Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-09-24
TAX APPEAL CASE
Won BY WARDMAN
U. S. Board Decision Results
in decomposition in Sum
of $46,s43,0l.

Harry Wardman won q victory against
the Government today when the
United States Board of Tax Appeals de-
cided that his income should be taxed
as corporation instead Of as an ir1di-
yidual for the year 1921.
As result OF the decision. there will
be recomputation Of the income tax
which Wardman paid for the taxable
year 1921 in the sum of sac. e43 OIL. This
tax he paid on the basis of net In
come OF $l3l. 323.2i as an individual.
The Bureau OF Internal Revenue had
attempted to collect an alleged def
cheney In his income tax OF Sl2.074.5i
and Wardman took the matter to the
Board OF Tax Appeals on the basis that
ne had reorganized his business as the
Wardman Construction Co, Inc" under
the State OF Virginia, and therefore
should be taxed as a corporation In
stead OF an individual under the reye-
nue. act of 1921.
Meet Law Requirements.
The. evidence before the board
showed. according to the decision, that
Wardman was Incorporating his busi-
ness to secure the BENEFITS Of reduced
tax rate" 1t held that he had met the
requirements of the law allowing him
10 De taxed as a corporation, despite
the contentious of the commissioner OF
internal revenue that he should still be
taxed as Harry Wardman, an individual.
The board found that the correct met
worth" OF the petitioners business jan
uary !. 1921, was $456. 536.14 and on
December 81, 1921. it was S543, 400 ~.
Total assets of the business at these
same dates. the board set forth, were
lively.
Several fine points of Interpretation
OF law we're involved IN the case. and
the board in its decision discioses a
NUMBER of details in Wardman's affairs.
including gifts to his wife and daughter
OF stock In the Swartzell. Rheen Il
Hensey Co.
The board held that wardman had
satisfied the three essential requires
ments OF the law for taxing of indi-
vidual partnership income for the year
1921 at corporate rates-"capital must
be material income producing factor;
there must be an organization as a COR
poration within four months after the
passage OF the revenue act of 1921 Zap
proved November %. 1920, and, the
provisions of the section shall not ap-
ply to trade or business the net in
come Of which Is less than 20 per cent
OF its invested capital for 1921"
Says Company Met Test.
There was contention over the last
factor of whether Wardman had made
net income OF over 20 per cent Of the
invested capital
Wardman commended that his COM
! pany met this test, asserting that the
evidence proved the net income OF the
| business. computed on corporate basis,
TO be $77.495.48 and the invested capt.
tai to be 1861, 98647. The commissioner
af internal ~
Wardman did not meet this test, claim
ing that, when correctly computed. the
net income, was $50, 495 .48 and the in
vested capital $760, 43759. The SIS, 900
difference was the matter OF Wardnaan's
salary. The Government commended
that he should be figured at a $50, 900
salary year, while Wardman con-
tended that $4,000 was a reasonable
compensation for the services he rem
dered.
AS matter Of fact. 1t was shown
| that Wardman had drawn q net amount
of $5l ,025.23 frcm the business in 1891
for his personal account. but the board
said that obviously, If sole proprietor
ship Is sufficiently fortunate as to realize
net earnings which are not entirely
needed In the further c-nduct of the
business, the proprietor will convert the
excess earnings into other investments
or appropriate them to his personal
needs and welfare. Withdrawals under
such circumstances bear no relation TO
reasonable compensation for services.
since they involve In addition to COM
pensation the taking of profits no longer
necessary in the business.
The board held that SIS, 900 was the
correct salary to credit Wardman with
In computation OF the corporations
yearly business records. Therefore his
, company had earned more than 30 per
cent on its invested capital and was
entitled to the BENEFITS OF the Law.