[427]*427OPINION.
Littleton:
The first question to be decided in this appeal is whether the taxpayer is entitled, under section 326(a)(2) of the Revenue Act of 1918, in view of the provisions of the statutes of the State of New York, to have the face or full value of an interest-bearing demand promissory note given by a responsible and solvent maker in payment for an original issue of capital stock included in its invested capital from the date of the note or to have included therein only the payments made on such note from the dates of actual payments.
[428]*428The facts surrounding the subscription of H. H. Hewitt for the 10,000 shares of stock of the Hewitt Rubber Co. and the method and manner of payment therefor, are not in dispute.
Section 326(a) (2) of the Revenue Act of 1918 provides—
That as used in this title the term “ invested capital ” for any year means: (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares at the time of such payment * * *.
Section 325(a) of the same Act provides—
That as used in this title the term “ tangible property ” means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.
The sections of the Revenue Act of 1918 quoted, defining what shall constitute invested capital, were intended solely for the purpose of computing the amount of war-profits and excess-profits tax to be paid by corporations, and to apply to all corporations alike where cash or such property is bona fide paid in for stock or shares. The only limitation which Congress has placed .upon the inclusion in invested capital of cash or property (which includes notes) paid in for stock or shares, is that the cash or property must be bona fide paid in. So in this appeal we have only to determine what Congress meant by the use of the words bona fide paid in.
The Commissioner admits the financial responsibility of H. H. Hewitt; admits that he was at the time of making the note for $1,000,000 and at all times thereafter able to pay the amount thereof on demand, and that the note was worth its face value. He does not deny that the purchase of this stock by Mr. Hewitt was a real transaction, or that the purchase by Mr. Hewitt and the sale by the corporation was in good faith and without fraud or collusion. It is contended by the Commissioner that bona fide as used in section 326(a) of the Revenue Act is equivalent to and means legally. So he contends that Congress in using the words “ bona fide paid in ” authorized the inclusion in invested capital of corporations only property (including notes) legally paid in; such property as is authorized or sanctioned by the law of its domicile to be received by corporations in payment for stock or shares; that if the acceptance of the property (note) by the corporation in payment for stock is not strictly in accordance with the law of the State it is not “bona fide paid in” within the meaning of section 326(a) of the Revenue Act of 1918. For this interpretation the Commissioner relies upon section 29 of the Stock Corporation Law of the State of New York in support of his disallowance from invested capital of taxpayer of the actual value of the note for $1,000,000 from April 1, 1918, and the inclusion of only actual cash payments thereon from the dates paid.
Before discussing the provisions of the New York Stock Corporation Law we will take up the interpretation of the words “ bona fide paid in” used in section 326(a)(2) of the Revenue Act of 1918. This section of the law is in no wise ambiguous, and the language used therein is to be construed in its ordinary and usual sense. To say that the words “ bona fide ” as used in the Revenue Act mean “ legally ” would be giving them a restricted meaning which we do not think Congress intended. “Bona fide” is synonymous with [429]*429“ really, truly, actually, sincerely, in good faith, upon honor.” The word “ legal ” is synonymous with “ lawful, legitimate, legalized, authorized or sanctioned by law, according to law.” (Soule’s Dictionary of English Synonyms).
Congress must be presumed to have known when enacting section 326(a) that corporations are creatures of and regulated by statutes, and that in most, if not in all, States various restrictions as to the issuance of stock are imposed by statute. If it had been the intention of Congress that the invested capital of corporations for the purpose of the excess-profits tax should be determined strictly according to the laws of the various States, it would have used the words “ legally paid in ” instead of “ bona fide paid in.”
In the case of Ware v. Hylton, 3 U. S. (Dallas) 199, the court had before it for consideration a provision of a treaty between the United States and Great Britain, and Mr. Justice Chase, at page 240, said:
But the debts contemplated were to be tona fiile debts, that is, tona -fide contracted before the peace, and contracted with good faith, or honestly and without covin, and not kept on foot fraudulently. Bona fide is a legal technical expression, and the law of Great Britain and this country has annexed a certain idea to it. It is a term used in statutes in England and in acts of assembly of all the States, and signifies a thing done really, with a good faith, without fraud or deceit or collusion or trust.
