Court Opinion

ID: 4631986
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:10:48.981544+00
Date Added: 2024-06-11T08:46:27.375878
License: Public Domain

INDEPENDENT ICE & COLD STORAGE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Independent Ice & Cold Storage Co. v. CommissionerDocket No. 20234.United States Board of Tax Appeals15 B.T.A. 52; 1929 BTA LEXIS 2933; January 24, 1929, Promulgated *2933  1.  The petitioner, by its secretary and treasurer, on November 9, 1925, executed a consent extending the time within which additional income and profits taxes for 1920 and 1921 could be assessed against and collected from it.  Held, that such consent was valid and that the assessment and collection of the deficiency in tax determined by the Commissioner is not barred by the statute of limitations.  2.  The petitioner kept its books of account and made its income-tax returns upon the accrual basis.  In 1921 it paid to its president and to its directors additional compensation for services rendered in years prior to 1921 and deducted the amounts paid from gross income in its tax return.  This additional compensation was disallowed as a deduction by the Commissioner.  The disallowance is sustained.  Walter E. Barton, Esq., and Raymond C. Cushwa, Esq., for the petitioner.  R. W. Wilson, Esq., for the respondent.  SMITH *52  Under date of August 27, 1926, the Commissioner sent a notice of deficiency to the petitioner showing an overassessment for 1920 in the amount of $102.48 and a deficiency in income and profits tax for 1921 of $7,067.52. *2934  This proceeding is for the redetermination of the deficiency determined for 1921.  Several of the allegations in the petition were abandoned at the hearing.  Those not abandoned are (1) that the assessment and collection of any deficiency for 1921 is barred by the statute of limitations, and (2) that the Commissioner erred in disallowing the deduction from gross income of 1921 of $13,600 paid as compensation to the petitioner's president and directors.  FINDINGS OF FACT.  The petitioner is a Louisiana corporation transacting business in Shreveport.  It was incorporated in 1912.  Its charter provides in part as follows: Article VIAll powers of this corporation shall be vested in and exercised by a board of directors composed of five stock-holders who shall be elected by ballot by the stock-holders annually on the first Monday after the first Tuesday in January of each year held in the office of the corporation in Shreveport.  Each share of stock held in person or by proxy shall be entitled to one vote and a majority of stock voting at such election shall elect.  The petitioner was duly organized as a corporation but never adopted any by-laws.  At the first meeting of*2935  the board of directors *53  S. J. Harman was eleted president and E. Y. Farley was elected secretary and treasurer.  These individuals continued to be the principal executive officers of the corporation from 1912 to 1925, inclusive.  Harman was interested in many other businesses and did not devote his entire attention to the petitioner.  He made it a practice of visiting the plant regularly one or more times each day and he actively supervised the affairs of the corporation.  Farley was in charge of the office when Harman was not there and acted under Harman's orders at all times.  The petitioner's income-tax return for 1921 was filed on May 15, 1922.  On November 1, 1925, petitioner, by its secretary-treasurer, E. Y. Farley, executed a consent extending the time for the determination by the Commissioner of the amount of income, excess-profits or war-profits taxes due under any return made by or on behalf of the petitioner for the years 1920 and 1921 either under the then existing revenue acts or under prior revenue acts.  The consent provided in part: This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, * * * The*2936  consent bore the corporate seal of the corporation and was duly accepted by the Commissioner.  The deficiency notice showing a deficiency for the year 1921 was mailed to the petitioner by the Commissioner on August 27, 1926, and this proceeding was instituted before this Board on September 27, 1926.  Prior to 1919, the petitioner paid no salaries to its president and directors.  Farley received a salary of $3,000 for each of the years 1917, 1918, and 1919.  In 1920 his salary was increased to $4,200 and remained at that figure during 1921.  He was paid a bonus in 1921 of $6,000, which was for the purpose of compensating him for services for prior years.  The deduction of the total amount paid to Farley in 1921 was allowed by the Commissioner.  Harman received a salary of $1,200 in 1919 and $5,000 in 1920, 1922, 1923, and 1924.  In 1921 he received a regular salary of $5,000 and additional compensation of $10,000 to compensate him for services performed prior to 1921.  The Commissioner disallowed the deduction of the additional compensation paid in 1921.  