Court Opinion

ID: 4629588
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:05:42.216405+00
Date Added: 2024-06-11T07:57:24.314818
License: Public Domain

EAST ST. LOUIS FINANCE COMPANY, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.East St. Louis Finance Co. v. CommissionerDocket No. 75090.United States Board of Tax Appeals34 B.T.A. 1085; 1936 BTA LEXIS 599; October 13, 1936, Promulgated *599  1.  Upon failure of petitioner to show that services actually performed for it were worth more than the amount of $1,901.88 allowed by the respondent, this amount is determined to be a reasonable allowance for services performed by a corporation owning all the petitioner's capital stock.  2.  The deduction for services as a business expense is limited to amounts which are reasonably commensurate with the services actually rendered and ratification of payment of the amount by the board of directors is not conclusive that the deduction meets the statutory qualifications of the tax deduction.  Sidney J. Hayles, C.P.A., for the petitioner.  O. W. Swecker, Esq., for the respondent.  HARRON *1085  This proceeding is for the redetermination of a deficiency in income tax for the year 1931 in the amount of $687.12.  Petitioner assigns as error the respondent's action in refusing to allow as a deduction from gross income the full amount of $8,000 which was paid by the petitioner to the Audit Supervision Corporation during the taxable year under the circumstances hereinafter set out.  FINDINGS OF FACT.  The petitioner is a corporation organized under*600  the laws of the State of Georgia, and has been engaged in the business of purchasing assignments of salaries, wages, and negotiable papers.  During the taxable year petitioner had an office in East St. Louis, Illinois, and its business transactions were handled there by the office manager and his assistant, who made daily reports to the president of the petitioner corporation.  The president maintained his own office in Atlanta, Georgia, where he carried on the same kind of business under the name of the Atlanta Finance Co., and devoted very little time to the business of the petitioner.  All of the petitioner's capital stock, amounting to $5,000, except for two shares held by the president and the secretary, was owned by the Audit Supervision Corporation, hereinafter called the Audit Corporation.  In addition thereto the Audit Corporation owned all of the capital stock of the following corporations: Allegheny Purchasing Co., Oakland Purchasing Co., East St. Louis Brokerage Co., Peoria Purchasing Co., and Stovall Investment Co.  The Audit Corporation supervised the business of each of these subsidiary companies, including the petitioner corporation, and furnished bookkeeping and*601  auditing services to these companies.  The *1086  service it rendered to the petitioner during the taxable year was as follows: Reports of each day's transactions were forwarded from the East St. Louis office to the Audit Corporation through the president of the petitioner, and the Audit Corporation caused these daily transactions to be entered in a general ledger kept in its offices in Atlanta.  Sometimes the president of the Audit Corporation was consulted on matters relating to the management of the petitioner's business.  There was no contract between the petitioner and the Audit Corporation with respect to payment by the petitioner for the services rendered.  The directors of the petitioner corporation, at a meeting held January 25, 1932, passed a resolution ratifying the action of the officers of the corporation in paying the sum of $8,000 to the Audit Corporation for "financing, supervision, auditing and general services furnished the corporation for the year 1931." In its income tax return for the year 1931 the petitioner reported a gross income of $23,945.42 and a net income of $2,627.92.  Included in the deductions listed in this return is an item of $8,000 for "supervision", *602  which item represents this payment of $8,000 to the Audit Corporation.  The books of the petitioner show credits to the Audit Corporation as of December 31, 1931, in the total amount of $12,400, as follows: "Supervision, $8,000; dividends, $4,400." The respondent reduced to $1,901.88 the deduction thus claimed by the petitioner in the sum of $8,000 and added the difference of $6,098.12 to the petitioner's income for the taxable year.  The notice of deficiency discloses that the respondent has taken the total expense of the Audit Corporation allocable to its subsidiary companies, in the amount of $5,742.87, and has allocated to the petitioner corporation 33.1173 percent of that amount, or $1,901.88, which allocation has been made on the basis of charging to the petitioner that percentage of this expense which the petitioner's gross income bears to the aggregate gross income of all the subsidiary companies.  OPINION.  HARRON: This deficiency arises out of the respondent's determination that the petitioner is not entited to deduct as an ordinary and necessary business expense, under section 23(a) of the Revenue Act of 1928, the entire amount of $8,000 which it paid to the Audit*603  Corporation for auditing and supervision during the year 1931.  The only issue raised by the pleadings is whether the respondent erred in disallowing the full amount of the deduction claimed.  The burden of proof to establish the deductibility of the expense and the amount of it, clearly is upon the petitioner.  . It is not questioned that the petitioner may deduct from its gross income a reasonable amount representing compensation *1087  for services rendered in keeping a record of its transactions and supervising the management of its business.  