We think this language of the Supreme Court is applicable to the meaning the words bona -fide as used by Congress in section 326 (a) (2) of the Revenue Act of 1918. Bouvier’s Law Dictionary defined “ bona lides ” as “ good faith, honestly, as distinguished from mala fidesN This view is strengthened by the fact that Congress used the words “ bona fide paid in ” not only in respect to tangible and intangible property, but in respect to “ cash paid in.” The fact that Congress intended to allow as invested capital only actual cash “bona fide paid in” clearly indicates that Congress intended that cash and property in reality and in good faith paid in for stock should be included in invested capital. In the case of Harriman National Bank v. Palmer, (1916), 93 Misc. 431, 158 N. Y. S. 111, the court said:
The policy of the law is that subscriptions to corporate stock shall be tona fide and that the interests of corporations and of those who, in good faith, contribute to their capital be conserved. It follows, therefore, that neither a promise to subscribe nor a conditional subscription is valid.
The evidence introduced by taxpayer clearly shows that the sale of the 10,000 shares of 8 per cent cumulative preferred stock by the taxpayer and the purchase thereof at par by H. H. Hewitt and paid for by his demand note for $1,000,000 was a real transaction, entered into in good faith, without fraud, deceit, or collusion; that the stock was actually and in good faith issued by the corporation to Mr. Hewitt; that the $1,000,000 demand note was carried on the books of taxpayer as an asset; that the regular quarterly dividends were paid on the stock, and that the entire note with interest was paid within the year. There is not a scintilla of evidence in the record to indicate that the purchase and sale of the stock was mala fide;
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[427]*427OPINION.
Littleton:
The first question to be decided in this appeal is whether the taxpayer is entitled, under section 326(a)(2) of the Revenue Act of 1918, in view of the provisions of the statutes of the State of New York, to have the face or full value of an interest-bearing demand promissory note given by a responsible and solvent maker in payment for an original issue of capital stock included in its invested capital from the date of the note or to have included therein only the payments made on such note from the dates of actual payments.
[428]*428The facts surrounding the subscription of H. H. Hewitt for the 10,000 shares of stock of the Hewitt Rubber Co. and the method and manner of payment therefor, are not in dispute.
Section 326(a) (2) of the Revenue Act of 1918 provides—
That as used in this title the term “ invested capital ” for any year means: (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares at the time of such payment * * *.
Section 325(a) of the same Act provides—
That as used in this title the term “ tangible property ” means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.
The sections of the Revenue Act of 1918 quoted, defining what shall constitute invested capital, were intended solely for the purpose of computing the amount of war-profits and excess-profits tax to be paid by corporations, and to apply to all corporations alike where cash or such property is bona fide paid in for stock or shares. The only limitation which Congress has placed .upon the inclusion in invested capital of cash or property (which includes notes) paid in for stock or shares, is that the cash or property must be bona fide paid in. So in this appeal we have only to determine what Congress meant by the use of the words bona fide paid in.
The Commissioner admits the financial responsibility of H. H. Hewitt; admits that he was at the time of making the note for $1,000,000 and at all times thereafter able to pay the amount thereof on demand, and that the note was worth its face value. He does not deny that the purchase of this stock by Mr. Hewitt was a real transaction, or that the purchase by Mr. Hewitt and the sale by the corporation was in good faith and without fraud or collusion. It is contended by the Commissioner that bona fide as used in section 326(a) of the Revenue Act is equivalent to and means legally. So he contends that Congress in using the words “ bona fide paid in ” authorized the inclusion in invested capital of corporations only property (including notes) legally paid in; such property as is authorized or sanctioned by the law of its domicile to be received by corporations in payment for stock or shares; that if the acceptance of the property (note) by the corporation in payment for stock is not strictly in accordance with the law of the State it is not “bona fide paid in” within the meaning of section 326(a) of the Revenue Act of 1918. For this interpretation the Commissioner relies upon section 29 of the Stock Corporation Law of the State of New York in support of his disallowance from invested capital of taxpayer of the actual value of the note for $1,000,000 from April 1, 1918, and the inclusion of only actual cash payments thereon from the dates paid.
