1930 BTA LEXIS 1827">*1827 1. CAPITAL EXPENDITURES. - The cost of certain additions to the elevators belonging to the petitioner held, upon the evidence, to be properly chargeable to capital investment, returnable through allowances for depreciation.
2. CORPORATIONS SUBJECT TO TAX. - The evidence shows the petitioner is specifically subject to the tax on business corporations under section 230 of the Revenue Acts of 1921, 1924, and 1926.
3. REASONABLE ALLOWANCES FOR SALARIES. - Salaries incurred during the taxable years and the amounts of deductions thereof allowable because reasonable, determined upon the evidence.
21 B.T.A. 617">*617 These are appeals for the redetermination of deficiencies in income taxes determined by the respondent in the following amounts: for 1922, $1,144.42; for 1923, $4,576.86; for 1924, $6,751.20; for 1925, $2,569.90; for 1926, $1,826.82; for 1927, $1,880.92. The appeals were consolidated for purposes of hearing and decision.
Petitioner alleges (1) with respect to 1927, expenditures, in an aggregate of $3,448.75 for devices installed on elevators, 1930 BTA LEXIS 1827">*1828 were not capital expenditures and they should be allowed in their entirety as deductions from income; with respect to all of the taxable years; (2) the respondent has erred in failing to give proper consideration to the fact that its president, Henri Chouteau, is the sole bona fide owner of all of the capital stock of the petitioner, and, therefore, the error lies in treating the petitioner as a business corporation, and (3) the respondent has failed to allow reasonable deductions for the salaries paid by the petitioner to its president.
FINDINGS OF FACT.
The petitioner is a Missouri corporation organized in 1913, with an authorized and outstanding capital stock of $300,000 par value, 21 B.T.A. 617">*618 and with principal place of business at St. Louis. Following its organization the petitioner issued $300,000 par value 6 per cent first mortgage bonds which were underwritten by the Missouri-Lincoln Trust Co. of St. Louis. The petitioner owns and operates a 17-story fire-proof office building located in St. Louis, built about 18 years ago upon leased ground. The leasehold and building were originally capitalized upon the books of the petitioner at a value of $600,000. Nearly all1930 BTA LEXIS 1827">*1829 of the income of the petitioner is derived from rentals of offices in its building.
Henri Chouteau, hereinafter referred to for convenience as Chouteau, a resident of St. Louis, purchased all of the capital stock of the petitioner from the Missouri-Lincoln Trust Co. which was then in the hands of a receiver in April, 1920, for a consideration of approximately $90,000 in cash. A few of the shares of stock owned by Chouteau are of record in the names of two directors for qualifying purposes. At the time when Chouteau acquired this stock the indebtedness of the petitioner on the first mortgage bonds had been reduced to approximately $260,000, the annual sinking fund for amortization purposes under the mortgage being $8,000 par value per annum.
The operations of the petitioner prior to this time had not been financially successful, the annual losses for several years being in excess of the allowances for depreciation of the building. The lease agreement calls for ground rents at the rate of $20,000 per annum, and the gross income derived from the building did not equal the aggregate of the ground rent, taxes, interest and various operating expenses. Upon acquisition of the stock1930 BTA LEXIS 1827">*1830 Chouteau at once assumed the presidency and treasurership and he took over the active direction and management of the affairs of the petitioner. However, the services of the building manager in charge of the details of the building service were retained. Chouteau had initiative and creative ability. He was ingenious in devising methods of attracting more desirable tenants for the building. He was energetic in putting his ideas into effect, and he was successful in changing the whole character of the building to that of a high-class office building with the result that rental rates were raised, vacancies were reduced, and the gross income from the property was increased to a point where the operations resulted profitably. Under Chouteau's direction the building was gradually remodeled and improved over a period of years.
Chouteau devoted all of his time to the affairs of the petitioner, and from time to time whenever the petitioner needed ready cash Chouteau advanced the money out of his individual resources, the 21 B.T.A. 617">*619 largest advance having been about $20,000. At this time Chouteau owned some real estate holdings and he employed agents for the management of that property. 1930 BTA LEXIS 1827">*1831 Chouteau maintained an office in the building and employed therein at first one stenographer and subsequently an additional employee, a young man who acted in the capacity of an assistant secretary. In addition to the building manager there were a number of other employees, resulting in a pay roll of about $3,000 per month. The salary of the president, inclusive of his services as treasurer for the respective years, was authorized as follows by appropriate action of the board of directors: On January 30, 1922, a salary at the rate of $24,000 per annum retroactively for 1921 and prospectively for 1922; on March 7, 1924, retroactively for 1923 at the rate of $60,000 per annum and on the same date prospectively for 1924 at the rate of $80,000 per annum; on December 15, 1925, at the rate of $50,000 for 1925; on November 17, 1926, accepting a proposition made by the president, the payment of a salary for 1927 of the remainder of the net profits after deducting an amount equaling 6 per cent on the par value of the outstanding capital stock.
