Wilkes v. Commissioner

*717 These proceedings, consolidated for the purpose of hearing, are for the redetermination*3744 of deficiencies in income tax for 1921 of $3,010.01 in the case of J. Renwick Wilkes, and $2,765.53 in the case of J. Frank Wilkes. The only question in issue is whether the petitioners derived any income in 1921 from certain book entries made during that year canceling charges against them upon the books of an individual business.

*718 FINDINGS OF FACT.

The petitioners are sons of John and Jane R. Wilkes. The Mecklenburg Iron Works was owned by Jane R. Wilkes and operated by her husband, John Wilkes, as agent of his wife, as an individual business from approximately 1860. The business being strictly a family affair, the method of bookkeeping was of minor importance. J. Renwick Wilkes was employed in the business of the Mecklenburg Iron Works from 1893 to the end of 1901, and his brother, J. Frank Wilkes, was employed in the same business for almost as long a period. When the petitioners went to work in the concern they were paid nominal salaries, in the case of J. Renwick Wilkes, $50 per month, although he was a college graduate and a mechanical engineer. It was the agreement made between the father and the petitioners that they should receive nominal salaries and*3745 be permitted to draw from the business such additional amounts as they might not have for necessary business expenses. The father, John Wilkes, died in 1908 and the entire management of the business fell upon the two petitioners. The mother then made the same arrangement with the petitioners which had been made with them by their father and they were permitted to draw from the business any addition to meager salaries necessary for living expenses. Jane R. Wilkes died January 20, 1913, at which time there were charges upon the books of the concern for advances made to the petitioners of $6,170.22 to J. Frank Wilkes, and $5,205.73 to J. Renwick Wilkes. The petitioners were made administrators of the estate of their mother and continued to manage the business the same as they had before her death. They drew from it only nominal salaries plus necessary living expenses.

Jane R. Wilkes left as her heirs the petitioners and two daughters. In 1920 the heirs received an offer for the sale of the Mecklenburg Iron Works property. There was a conference of the heirs at Charlotte, N.C., on November 1, 1920, at which time the heirs entered into the following agreement:

It is agreed by*3746 the undersigned, heirs of Jane R. Wilkes, who died January 20th, 1913, that the following indebtedness due to her Estate at her death shall be cancelled and considered as a gift for services rendered before her death;

At the same time a further agreement was signed by the heirs, reading as follows:

It is agreed by the undersigned, heirs of Jane R. Wilkes, who died Jan. 20th, 1913 that the salaries allowed to J. Frank and J. Renwick Wilkes as Admrs. running the business of the Mecklenburg Irons Works (Estate of Jane R. Wilkes) be $350.00 per month from Jan. 1st, 1913, until Jan. 1st, 1922, or such time as may be mutually agreed upon thereafter.

*719 The salaries paid and amounts withdrawn by the petitioners from January 20, 1913, to November 1, 1920, averaged approximately $350 per month for each of the petitioners and the object of the agreements was to settle any claim which the estate might have against the petitioners in respect of withdrawals made by them.

J. Renwick Wilkes advised the bookkeeper of the Mecklenburg Iron Works of the agreements which had been made and instructed him to make*3747 such changes as might be necessary to be made in the books of the corporation to show the cancellation of the charges against the two petitioners. The bookkeeper neglected to carry out this instruction in 1920 and it was not until the close of 1921 that the petitioners discovered that the books still showed a charge against them of the moneys theretofore advanced. Entries were made upon the books as of December 31, 1921, canceling the indebtedness against the petitioners.

The petitioners made income-tax returns for years prior to 1921. The record does not definitely show whether the petitioners included in their incomes for years immediately prior to 1921 the amounts which had been paid to them by the estate but which were charged to them upon the books of account. A revenue agent examining the petitioners' records for the purpose of verifying their income-tax returns for 1921 added to the net income reported by J. Renwick Wilkes $22,596.87, $5,207.73 of which represented cancellation of indebtedness to the estate of Jane R. Wilkes existing prior to January 20, 1913, and $17,389.14 representing increased salary from January 20, 1913, to December 31, 1920, and to the net income*3748 reported by J. Renwick Wilkes $21,041.62, of which amount $6,170.22 represented cancellation of indebtedness to the estate of Jane R. Wilkes existing prior to January 20, 1913, and $14,871.40 representing increased salary from January 20, 1913, to December 31, 1920.

OPINION.

SMITH: The question presented by this proceeding is whether the petitioners derived income in 1920 from the cancellation against them of certain indebtedness of theirs to the estate of Jane R. Wilkes, which was placed upon the books in 1921. The petitioners had been paid very nominal salaries prior to 1920 and had been permitted to withdraw from the business which they were serving additional amounts for necessary living expenses. There was an understanding between the owner of the business prior to the date of her death in 1913 and her sons that the sons should never be required to repay the advances made to them for necessary living expenses and this was acquiesced in by all of the heirs subsequent to 1913, and the same arrangement was continued. It does not *720 clearly appear of record whether the heirs returned as income for years prior to 1921 their salaries received plus advances. J. Renwick*3749 Wilkes testified that he doubted whether the advances had been returned as compensation. We are of the opinion that if the advances were not included as compensation they should have been for they were paid as such to the petitioners. There is no evidence that the petitioners actually derived any income from the bookkeeping entries made on the books of the Mecklenburg Iron Works in 1921. Certain entries should have been made on those books in 1920. If the petitioners derived any income from the agreements made among the heirs on November 1, 1920, that income was income of 1920 and not of 1921. The only compensation received by each of the petitioners from the Mecklenburg Iron Works for 1921 was salaries of $350 per month paid to each.

Judgment will be entered on 15 days' notice, under Rule 50.