Before discussing the provisions of the New York Stock Corporation Law we will take up the interpretation of the words “ bona fide paid in” used in section 326(a)(2) of the Revenue Act of 1918. This section of the law is in no wise ambiguous, and the language used therein is to be construed in its ordinary and usual sense. To say that the words “ bona fide ” as used in the Revenue Act mean “ legally ” would be giving them a restricted meaning which we do not think Congress intended. “Bona fide” is synonymous with [429]*429“ really, truly, actually, sincerely, in good faith, upon honor.” The word “ legal ” is synonymous with “ lawful, legitimate, legalized, authorized or sanctioned by law, according to law.” (Soule’s Dictionary of English Synonyms).
Congress must be presumed to have known when enacting section 326(a) that corporations are creatures of and regulated by statutes, and that in most, if not in all, States various restrictions as to the issuance of stock are imposed by statute. If it had been the intention of Congress that the invested capital of corporations for the purpose of the excess-profits tax should be determined strictly according to the laws of the various States, it would have used the words “ legally paid in ” instead of “ bona fide paid in.”
In the case of Ware v. Hylton, 3 U. S. (Dallas) 199, the court had before it for consideration a provision of a treaty between the United States and Great Britain, and Mr. Justice Chase, at page 240, said:
But the debts contemplated were to be tona fiile debts, that is, tona -fide contracted before the peace, and contracted with good faith, or honestly and without covin, and not kept on foot fraudulently. Bona fide is a legal technical expression, and the law of Great Britain and this country has annexed a certain idea to it. It is a term used in statutes in England and in acts of assembly of all the States, and signifies a thing done really, with a good faith, without fraud or deceit or collusion or trust.
We think this language of the Supreme Court is applicable to the meaning the words bona -fide as used by Congress in section 326 (a) (2) of the Revenue Act of 1918. Bouvier’s Law Dictionary defined “ bona lides ” as “ good faith, honestly, as distinguished from mala fidesN This view is strengthened by the fact that Congress used the words “ bona fide paid in ” not only in respect to tangible and intangible property, but in respect to “ cash paid in.” The fact that Congress intended to allow as invested capital only actual cash “bona fide paid in” clearly indicates that Congress intended that cash and property in reality and in good faith paid in for stock should be included in invested capital. In the case of Harriman National Bank v. Palmer, (1916), 93 Misc. 431, 158 N. Y. S. 111, the court said:
The policy of the law is that subscriptions to corporate stock shall be tona fide and that the interests of corporations and of those who, in good faith, contribute to their capital be conserved. It follows, therefore, that neither a promise to subscribe nor a conditional subscription is valid.
The evidence introduced by taxpayer clearly shows that the sale of the 10,000 shares of 8 per cent cumulative preferred stock by the taxpayer and the purchase thereof at par by H. H. Hewitt and paid for by his demand note for $1,000,000 was a real transaction, entered into in good faith, without fraud, deceit, or collusion; that the stock was actually and in good faith issued by the corporation to Mr. Hewitt; that the $1,000,000 demand note was carried on the books of taxpayer as an asset; that the regular quarterly dividends were paid on the stock, and that the entire note with interest was paid within the year. There is not a scintilla of evidence in the record to indicate that the purchase and sale of the stock was mala fide; not a real transaction, or that it was not entered into in good faith, and for the best interests of the taxpayer.
[430]*430We reach the conclusion that Congress intended by the language used in section 326(a) that for the purpose of computing the profits tax, notes in reality and without fraud or collusion paid in for stock should be included in invested capital unless such sale of stock is rendered absolutely void by positive statute.
We do not believe that the New York State statutes relating to the issuance and sale of stock in any way conflict with the conclusion reached because:
(1) Congress has laid down a rule in clear and unambiguous terms for determining invested capital of corporations and where all requirements of that rule are met, a State statute imposing certain restrictions upon corporations for the purpose of enforcing full payment for its stock, designed and intended to serve as entirely different purpose, can not operate to nullify the plain provisions of the Federal statute.
