Schiff-Lang Co. v. Commissioner

*1201 In this proceeding the petitioner appeals from the determination of a deficiency in income and profits taxes for the year 1917 in the amount of $2,471.68, approximately all of which is in controversy. The issues raised under the pleadings are: (1) Whether the petitioner is entitled to a deduction for the year 1917 of $4,800 representing alleged additional salaries of two of its officers that year; and (2) whether petitioner's excess profits tax for 1917 should be computed under section 209 of the Revenue Act of 1917.

FINDINGS OF FACT.

The petitioner is a California corporation engaged in the business of selling groceries and food products as merchandise brokers, with principal office in the City of Los Angeles, Calif.

Petitioner kept its books and made its returns on the basis of a calendar year.

During 1917, the stockholders and the number of shares held by each were: Sol Schiff, *3656 43 shares; W. H. Lang, 43 shares; Sam Behrndt, 10 shares; and Charles R. Ferson, 2 shares. Schiff was president and a director, and Land was secretary, treasurer and a director. The principal and active work of the corporation was carried on by these two individuals, both devoting all of their time soliciting business and acting as salesmen.

*1202 Ferson was vice president and a director, and acted as bookkeeper and carried on the clerical work of the corporation.

During 1917, and for sometime prior, it was the custom of the directors to hold informal meetings, at noon or in the evening, in the office of petitioner, at which the business affairs of the corporation were discussed. Such minutes of these meetings as were written up were written in longhand. In September or October, Lang and Schiff discussed the matter of salary increases for themselves for 1917, but the question was left unsettled pending more definite assurance of income to be realized that year by petitioner. The salaries drawn by each of the two officers from January 1 and until December, 1917, were at the rate of $300 per month.

About the middle of December, 1917, at a meeting in petitioner's*3657 office at which all three directors, Schiff, Lang and Ferson, were present, it was agreed that the salaries of Schiff and Lang should each be increased from $300 to $500 a month, effective from January 1, 1917. Ferson, the bookkeeper, made a penciled memorandum of the increase at the time, but no record was made in petitioner's minute book in 1917.

At a meeting of petitioner's stockholders on January 14, 1918, the following record was entered in the minute book:

At a special meeting of the stockholders of the company held at their office and principal place of business this 14th day of January, 1918, in accordance with the bylaws of the company, and in pursuance of notice to the stockholders given by a notice in writing by the president delivered to each stockholder personally, in accordance with the bylaws of the company, there were present at the meeting the following stockholders, to wit: Sol Schiff representing 43 shares, W. H. Lang representing 43 shares, Sam Behrndt 10 shares and C. R. Ferson 2 shares, a total of 98 shares, a majority of the entire issued and outstanding capital stock of the company. On motion duly made and seconded it was resolved because of the extraordinary*3658 efforts of the president and treasurer in extending the service of the company during the year of 1917, to increase their respective salaries for the year 1917 from $300.00 to $500.00 per month, and said increase to be deducted from the undivided profits of the year 1917. There being no further business the meeting on motion adjourned. Signed: W. H. Lang, secretary.

Petitioner, in March, 1918, made entries in its books crediting each of the two officers, Schiff and Lang, with $2,400 on account of salary increases for 1917.

In the individual income-tax returns filed by Schiff and Lang for 1917, each reported a salary of $500 a month as income received that year.

Upon audit of petitioner's return for 1917 the deduction of the extra compensation of $4,800 to the two officers for that year was disallowed by the respondent.

*1203 OPINION.

VAN FOSSAN: Section 12(a) of the Revenue Act of 1916 provided that a corporation might deduct "all the ordinary and necessary expenses paid within the year." The word "paid" has been interpreted by article 126 of Regulations 33 to admit an expense not actually disbursed "provided it is so entered on the books of the company as to*3659 constitute a liability against its assets and provided further that the income is also returned on an accrual basis." This interpretation is a reasonable construction of the language of the Act.

In the instant case the record fails to show when, if ever, the additional salaries were actually paid. We know they were not paid within the taxable year. We are also unadvised whether petitioner made its return on a cash receipts and disbursements basis or on the accrual basis. Such being the state of the record, the determination of the respondent must be approved. See ; and .

The above conclusion makes unnecessary a decision as to whether or not the evidence would bring this case within the ruling of the Board in , where it was held that a corporation in which the stock is closely held and which conducts its business largely by informal meetings of its directors may, by such informal action, create a binding corporate obligation.

Judgment will be entered for the respondent.