Washington Cadillac Co. v. Commissioner

*845OPINION.

In its return for the fiscal year ended September 30, 1921, the taxpayer claimed a deduction from gross income of a bonus of $4,800 paid to its president. The Commissioner disallowed the deduction of $4,800 from the gross income of the taxpayer for the fiscal year ended September 30, 1921, on the ground that the taxpayer kept its books of account upon the accrual basis and the bonus paid to the president for that year was not voted until December, 1921, which was after the close of its fiscal year.

This bonus was paid under an agreement made by the stockholders of the taxpayer with its president in 1919. This agreement was that, in addition to a salary of $7,200 per year, the president should receive a bonus for each fiscal year at the rate of $400 per month, provided the profits of the business for each year were sufficient to pay such bonus. The bonus was voted by the board of directors in December of each of the years 1919, 1920,1921, and 1922.

There was no element of distribution of profits in the payment of this bonus to the president. The regular salary of $7,200 per year, plus the bonus of $4,800 per year, was only a reasonable salary for him. As we understand the situation, the Commissioner has disallowed the deduction of any bonus from the gross income of the fiscal year ended September 30, 1921, on the ground that the taxpayer kept its books of account upon the accrual basis; that the bonus paid in December, 1921, did not accrue during the fiscal year ended September 30, 1921; and that the amount of $4,800 paid in December, 1920, was for services performed during the preceding fiscal year ended September 30, 1920, and was therefore not an accrual of the fiscal year ended September 30, 1921.

It will be noted that by this reasoning the taxpayer has been permitted to deduct less than the entire amount of compensation paid to its president merely by reason of the fact that it has kept its books of account on the accrual basis and not on the cash basis. We think that this reasoning is not logical. If the bonus paid in December, 1921, was not an accrual of the preceding fiscal year, then the bonus paid in December, 1920, was an accrual of that year. Appeal of Lihue Plantation Co., 2 B. T. A. 740.