(2) The statutes of the State of New York do not make void a bona fide sale of an original issue of stock by a corporation paid for by a promissory note of a responsible and solvent maker. They were intended merely to circumscribe the transaction with certain restrictions to prevent fictitious sales, to enforce full payment of subscriptions and to make the directors and officers personally liable for the protection of stockholders and creditors of the corporation. Section 29 of the New York Stock Corporation Law provides:
Liability of directors for loans to stockholders. — No loan of moneys shall be made by any stock corporation, except a moneyed corporation, or by any officer thereof out of its funds to any stockholder therein, nor shall any such corporation or officer discount any note or other evidence of debt, or receive the same in payment of any installment or any part thereof due or to become due on any stock in such corporation, or receive or discount any note, or other evidence of debt, to enable any stockholder to withdraw any part of the money paid in by him on his stock. In ease of the violation of any provision of this section, the officers or directors making such loan, or assenting thereto, or receiving or discounting such notes or other evidences of debt, shall, jointly and severally, be personally liable to the extent of such loan and interest, for all the debts of the corporation contracted before the repayment of the sum loaned, and to the full amount of the notes or other evidences of debt so received or discounted, with interest from the time such liability accrued.
A reading of this section discloses that its purpose is not to make void the issuance of stock for an interest-bearing demand promissory note of a responsible and solvent maker, or on a credit basis. Installment payments are specifically permitted by section 53. The purpose of section 29 is to enforce the obligation of stockholders to make good their subscriptions and to keep them good at all times and to make the officers and directors also personally liable for the protection of other stockholders and creditors of the corporation. This section can no more be held to forbid the use of such promissory notes as a part of invested capital of the corporation than it can be held to withdraw from the corporation a part of its invested capital in the event the stockholder borrows from the corporation in violation of such section. Since Congress has specifically provided that “Notes, and other evidences of indebtedness, bills and accounts receivable” (which include an obligation of a stockholder to pay) constitute invested capital, a section designed to protect and enforce that obligation by making certain transactions illegal can not be [431]*431construed as taking away from the stock tbe quality of invested capital merely because additional safeguards are thrown around the ultimate payment of the obligation so entered into.
If the officers of a New York corporation permitted a stockholder to borrow, contrary to section 29, the entire amount he had originally paid for his stock taking his note therefor (for which they would become personally liable), charging him with such loan on the books of the corporation, this fact would not deprive the corporation of any portion of its invested capital. How, then, can it be successfully argued that a transaction of exactly similar character, except that it relates to the original issue of the stock, can be held to deprive the corporation of a portion of its invested capital ?
In the instant appeal the capital stock certificate for 10,000 shares was actually issued on April 1, 1918. In the general journal of the taxpayer “ Bills Receivable ” was debited with $1,000,000 on that date, and capital stock credited with a like amount accompanied by the following notation, “Purchase of 10,000 shares preferred capital stock to Mr. H. PI. Hewitt” — all done with the assent and upon instructions of the purchaser who was president and a director of taxpayer, and with the assent and knowledge of the other officers and directors. Subsequently and before the end of the taxable year the entire amount was paid. It is obvious, therefore, that under section 29 Mr. H. H. Hewitt was not only liable as the purchaser of the stock for the $1,000,000, but, together with the other officers and directors, was liable as an officer and director for the full amount with interest and for all debts of the corporation contracted before payment. The fact of complete payment of the $1,000,000 within the year proves the good faith of the transaction at the time of giving the note.
