Court Opinion

ID: 4626314
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:58.660079+00
Date Added: 2024-06-11T07:56:51.498190
License: Public Domain

YOUNG IRON WORKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Young Iron Works v. CommissionerDocket No. 33329.United States Board of Tax Appeals21 B.T.A. 1238; 1931 BTA LEXIS 2225; January 19, 1931, Promulgated 1931 BTA LEXIS 2225">*2225  1.  Held that certain salaries claimed as deductions from petitioner's gross income in the years 1921 and 1922, were incurred and accruable in such years, and were proper deductions from income as ordinary and necessary business expense.  2.  Amount of net losses for 1921 and 1922 determined for reduction of petitioner's tax liability in 1923.  Raymond G. Wright, Esq., and S. F. Racine, C.P.A., for the petitioner.  Arthur H. Murray, Esq., for the respondent.  LANSDON 21 B.T.A. 1238">*1239  The respondent has asserted a deficiency in income tax for the year 1923, in the amount of $1,895.18.  The only issue is whether the Commissioner erroneously disallowed certain losses alleged to have been sustained in 1921 and 1922 as net losses applicable for the reduction of petitioner's taxable income in 1923.  This issue in its turn depends upon the deductibility of certain amounts from income in the years 1921 and 1922, as salaries of officers received in such respective years.  FINDINGS OF FACT.  Petitioner is a Washington corporation with its principal office in Seattle.  It was organized in 1920, with authorized capital stock of the par value of $20,000, 1931 BTA LEXIS 2225">*2226  subscribed for and issued to G. T. Young, O. A. Young, and John Isaacson, in the respective amounts of $4,000, $4,000, and $12,000.  In 1923 the authorized capital was increased to $100,000 and additional stock was issued, so that all outstanding shares were held in the year 1923 by G. T. Young, O. A. Young, John Isaacson, Paul Isaacson, and A. E. Hanson, in the respective amounts of $14,000, $14,000, $50,500, $7,500, and $14,000.  Considerations for the issue of the additional stock were certain unpaid salaries due to the Youngs and Isaacsons, and a patent which was paid in by Hanson.  At or about the date of beginning business, salaries of officers of the petitioner were authorized by proper corporate action as follows: John Isaacson, G. T. Young, and O. A. Young, $500, $350, and $350 per month, respectively.  There was no change in such authorized salaries in 1921 or 1922, which were reasonable compensation for the services rendered.  In the years 1921 and 1922 the petitioner paid on account of salaries the amounts of $6,779.34 and $10,471.60, and deducted such amounts from its income-tax returns for such respective years.  The amounts so paid and deducted were allowed.  Such1931 BTA LEXIS 2225">*2227  amounts were described in the income tax returns for the years involved as officers' salaries, $2,325, $3,140 and salaries $4,454.34 and $7,471.66, respectively.  At December 31, 1922, the undrawn authorized salaries of officers had not been credited to the personal accounts of the officers, charged to expenses, or deducted from income in either 1921 or 1922.  In the year 1921, without the deduction of the undrawn salaries in controversy, the petitioner sustained a net operating loss in the amount of $130.08; in 1922, without the deductions now claimed, it 21 B.T.A. 1238">*1240  realized a net gain in the amount of $1,193.73; in 1923, deducting only the salaries actually paid, it realized a net gain in the amount of $15,777.94, and on its income-tax return deducted the amount of $13,808.49 as a net loss brought forward from the two preceding years.  Upon audit the Commissioner disallowed the net loss deduction, made other minor adjustments, and asserted the deficiency here in controversy.  The petitioner kept its accounts and rendered its income tax return on the accrual basis.  Some time in January, 1923, the capitalization of the petitioner was increased to enable it to acquire a patent1931 BTA LEXIS 2225">*2228  deemed vital to its business that was owned by hanson.  As one of the conditions of the recapitalization the officers of the petitioner accepted additional stock for unpaid salaries then due, and agreed that thereafter their compensation should be the amounts actually paid them in cash in each year.  Isaacson was president and general manager and treasurer of the petitioner in 1920, 1921, 1922, and 1923.  Although engaged in other important undertakings, he devoted an average of 50 per cent of his time to the affairs of petitioner.  Gustave Young was shop superintendent in the same years and was in charge of efficiency, shop management, and production.  