*3052 Compensation of corporate officers held reasonable and an ordinary and necessary expense.
*1374 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1920 and 1921 in the amounts of $5,265.90 and $1,073.09, respectively. Only that portion of the deficiencies involved in the disallowance by the respondent of a deduction of $12,000 in each year for officers' salaries is in controversy.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office at South Chicago. During the years 1920 and 1921 the petitioner paid each of its five salaried officers a monthly salary of $200 and deducted the total amount so paid of $12,000 as an ordinary and necessary expense of its business in each of the years 1920 and 1921. This deduction was disallowed for each of the years by the respondent in determining the deficiencies here involved.
Petitioner was organized in 1913 by a group of practicing physicians in South Chicago for the purpose of engaging in the retail drug business. *3053 Prior to that time the physicians had difficulty in getting their prescriptions for their patients properly filled without substitution of drugs and without overcharging of patients. The total number of shares of stock outstanding was 486 which, during the years 1920 and 1921, were held as follows:
| A. W. McLaughlin, M.D. | 63 |
| James W. Skibelsky, M.D. | 63 |
| G. G. O'Brien, M.D. | 63 |
| Don S. Harvey, M.D. | 43 |
| Fred T. Barrett, M.D. | 63 |
| Edward C. Wrightman, M.D. | 63 |
| Thomas Faith, M.D. | 27 |
| Helen Galligan | 62 |
| Joseph P. Galligan | 1 |
| John W. Stanton, M.D. | 9 |
| Robert A. Poynton, M.D. | 9 |
| Mary L. Harvey | 20 |
*1375 Mary L. Harvey was a sister of Doctor Harvey, and the 20 shares held in her name were not owned by her but were held on her brother's behalf. Galligan was the store manager, employed on a salary. The officers to whom salaries of $200 a month were paid were Dr. W. A. McLaughlin, president, Dr. Don S. Harvey, vice president, Dr. Fred T. Barrett, second vice president, Dr. G. G. O'Brien, treasurer, and Dr. James W. Skibelsky, secretary. Payment was made to them by virtue of a resolution of the board of directors dated March 19, 1918. At the meeting at which*3054 the salaries were authorized there were present only the five officers to whom salaries were voted. The other three members of the board of directors were not present. The five officers to whom salaries were paid had been active in the organization of the petitioner and were instrumental in sending to it from four-fifths to five-sixths of all prescriptions filled at its place of business. Its prescription business was very large and amounted to an average of about 100 prescriptions a day and sometimes would reach 250 a day. In addition to sending prescriptions to the petitioner to be filled, the five officers above named each spent time in the store varying from a few minutes to several hours each day. Doctors Harvey and Skibelsky were registered pharmacists as well as physicians and devoted more time to the business of the petitioner than any of the other officers. All of the officers maintained offices separate and apart from the drug store and were active in the practice of their profession.
It is a recognized practice in many communities, including South Chicago, for physicians to receive commissions from drug stores for sending prescriptions to them to be filled. The*3055 amount of such commissions ranges from 10 per cent to 25 per cent for prescriptions and from 25 per cent to 50 per cent on appliances. No commissions were paid by the petitioner for prescriptions sent in by physicians and it was understood that the payment of salaries to the five officers above named was to be in lieu of any commission. Before the salary was voted to them they were dissatisfied and felt that they were and energy devoted by them to the business, it appearing that other physicians who were stockholders were not sending an equal number of prescriptions to be filled by the petitioner but were benefiting through the earnings of the business. The payment of salaries to the five officers above named was intended, at least in part, to remedy this inequality.
During the years 1920 and 1921 the officers of the petitioner individually, at irregular intervals, called at the company's place of business for the purpose of advising, if occasion should arise, and also observing the conduct and management of the business and *1376 the compounding by the pharmacists of medicines and other prescribed remedies.
The principal business and source of revenue of the petitioner*3056 during the years 1920 and 1921 was its prescription business. It maintained a soda fountain during the year 1920 but it was taken out after a short time. It also installed a cigar counter during the year 1921 but this also was discontinued. Except for a bonus of $200 paid to Dr. J. E. Skibelsky in 1920 as additional compensation for extra services rendered to the petitioner, the officers received no other compensation from the petitioner except the $200 per month paid to each. The salaries paid to the officers of the taxpayer during the years 1920 and 1921 were reasonable and were for services actually rendered on behalf of the petitioner.
OPINION.
SIEFKIN: The only question involved in this proceeding is whether the respondent properly disallowed the deduction of amounts paid as salaries in 1920 and 1921. We are satisfied from the entire record that the amounts paid were reasonable compensation for the services rendered to the corporation, and that the Commissioner was in error in disallowing the deduction. The services were none the less real in that they were performed, in the main, away from the petitioner's place of business;
Judgment will be entered under Rule*3057 50.