*2926 BONUS. - Held, that for the year 1924, petitioner is entitled to a deduction in the amount of $1,584.90, representing additional salaries authorized and paid during the year 1924.
*61 The deficiency complained of is in the amount of $225 for the year 1924, which arises from respondent's disallowance of a deduction in the amount of $1,800 alleged to represent bonuses paid for services rendered by certain officers during 1924.
FINDINGS OF FACT.
Petitioner is a Wisconsin corporation with its principal place of business at Milwaukee.
During the year 1924 petitioner's stockholders, its officers and their salaries in the amounts authorized at the beginning of that year, were as follows:
| Name | Office | Salary | Shares of stock |
| L. Friedman, sr | President | $6,000 | 350 |
| M. Zolin | Vice president | 2,500 | 101 |
| Leon Friedman, jr | Secretary | 1,500 | 50 |
| Total | 10,000 | 501 |
*62 Leon Friedman, Jr., was a son of F. Friedman, Sr., and M. Zolin was the latter's son-in-law, and those three men constituted the board of directors*2927 of petitioner which was a close corporation. The officers withdrew their salaries in regular weekly amounts, which were debited to their respective drawing accounts.
At various times during the year 1924, Zolin and Friedman, Jr., needed money for living expenses in addition to their regular authorized salaries, and upon such occasions they asked Friedman, Sr., who controlled the business, if they might draw additional sums, and if the financial condition of the business warranted the withdrawal of such additional sums, he would consent thereto. At each request for such additional sums the officers held an informal meeting and agreed that the additional sums or overdrafts should be in the nature of additional salary to be debited to their respective drawing accounts. It was agreed that the success of the business would determine finally whether such additional withdrawals could be allowed as salary.
At various times from January 3 to August 13, 1924, M. Zolin drew additional sums in amounts varying from $100 up to $400 and totaling $1,153. Also, at various times from April 5 to November 15, 1924, Leon Friedman, Jr., drew additional sums in amounts varying from $5 up to $35*2928 and totaling $431.90.
The officers and directors of petitioner were accustomed to having informal meetings at most any time for the purpose of determining matters pertaining to petitioner's business, but no written minutes were kept of such meetings. In the latter part of November, 1924, at an informal meeting, L. Friedman, Sr., stated that business had been good during the year, that the additional withdrawals could be allowed as salary, and it was agreed that such amounts were paid as bonuses for services rendered.
At the regular annual formal meeting of petitioner's directors held on January 6, 1925, the following resolution was adopted:
It was moved and seconded that the salaries of the officers should be as follows for the year 1925: President, $6,000; Vice-President, $2,500; Secretary, $1,500; motion carried. At the suggestion of the president, it was moved that a bonus of $1,300 be given to Mr. M. Zolin for his services during the past year, and $500 be given to Mr. L. Friedman, Jr., for his services during the past year. The motion was seconded and carried.
The bonuses granted in the amounts of $1,300 and $500, together with Zolin's and Friedman, Jr.'s regular*2929 services, balanced their respective drawing accounts at the close of the year 1924. As to Zolin's account, the difference between $1,153, the amount of additional sums drawn by him during 1924, and the $1,300 bonus voted to him in January, 1925, represented the amount of overdrafts made in 1923, and carried forward in his account at the beginning of the year 1924. *63 Also, the difference between $431.90 withdrawn by Friedman Jr., during 1924, and the $500 bonus voted to him, represented overdrafts for 1923, which were debited to his account at the beginning of the year 1924.
The amounts of the bonuses were credited to the respective officers' accounts as of December 31, 1924. Petitioner was on the cash receipts and disbursements basis of accounting.
The authorized salaries plus the additional salaries paid during 1924, and amounting to $3,653 and $1,931.90 for Zolin and Friedman, Jr., respectively, constituted reasonable compensation for services rendered by each of them during the year 1924.
In its income-tax return for the year 1924, petitioner included in the total deduction from gross income an item of $10,000 as "Compensation of Officers" and an item of $1,800, *2930 as "Stock Dividends declared." The respondent disallowed the deduction of $1,800 for the reason that, "stock dividends issued as bonus for services rendered in prior years are not an allowable deduction from gross income," which action resulted in the deficiency in question.
OPINION.
TRUSSELL: The respondent has disallowed the total claimed deduction of $1,800 on the basis of its being a stock dividend declared in January, 1925, for services rendered in prior years.
The fact that petitioner termed the said additional sum paid for services as a stock dividend is not controlling in view of the actual facts of the transaction. See ; ; ; also . The payment of the $1,800 was not a distribution in accordance with stockholdings, for L. Friedman, Sr., who held 350 of the outstanding 501 shares of petitioner's capital stock, received no portion thereof.
Petitioner was a close corporation whose directors were also its officers and actively*2931 engaged in the business. The officers and directors held informal meetings at various times to decide corporate matters and at various meetings during 1924 certain overdrafts were authorized as additional salary. However, it was agreed that such overdrafts would be debited to the respective drawing accounts until it could be determined that the business had made sufficient profits for that year. In November, 1924, it was known that the business had prospered and it was agreed at a meeting of officers and directors that the overdrafts made during the year should be credited to the respective drawing accounts as additional salaries or bonuses for services rendered. The resolution of January 6, 1925, *64 added no force and effect to those additional salaries authorized and actually paid during the year 1924.
Upon all the facts of record we are of the opinion that in addition to the $10,000 salary deduction already allowed, this petitioner is entitled to a deduction in the amount of $1,584.90 as additional salaries authorized and paid during 1924 for services rendered during that year. The total salaries so paid were reasonable within the meaning of section 234(a)(1) of*2932 the Revenue Act of 1924.
Judgment will be entered pursuant to Rule 50.