*461 Before LITTLETON, SMITH, and TRUSSELL.
LITTLETON: The petitioner questions the correctness of the Commissioner's determination of a deficiency in income and profits tax for the calendar year 1918 in the amount of $14,745.55, in so far as it results from the disallowance of a deduction from gross income of $6,400 as additional compensation of F. W. Long, its president.
FINDINGS OF FACT.
The petitioner is an Indiana corporation engaged in the sale of plumbing and heating supplies, at wholesale, with principal office at South Bend. It was organized in 1906, since which time F. W. Long has been its president and majority stockholder. He has always had charge of the affairs of the company and looked after the *462 purchases and sales. Prior to January 1, 1917, he had negotiated certain contracts for the company in the purchase of real estate. From the date of organization to 1917 his salary had been credited on the books of the company in the amount of $300 at the close of each month, and he drew against this account at his convenience.
*2275 Prior to and during 1917, F. W. Long borrowed from the company certain sums of money with which to purchase certain shares of its capital stock owned by other persons and for other purposes. The amounts thus borrowed from time to time were charged against him upon the books of the company in an account designated "F. W. Long Capital Account," carried concurrently with his salary account. On January 1, 1917, the charges to the "F. W. Long Capital Account" totaled $10,017.77, and during 1917 seven items were charged to this account aggregating $9,534.88, making a total of $19,552.65.
At a special meeting of the board of directors held on December 8, 1917, the board, among other things, transacted the following business as shown by the minutes:
A motion was duly made and supported that on account of the many years of faithful service, and undivided attention given to the affairs of the Company, purchases and contracts entered into for the acquiring or real estate, transfers of stock, etc., all of which being beneficial and responsible for the welfare of and profitable to the company, that the amount of $14,000.00 be credited to the Goodwill account of F. W. Long, and charged*2276 against the earnings of the Company carried as a surplus account, and that the amount of $6,400.00 be so charged and credited for the year 1917. Motion carried.
On December 31, 1917, the bookkeeper made an entry in the journal crediting the "F. W. Long Capital Account" with $14,000. This entry, however, was canceled and the account was credited with $6,400, and no entry was made upon the records of the company for 1917 with respect to the $14,000. As had been his custom, F. W. Long continued during the years 1918 and 1919 to make withdrawals from the company's funds which were charged to his capital account. In March, 1919, an accountant was employed to audit the company's books for the year 1918. In view of this intention the books had not been closed. During the course of his audit the accountant made inquiry concerning the charges to F. W. Long. His attention was called to the resolution of December 8, 1917, and he was advised that F. W. Long should have been credited with $6,400 additional salary for the year 1918. The accountant considered the December 8, 1917, resolution as authorizing the crediting of F. W. Long's account with $14,000 for services in prior years, *2277 and with the amount of $6,400 as additional compensation for the year 1917, but reported to the officers that this resolution was uncertain and indefinite as to any additional compensation for the year 1918. Thereupon , a special meeting of the board of directors was called on March 15, 1919, and the following resolution was adopted:
*463 Special Directors Meeting of the South Bend Supply Company was called to order by the President, F. W. Long, in the office of the company, 324 So. St. Joe St., Directors present:
F. W. Long L. R. SmithThis meeting was called for the purpose of correcting and making clear the records of the meeting held December 8, 1917. The following motion was made and seconded:
Moved that records of Directors' Meeting held December 8th, 1917, be corrected to read as follows: That the sum of $14,000.00 (Fourteen Thousand) Dollars be set aside out of the earned surplus of the company as a reserve for the future payment to F. W. Long for special services rendered to the Company; the said reserve to be credited on December 31, 1921, or sooner if so directed by the Board of Directors. This reserve shall be binding and in full effect from and after*2278 December 8th, 1917, and shall not be subject to dividend at any future period. Motion carried.
Moved that the salary of the President shall be increased from $3,600.00 (Thirty-six Hundred) Dollars per annum to $10,000 (Ten Thousand) Dollars per annum, and that his salary begin as of January 1st, 1917, and to continue until changed by Board of Directors. Motion carried.
Upon the adoption of this resolution the account made an adjusting entry crediting the "F. W. Long Capital Account" with $6,400 additional compensation for 1918.
The entries appearing in the "F. W. Long Capital Account" upon the ledger were as follows:
| CHARGES. | CREDITS. | ||
| Jan. 1, 1917 Brt Ford | $10,017.77 | Dec. 26, 1917 | $6,400.00 |
| Nov. 6 | 500.00 | Dec. 31, 1918 Div | 3,184.00 |
| Dec. 30 | 880.00 | ||
| 30 | 1,160.00 | ||
| Nov. 18 | 2,000.00 | ||
| Dec. 31 | 2,142.50 | ||
| 31 | 2,211.38 | ||
| 31 | 641.00 | ||
| Mar. 2, 1918 | 150.00 | ||
| Aug. 19 | 250.00 | ||
| Oct. 21 | 3,581.25 | ||
| Dec. 6 | 3,000.00 | ||
| 30 | 800.00 | ||
| Jan. 9, 1919 | 1,594.42 | ||
| Mar. 7 | 1,850.00 | ||
| Dec. 31 Adj. Vo | 2,600.00 | Dec. 31 Adj. 19 | 6,400.00 |
| July 21 | 600.00 | Sept. 25 | 1,850.00 |
| Dec. 29 Trf from A-66 | 1,000.00 | Dec. 31 Ford | 16,600.00 |
| 31 To personal Acct | 544.32 | ||
| Dec. 31, 1919 Brt For'd | 16,600.00 | ||
| May 31 | 14,000.00 | ||
| July 28 Transferred from | |||
| F. W. Long | |||
| pers | 1,098.90 | ||
| Feb. 28 Transferred to | |||
| Pers. Acct. | 1,501.10 |
*2279 Judgment for the Commissioner.