*2657 1. Held, that the evidence fails to show that the Commissioner did not include the alleged value of a certain leasehold in his computation of the petitioner's invested capital and depreciation deductions in the years 1920 and 1921.
2. Held, that salaries paid to certain employees of petitioner in 1921 were no more than reasonable compensation for services rendered.
3. Earnings available for the payment of dividends in 1920 may not be decreased by the amount of a tentative tax for such year.
*57 The respondent asserts deficiencies in income and profits taxes for the years 1920 and 1921 in the respective amounts of $415.04 and *58 $1,468.28. For its causes of action the petitioner alleges that the respondent erred (1) in disallowing a deduction from its net income in each of the taxable years of any amount representing amortization of a certain lease; (2) in refusing to include the actual cash value of a certain leasehold acquired for shares of stock in the computation of its invested capital for each of the years here involved; *2658 (3) in disallowing the deduction of parts of salaries paid in 1921 for services rendered in that year; and (4) in reducing earnings available for dividends by the amount of a tentative tax.
FINDINGS OF FACT.
Petitioner is an Illinois corporation, with its principal office in Chicago, where it operates a motion picture theatre. It was organized in March, 1917, with authorized capital in the amount of $25,000, divided into 250 shares of the par value of $100 each. At date of incorporation its entire authorized capital was issued for property designated and valued as follows: leasehold on theatre property, $12,500; cash and other property, $12,500. During the years here involved its capital stock was held as follows: L. R. Retchin, president, 126 shares; H. E. Newell, secretary-treasurer and general manager, 122 shares; R. G. Retchin, director, 5 shares; M. C. Newell, director, 3 shares. R. G. Retchin is the wife of L. R. Retchin. M. C. Newell is a sister of H. E. Newell, but in the taxable year was not a member in her brother's household or in any way dependent on him for support.
In December, 1916, the leasehold involved in this controversy was acquired by Vernon C. Seaver*2659 and Louis Zahler for no other consideration than the rentals reserved therein. It covered a motion picture house and was for a period of 10 years, commencing on the 1st day of June, 1917. By the terms of the lease the lessees were required to install a pipe organ, seating capacity, projection machines and other equipment necessary in the operation of a moving picture theatre. It provided that the chairs and organ should cost not less than $4,950 and $3,000 respectively, but was silent as to the cost of other necessary equipment. The property which the lease required the lessees to install was to belong to the lessor at the date of installation, but at the expiration of the leasehold term it might be removed by the lessees, conditioned upon their having discharged all their obligations under the lease and upon the payment by them to the lessor of $100. Upon incorporation of the petitioner the lease was assigned to it and stock issued therefor as set forth above. The parties agree that the value of the leasehold at date of its acquisition by this petitioner was $12,500.
*59 In the year 1921 R. G. Retchin was employed by the petitioner as film reviewer. It was her duty*2660 to review films offered for sale or lease by the producers or distributors and to decide what pictures were suitable for presentation by the petitioner and suited to the tastes of its clientele. She was the only employee who reviewed films for the petitioner in the year 1921. The nature of this work is such that it does not require any regular number of hours in each day or any definite number of days in a year. She devoted to it whatever time was necessary. Motion picture theatres usually employ one or more persons for the work that was done by this employee. In the taxable year the petitioner paid R. G. Retchin a salary of $4,700 for her services as film reviewer.
During the year 1921 the petitioner employed M. C. Newell as assistant to the secretary-treasurer, and paid her a salary of $4,700 for services which she rendered. During that year H. C. Newell was absent from business about one-half the time on account of sickness and the death of his wife. His duties as secretary-treasurer and manager were largely performed by M. C. Newell, who devoted her entire time to the business of petitioner.
Upon audit of the petitioner's income and profits-tax return for the year*2661 1920, the Commissioner reduced net earnings available for dividends by a tentative tax in the amount of $1,169.50, and deducted prorated dividends from invested capital.
In the year 1921 the petitioner's gross income was $161,628.62 and its gross expenses exclusive of salaries to officers were $131,495.56.
In its income and profits-tax return for the year 1921 the petitioner reported an operating loss of $4,510.52. Upon audit of such return the Commissioner disallowed one-half the salaries paid to R. G. Retchin and M. C. Newell in the amount of $4,700, disallowed depreciation in the amount of $347.22 and restored to income $7,350 paid out as dividends within the year, determined adjusted net income of $7,886.70, and asserted the deficiency here in controversy.
OPINION.
LANSDON: The petitioner contends that the value of its lease on the premises which it used for business purposes in each of the taxable years involved should be included in its invested capital and in the computation of depreciation deductible from its gross income in each year. The respondent concedes that the lease had a value of $12,500 when paid in for stock, but contends that such value, in conformity*2662 with the provisions of section 331 of the Revenue Act of 1918, must be excluded from invested capital, and second, that he has already allowed the petitioner a proper deduction from its gross income on account of the exhaustion of the leasehold.
*60 In its income-tax return for 1921 petitioner took and was allowed a deduction in the amount of $3,125 on account of "Exhaustion, wear and tear." There is nothing in the record which enables us to determine whether any or all of this amount represented amortization of the lease or depreciation of equipment. There is the same uncertainty as to invested capital. Entirely aside from any effect that section 331 of the Revenue Act of 1918 may have on the situation here, the evidence does not sustain the petitioner's contention that it is entitled to an increased profits-tax credit in any of the years under review. For the year 1920 it has been allowed adjusted invested capital in the amount of $23,365.30, which is the par value of its outstanding capital stock decreased only by the proration of dividends paid in that year. Inasmuch as there is no evidence that it had any earned surplus in 1920, this indicates that the value of the*2663 leasehold acquired for stock was included in the computation of invested capital for such year and so far as we know this situation also applies to 1921. The evidence as to invested capital and depreciation is not sufficient to overcome the presumption that the determinations of the Commissioner are correct.
Throughout the year 1921 the petitioner employed the wife of its president and the sister of its secretary-treasurer manager as film reviewer and assistant secretary-treasurer manager, and in that year paid each a salary of $4,700. The record discloses that the gross income of the petitioner in 1921 was slightly more than $161,000. Expenses, including salaries of officers, reduced the net income to $3,166.70, which is sufficient to pay a 10 per cent dividend on outstanding capital stock with a remainder of $666.70 to be carried forward as surplus. The evidence indicates that M. C. Newell devoted her entire time to the affairs of the petitioner and that R. G. Retchin devoted all the time necessary to the efficient discharge of her duties and that the services of both contributed directly and largely to the production of the petitioner's operating income. In these circumstances*2664 we think the salaries of $4,700 paid to each in the taxable year were reasonable compensation for services rendered.
In the year 1920 the Commissioner deducted from earnings available for the payment of dividends in such year the amount of $1,169.50 as a tentative tax accrued in such year. We have held in , that this procedure is not in conformity with the law and on this point we sustain the contention of the petitioner.
Decision will be entered under Rule 50.