Court Opinion

ID: 4588736
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:42:42.982593+00
Date Added: 2024-06-11T07:50:08.154881
License: Public Domain

AMERICAN SNUFF COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American Snuff Co. v. CommissionerDocket No. 56039.United States Board of Tax Appeals32 B.T.A. 991; 1935 BTA LEXIS 859; July 19, 1935, Promulgated 1935 BTA LEXIS 859">*859  In 1928 the petitioner recomputed the compensation of certain of its officers for the years 1912 to 1927, inclusive, in accordance with the terms of one of its bylaws adopted in 1912 and not thereafter amended or changed.  As a result of this recomputation, and as compensation for the years 1912 to 1927, inclusive, petitioner in 1928 paid to the said officers the additional sum of $72,122.45.  Held, that the amount so paid is not deductible under the provisions of section 23(a) of the Revenue Act of 1928 in determining net income for the year 1928.  John S. Glenn, C.P.A., for the petitioner.  Frank B. Schlosser, Esq., for the respondent.  TURNER 32 B.T.A. 991">*991  This proceeding involves a deficiency in income tax determined against the petitioner for the year 1928, in the amount of $8,629.75.  The only error alleged in the petition is that the respondent wrong-fully disallowed the deduction of $72,122.45 claimed by the petitioner as compensation paid to its officers during the taxable year.  FINDINGS OF FACT.  The facts are set forth in a stipulation introduced at the hearing as follows: The petitioner is a corporation, organized under the laws1935 BTA LEXIS 859">*860  of the State of New Jersey during the year 1900.  It is engaged in the manufacture of snuff, with its plant and principal office located at Memphis, Tennessee.  On March 5, 1912, the stockholders of the petitioner adopted the following resolution: That the By-laws of the company be, and they are hereby amended by adding thereto an article to be designated as XVI, and reading as follows: Section 1.  As soon as practicable after the end of the year 1912 and of each year of the Company's operations thereafter, the Treasurer of the Company shall ascertain the net profits, as hereinafter defined, earned by the Company during such year, and if such net profits exceed the profits ascertained in like manner earned during the year 1911, by the businesses that now belong to the Company the Treasurer shall pay an amount equal in the aggregate to ten per cent of such excess to the President and three Vice-Presidents of the Company in the following proportions, to-wit: one-fourth thereof or 2 1/2% of such amount, to the president; and one-fourth thereof or 2 1/2% of such amount to each of the three vice-presidents, but in the case the Board of Directors shall at any time fix the number of1935 BTA LEXIS 859">*861  Vice-Presidents at two, the Treasurer shall pay the said amount of such excess, in the following proportions, to-wit: four per cent thereof to the president and three per cent thereof to each of said two vice-presidents, as salary for the year, in addition to the fixed salary of each of said officers.  32 B.T.A. 991">*992  Section 2.  If any such office be vacant for a time amounting in the aggregate to one month in any year, so much of the amount provided by this by-law to be paid to the incumbent of such office as is proportionate to the time of such vacancy shall be returned into the general profit account of the Company.  If there shall be a change during the year in the incumbent of any such office, the amount hereinbefore provided to be paid shall be divided among the different incumbents of such office in the proportion of their respective periods of incumbency during the Section 3.  For the purpose of this by-law the net profits earned by the Section 3.  For the purpose of this by-law the net profits earned by the Company in any year shall consist of the net earnings made by the Company in its business as a manufacturer and seller of tobacco and its products after deducting all, 1935 BTA LEXIS 859">*862  expenses and losses, such provisions as shall be determined by the Board of Directors of the Company for depreciation and for all outstanding trade obligations, and an additional amount equal to six per cent dividends on its six per cent preferred stock, to which profits shall be added, or from which profits shall be deducted, as the case may be, the Company's proportion (based on its stockholders) of the net profits or losses for the year of its subsidiary companies, if any, engaged in the manufacture and sale of tobacco or its products.  Section 4.  The declaration of the Treasurer as to the amount of net profits for the year and the sum due any one hereunder, shall be binding and conclusive on all parties, and no one claiming hereunder shall have a right to question the said declaration or to any examination of the books or accounts of the Company, and nothing herein contained shall give any incumbent of any office any right to claim to continue therein, or any other right except as herein specifically expressed.  Section 5.  This article of the By-law may be amended or repealed only by the action of the stockholders of the company and not by the Directors.  During the years1935 BTA LEXIS 859">*863  1912 to 1927, inclusive, the petitioner deducted depreciation on its books in greater amounts than was claimed by it or allowed by the Commissioner in its Federal income tax returns with the result that the net profits of the Company as shown by the books for each year was less than the taxable net income reported.  The bonuses provided for in the resolution of March 5, 1912, were paid to and accepted by the officers of the petitioner for each of the years 1912 to 1927, inclusive, on the basis of the net profits, as shown by the petitioner's books, computed on greater rates of depreciation than allowed by the Commissioner.  The amounts so paid were deducted in the Federal excise and income tax returns filed by the petitioner for the years 1912 to 1927, inclusive, and allowed by the Commissioner.  During the taxable year 1928 an accounting firm employed by petitioner advised some of the officers that the bonus should be computed upon the basis of the petitioner's earnings as reflected by the Federal tax returns, instead of the earnings shown by the books and records of the petitioner.  Subsequent to this advice of the accounting firm, some of the officers approached the Treasurer, 1935 BTA LEXIS 859">*864  who was charged with the responsibility of ascertaining the net income and bonus under above resolution of the Board of Directors, with a view of obtaining the additional bonuses claimed to be due them for prior years.  