There were from 30 to 50 men under his direction.  Oscar Young was in charge of furnaces and forgings.  Both of the Youngs devoted all their time to the business.  The gross sales of the petitioner in 1921, 1922, and 1923 were in the amounts of $69,622.65, $81,893.74, and $142,440.29, respectively.  OPINION.  LANSDON: The primary question here involved is whether, in the circumstances set out above, the full amounts of authorized officers' salaries may be deducted from the petitioner's income in the years 1921 and 1922.  Such1931 BTA LEXIS 2225">*2229  years are not before us in this proceeding, but the facts in relation thereto are essential to the redetermination of the deficiency here in controversy and, therefore, may be considered.  . The evidence is convincing that salaries of the officers of the petitioner were authorized in 1920, in the aggregate amounts of $14,800 per year, and that such salaries were undrawn in 1921 and 1922 in the amounts of $8,120.66 and $4,288.34, respectively.  These amounts are somewhat less than the claims of the petitioner, but they are consistent with the evidence which shows that only Isaacson received salary as an officer.  Petitioner asserts that the two Youngs were also paid certain amounts on account of salaries in each of the years.  If this is true it was not so reported in petitioner's income 21 B.T.A. 1238">*1241  tax returns or proved at the proceedings.  In addition to the amounts paid to Isaacson as officer's salary in 1921 and 1922, the petitioner made other payments designated merely as salaries in the respective amounts of $4,454.34 and $7,471.66.  Such amounts may include the payments alleged to have been made to the Youngs as officers' 1931 BTA LEXIS 2225">*2230  salaries, but, on the record, we are unable to find as a fact that this is true.  It is beyond question that petitioner has deducted the sums of $6,779.34 and $10,471.66, respectively, from its income in the years 1921 and 1922, and that such deductions have been allowed.  In the absence of any proof as to the nature of the undesignated salaries, it is clear that the petitioner has not proven officers' salaries undrawn in the amounts claimed.  On the record, therefore, we must hold that officers' salaries for the respective years 1921 and 1922 in the respective amounts of $8,120.66 and $4,288.34, only, were undrawn at the close of the year 1922.  We are satisfied such amounts were liabilities of the petitioner at December 31, 1921 and 1922, as salaries incurred for services rendered within the respective years.  The petitioner was on the accrual basis.  The salaries in question were properly accruable as of the end of each of the years involved and said accruals are allowable deductions from income if they are reasonable compensation for service rendered in such respective years.  While the amounts in question are rather large for salaries of a concern not on a profit-making basis, 1931 BTA LEXIS 2225">*2231  we are satisfied that they were reasonable compensation for the services rendered in the respective years.  The enterprise was new and business was none too good.  The officers were men of long experience and proved ability within the purview of their duties.  The respondent has disallowed the salaries claimed as deductions in 1921 and 1922, (1) because they were not accrued on the books, and (2) because they were not subsequently paid in cash, but were waived.  The first ground for disallowance is insufficient.  Tax liability depends on facts and not on mere bookkeeping entries.  ; ; ; . The facts here are that liability for the salaries in question was incurred in 1921 and 1922.  The second ground for disallowance is controverted by the record.  The unpaid salaries were not waived by the officers in 1923, but were paid to them in that year in additional shares of stock.  Cf. 1931 BTA LEXIS 2225">*2232 . The effect of our holding above is to increase the operating expenses of the petitioner for the years 1921 and 1922, in the respective amounts of $8,120.66 and $4,288.34.  Such increases indicate operating losses in these years in the respective amounts of $8,250.74 and 21 B.T.A. 1238">*1242  $3,094.61, or a total at December 31, 1922, of $11,345.35.  The record is clear that no nondeductible expenses or disbursements are included in the losses thus computed.  The entire loss in each year was incurred in the operation of a business regularly carried on by the petitioner.  The petitioner's tax liability for 1923 must be determined under the provisions of section 204(b) of the Revenue Act of 1921.  . Reviewed by the Board.  Decision will be entered under Rule 50.