Court Opinion

ID: 4624052
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:54:21.820206+00
Date Added: 2024-06-11T07:56:28.178692
License: Public Domain

AM-PLUS STORAGE BATTERY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Am-Plus Storage Battery Co. v. CommissionerDocket No. 11365.United States Board of Tax Appeals11 B.T.A. 733; 1928 BTA LEXIS 3735; April 20, 1928, Promulgated *3735  The respondent's determination of the reasonableness of compensation paid by the petitioner to its officers, approved.  Paul E. Shorb, Esq., and C. L. Todd, Esq., for the petitioner.  Alva C. Baird, Esq., for the respondent.  MARQUETTE *734  This proceeding is for the redetermination of a deficiency in income taxes amounting to $2,007.71 asserted by the respondent for the year 1921.  The deficiency arises from the disallowance by the respondent of certain salary deductions claimed by the petitioner.  FINDINGS OF FACT.  The petitioner is an Illinois corporation organized in 1919 with a capital stock of $10,000.  Fred V. Brown and Arthur J. Baracree each subscribed and paid for 49 of the 100 shares of stock and they owned such shares during the taxable year 1921.  Prior to organizing the company, Brown and Baracree agreed in writing that one should be president-treasurer, and the other vice president-secretary of the new corporation; that each should receive a salary of $5,000 per year and in addition each should also receive an amount equal to 10 per cent of all business done by the corporation above $2,500.  This was confirmed by vote*3736  of the directors of the company at their first meetings, May 21, 1919.  Brown and Baracree did all the purchasing and all the selling for the company, conducted all correspondence, looked after all the advertising, and attend to all banking arrangements.  Each worked from eight to ten hours per day on the average.  The sales of the company for 1921, less returns and allowances, amounted to $123,774.78; the cost of production amounted to $65,325.22, leaving as the net sales, $58,449.56.  Brown and Baracree each received as compensation from the year 1921, the amount of $17,347.88, of which $5,000 was flat salary and $12,374.88 represented 10 per cent commission on gross sales.  Neither man gave his entire time to selling, but devoted about half his time to selling and half to office work.  No expense account was allowed to either one, and all expenses incident to selling, such as automobile upkeep, entertaining, and the like, were borne by Brown and Baracree out of their own pockets.  Other battery concerns in that city paid from 7 per cent to 10 per cent commissions, plus a drawing account for expenses, to full-time salesmen.  The capital employed by the corporation during*3737  the taxable year was $10,457.62.  The petitioner's income-tax return for 1921, after making all deductions, including the $34,749.76 paid to Brown and Baracree, showed a net income of $431.79.  The respondent has disallowed $9,381.48 of the total paid these two corporate officers on the ground that such compensation was unreasonable.  OPINION.  MARQUETTE: The sole question for our determination is whether the compensation paid by the petitioner to Brown and Baracree is *735  deductible under section 234(a)(1) of the Revenue Act of 1921, which provides: SEC. 234. (a) That 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.  The evidence shows that during the taxable year the petitioner's gross sales, less returns and allowances, amounted to $123,774.78; that the cost of goods sold was $65,325.22, leaving as net sales the sum of $58,423.56.  Against this sum there appears*3738  expenses, not including salaries, amounting to $22,234.01, and the compensation of the two stockholders and officers, Brown and Baracree, amounting to $34,749.76.  There are still further deductions for bad debts, depreciation, etc., and as a result the net profits amount to $431.79.  It also appears that the petitioner, at its inception, voted for its two officers, holders of 98 per cent of its stock, compensation as follows: To each a salary of $5,000 per year and also commissions of 10 per cent on all petitioner's business for the year in excess of $2,500.  We are not greatly concerned with the amount of compensation, as such, which a corporation may choose to pay for services.  That is a matter which rests in the sound judgment of the corporate directors, and which the Government may not question in the absence of express statutory authority.  But we may properly inquire whether such compensation is deductible as "a reasonable allowance for salaries or other compensation for personal services actually rendered" to the petitioner.  Upon consideration of the evidence we are of the opinion that the compensation paid by the petitioner to its two stockholders was more than "a*3739  reasonable allowance for salaries or other compensation," for the taxable year.  It is true that the petitioner made a contract to pay that rate of compensation.  But when we consider that the two men receiving the compensation held 98 per cent of the entire capital stock of the petitioner, and all which that fact implies; when we consider that the compensation so paid them absorbed all the net profits of the taxable year except $431.79, we can not escape the conclusion that the contract for compensation was not one negotiated at arm's length between employer and employee.  We think the evidence fairly sustains the conclusion that the compensation paid included a distribution of profits under the cloak of salary and commission, as well as being unreasonably large under the circumstances.  The petitioner cites and relies upon two decisions of this Board, , and George Bernard's Inc., 8 *736  B.T.A. 716.  In the first case, while we upheld the validity of the company's contract for compensation, the facts of the case and the question in dispute were entirely different from those now before us.  In the second case, while some*3740  of the facts closely resemble those in the instant proceeding, other facts, notably the relation of salary paid to volume of business done, are so wholly different that the case is not a proper guide for deciding the present one.  The respondent has allowed the petitioner a deduction of all the compensation paid except $9,381.48, which he contends should be classed as profits.  This, we think, is not unreasonable and should be sustained.  Judgment will be entered for the respondent.