*2371 Reasonable amounts as compensation of officers determined in accordance with respondent's determination.
*53 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1920 of $52,311.01. The errors alleged relate to the refusal of the respondent to allow as deductions from gross income the amounts of $71,637.50 and $84,765 alleged to be salaries or compensation for personal services of officers. At the hearing the respondent asserted a claim for a larger deficiency.
FINDINGS OF FACT.
The petitioner was incorporated January 1, 1916, under the laws of Illinois. Its office is at Chicago. On organization its authorized capital consisted of $25,000, divided into 250 shares of a par value of $100 each. The officers and ownership of the capital stock were as follows:
| Shares | Per cent of total | |
| Benjamin Mendelson, president | 83 | 33.2 |
| Emanuel M. Mendelson, treasurer and general manager | 166 | 66.4 |
| Leonard T. Nitkey, secretary | 1 | .4 |
*54 The petitioner*2372 deals in paper manufacturer's supplies and is one of the largest enterprises of its kind in the United States; it purchases all kinds of wastepaper in large quantities from various sources such as waste paper dealers and collectors and business houses and factories where waste paper is accumulated. This waste paper is then carefully sorted and graded and converted by the petitioner into paper stock by being pressed into bales suitable for shipment. The paper stock is then sold by the petitioner to manufacturers of paper throughout the United States as a substitute for wood pulp.
During 1920 Benjamin Mendelson was credited by the petitioner with a total payment of $71,637.50, allocated by the petitioner as $26,000 salary and 5 per cent on sales, amounting to $45,637.50. During the same year Emanuel M. Mendelson was credited by the petitioner with the total sum of $84,765 allocated by the petitioner as $30,000 salary plus 6 per cent of sales, or $54,765. During the year 1919 Benjamin Mendelson had received a salary of $13,000 plus 1 per cent of sales, or $3,791.73, a total of $16,791.73 and Emanuel Mendelson had received a salary of $15,000 plus 1 per cent of sales, or $3,791.73, *2373 a total of $18,791.73. Emanuel M. Mendelson is the of Benjamin Mendelson.
The respondent allowed, as a deduction from the petitioner's gross income for 1920, on account of the services of Benjamin Mendelson and Emanuel M. Mendelson, salaries of $13,000 and $15,000, respectively, plus $9,127.50 to each on percentages of net sales, or totals of $22,127.50 and $24,127.50, respectively. The petitioner in its return for 1920 had deducted $71,637.50 and $84,765 as compensation of Benjamin Mendelson and Emanuel M. Mendelson, and the deficiency asserted is reflected in the disallowance of $110,147.50.
The minutes of the petitioner contain the following:
MINUTES of regular annual meeting of the DIRECTORS OF MENDELSON BROS.
PAPER STOCK COMPANY, held on Monday, January 5th, 1920, at the offices of the Company, at the hour of 11:15 A.M.
PRESENT: Benjamin Mendelson, Emanuel M. Mendelson, Samuel E. Mendelson, Directors of said company.
Benjamin Mendelson, President of the Company, occupied the Chair, and Leonard T. Nitkey, acted as Secretary thereof.
The following persons were elected to the offices set opposite their respective names:
| Benjamin Mendelson | President |
| Emanuel M. Mendelson | Treasurer |
| Leonard T. Nitkey | Secretary |
*2374 The Chairman announced the election of the above officers to hold office for the ensuing year, or until their successors have been elected and qualified.
*55 The Chairman thereupon stated that the next order of business was to determine the compensation to be allowed and paid to said respective officers for the ensuing year. He invited discussion upon that subject. The matter of increasing the salaries of the officers of the company was thereupon discussed. It was pointed that the salaries and wages of the employees had increased over one hundred per cent. Also that the officers of this company were devoting their best efforts to the development and expansion of this company; that through the prestige and long standing of the officers in the trade the business was greatly benefited, and increased business would result. It was also pointed out that the capital invested in the company played only a minor part in the earnings of the company, and that the profits were mainly derived through the personal efforts of the individual officers, inasmuch as they personally managed and directed the sales and the purchases of the company, thus saving the company employment of high-salaried*2375 managers, consequently increasing the earnings of the company to a very large extent through their personal efforts. After careful consideration of this subject the following resolution was offered, put to a vote, and unanimously adopted: -
"RESOLVED by the Board of DIRECTORS OF MENDELSON BROS. PAPER STOCK COMPANY, an Illinois Corporation, that the salaries of the respective officers of said corporation for the ensuing year be fixed and determined as follows: -
That Benjamin Mendelson, President of the company be paid a salary of $26,000 for the fiscal year, and in addition thereto an amount equal to five per centum (5%) of the amount of the net sales of the company for the fiscal year, payable in such manner and at such times as he may direct.
That Emanuel M. Mendelson, Treasurer and General Manager of the Company be paid a salary of $30,000 for the fiscal year, and in addition thereto an amount equal to six per centum (6%) of the amount of the net sales of the company for the fiscal year, payable in such manner and at such times as he may direct.
