Archer Paper Co. v. Commissioner

*635OPINION.

The only question for determination herein is whether the additional salaries fixed for two of its officers by the taxpayer are properly deductible from gross income in the year 1918. At the time of its organization the board of directors of the taxpayer, by formal resolution, authorized its general manager to fix salaries of all of its employees, and from that time continuously, to and including the year in question, all such salaries had been fixed by said official without any formal action of the board of directors and without any minute entry of such action. Additional salaries had been fixed and paid from time to time and no question was ever raised as to the propriety of such action. In the year 1918 the directorate of the corporation was composed of five of its six stockholders, and all were employees actually engaged in the business of the corporation. The question of additional salaries to be *636paid for services in the year 1918 was the subject of discussion between the president and the general manager of the taxpayer, and these discussions were conducted in the presence and hearing of two other directors. It was determined in July, 1918, by the general manager, that additional salaries of $5,000 each should be paid to the president and general manager, and such fact was communicated to the president at that time. After the close of the year a tax advisor was called in, who informed thé president that, in order to make the payment of the additional salaries legal, formal action of the board of directors was necessary. The general manager protested the necessity of such action, but upon the insistence of the president a formal resolution was passed by the directors on J anuary 10, 1919, authorizing the payment of the additional salaries to the persons and in the amounts as formerly fixed by the general manager. The accountant who prepared the taxpayer’s original return for the year 1918 doubted the validity of the deduction and made no claim therefor. After consultation with certain tax officials, amended returns were filed for that year in which the amount of the additional salaries was claimed as a deduction, and this deduction has been disallowed by the Commissioner.

Upon these facts we are of opinion that the action of the general manager and the communication of such action to the president of the' company created a valid obligation on the part of the corporation to pay the amount of the additional salaries and without any formal action on the part of the directors. If any question can be raised as to the extent of the authority of the general manager under the resolution in fixing salaries or additional salaries of the officers or employees, we think the practical construction by the taxpayer, continued over a period of years without objection from the directors and stockholders, should control, and that the action of the general manager in such circumstances is the action of the corporation. The fact that the board of directors in the year following passed a formal resolution authorizing the payment of additional salaries to the same officers and in the same amounts can not impair the authority previously vested in the general manager and actually exercised by him. The most that can be said for the resolution of J anuary 10, 1919, is that it was passed for further security and in confirmation of action theretofore legally binding.

It is our opinion that the additional salaries in the amount of $10,000, fixed by the general manager in 1918, are properly deductible from gross income in that year.