*1049OPINION.
Lansdon :The case involves two questions.
1. Is the taxpayer’s claim of $131,500 as salaries for its seven officials “A reasonable allowance for salaries or other compensation for personal services actually rendered?”
2. Is the Commissioner’s claim that the taxpayer’s return is “ false or fraudulent ” sustained by the facts ?
Prior to June 30, 1919, the salaries of the officials and employees of the company had been conservatively low. In 1918 and 1919, two executives had received $5,000 each; two others, the president and secretary and treasurer, $4,000 each; and the other three, $3,000 each. Of these amounts, about 50 per cent had been considered by each of the payees as a drawing or checking account, payable semi-monthly, and the balance as not to be paid until near, the close of the fiscal year June 30, when the peak of the demand of the company’s seasonal need for funds had passed. During each of these years the net income of the company, including the salaries of its officials, was about $100,000. By the end of the calendar year 1919 it was manifest that the sales for the fiscal year would reach, and probably exceed, $3,000,000. The five younger executives, all stockholders of the petitioner and régularly employed in its operations, were of the opinion that their remuneration was entirely, incommensurate with the services required and performed. They were devoting all their time, and much overtime, to their duties, often leaving the office or plant as late as midnight. The period was one of inflation, when increasingly high salaries were the rule. They chafed under the comparatively low pay which they were receiving.
The salaries had up to this time been fixed by the two founders of the business. Early in January, 1920, at a general informal meeting of the officials, the sons freely expressed their discontent and demanded compensation ranging from $12,500 to $26,000 per year. The fathers took the matter under consideration, and, in a few days, announced that they had increased their own salaries and those of the general superintendent and general manager to $25,000 each pei year, and those of the three younger Harms to $12,500 each, and that such increases would be effective for the fiscal year ending June 30,1920. This was a regular and legal determination of the salaries. Appeal of Reub Isaacs & Co., 1 B. T. A. 45; Appeal of Max Levy & Co., 3 B. T. A. 422.
Taking into consideration the rapid expansion and the great volume of the business of the petitioner, the increased compensation was not incommensurate with the services and responsibilities of the executives. In view of this fact, and the facts that the salaries previously paid were meager, that the petitioner was a close corporation, *1050and that the net profit available for dividends after the deduction of the increased salaries was nearly 38 per cent of the invested capital, we are of the opinion that the salaries, regularly determined in January, 1920, for the fiscal year ended June 30, 1920, in the total amount of $137,500, were reasonable, and that the taxpayer was entitled to deduct such amount from its gross income in making its income and profits-tax return for each year.
The increased salaries for the fiscal year ended June 30, 1920, legally determined by the directors, created an enforceable liability against the petitioner. Unfavorable business conditions due to the curtailment of credits throughout the country, beginning about the first of May, 1920, made it impossible for the petitioner to pay such salaries in cash without seriously endangering its credit and solvency. Mail orders had diminished in volume, collections were slow, and the petitioner’s cash position was a matter of grave concern to its executives even before June 30. At that date it had cash obligations due within the next three months in excess of $1,000,000, and its available cash was less than $100,000. Its profits from the year, in excess of $200,000, were frozen in accounts receivable and inventories. In these circumstances it was no more than sound and prudent business procedure to liquidate indebtedness by the issue of preferred stock to creditors willing to accept such payment.
The amount of $13,000 paid to C. J. Scheiman is not involved in (his controversy. It was neither authorized nor paid in the taxable year, nor does it appear from the record that it was deducted from the gross income of the petitioner for such year. We are without any clear evidence as to how this amount.was treated, either by the petitioner in the income and profits-tax returns for the year involved or by the Commissioner upon the audit of such returns, but we are convinced that regardless of the propriety of such payment the amount thereof is not a proper deduction from the petitioner’s gross income for the taxable year.
The evidence is conclusive that the salaries paid, to the executives of the petitioner for the year ended June 30, 1920, in the amount of $137,500 were reasonable, and that its income and profits-tax return for such year was not false and fraudulent.
Order of redetermination will be entered on 15 days’ notice, under Rude 50.