Court Opinion

ID: 9443553
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:24:43.997146+00
Date Added: 2024-06-11T17:29:32.251754
License: Public Domain

MARTIN, Circuit Judge
(dissenting).
I think the judgment of the district court is correct and should be affirmed. I am in accord with the conclusions of the district judge that the minutes of the directors’ meetings of January 24, 1935, January 18, 1937, and December 27, 1939, make it apparent that the intention of the directors in those meetings was to abide by the directors’ resolution of 1923, which provided that President Dolle and Secretary-Treasurer Long of the corporation should receive a bonus amounting to five per cent of the net profits of the company for 1923 and each year following, provided the earnings were sufficient to take care first of a regular dividend of twenty per cent; that, in the resolution of December 27, 1939, the company recognized its indebtedness to these two officers for the bonus payments due them for each of the years in question; and that there was a legal obligation to pay the bonus compensation, although the date of payment was deferred until the retirement of $113,000 of corporate bonds.
In my view, as was held by the district judge, the case falls within the ambit of the opinion of this court in American Snuff Company v. 'Commissioner of Internal Revenue, 6 Cir., 93 F.2d 201. There, the stockholders of a corporate taxpayer, which kept its books on an accrual basis as did the taxpayer here, adopted a resolution in 1912 providing that, for that year and each succeeding year, the president and the vice-presidents of the company should each be paid for his services — in addition to his regular salary — a certain percentage of any profits earned by the company for the year in excess of those earned by it in 1911. The additional compensation stipulated was not paid in full, however, as a result of improper computation of the net profits by the treasurer of the company. This court held that the resolution constituted a subsisting agreement which, upon performance, became a legal obligation of the corporation; from which the conclusion was drawn that the amount of the unpaid compensation to *607the corporate officers, paid in 1928, was not deductible as an expense incurred in that year in computing income for 1928.
Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 50 S.Ct. 273, 74 L.Ed. 733, was distinguished, for the reason that “in that case there was no prior agreement or legal obligation to pay the salaries at the time the services were rendered.” [93 F.2d 202.] Moreover, the directors’ resolution in the Lucas case explicitly stated that the extra compensation was voted to the officers for past services. Among those past services had been personal guarantees by the officers of bank loans of considerable amounts to the corporation. The Supreme Court pointed out that, prior to the administration by the officers to whom the extra compensation was granted, “the business of the corporation had been in a chaotic state and had been conducted at a loss”; that the net result brought about by the officers had effectuated a change from an operating loss of some four thousand dollars in 1908 to net earnings of some $150,000 in 1920; that both cash and stock dividends had been paid to the stockholders; and that the net income of the company in 1920 (the year in which the extra compensation was allowed), after deducting all expenses, represented a return of 21.13% on its invested capital; and that the “corporation had advanced to a leading place in the brush trade.” In view of these considerations and of the salaries paid the officers, additional compensation of $24,000 to them was held to be deductible as a reasonable payment in the year paid. Here, we find no similarity in facts to those described in the Lucas case.
The words used by this court in Ohmer Register Co. v. Commissioner of Internal Revenue, 6 Cir., 131 F.2d 682, 686, 143 A.L.R. 1164, seem directly applicable here: “The essence of the accrual method of keeping accounts and making returns is that the right to receive and not the actual receipt determines whether an amount should be included in gross income. The right accrues when the right to receive the amount becomes fixed. Spring City Foundry Co. v. Commissioner of Internal Revenue, 292 U.S. 182, 184, 54 S.Ct. 644, 78 L.Ed. 1200. Correspondingly, the right to deduct an expense item accrues when the fixed obligation is incurred, even though the amount may be diminished by subsequent events. Both sides of the ledger must be treated alike. Bonded Mortgage Co. of Baltimore v. Commissioner of Internal Revenue, 4 Cir., 70 F.2d 341.”