Case Name: Appeal of ILLINOIS PAPER BOX CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-09-30
Citations: 4 B.T.A. 1227
Docket Number: Docket No. 770
Parties: Appeal of ILLINOIS PAPER BOX CO.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 4
Pages: 1227–1231

Head Matter:
Appeal of ILLINOIS PAPER BOX CO.
Docket No. 770.
Decided September 30, 1926.
' Samuel J. Moran, Esq., for the petitioner.
B. H. Saunders, Esq., for the Commissioner.

Opinion:
OPINION.
Love
: In respect to the controversy over depreciation, there is no dispute between the Commissioner and the taxpayer as to the rate of depreciation or additions to the machinery account since January 1, 1909. The sole issue relates to the value to be used as the basis of depreciation. On January 1, 1909, the taxpayer increased its machinery account by $4,361.35, based on additional values attributed to the machinery by an insurance appraiser employed by the taxpayer. The Commissioner refused to recognize and accept this increase, and used as a basis the former valuation as carried upon the taxpayer's books January 1, 1908. This amount is the only difference entering into the Commissioner's and the taxpayer's March 1, 1913, values and the amounts of depreciation in 1919 and 1920.
It appears that the taxpayer, on January 1, 1908, for the first time opened a double-entry system of books in which it kept a separate machinery account and expense account. The machinery valuations were based upon appraisals by the officers of the taxpayer derived from a personal knowledge of the condition of the equipment and the information contained in its old single-entry system of books. This valuation was carried upon the books until January 1, 1909.
In the fall of 1908 an insurance appraiser persuaded the taxpayer that it was entitled to more insurance and that he was qualified to reappraise the property. He was employed and as a result of his appraisal the taxpayer, on January 1, 1909, carried the increased appraised value upon its books. The appraiser was not present at the hearing for examination nor were any of the factors used by him in arriving at his valuations presented in evidence. The officers of the taxpayer knew nothing of his qualifications as an appraiser, either before or after his appraisal, except that he had letters of recommendation when he applied for employment. Under the circumstances, we are of the opinion that the Commissioner was justified in refusing to accept the increased valuations and correctly used the taxpayer's valuations of January 1, 1908.
In relation to the disallowance of additional salaries to officers, the taxpayer contends that, since it was a close corporation, the informal discussions and agreements of the two dominant stockholders and directors during the year 1921, in relation to salary increases, should be given the effect of corporate acts under the principles adopted by the Board in Appeal of Reub Isaacs & Co., 1 B. T. A. 45. From the evidence in the instant appeal it appears that, whatever discretion the directors gave the two officers as to corporate management, it was the practice and custom to fix the salaries by formal resolution of its directors. Thus, on January 31, 1921, the directors by resolution fixed the 1921 salaries of the two officers at $200 per week each. Formerly it had been $230 per week. For a short time the drawing account was reduced to $150 per week in 1921, but it was restored to $200 so that at the end of the year each had drawn at the rate of $200 per week in accordance with the resolution of January 31, 1921. But the two officers evidently considered it necessary to get authority from the board of directors for' a retroactive raise of $30 per week for 1921 and this was accordingly done February 7, 1922, by resolution of the directors. A close reading of the resolution does not indicate or suggest a mere ratification of former acts of the officers, but clearly indicates an original attempt to refix the 1921 salaries, which, under the decisions of this Board, were deductible only in the year in which the authority was given. Appeal of Van De Kamps Holland Dutch Bakers, 2 B. T. A. 1247.
As to the donations, the taxpayer's returns admitted in evidence indicate that the taxpayer reported donations as follows: 1919, $226.41; 1920, $227.85; 1921, $155.21; but it did not deduct them as expenses before the computation of the tax. The Commissioner added the amounts to income on the theory that they had been deducted by the taxpayer, but the evidence shows that the Commissioner was in error and the deficiency should be computed accordingly.
After the hearing and argument, the Commissioner for the first time made a motion that' the invested capital of the taxpayer for each year be reduced to the extent of the full amount of the tax paid for the prior year, instead of prorating such tax from the time it became due and payable.
Since the submission of this appeal the .Revenue Act of 1926 has been passed. Section 1207 of that Act precludes any action on the part of the Board other than to deny the motion of the Commissioner, and his motion is, therefore, denied.
The action of the Commissioner in disallowing certain depreciation claimed by taxpayer and in disallowing additional compensation to officers is approved.
The action of the Commissioner in adding certain donations to gross income is disapproved.
The motion of the Commissioner to decrease the amount of invested capital for each taxable year by the amount of income tax paid for the prior year is denied.
Order of redeterrmnation will be entered on 15 days' notice, under Rule 50.