has not distinguished between the stockholders of a corporation prior and subsequent to March 1, 1913. If this was neglect, and is serious, which is doubtful, it must be corrected by legislation. Between February 28, 1913, and December 31, 1917, the Puget Mill Company sustained operating losses in the aggregate amount of $1,048,871.57. In the years 1918, 1919 and 1920 it realized $841,611.49 as operating profits, which, neither in the aggregate nor in any one of the years in which the distributions were made, was suffi

cient to replace the impairment sustained between February 28, 1913, and December 31, 1917. It follows, therefore, that none of the distributions here involved were made from earnings accumulated after March 1, 1913. The determination of the respondent proposes to tax earnings and profits accumulated before such date, and in our opinion is contrary to the plain intention of Congress as reflected in the applicable statute.

Since this report was prepared our decision in Charles J. Canfield, 24 B. T. A. 480, relied on by the respondent, has been reversed by the Circuit Court of Appeals for the Seventh Circuit, 62 Fed. (2d) 751.

Reviewed by the Board.

Decision will be entered under Rule 50.

EDWARD B. ARCHBALD, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JOSEPH A. ARCHBALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

EMILY A. GALE, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JOSEPH A. ARCHBALD, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 61660, 61661, 61672, 61673, 65062-65064. Promulgated February 28, 1933.

1. Upon a sale by a partnership of property contributed by a partner at the time of organization at its then value, which was greater than the partner's cost or other basis, for a price greater than the value when contributed, the basis for computing the gain of the partnership is such value; and neither the individual partner's distributive share of partnership income nor his other income may include as gain the earlier increment.

2. Upon the organization of a partnership, the contribution by an individual partner of property having a value greater than its cost or other basis to him is not a realization by him of such increment and may not be included in his income as a gain at the time of contribution.

Joseph H. Morey, Esq., Robert A. Littleton, Esq., and W. W. Spalding, Esq., for the petitioners.

Prew Savoy, Esq., for the respondent.

OPINION.

STERNHAGEN: These petitioners were all members of a partnership, and the controversy is as to the taxable gain to be imputed to each of

them as the result of a sale by the partnership of property contributed by them to the firm's capital at the time it was organized. The facts in detail are set forth in a written stipulation, but it is not necessary either to restate the stipulation or to set forth all the facts in order to indicate clearly the nature of the issue or the basis of the decision.

The Archbald Securities Company was organized as a partnership under New York law on July 20, 1928, to buy, sell and otherwise deal in stocks, bonds and other securities and other property. The organizing partners were Edward B. Archbald, Joseph A. Archbald, and Joseph A. Archbald, Jr. On November 6, 1928, Emily A. Gale (nee Archbald) became a partner. Each of these individuals contributed to the partnership certain securities theretofore owned by him which had been acquired either by purchase or by gift. These contributions were entered by the partnership upon its accounts at their fair market value at the time of contribution, and upon this basis the individual partners' proprietary interests were fixed. The market value of the contributed securities was in each instance greater than the cost or other proper basis to the contributor. During 1928 and 1929 the partnership sold some of these securities at prices sometimes in advance of and sometimes equal to their value at the time of contribution, such prices being greater than the cost or other basis to the individual contributing partner.

A concrete instance will be sufficient to exemplify. Edward B. Archbald, in December, 1927, acquired by gift from his father 900 shares of the common stock of Noranda Mines, Ltd., which the father had purchased at a cost of $15.56 per share. This figure, $15.56, was therefore Edward's basis for determining gain or loss, whenever that determination should be made, Revenue Act of 1928, section 113 (a)(2). These 900 shares of Noranda were contributed by Edward to the partnership at the time of its organization, July 20, 1928, and his proprietary or capital account was credited with the market value thereof on that date, which was $50 per share. The other partners, including Emily when she entered, likewise contributed Noranda common shares in divers amounts and were credited with the same market value per share. Eight thousand eight hundred shares were thus contributed by the original three partners in July and 1,200 by Emily in November. In August October, 1928, the partnership sold 4,000 shares for $224,877.50, a rate of over $56 a share, and in November and December, 1928, after Emily's admission to the firm, 2,200 shares were sold for $136,827, a rate of over $62 a share. The remaining 3,800 shares were sold in 1929 for $240,873.25, a rate of over $63 a share.

and

The partnership remained in existence without change through 1928 and 1929, and still continues. When dissolution occurs, each