Independent Electric Machinery Co. v. Commissioner

*1117OPINION.

Lansdon:

The issue in this appeal is whether the Commissioner erred in adding the amounts of $5,000 and $4,400 to the taxpayer’s taxable income for the years 1920 and 1921, respectively. The petitioner asserts that such amounts were accrued on its books as compensation of its president, and were either drawn by such officer or available for his withdrawal and use during the taxable years *1118involved. The Commissioner contends that the amounts in question were never authorized as compensation and were not received by the president, either actually or constructively, during such years. The reasonableness of the compensation is not in question.

The parties agree that the compensation of the president for the years 1917 and 1918 was fixed by the taxpayer’s directors at $6,000 per annum, with a bonus of 20 per cent of the net earnings. No subsequent corporate action is asserted by the taxpayer which concedes that the amounts of $11,000 and $10,400, accrued on its books as compensation of its-president for the years 1920 and 1921, were determined by the president without any action by the directors, and that the only record of such action is the accrual on its books of the amounts so determined. The president testified that the matter of his compensation was never considered by the directors after the year 1918, and that, as he was the owner of substantially all the stock, he believed himself to be within his rights in fixing and paying his own compensation without conferring with the other directors. The hearing was held in Kansas City, where the principal office of the taxpayer is located, but no minutes of any meeting of stockholders or directors or any books of account were offered in evidence.

The Board is of the opinion that the taxpayer was entitled to deduct the amount of $6,000 as salary paid to its president for each of the years 1920 and 1921, as an ordinary and necessary expense, and to an additional deduction of 20 per cent of $14,448.77 from its gross income for 1920, and of 20 per cent of $24,703.21 from its gross income for 1921, on account of the bonus voted by the directors to its president in 1918.

Order of redetermination will he entered on 20 days’ notice, under Rule 50.