No cases are cited and we find none specifically holding that a sale of the character here involved is void, when entered into in good faith, both parties thereto having performed acts to effectuate and carry out the contract, and the purchaser having made payments on the note for stock actually issued. In Furlong v. Johnston, 209 App. Div. 198. 204 N. Y. S. 710-716, it is stated:
It does not necessarily follow that, when the law prohibits an act, a contract made in contravention of it may be avoided. The Legislature may impose other penalties than declaring such contract void. Harris v. Runnels, 12 How. (U. S.) 79, 13 L. Ed. 901; Pratt v. Short, 79 N. Y. 437, 35 Am. Rep. 531. There are other penalties imposed here. An officer or director of a corporation, who issues stock contrary to law, may be punished criminally (Penal Law, sections 062, 664, subd. 3), and may become personally liable for receiving or discounting a note in payment for an installment due on stock (Stock Corporation Law, sec. 29), or in certain corporations, for debts incurred while the corporation is doing business before its capital stock shall have been fully paid (Id. sec. 20 [as added by Laws 1912, c. 351, sec. 1]) * * *
Such notes are held valid and collectible by receivers of insolvent corporations for the benefit of creditors (Farmers’ & Mechanics’ Bank v. Jenks, 48 Mass. 17 Metc.] 592; Finnell v. Sanford, 56 Ky. [17 B. Mon.] 748) ; by persons taking them for value without notice (Willmarth v. Crawford, 10 Wend. 341; Ogdenshurgh, C. & R. R. Co. v. Wolley, *40 New York 118; Washer v. Smyer, 109 Tex. 398, 211 S. W. 985, 4 A. L. R. 1320) ; and by holders with notice and by the corporation itself (Magee v. Badger, 30 Barb. 246, affd. 34 N. Y. 247, 90 Am. Dec. 691; Borough Bank of Brooklyn v. Lamphear, 154 App. Div. 177, 13S N. Y. Supp. 864; Vermont Cent. R. Co. v. Clayes, 21 Vt. 39; Stoddard [432]*432v. Shetucket Foundry Co., 34 Conn. 542; Goodrich v. Reynolds, 31 Ill. 490, 83 Am. Dec. 240; First National Bank of Ottumwa v. Fulton, 156 Iowa, 734, 137 N. W. 1019) ; although sometimes resort is had to circuity of action (First National Bank of Baldwinsville v. Cornell, 8 App. Div. 427, 40 N. Y. Supp. 850). See, also, Cook, Corporations (8th Ed.) section 20; Fletcher, Cyc. Corporations, section 3513.
The note so taken is regarded as another form of subscription or new promise, and an extension of credit by the corporation to the subscriber. Cook, Corporations, supra; Fletcher, Cyc. Corporations, supra. At common law it was not illegal to give credit for stock issued. Wheeler v. Millar, supra; 14 C. J. 439. If prohibited now, it is not because it is malum in se. First National Bank v. Cornell, supra. At best the note would not be wholly void, but voidable only. Weeks v. Bridgman, 159 U. S. 541, 547, 16 Sup. Ct. 72, 40 L. Ed. 253.
Again, at page 712, it is stated:
It is not fully settled in this State just what effect the violation of such statutory provisions has on the contract. The provisions in statutes and in constitutions relative to the issuance of stock differ somewhat in language in the several jurisdictions, but in general are the same in effect. Generally speaking, a note is personal property, particularly the note of a solvent person, and in many jurisdictions is held valid when given on a subscription for stock. Pacific Trust Co. v. Dorsey, 72 Cal. 55, 12 Pac. 49; Meholin v. Carlson, 17 Idaho, 742, 107 Pac. 755, 134 Am. St. Rep. 286; Schiller Piano Co. v. Hyde, 39 S. D. 74, 162 N. W. 937; German Mercantile Co. v. Wanner, 25 N. D. 479, 142 N. W. 463, 52 L. R. A. (N.S.) 453; 14 C. J. 439; Cook, Corporations (8th Ed.) section 20. * * *.
The object of the statute and the result to be obtained are that the corporation shall become vested with assets, so that strangers dealing with it and stockholders may be protected. First National Bank v. Fulton, supra. Although the statute may use the word “ cash,” the form of the payment, either the 10 per centum on subscription or the whole amount, is unimportant. An equivalent is sufficient. Matter of Staten Island Rapid Transit R. Co., 37 Hun, 422, affd. 101 N. Y. 636; Id., 38 Hun 381; Rodgers v. H. S. Karnaugh, Inc., (Sup.) 190 N. Y. Supp. 245; Lee v. Cutrer, 96 Miss. 355, 51 South. 808, 27 L. R. A. (N. S.) 315, Ann. Cas. 1912B, 478; People v. Stockton & V. R. Co., 45 Cal. 306, 13 Am. Rep. 178. * * *
A mere promise or conditional agreement to subscribe for capital stock has been held void. General Flectric Co. v. Wightman, 3 App. Div. 118, 39 N. Y. Supp. 420. It may be that, as between the corporation and the subscriber for original shares, there being nothing but a bare subscription, without the equivalent of a cash payment, the subscription agreement is void (New York & Oswego M. R. Co. v. Van Horn, 57 N. Y. 473; Van Schaick v. Mackin, 129 App. Div. 335, 113 N. Y. Supp. 408), * * *.