That Leonard T. Nitkey, Secretary of the Company be paid a salary of $3,500 for the fiscal year."
There being no further business*2376 before the meeting, the meeting adjourned.
(Signed) LEONARD T. NITKEY
Secretary.
(Signed) B. MENDELSON
EMANUEL MENDELSON
SAMUEL E. MENDELSON
Directors.
The amounts paid to officers by the petitioner from 1916 to 1921, inclusive, were as follows:
| Benjamin Mendelson | E. M. Mendelson | L. T. Nitkey | |
| 1916 | None. | None. | $1,400 |
| 1917 | $13,000 | $14,000 | 1,400 |
| 1918 | 13,000 | 15,000 | 1 300 |
| 1919 | 16,791 | 18,791 | 2 1,120 |
| 1920 | 71,637 | 84,765 | 3,500 |
| 1921 | 14,757 | 18,514 | 3,300 |
*56 For 1920 a comparison of the stockholdings and amounts paid to officers is as follows:
| Per cent of total stock | Per cent of total salaries | |
| paid stockholders | ||
| Benjamin Mendelson | 33.2 | 44.8 |
| E. M. Mendelson | 66.4 | 53.0 |
| L. T. Nitkey | 0.4 | 2.2 |
| 100.0 | 100.0 |
Certain financial statistics of the petitioner from 1917 to 1921, inclusive, are as follows:
| Year | Net sales | Tons handled | Invested capital |
| 1917 | $262,130 | 9,812 | $55,541 |
| 1918 | 321,550 | 11,743 | 60,848 |
| 1919 | 379,172 | 14,782 | 64,280 |
| 1920 | 912,750 | 16,690 | 69,164 |
| 1921 | 351,450 | 14,026 | 87,516 |
| 5-year average return | |||
| on invested capital |
| Year | Net profits | Per cent | Per cent |
| after salar- | of return | of return | |
| ies and | on capital | on invest- | |
| taxes | stock of | ed capital | |
| $25,000 | |||
| 1917 | $5,306 | 21.2 | 9.5 |
| 1918 | 3,432 | 13.7 | 5.6 |
| 1919 | 4,883 | 19.5 | 7.6 |
| 1920 | 18,411 | 73.6 | 26.6 |
| 1921 | 1,620 | 6.5 | 1.8 |
| 5-year average return | 9.8 | ||
| on invested capital |
The petitioner kept its books and made its income and profits-tax return for 1920 on an accrual basis.
Benjamin Mendelson, the president of the petitioner, came to America from Riga, Russia, when he was 15 years old. He first traded in rags at about the time paper manufacture started in Wisconsin, selling rags to a concern that had a small grist mill. He pursued this business until about 1885 when he went into the paper-stock business exclusively. During 1920 he had complete charge of the operations and production of the business which he had built up and incorporated, although his activities were more confined to the plant where waste paper was packed and loaded than to the sales end of the business. He was experienced in packing waste paper for paper mills, and his judgment and character were relied upon by the petitioner's*2378 customers as outstanding in a business in which such attributes were rare. During 1920 he devoted substantially all his time to the petitioner's business.
In 1920 Emanuel M. Mendelson was 27 years old. He was vice president, treasurer and general manager of the petitioner. He supervised the purchase and the sales, paid the bills and pay rolls, maintained contact with customers and attended to financing. He was *57 well regarded by the trade, and was the salesman for the petitioner. He had worked for his father or the petitioner since he was about 15 years old, first in vacation time and after school, and, after learning the business from the packing and sorting room up, became a salesman. He gave all of his time to the petitioner's business, except that he was an officer of the Cook County Paper Stock Co., to which he served as financial adviser and devoted a portion of his time. The stockholders of that company were related to him.
The maximum reasonable compensation to Benjamin Mendelson and Emanuel M. Mendelson in 1920 was $22,127.50 and $24,127.50, respectively.
OPINION.
SIEFKIN: The sole question in this proceeding is whether the amounts which the petitioner*2379 credited to its two principal officers in 1920 were reasonable compensation. A total of $156,402.50 was so credited. The respondent allowed $46,255, on the ground that the remainder of the amounts credited were distributions of profits. See ; ; .
We are satisfied that the amounts allowed as deductions by the respondent are the maximum amounts payable by the petitioner for personal services of the officers in question in 1920. We are not prepared to go further and say that he allowed too much, as he now asserts by his claim for an increased deficiency. There is no doubt that Benjamin Mendelson and Emanuel M. Mendelson had an excellent standing in the trade in which they were engaged, but that is far from leading us to the conclusion that their services were worth the amounts deducted. It is apparent, not only from the testimony of witnesses called for the respondent, but also from evidence introduced by the petitioner, that the jump in net sales of $379,172 in 1919 to $912,750 resulted*2380 from a scarcity of paper and high prices, since the tons handled increased only from 14,782 to 16,690. The reason the petitioner credited these amounts to its two stockholders, we are convinced, lay in the stockholdings, not in the services.
Judgment will be entered for the respondent.