Although salaries are generally paid to individuals for such services, there is no apparent reason why amounts paid to another corporation should not come within the provision of the statute.  But it must be shown that the compensation is reasonable in amount and that it is for personal services actually rendered.  The action of the directors of the petitioner corporation in ratifying the payment in question is not conclusive of the reasonableness of such payment.  See *604 , where this Board held: * * * For the purpose of determining taxable net income, the deduction is limited to amounts which are reasonably commensurate with the personal services actually rendered and thus are no more than ordinary and necessary expenses of carrying on the business.  Hence the directors' duty to the corporation is no criterion of the Commissioner's duty to limit the tax deduction within the statutory bounds, and the two are not in conflict.  When the Commissioner has made a determination, the taxpayer who attacks it must prove by evidence of the services rendered and their value that a correct determination would exceed that of the Commissioner.  Where the payments are to kinsfolk or to shareholders, the proof must also show that they were not influenced by family considerations and were not disguised distributions of profits.  See ; ; *605 ; ; ; ; ; . In , it was held: "The question of the reasonableness of the salaries must be determined with reference to the volume of business, the profits made, the character of the services for which the compensation was paid, and all other pertinent facts shown." In the instant proceeding the services performed for the petitioner by the Audit Corporation appear to have been ordinary bookkeeping services.  The Audit Corporation owned all of the capital stock of six subsidiary companies, including the petitioner, and each company presumably received the same service from the Audit Corporation, so that each company should have had a similar expense.  The Audit Corporation, however, did not charge all of its subsidiary companies for the services rendered during the taxable year but charged only*606  the petitioner, the Peoria Purchasing Co., and the East St. Louis Brokerage Co., in the respective amounts of $8,000, $1,000, and $1,000.  It is alleged in the petition witrh respect to the charges thus made against only three of the six subsidiary companies, as follows: The charges were not made until the end of the calendar year for the reason that the parent corporation did not wish to burden its subsidiary corporations with adequate charges for supervision and financing if such charges would result in creating a deficit on the books of the subsidiaries.  The charges made *1088  by the parent corporation to its subsidiaries were never more but oftentimes less than commensurate with the benefits derived by the subsidiary corporations from their affiliation with the parent corporation.  The president of the petitioner testified that the charge of $8,000 was not based on any contract between the petitioner and the Audit Corporation.  In reply to a question as to how this figure of $8,000 was arrived at, the president said: I don't know why I was assessed that.  I don't know why I had to pay $8,000.  There might have been more work and more expense for them for us than some*607  of the others.  The petitioner asserts that "the charges made by the parent corporation to its subsidiaries were never more * * * than commensurate with the benefits derived by the subsidiary corporations from their affiliation with the parent corporation." Whether or not this is true is within the judgment of the directors of the petitioner corporation.  But to sustain its claim for deduction of the full amount of these charges from its gross income, the petitioner is obliged to show that the amount of the charges in question was reasonable and meets the statutory requirements for a tax deduction.  In spite of this burden on the petitioner, it has failed to produce evidence to show the real value of these services to its business, or what amount it would be required to pay to some other agency for the same services as those rendered by the Audit Corporation, or whether the services were unique and of unusual value.  The Audit Corporation had offices in Atlanta, Georgia, where the hearing was held, but none of its officers was present to testify on behalf of the petitioner with respect to the services rendered or the reasonableness of the total amount of the charge.  Under these*608  circumstances it is concluded that a charge of $8,000, constituting approximately one-third of petitioner's gross income, is not a reasonable charge for the services rendered within the statutory qualifications of the tax deduction.  The respondent has allowed a deduction of $1,901.88 for these services, and here again the burden is upon the taxpayer to prove that the services were worth more than the amount allowed by the respondent for the purposes of tax deduction.  The petitioner has failed to prove that the services rendered to it by the Audit Corporation during the taxable year were reasonably worth more than $1,901.88.  Having reached this conclusion, it is unnecessary to discuss the petitioner's contention raised in its brief that the provisions of section 45 of the Revenue Act of 1928 have not been properly applied in this case, and the respondent's theory that the payment of $8,000 amounted in part to a distribution of profits to the petitioner's parent corporation.  Judgment will be entered for the respondent.