Court Opinion

ID: 4494992
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:05.873954+00
Date Added: 2024-06-11T14:54:12.166446
License: Public Domain

*763OPINION.
Momas:
The first question involved in this appeal is whether the taxpayer should include in his return for the year 1920, $2,500 which he received from the Commercial Health & Accident Co. and returned to it during that year. The taxpayer contends that his salary for the year was $500, due to a salary adjustment having been made prior to the close of the taxable year, while the Commissioner’s position is that the $2,500 returned to the corporation was a contribution to capital. We are convinced from the evidence that there was an understanding among the officers and directors of the corporation that salaries should be set at the highest possible point in the hope that the business would justify them, but if unexpected claims developed, thereby reducing the income of the corporation, the officers would refund a portion thereof. All of the officers and directors of the corporation were active in the conduct of its business and interested in its success.
Toivard the close of the year 1920 it was found that the reserve-required by law had been depleted through the payment of claims,, and that it would have to be increased to the extent of $10,000. At. an informal meeting the directors decided to return that amount to-the company in accordance with their understanding. On December *76423 they purchased $10,000 of second Liberty loan bonds and turned them over to the company, each contributing $2,500. It appears to us that the effect of this action was to modify any prior agreements as to salaries for the year 1920 and to substitute therefor the amounts which were actually retained by the respective officers. We have held in the' Appeal of H. C. Couch, 1 B. T. A. 103, that—
Salary arrangements between corporations and tbeir principal stockholders and managers in cases like this one, where the manager is expected by his associates to protect the interests and the future prospects of the company even at a sacrifice to himself, are and must be at all times subject to such modifications as may be made by agreement from time to time; and it appears to us that the arrangement entered into by this taxpayer and this corporation in the month of December, 1920, clearly shows an intent on the part of both sides to modify the prior existing agreements in regard to this taxpayer’s compensation.
We are of the opinion that the principle therein announced is controlling in this appeal, and that therefore the salary from the Commercial Health & Accident Co. to be reported in the taxpayer’s return for the year 1920 is $500.
No question is raised under the second issue as to the right of the taxpayer to a recovery of the $4,000 paid for the contract with the Central Life Insurance Co. of Illinois, but the basis upon which it shall be recovered is in dispute. The taxpayer contends that he is entitled to a recovery of the $4,000 before any part of the renewal commissions should be reported, while the Commissioner has allocated it ratably over the period during which it is expected such commissions will be received, which is six and two-thirds years. There is one distinctive feature of this contract upon which we believe the solution of the problem rests. Commissions are paid on the first nine renewal premiums on each policy written thereunder. The last policy was written in 1916, so it is apparent that the number of renewal premiums upon which the taxpayer is entitled to commissions is gradually diminishing, although the policies remain in force. The cancellation of policies through death or the nonpayment of premiums also eliminates the possibility of the taxpayer’s receiving further income from them. The net result is that the taxpayer is realizing a diminishing income from the contract, not by reason of fluctuating business conditions, but by reason of the nature of the contract itself. Section 214 (a) (8) provides for a reasonable allowance for the exhaustion, wear and tear of property used in a trade or business. We are of the opinion that the yearly allowance, in order to be reasonable and permit a recovery of the capital investment under the circumstances of this appeal, should be that proportion of $4,000, the cost of the contract, which the income received in each year bears to the total anticipated income under the contract. *765The commissions for the years 1920, 1921, 1922, 1923, and 1924 are definitely known and constitute substantially all the income that will be received.