Three directors were each paid a salary of $1,200 in 1920 and in 1921, and an additional amount in 1921 of $1,200 each to compensate*2937  them in part for services performed prior to 1921.  The Commissioner disallowed the deduction of $3,600 of the total amount of $7,200 paid to directors in 1921.  The petitioner's books were kept and its returns were made on the accrual basis.  OPINION.  SMITH: The first contention of the petitioner is that the assessment and collection of any deficiency in tax for 1921 is barred by *54  the statute of limitations.  Its return for 1921 was filed on March 15, 1922, and the petitioner contends that the statute of limitations operated to bar the assessment and collection of a deficiency after March 15, 1926.  The respondent contends, however, that he is not barred from making the assessment and collection of a deficiency for 1921, inasmuch as the petitioner filed a consent in 1925 extending the period within which the assessment and collection of an additional tax for 1921 might be made.  The consent was given by the secretary-treasurer of the corporation, who was in charge of the books and the office of the petitioner.  The petitioner contends that the giving of the consent was not authorized by the petitioner's board of directors or by its president and that under the statutes*2938  of Louisiana only the president is authorized to execute such a consent as that given to the respondent by the secretary-treasurer on November 9, 1925.  Section 16 of Act 267 of 1914, relied upon by the petitioner, provides as follows: Be it further enacted, etc., That the president, vice-president or manager of any corporation organized under the laws of Louisiana, or of a foreign corporation doing business in this State, shall have power in the name and in behalf of the corporation to authorize the institution of any suit and other legal proceedings, and no exception of want of authority shall lie on the part of any defendant.  They shall have authority to direct the issuance of conservatory writs; the bonding of property in custodia legis, without other general or special power from the board of directors of such corporation.  Such person, or persons, are also authorized by and on behalf of said corporation to execute in its name any bond, or bonds, in connection with any legal proceedings where it is a party plaintiff, defendant, intervenor, third opponent or otherwise interested, and to make any affidavit reqjuired by law or the rules of the court; and such acts by the*2939  person, or persons, designated in this section, shall have the same force and effect as the act of the corporation, itself and be binding upon it; provided, however, that the authority and powers herein conferred upon said officers, may be modified, limited or denied to them by the charter or by-laws of the corporation or by resolution of the board of directors.  Such by-laws or resolution to effect the purpose must, however, be placed of record at the domicile of the corporation in the office where the charter is recorded.  (Italics ours.) This statute specifically provides that not only the president but also the vice president or "manager" of a corporation might execute an instrument of the character of the consent given by the petitioner on November 9, 1925.  The consent was given by the person who was the manager of the petitioner at the time that the agent called.  He held the important office of secretary-reasurer of the corporation, and as such executed the return of the petitioner.  The Board is of the opinion that the consent is sufficient to bind the petitioner.  See *2940 , and . In its income-tax return for 1921 petitioner deducted large amounts as additional compensation paid to its president and directors.  *55  The president of the corporation unqualifiedly stated that these amounts were designed to compensate the officers for services performed prior to the taxable year.  The petitioner's books were kept and its income-tax return was made on the basis of accruals.  The taxing statute permits a corporation to deduct "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 salary or other compensation for personal services actually rendered." Section 234(a)(1), Revenue Act of 1921.  Under the scheme of the taxing statute each taxable year stands by itself.  A corporation may not deduct from its profits of one year the expenses that logically belong to a prior year.  This is clearly true of a taxpayer making returns upon the basis of accruals.  Under such a system of accounting and reporting, each year should show the true net income*2941  of that year.  Clearly the true net income of 1921 is not reflected if there is deducted from the gross income of the year the compensation of officers and employees of prior years.  This question has many times been pased upon by this Board.  ; ; ; . The disallowance of the deduction of the additional compensation paid in 1921 for prior years' services is sustained.  Judgment will be entered under Rule 50.