*2519 Additional compensation authorized to be paid to petitioner's officers for the taxable years held not to be deductible from gross income.
*1127 The deficiencies involved herein are for the years 1924 and 1925 in the respective amounts of $1,043.09 and $1,540.31. It is claimed that the respondent erred in disallowing as deductions from gross income the sum of $9,000 in 1924 and $12,000 in 1925, representing liabilities for additional compensation to petitioner's officers.
FINDINGS OF FACT.
The petitioner, a New York corporation with its principal office and place of business at Rochester, N.Y., was organized on April 1, 1923, and is engaged in the business of manufacturing and installing automatic sprinkler systems.
During the taxable years all of the outstanding common stock of petitioner, amounting to 300 shares, was owned by W. Comery, president, and his two sons, W. C. Comery, treasurer and general manager, and E. F. Comery, secretary, in equal proportions. All of its preferred stock was owned by W. *2520 Comery. These officers were also the directors of petitioner.
During the taxable years the petitioner made the following cash payments to W. C. Comery and E. F. Comery for services rendered:
| 1924 | 1925 | |
| W. C. Comery | $4,800 | $4,600 |
| E. F. Comery | 3,000 | 3,000 |
During those years the petitioner did not make any cash payments to W. Comery for services performed.
At a meeting held on April 15, 1924, petitioner's directors adopted a resolution authorizing the payment of $3,000 to each officer as additional compensation for the year 1924, the petitioner to "issue its notes in lieu of cash if a cash distribution would impair working capital." The resolution also provided for charging the extra salaries of $9,000 to 1924 profits.
On April 15, 1925, the directors of petitioner passed a resolution reading in part as follows:
It was voted that if the profits of the Company warranted, a bonus is to be given as additional compensation to officers of the Company from the earnings of 1925 as follows:
| To Wm. C. Comery | $4,500.00 |
| To E. F. Comery | 4,000.00 |
| To Wm. Comery | 3,500.00 |
| 12,000.00 |
However, it is understood that the corporation is to*2521 credit these sums to the individual accounts of the officers above named, and to pay these amounts in cash only when working capital, in the opinion of the Board of Directors, is sufficient to make such disbursements in cash.
*1128 Noninterest-bearing demand promissory notes were issued by the petitioner to its officers for the additional compensation authorized by the resolutions, and their amounts were charged on the corporate books to an account kept for officers' salaries.
At the time the April 15, 1925, resolution was adopted the directors were aware of the fact that the notes issued for additional compensation for 1924 had not been paid.
The petitioner made a profit and had a surplus during each of the taxable years.
On May 1, 1925, and July 1, 1926, petitioner's directors passed resolutions, reading, respectively, so far as material, as follows:
On account of the corporation experiencing difficulty in borrowing money it was proposed by Wm. C. Comery that the officers surrender the notes which they held for outstanding salaries for the year ending Dec. 31, 1924, in the amount of $9,000.00 donating same back to the Corporation and this indebtedness to be cancelled*2522 on the books.
Wm. C. Comery informed the Company that in his opinion the only course left over to the Corporation was for the officers to allow the corporation to cancel the outstanding liability of $12,000.00 which represented Officers Salaries for the year 1925, and he made a motion to the effect which was seconded by William Comery the President and this motion was carried.
The notes issued by the petitioner in favor of its officers for additional compensation were never presented for payment or paid. At times not disclosed by the record the officers destroyed the notes they held and the petitioner eliminated the liability for their payment from its books.
During the taxable years the petitioner had from 100 to 125 employees. Its gross revenue in 1924 was about $170,000, and in 1925, about $326,000.
W. S. Comery has been engaged in the automatic sprinkler business for 21 years. Before entering the service of the petitioner he was employed by the Grinnell Co. at a salary of $9,000 per year. He took care of petitioner's correspondence, supervised its office work, purchased materials, supervised the work of salesmen - six in number, and all other employees except those*2523 engaged in sprinkler installment work, and had charge of the engineering plant and shop. He had no other business connections and devoted all of his time to petitioner's affairs.
E. F. Comery has been an automatic sprinkler engineer for about twelve years. During the taxable year, in addition to being petitioner's secretary, he was its superintendent of construction and a consultant for its engineering department. He checked estimates for construction contracts, checked working surveys to determine whether the plans had been properly drawn, supervised installation work in the field, did most of the soliciting done by petitioner's *1129 officers, and negotiated some of the loans made by petitioner. He had charge of about 100 of petitioner's employees. Before entering the petitioner's service he had charge of the sales and construction departments of the Syracuse, N.Y., office of the Independent Aetna Sprinkler Co., and received for his services salary and commissions amounting to from $6,000 to $7,000 per year.
W. Comery passed on all applications made to petitioner for credit, assisted other officers in negotiating loans and arranged some loans without their assistance, *2524 gave other of petitioner's officers the benefit of his business experiences, and in 1924 enabled the petitioner to obtain sprinkler heads, dry pipe valves and alarm valves, known as sprinkler specialties, from other manufacturers. His place of residence was Central Falls, R.I. During 1924 and 1925 he visited the petitioner's place of business six times, staying either overnight or for a day or two on each visit. The petitioner did not pay Comery's expenses on any of these trips. In 1925 petitioner rendered a report to W. Comery each week and practically every Sunday night W. C. Comery discussed business affairs with him on the telephone.
The total amounts of the notes issued to petitioner's officers each year for additional compensation were claimed as deductions in returns filed by petitioner for the taxable years and were disallowed by the respondent.
OPINION.
ARUNDELL: We are of the opinion that the respondent's determination should be approved. It may well be that the salaries actually paid when added to the amounts fixed in the corporate resolutions did not aggregate an amount which may be characterized as unreasonable compensation, but this we need not determine. *2525 Our difficulty is in convincing ourselves that the amounts fixed in the resolutions of 1924 and 1925 created a definite obligation on the part of the petitioner to pay the amounts fixed. Three stockholders owned all of the common stock in equal proportions, a father and his two sons. They were its officers and directors. The father gave a very small amount of his time to petitioner's affairs and has been paid no salary for the years before us. The two sons devoted all of their time to petitioner's affairs, for which each has been paid a fixed salary.
The resolution of 1924 recognizes the need of petitioner to conserve its cash position and provides that notes be given to cover the additional compensation voted. The second resolution provides for bonuses, if the profits of the year warrant, the sums voted to be credited to the individual accounts of the officers and not to be paid in cash until in the opinion of the board of directors this may be done without impairing the petitioner's working capital. Payment of the *1130 notes was never demanded and they in fact were never paid, but by resolutions set forth in our findings the indebtedness said to have been created*2526 was canceled. The naked fact is that the company never paid the additional compensation and the officers never received it. It is our opinion that the bonuses were only tentatively fixed and that the resolutions did not create an absolute obligation of the petitioner and the subsequent action of the parties gives credence to this view. See .
We have disposed of this case on the theory that petitioner kept its accounts and reported its income on the accrual basis. The record, however, does not affirmatively disclose the fact.
Judgment will be entered for the respondent.