At first the Treasurer, who denied any liability for any additional bonus, declined to make any further payments.  Numerous conferences were held at which the officers contended that the Treasurer had misinterpreted the resolution, and that they were entitled to a greater amount than had been paid 32 B.T.A. 991">*993  in prior years, and the Treasurer, still denying any liability and refusing to pay any additional bonus, suit was threatened by one of the officers for the additional bonus.  The matter was finally referred to New York counsel, who drew up the resolution in 1912, and he advised the petitioner that the Treasurer had misinterpreted the resolution and that the bonus should have been paid on the basis of the earnings shown on Federal income tax returns for the years 1912 to 1927, inclusive, rather than the earnings reflected by the petitioner's books.  In accordance with the above advice received from the petitioner's counsel, the Treasurer of the company computed1935 BTA LEXIS 859">*865  the sum of $72,122.45 as representing the total of the additional amounts due the officers for the years 1912 to 1927, inclusive, under the terms of the resolution of March 5, 1912.  The said amount of $72,122.45 was paid to the officers during the year 1928, and deducted in petitioner's income tax return for that year, together with amounts representing fixed salaries and bonuses for the year 1928.  Said amount of $72,122.45 included $367.80, being 10 per cent on refunds of income taxes for the years 1921, 1922 and 1923.  On June 27, 1928, the Board of Directors of the petitioner adopted the following resolution: RESOLVED: That the Treasurer's action in deducting the same amount of depreciation as deducted by the Federal Government for income tax purposes, in ascertaining, adjusting and paying additional compensation as provided for by resolution adopted at a stockholders' meeting held March 5, 1912, be and the same is hereby approved, ratified and confirmed; firmed; and that until further notice depreciation be deducted on the same basis in ascertaining and paying such compensation.  In the determination of the deficiency the Commissioner disallowed as a deduction the sum of1935 BTA LEXIS 859">*866  $72,122.45 representing the amount of the additional bonuses paid for the years 1912 to 1927, inclusive.  OPINION.  TURNER: The deduction claimed was disallowed by the respondent on the ground that it represented salary payments for services rendered in years prior to 1928 and, for that reason, was not a proper charge against income for the taxable year.  In his brief the respondent offers the further objection that the petitioner has not produced proof to show that these salary payments were reasonable and necessary business expenses for the taxable year, in accordance with the provisions of section 23(a) 1 of the Revenue Act of 1928.  The petitioner contends that the salary payments in question could not have been accrued as obligations in the years to which they relate because the exact amounts, as well as the1935 BTA LEXIS 859">*867  liability of the company in respect thereto, were not determinable in those years.  It bases 32 B.T.A. 991">*994  this contention upon the fact that the treasurer refused to pay the additional sums requested by the officers until after submission of the matter to the petitioner's attorney and the receipt of his opinion that the company was liable for the amounts so claimed under its bylaws adopted in 1912.  In support of this contention it is claimed that this case is controlled by numerous decisions of the courts and of this Board.  To maintain its position, the petitioner has cited ; ; ; ; ; ; ; ; and a number of similar cases. In substantially all of the cases cited by the petitioner the liability for the payments claimed was disputed1935 BTA LEXIS 859">*868  by the taxpayer and the amounts finally paid resulted from compromise or litigation.  In the case of compromise of a disputed liability, a new liability is then and there created through agreement of the parties.  We have nothing of that kind present in this case.  With reference to payments made as the result of litigation, the situation is also different.  In , a former sales manager of the taxpayer, after being discharged, brought suit for damages under his employment contract.  He was discharged in 1919, but his claim was not paid until 1923, when the judgment rendered in 1922 was affirmed.  The taxpayer sought the deduction as a loss in 1919, when the discharge occurred.  As a reason for disallowing the deduction in 1919, the court pointed out that on the facts the liability of the company and the amount of the damages were wholly unpredictable until the judgment was rendered and that it could not have been said that the loss actually paid was, as a matter of law or of undeniable fact, sustained in the year of the discharge, and further that the taxpayer, by its contest in the court and payment only after judgment, clearly1935 BTA LEXIS 859">*869  did not consider the amount of the judgment as a liability in the prior year.  In this case, the final conclusion of the petitioner itself was that as a matter of law and of fact the payments made to its officers in 1928 were the payments of liabilities which existed in the years with respect to which they were paid.  It is true that the treasurer of the petitioner at first contended that he had properly computed the amounts payable to the officers, but after numerous conferences and discussions, he asked the advice of petitioner's general counsel, and upon receipt of his opinion, to the effect that the compensation of the officers had been erroneously computed for the years from 1912 to 1927, inclusive, the treasurer, without further objection, paid to the 32 B.T.A. 991">*995  officers the amounts here in question.  It is thus apparent that the amounts so paid to the officers were liabilities in the years prior to 1928, and the action of the respondent in disallowing the deduction claimed is sustained.  . Cf. 1935 BTA LEXIS 859">*870 ; . By reason of the above disposition of the contention of the petitioner, it is not necessary to consider the question raised by the respondent as to the reasonableness of the compensation.  Decision will be entered for the respondent.Footnotes1. SEC. 23.  DEDUCTIONS FROM GROSS INCOME.  In computing net income there shall be allowed as deductions: (a) Expenses.↩ - 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; * * *