Albert Bettens, one of the taxpayers, appeals from the determination of a deficiency in income and profits taxes for the calendar years 1917, 1919, and 1920, in the sum of $3,977.16, this amount be ing made lip of deficiencies of $1,522.29 for 1919 and $2,699.37 for 1920, and an overassessment for 1917 in the sum of $244.50.
H. W. Lake, the other taxpayer, appeals from the determination by the Commissioner of a deficiency of $1,998.26 income tax for 1919.
The appeals of the two taxpayers were consolidated by an order of the Board.
FINDINGS OF FACT.
During the years 1917 to 1920, inclusive, Albert Bettens was the owner of 50y2 per cent of the capital stock of the Hotel Fresno Co. and H. W. Lake was the owner of 4914 per cent of such stock. This corporation operated the Hotel Fresno at Fresno, Calif., under a lease expiring in 1922. This hotel was managed by Lake, who was paid a salary.
Bettens and Lake were also jointly interested in the operation of three other hotels, two at Sacramento and one at Grass Yalley, Calif., the hotel at Grass Yalley having been opened in 1919.
The Hotel Fresno was operated at a profit. Dividends were declared and paid by the company in 1918 and in 1921.
It was the custom of the taxpayers, as money was needed for the operation of the other hotels or for their personal expenses, to draw drafts on the Hotel Fresno, which were paid by the cashier and charged on the books of the company to the personal account of the taxpayer making such draft. Notes were given and no interest was paid. During the years involved Bettens- drew less than Lake. Such amounts were carried as accounts receivable on the books of the company. The amounts so withdrawn by the taxpayer were subsequently repaid in full in 1922 and 1923, during which years the lease on the Hotel Fresno expired and the corporation entered upon the opera-tion of another hotel under another lease.
The amounts so drawn by the taxpayers and charged to their personal accounts, to the extent that they were in excess of salaries, were treated by the Commissioner as dividends paid to the taxpayers and were so included by the Commissioner in computing their tax liability, resulting in the deficiency in tax which is now in dispute. The amounts so drawn during 1917 were in excess of the surplus. During none of the years involved did the amounts so drawn have any apparent relationship to surplus or earnings.
DECISION.
The deficiencies determined by the Commissioner are disallowed.
Arundell not participating.