1927 BTA LEXIS 2564">*2564 1. Held, that in the circumstances of this proceeding certain salaries were ordinary and necessary business expenses.
2. Penalty for delinquency should not be imposed.
9 B.T.A. 499">*499 The respondent has asserted a deficiency in income tax for the year 1918 in the amount of $5,623.02, and to such deficiency has added $1,405.75 as a penalty for alleged delinquency in filing a final income-tax return for the taxable year. Aside from such penalty the only issue involved is whether certain amounts paid in 1918, by K. Threefoot to two sons who were associated with him in business, are deductible from gross income as ordinary and necessary expenses.
FINDINGS OF FACT.
In 1896, K. Threefoot, now deceased, became a member of a business partnership known as A. Threefoot & Sons, a concern engaged in trading in cotton and in other commercial activities. In 1890, A. Threefoot & Sons and Marks Rothenberg & Co. were merged into a partnership composed of the individuals who had theretofore been members of A. Threefoot & Sons and the firm of Marks, Rothenberg & Co. 1927 BTA LEXIS 2564">*2565 From the date of such merger down to and through the taxable year, K. Threefoot was the principal active and directing member of such partnership, which was known as Threefoot Brothers & 9 B.T.A. 499">*500 Co. The operations of the partnership increased in volume from year to year and in 1918 it was one of the largest enterprises of its kind in the State of Mississippi. It traded in cotton in the average amount of 125,000 bales per annum, conducted a wholesale grocery store, and engaged in other business activities. The distributive share of the profits of such partnership credited to K. Threefoot averaged approximately $40,000 per annum at or about the year here involved.
In 1918 K. Threefoot was between 55 and 60 years of age. He had general supervision and direction of all the operations of the partnership, was in charge of the credits department thereof, and arranged for financing all its business operations. Prior to the beginning of the year 1918, he was greatly weakened physically, and his life was threatened by angina pectoris, a disease of the heart. Resulting from such disease, and a decline in his general health, he became unable to withstand the arduous labors incident1927 BTA LEXIS 2564">*2566 to his relations and obligations to the partnership.
At the beginning of the taxable year Threefoot entered into verbal contracts with his two sons whereby they agreed to do much of the work that had previously been done by their father. For such services, to be rendered largely in connection with the operation of Threefoot Brothers & Co., the father agreed to pay each of his sons the amount of $6,000 per annum in addition to the salaries such sons were already receiving for service which they rendered to the partnership. These contracts were fully executed in 1918. The sons rendered the services specified in the contract, and the father paid each of them from his funds the amount of $6,000 and in his income-tax return for each year deducted the amounts so paid from his distributive share of the net earnings of the partnership.
L. M. Threefoot, the elder of the two sons, was 29 years old in 1918. He was graduated from Cornell University in 1911 and shortly thereafter took a course in a business college. Since 1911 he has been associated with Threefoot Brothers & Co., first as an employee and, since 1920, as a partner. In compliance with the agreement between himself and1927 BTA LEXIS 2564">*2567 father at the beginning of 1918, during that year, in addition to his regular line of work as an employee of the partnership, he assisted his father in looking after credits and collections and in financing the business, participated in the management of the cotton department, and looked after the interests of his father outside of the partnership, such as investments in lands, insurance of properties, and many other matters. For this work he received from his father in 1918 a salary of $6,000.
S. A. Threefoot, the second son, was 24 years old in 1918. He was graduated from the Meridian, Miss., High School and Riverview 9 B.T.A. 499">*501 Academy of Poughkeepsie, N.Y. Prior to the taxable year, he had been for five years in the employment of the partnership in the wholesale grocery department of that concern. In conformity with the agreement made with his father early in 1918, he took on more of the management of sales and the sales force, and did more of the buying. For this additional work his father paid him a salary of $6,000 in the taxable year.
The salaries of the two sons were paid by the partnership and as such payments were made they were charged to the account of K. Threefoot, 1927 BTA LEXIS 2564">*2568 with the result that the distributive share of the net earnings of the partnership due to the father for the year 1918 were reduced by the amount of $12,000 and, such distributive net earnings so reduced, were included in the gross income of K. Threefoot in his income-tax return for such year.
On March 15, 1919, K. Threefoot filed a tentative income-tax return in the office of the collector of internal revenue at Birmingham, Ala., showing a net income subject to normal tax in the amount of $26,000, and subject to surtax in the amount of $29,000, and paid to such collector the amount of $1,140 as the first quarterly installment of tax which he computed as due on the income reported. On March 22, 1919, the audit of the books of Threefoot Brothers & Co. having been completed, he filed a final return of income for the year 1918. Upon audit of such returns, the respondent added $12,000 to the item designated as distributive share of partnership earnings and imposed a penalty of 25 per cent of the total tax determined as a penalty for delinquency in filing a return for the year involved.
OPINION.
LANSDON: K. Threefoot was a business man interested in large operations. His membership1927 BTA LEXIS 2564">*2569 in the partnership of Threefoot Brothers & Co. was only one of the many activities in which he was engaged. Outside of the partnership he had large property interests that required his attention. At the beginning of the taxable year he employed his two sons to assist him in his business. The sons relieved him from many of the burdensome details for which he was responsible in the operation of Threefoot Brothers & Co. They looked after his outside affairs. They were 29 and 24 years of age respectively, were well educated, and each had already had several years of business experience. There is nothing in the record that throws the slightest shadow of doubt on the ability or the efficiency of either. The salaries which K. Threefoot paid his two sons in the taxable year were ordinary and necessary expenses incident to the conduct of his business, and are a proper deduction, for income-tax purposes, from his gross income for such year.
9 B.T.A. 499">*502 A matter of accounting is involved here. The salaries received by the sons were paid by the partnership and charged to the partnership account of K. Threefoot in the taxable year. On the books of the partnership this procedure appeared1927 BTA LEXIS 2564">*2570 to reduce K. Threefoot's share of the distributable net earnings for such year in the amount of $12,000, and it was so reported in the personal income-tax return of said Threefoot. The respondent properly added said amount to the K. Threefoot share of the distributable net income of the petitioner. He was in error in not permitting its deduction from the petitioner's gross income as an ordinary and necessary expense. ; .
As we have found that the amount of $12,000 is deductible from the petitioner's gross income for the taxable year as business expense, the deficiency is probably entirely eliminated. We are convinced that there were reasonable causes for the delay in filing the complete return. The 25 per cent penalty for delinquency should not be imposed.
Judgment will be entered on 10 days' notice, under Rule 50.
Considered by GREEN and ARUNDELL.