The operations of the petitioner resulted according to the books of account as follows: for 1918, loss, $106.26; for 1919, profit, $124.33; for1930 BTA LEXIS 1827">*1832 1920, profit, $4,179.43; for 1921, profit, $102.23; for 1922, profit, $3,124.60; for 1923, profit, $2,028.56; for 1924, profit, $2,784.56; for 1925, profit, $487.40; for 1926, profit, $23,083.51; for 1927, profit, $18,000.
Gross income from rents was reported in the returns filed by the petitioner in the following amounts: for 1922, $175,187.75; for 1923, $205,983.76; for 1924, $221,171.14; for 1925, $195,768.61; for 1926, $207,704.24; for 1927, $201,314.29.
The balance sheets as at December 31 of each year were reported in the returns filed by the petitioner as follows:
| 1921 | 1922 | 1923 | |
| Building and leasehold | $600,000.00 | $600,000.00 | $600,000.00 |
| Depreciation | 43,000.00 | 64,500.00 | 86,000.00 |
| Net book value | 557,000.00 | 535,500.00 | 514,000.00 |
| Cash | 828.34 | 6,478.19 | 16,926.75 |
| Accounts receivable | 27,500.00 | 58,650.00 | 78,650.00 |
| Total | 585,328.34 | 600,628.19 | 609,576.75 |
| Rent paid in advance | 15,000.00 | ||
| Other liabilities | 7,520.00 | 27,553.13 | 27,473.13 |
| Bonds | 252,000.00 | 244,000.00 | 236,000.00 |
| Bonds reserve | 32,000.00 | 32,000.00 | 32,000.00 |
| Capital stock | 300,000.00 | 300,000.00 | 300,000.00 |
| Deficit | 6,191.66 | 2,924.94 | 896.38 |
| Surplus | |||
| Total | 585,328.34 | 600,628.19 | 609,576.75 |
1930 BTA LEXIS 1827">*1833 21 B.T.A. 617">*620 The salaries of the president claimed as deductions in the returns filed by the petitioner and the adjustments of the deductions made by the respondent in determining the deficiencies are as follows: for 1922, claimed $30,000, reduced by respondent to $24,000; for 1923, claimed $60,000, reduced to $24,000; for 1924, claimed $78,000, reduced to $24,000; for 1925, claimed $50,000, reduced to $24,000; for 1926, claimed $35,000, reduced to $24,000; for 1927, claimed $32,656.43, reduced to $24,000.
The bonds of the petitioner are payable to bearer and with the exception of a very few, the holders of which are registered, the present holders of the bonds are unknown to the petitioner.
The petitioner operated, during the taxable years, five elevators which served 17 stories in addition to the basement. Under date of April 22, 1926, the Revised Code of St. Louis relating to the construction and operation of elevators was modified to require, among other things, interlocking devices designed to prevent movement of the car while the shaft-way doors or gates were open. It was further provided that all elevators installed before the approval of this ordinance should be made1930 BTA LEXIS 1827">*1834 to conform with the requirements within a reasonable time, but in any event within 18 months thereof. The elevators of the petitioner lacked such an interlocking safety device, and the city authorities threatend to lock the elevators in a manner to prevent their operation if the safety device was not installed. The petitioner then proceeded to install a device was not was a mechanical but not an electrical lock which operated to prevent starting of the elevator when a door was open. The device was in part installed in the form of a cam at the doorway of each floor, and in part in each elevator. Prior to the installation of the safety devices the petitioner had suffered very few accidents. Operation of the elevators was slowed down by the devices due to the necessity of bringing the floor of the elevator very nearly in the same plane with the floor at which a stop was intended. The devices are still in use on the elevators. The cost incurred in 1927 of the safety devices amounted to $3,348.75 and it was charged off to profit and loss by the petitioner and claimed as a deduction in the return. In determining the deficiency the respondent disallowed the claimed deduction, capitalized1930 BTA LEXIS 1827">*1835 the expenditure, and allowed a deduction of an amount of depreciation thereof attributable to the taxable year involved.
