Case Name: Appeal of WOODCLIFF SILK MILLS
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1925-03-09
Citations: 1 B.T.A. 715
Docket Number: Docket No. 559
Parties: Appeal of WOODCLIFF SILK MILLS.
Judges: Before Ivins, Kornee, and Marquette.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 1
Pages: 715–719

Head Matter:
Appeal of WOODCLIFF SILK MILLS.
Docket No. 559.
Submitted January 8, 1925;
decided March 9, 1925.
Marh Eisner, Esq., for the taxpayer.
Willis D. Nance, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.
Before Ivins, Kornee, and Marquette.

Opinion:
OPINION.
Marquette:
The Commissioner has disallowed as deductions in computing the net income of the affiliated corporations for the year 1918 the sum of $32,000 in officers' salaries upon the grounds (1) that it does not constitute salaries but is an attempt to distribute profits under the guise of salaries, and (2) if said amount does constitute salaries, such salaries are unreasonable.
The facts disclose that prior to the year in question, and at the time of reorganization in 1917, the amount ox stock each officer should hold was determined by ascertaining the value of his services to the corporation; that at the same time resolutions were passed fixing the amount of salaries officers should receive, and these salaries were in proportion to the stockholdings of the respective officers. It is apparent that the salary deductions disallowed were those voted by the directors of the Woodcliff Silk Mills in the amount of $24,000, and the Weatherby Realty Co. of $8,000, while that voted by Valentine, Bunker & DeBar upon a percentage of net sales was allowed.
The testimony shows that the officers of these corporations had been engaged in the silk business for from 10 to 40 years; that they rendered services to these corporations during the year in question; and that they devoted their entire time to the business.
The first ground for disallowance has as a basis the contention that, as the amounts voted by the directors of the respective corporations were divided among the officers in direct proportion to their stockholdings, they were in reality a distribution of profits under the guise of salaries, and thus were not salaries but dividends.
The revenue act of 1918 provides for the deduction of salaries as follows:
Sec. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered,
To become an allowable deduction under the statute the salary or compensation paid must have been for personal services actually rendered and must further have been reasonable in amount. Whether amounts paid constitute compensation for personal services actually rendered or are an attempt to distribute profits as salaries is, in the last analysis, a question of fact to be determined from all the evidence. United States v. Philadelphia Knitting Mills Co., 273 Fed. 657. The fact that salaries paid to its officers by a corporation are in direct proportion to the stockholdings of the respec-' tive officers is strong evidence of an intent to distribute profits as salaries and must be overcome by clear evidence showing that the salaries are reasonable in amount and actually represent compensation for personal services rendered. In every case where the compensation paid is in direct proportion to stockholdings, the evidence adduced will be carefully examined and if, from the surrounding facts and circumstances, it appears that the salaries are unreasonable in amount or do not in fact represent compensation for personal services actually rendered, they will be disallowed as a deduction from gross income.
The amount of compensation which a corporation shall pay its officers for their personal service is, in the first instance, a matter within the judgment and discretion of its board of directors, and the only limitation upon the deduction of such amount for income tax purposes is that the amount must be reasonable. In the instant case it was determined at the time of reorganization in 1917 that the stockholdings of its respective officers should be in proportion to the value of their services to the corporations, and that the compensation to be paid for such services should be in the same proportion. We find nothing in this which leads us to the conclusion that there was an attempt to distribute profits as salaries but, on the other hand, we think it shows an appraisement of the value of the services of the respective officers, and under the statute amounts paid or incurred therefor are properly deductible unless we can find that the amount thereof was unreasonable.
The testimony presented showed that all of the officers of the respective corporations devoted their entire time to the affairs of the several corporations and were men of long experience in the silk business. The principal officers had been engaged in the manufacture and sale of silk from 25 to 40 years and were expert in their respective branches of the business. It further appears that some qf them had been offered salaries higher than those paid by the corporations herein, and the testimony of witnesses familiar with the silk business shows that the salaries paid were not in excess of those paid for similar services by concerns doing a like business.
From all the evidence we are of opinion that the amount voted as salaries represented reasonable compensation for personal services actually rendered by the respective officers and that it must be allowed as a deduction in ascertaining the net income for the year 1918.