1927 BTA LEXIS 2577">*2577 Salaries voted by board of directors at informal meetings to a director for services, held to be reasonable and deductible as accrued expenses.
9 B.T.A. 465">*465 This proceeding is for the redetermination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921, in the amounts of $111.29, $1,138.53, and $1,722.64, respectively. The petitioner alleges as error the Commissioner's disallowance of salary accruing to M. Savinar during the years in controversy and the Commissioner's failure to allow in the year 1921 depreciation on certain real property. The question of depreciation was waived by the petitioner during the course of the hearing and will not be considered.
FINDINGS OF FACT.
The taxpayer is a close corporation organized under the laws of Oregon and doing a brokerage and commission business with principal offices at Portland. It was organized in 1914 with a capital of $2,000, of which M. Savinar held 398 shares and his two sons, J. W. and Harry Savinar, held one share each. Each share of1927 BTA LEXIS 2577">*2578 stock had a par value of $5. This ownership continued until 1917, when M. Savinar resigned as president and disposed of all but 5 shares of 9 B.T.A. 465">*466 stock to his sons. Before and during the taxable period the stockholders were also directors of the corporation.
Prior to 1918 none of the directors had stipulated salaries. If profits justified it, small sums were paid to them as they required funds to meet necessary personal expenses. Thereafter payment of salaries was not contingent upon profits.
At an informal meeting of the board of directors on or about April 11, 1918, of which no minutes were made, M. Savinar was voted a salary of $2,000 per year and each of his sons a monthly salary of $200, these salaries to be effective until changed, and to be entered in the books as a credit to the respective parties. M. Savinar's salary for 1921 was increased to $3,000 at an informal meeting of the directors during the fall of that year. The by-laws of the corporation authorized the board of directors to fix rates of compensation of officers and employees.
Unlike his two sons, M. Savinar did not at any time devote all of his time to the corporation's business, but confined1927 BTA LEXIS 2577">*2579 his activities to the consideration of matters of policy and to the giving of advice on corporate affairs. During the early existence of the corporation, M. Savinar visited the place of business daily and after the business developed called every other day. After his resignation as president in 1917 he continued his activities in the business and due to the growth of the enterprise was required to and did devote more time to its affairs than formerly. He had no other occupation or business and was available to the corporation whenever his services were needed. M. Savinar was experienced in the brokerage and commission business, having engaged in that business before the corporation was organized. During 1921 he also conducted negotiations leading to the advantageous purchase of a piece of real property by the corporation.
During 1921 employees of the corporation were being paid the following amounts for their services: chicken pickers, $50 per week; egg candlers, $35 to $40 per week; truck drivers, $40 to $45 per week; and the office manager $225 per month.
Of the total salary voted M. Savinar, only his salary for 1919 and $2,000 of his 1921 compensation was credited to1927 BTA LEXIS 2577">*2580 his account. The taxpayer's surplus account under date of May 1, 1921, contains two debit entries of $2,000 each, which entries read as follows: "To M. Savinar for 1916 - $2,000.00; To M. Savinar for 1914 - $2,000.00." Under date of December 31, 1921, the surplus account is debited with the following entry: "To M. Savinar - Salary, $1,000.00." The entries on May 1, 1921, were made by the corporation's bookkeeper in compliance with the direction of J. W. Savinar that M. Savinar's account be credited with 1920 and 1921 salary. The error was not 9 B.T.A. 465">*467 discovered until the books were audited by the respondent. During 1919, 1920, and 1921 M. Savinar received salary payments of $80, $115 and $130, respectively.
During the taxable periods in question the petitioner's sales and net income after deducting officer's salaries, were as follows:
| 1919 | 1920 | 1921 | |
| Sales | $507,008.35 | $796,307.19 | $626,328.42 |
| Net income | 2,885.81 | 6,077.43 | 3,505.03 |
The taxpayer's books were kept on the accrual basis and returns were made on the basis of calendar years.
OPINION.
ARUNDELL: The respondent has allowed as deductions only so much of M. Savinar's salary for1927 BTA LEXIS 2577">*2581 the years in question as he drew in cash during those years. He has disallowed the balance, consisting of $1,920 for 1919 and the additional compensation for 1921 amounting to $1,000, both of which items were accrued on the books, as well as the amounts voted in 1918 for 1920 and 1921, but not entered in the books until 1921, less payments actually made. In this we think he erred.
It is clear from the testimony of two of the three members of the board of directors that the salaries were voted and directed to be paid at informal meetings of the directors. Such informal action is not forbidden and in fact is a practice frequently indulged in by close corporations such as we have here. ; . See also , and , and the decisions cited therein. Accordingly, we must hold that the taxpayer incurred liability for the salaries in question. Nor is it essential that the salary voted for 1920 and a portion of the salary for 1921 was not accrued on the books until 1921. The facts rather1927 BTA LEXIS 2577">*2582 than the bookkeeping entries must determine the allowability of the deduction. .
There is no doubt about the reasonableness of the salaries. M. Savinar was not paid to perform daily services or labor, but to give advice concerning matters of policy. This he did. He had had a great deal of experience in the line of business the taxpayer was engaged in and was well qualified to perform the services for which he was engaged. It was not necessary for him to be at the taxpayer's place of business at all times in order to perform the services for which he was paid.
9 B.T.A. 465">*468 Considering the volume of business transacted during the taxable periods and all of the surrounding facts and circumstances, we are of the opinion that the salaries in question are reasonable and their deduction should be permitted.
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by STERNHAGEN and GREEN.