A note of no value, or of doubtful value, would not constitute assets; but in this case the maker was responsible.
The Commissioner calls attention to section 53 of the New York Stock Corporation Law which provides that “ every subscriber shall pay in cash 10 per cent upon the amount subscribed by him,” and to section 55, which provides that “no corporation shall issue either shares of stock or bonds, except for money, labor done, or property actually received, for the use and lawful purpose of such corporation.”
Section 53, which requires the payment of 10 per cent of the amount subscribed is immaterial in this case. Ten per cent of the purchase price was paid within four months, and the full amount of the note given for the stock was paid within the year. A subsequent payment satisfies this section. Black River & Utica R. Co. v. Clarke, 25 N. Y. 208; Ogdensburgh C. R. Co. v. Wolley, 40 N. Y. 118; Excelsior Grain Binder Co. v. Stayner, 25 Hun, 91; Primos Chemical Co. v. Fulton Steel Co., 266 Fed. 937; Miles v. Friedman, 181 N. Y. S. 285, at page 294.
[433]*433In the case of Jeffery v. Selwyn, 220 N. Y. 77, 82; 115 N. E. 275, 276, (6. A. L. R., Ill), it is said:
Subscriptions not accompanied by immediate cash payments have not, however, been held void. A subsequent payment will suffice, even though it is made through the medium of services rendered the corporation. Beach v. Smith, 30 N. Y. 116. The statute does not prohibit or forbid anl other mode of subscription, and this court said in Buffalo & J. R. R. Co. v. Gifford, 87 N. Y. 294, 300 that “ We are inclined to the opinion that it was not intended by this section to prescribe a fixed statutory mode of making a subscription, and that any contract of subscription good and valid at common law is still valid, notwithstanding this section.”
Likewise we are of the opinion that the provisions of section 55 of the New York Stock Corporation Law has no bearing on this case. Although a note was given the corporation actually received the money. The note had an actual cash value of $1,000,000 at the time paid in and satisfies section 326(a) (2) of the Revenue Act.
We find nothing in the New York law which would make the stock issued in this case void. This was not a mere subscription but was a purchase of stock. The contract which this note represents violates no general principle of public policy and is in no sense what may be termed makt/rn in se. First National Bank of Baldwinsville v. Cornell, 8 App. Div. 427; 40 New York Supp. 850. The debt which the note of $1,000,000 represents, for which the stock was actually issued, was at all times fully collectible from Mr. Hewitt, the purchaser, and also as a director, as well as from the other officers and directors. Even though there might have existed as between the parties certain defenses in the event of refusal of the maker to pay and an attempt to recover on the note, the corporation nevertheless had as an asset a valid and enforceable account receivable for the stock issued from a responsible and solvent debtor, safeguarded by personal liability of the directors.
Had taxpayer sold this note for $1,000,000, which it could have done, no question could now be raised as to the inclusion thereof in invested capital. In the event of insolvency the defense of illegality could not be availed of to defeat the rights of creditors.
In order to exclude from invested capital a note given in good faith for stock issued, it is not enough to point to a defense which might be interposed as between the parties in the event of a suit on the note. It must be shown that the sale was void and not enforceable, or that the purchase of the stock and the giving pf a note was in bad faith and for the purpose of evading the provision of the revenue law — neither of which is true in this case.
We are therefore of the opinion under the facts in this appeal that the demand promissory, note of H. H. Hewitt was tangible property bona fide paid in for stock issued to him; that it had an actual cash value of $1,000,000 at the time paid in, and constituted a part of taxpayer’s invested capital within the meaning of section 326(a) (2) of the Revenue Act of 1918.
Since it is held that the note in question constituted invested capital from the date paid in for stock to the full amount thereof, the interest paid thereon constituted income to the taxpayer, and the $1,000 paid at the time of the option and refunded in 1920, is not a part of invested capital for 1918.