OPINION.
TRUSSELL: Three issues are presented in this appeal, and we shall take them up in the order in which they are stated above.
In the first issue we are required to decide whether the cost of installing certain safety devices on the elevators in the office building 21 B.T.A. 617">*621 owned and operated by the petitioner should be capitalized as determined by the respondent, or should be allowable in its entirety as a deduction from income in the year incurred as claimed by the petitioner. The facts, including the amount of cost, are undisputed. It is contended by the petitioner that an expenditure for an addition to an asset to be chargeable to capital must increase the monetary value of the asset and/or tend to prolong the life of the asset. Petitioner claims that the additions to the elevators accomplished neither of these purposes and furthermore they proved detriments rather than improvements in that they were found to slow up the service of the elevators thus making for dissatisfaction. The evidence shows that when confronted with a new city ordinance1930 BTA LEXIS 1827">*1836 calling for an improvement of its elevators and with a threat of the city authorities to prevent the continued operation of the elevators in violation of the ordinance, the petitioner elected to comply with the requirements and it proceeded to equip the elevators with devices which clearly contributed to the safety of persons making use of the building. We think the additions were distinctly improvements and we are not prepared to agree with the claims of the petitioner that the value of the assets was not enhanced or that their useful life was not extended. That the petitioner is in somewhat the same position with reference to the useful life would appear from its next argument addressed to establishing the expenditure as ordinary and necessary expense in the admission that it is shown by the record that the business could not have continued without the additions. At any rate, we have heretofore had occasion to decide adversely practically all of the contentions of the petitioner; it is not necessary that the monetary value be increased or that the life of the asset be prolonged, 1930 BTA LEXIS 1827">*1837 ; a betterment of operating conditions, whether voluntary or involuntary, is a sufficient reason for capitalization, ; distinct improvements should be capitalized, ; citing . Furthermore, we are not satisfied without more to accept the opinion of the manager of the building that the safety devices did not contribute to an increase in income. After a careful consideration we see no valid objection to the proposal of the respondent to capitalize the cost and return it to the petitioner in the form of reasonable allowances for depreciation spread over the period of the useful life of the improvements.
The contention of the petitioner in the second issue is that it should not be taxed as a business corporation. The basis of this claim is that for equitable reasons form should be disregarded since all of the capital stock is owned by one individual. It is settled, 21 B.T.A. 617">*622 however, that the separate entity of a corporation is distinguishable from its stockholder for tax purposes. 1930 BTA LEXIS 1827">*1838 Cf. ; . See also the discussion in .
The third issue is a question of allowable deductions of salary. The pertinent provisions of sections 234(a)(1) of the Revenue Acts of 1921, 1924 and 1926 are the limitation of the deduction for salaries to reasonable allowances. The evidence shows that when the present sole stockholder acquired the stock of the petitioner the business was operating at a loss; this stockholder at once assumed the active management of affairs, devoting all of his time to the business, and through his ability, initiative and energy he was successful in establishing the business on a paying basis. We find no difficulty whatever in agreeing with the petitioner that his services were clearly of value to the petitioner. The respondent is also of that opinion as evidenced by his allowance uniformly, at a rate of $24,000 per annum, for all of the years of the deduction of a salary for the sole stockholder, who held the offices of president and treasurer. It is over the amount of the deduction that the parties are in disagreement.
1930 BTA LEXIS 1827">*1839 The petitioner claimed in the returns it filed deductions larger in amount than the allowances of the respondent, and it now contends that it is entitled to the deduction in full of the salaries which are shown by the evidence to have been duly authorized respectively for the several years, arguing that the liabilities of the petitioner must be recognized in full; particularly with emphasis upon the claimed contractual liability for the year 1927 to pay over to the president-treasurer the remainder of the net profits after reserving an amount thereof computed at a rate of 6 per cent upon the par value of the capital stock. It is apparent, without discussion, that the petitioner ignores the express restrictions of the statutes to deductions in amounts which are reasonable; restrictions which may not be avoided. It is of no avail merely to show incurrence of a contractual liability or to argue that the expense would be deductible were it not for the restriction. Marion Stone Burt Lansill et al..,.
After a careful consideration of all of the facts which are before us in this case, we are of opinion that the deductions allowed by the respondent for1930 BTA LEXIS 1827">*1840 the salary of the president-treasurer are reasonable in amount and they are approved.
Judgment will be entered pursuant to Rule 50.