*313 Decision will be entered under Rule 50.
In 1938 three individuals acquired an equal interest in all of petitioner's capital stock and became its three officers. By reason of the special experience in that phase of the business supervised by each and the devotion of extraordinary hours of labor, they were successful in converting a loss in the two preceding years to a profit of approximately $ 25,000 in 1938 and $ 78,000 in the taxable year, 1940. Held, under all the circumstances, that $ 11,000 is the reasonable salary for each for the taxable year.
*87 This proceeding involves tax liability for the calendar year 1940 as follows: Income tax, $ 3,752.93; declared value excess profits tax, $ 2,855.58; and excess profits tax, $ 3,298.92.
The sole issue is the reasonableness of the salaries paid to petitioner's three officers. The case was submitted upon oral testimony and exhibits.
FINDINGS OF FACT.
Petitioner is a New York corporation, organized in 1933, and has its principal office and place of business at 151 Knickerbocker Avenue, Brooklyn, New*314 York. Petitioner is engaged in the processing and sale of meat sausages. It keeps its books and makes its tax returns on the accrual basis of accounting. Its Federal income tax return for the taxable year ended December 31, 1940, was filed with the collector of internal revenue for the first district of New York. In January 1938 petitioner's outstanding shares of its capital stock were purchased by Martin Ramelmeier, Fred Horn, and Henry *88 Daszewski, each acquiring a one-third interest. Ramelmeier was elected president, Horn, treasurer, and Daszewski, secretary. These three also constituted the board of directors. At the time the aforementioned individuals acquired all the stock of petitioner, it was occupying a small plant located at 683 Woodward Avenue, Brooklyn. At the expiration of the lease, about July or August 1940, it moved into a much larger plant at its present address and installed more modern and larger equipment to handle its expanding business.
Prior to their acquisition of petitioner, the three named individuals had been connected with the Ideal Provisions Co., a concern engaged in a similar type of business. During the years 1938 and 1939 all of such*315 officers started work before 6 o'clock in the morning and did not leave before 10 or 11 o'clock at night, except on Sundays, when they worked only part time. Horn attended to the wholesale trade at the premises, then delivered merchandise by truck to the retail trade. Daszewski went to the early market to make purchases and helped with the wholesale trade. Both also worked in the plant in cutting and preparing meat for the following day of manufacturing Ramelmeier confined his work to preparing and mixing the meats. In addition to the 3 officers, petitioner employed at the beginning of 1938, 2 employees, and at the end of 1938, 6. In the taxable year the number of outside employees remained at 6. The employees worked from 7 a. m. to 4 p. m. and were paid $ 35 per week during the years 1938, 1939, and 1940.
In the year 1937, prior to the acquisition of its stock by the aforementioned individuals, petitioner's gross sales were $ 20,285.55 and its net loss was $ 3,558.43. In the preceding year, 1936, the gross sales were $ 50,241.21 and its net loss was $ 2,401.98. The gross sales, gross profit, officers' salaries, and ratio of salaries to gross profit for the years 1938 to 1940, *316 inclusive, are as follows:
| Ratio of | ||||
| Year | Gross sales | Gross profit | Officers' | salaries to |
| salaries | gross profit | |||
| 1938 | $ 123,440.70 | $ 25,653.74 | $ 14,685 | 57.24% |
| 1939 | 203,805.08 | 53,747.62 | 33,000 | 61.39% |
| 1940 | 252,963.79 | 78,015.12 | 45,000 | 57.68% |
In the taxable year petitioner declared and paid a dividend of 10 percent amounting to $ 4,320.
In the year 1939 the respondent did not disallow any part of the $ 33,000 claimed by petitioner as salaries paid to its three officers. In the taxable years involved herein, 1940, the respondent allowed only $ 22,500 of the amount of $ 45,000 claimed as a deduction for salaries paid to its three officers in that year. A reasonable allowance for salaries for petitioner's three officers during the taxable year 1940 is $ 33,000, or $ 11,000 each.
*89 OPINION.
This controversy presents the usual troublesome question of the reasonableness, for income tax purposes, of salaries paid by a corporation to its executive officers. The question being one of fact, all the circumstances presented by the particular case at hand must be weighed. Various criteria have been applied in attempting to arrive at an amount that*317 may be found proper for tax purposes. Where, as here, the salaries in question are those paid to officers, who are the sole stockholders holding an identical interest, as well as the sole directors, the payments must be closely scrutinized, to learn whether what are denominated salary payments are not in fact a distribution of corporate profits. The burden is upon the petitioner to overcome the prima facie correctness accorded the respondent's determination. In a small corporation such as petitioner, operated somewhat along the lines of a partnership, as the evidence indicates, the difficulty of drawing the line between what is in fact paid as salary and what part is in the guise of a distribution of profits is apparent. Notwithstanding the difficulty imposed, we must determine the fact in the light of the particular circumstances and the application of experience gained from passing on such cases so often presented here for review.
The three individuals whose salaries are in controversy, through prior association with a similar concern, were well acquainted with the nature of the business petitioner was engaged in when they acquired its shares of capital stock. They were well*318 aware of the peculiar capabilities each possessed. Taking over a failing concern, through their knowledge of the problems involved and their willingness to make sacrifices and apply their industry almost to the limit of physical endurance, they have succeeded in rehabilitating the company into a successful and continuously progressive business. The record shows that in 1937, the year prior to acquisition of petitioner, its gross sales were $ 20,285.55. The gross sales were increased to $ 123,440.70 in 1938; to $ 203,805.08 in 1939; and to $ 252,963.79 in the taxable year, 1940. The gross profit increased in greater proportion. The efforts that made such achievement possible command a fair reward. The record demonstrates that, while the salaries paid were not definitely fixed at the beginning of the year, it was the practice to draw equal amounts as salary from time to time and to approve the payments made by year-end resolution. Was the payment of $ 15,000 each reasonable compensation for the services rendered in the taxable year under the circumstances here disclosed? The evidence establishes that the three individuals worked fewer hours in 1940 than in 1939; they employed*319 the same amount of help at the same rate of wages and the aggregate salary paid to the three executives in 1939 was $ 33,000, *90 or $ 11,000 each. The gross sales and gross profit in 1940 increased, but this condition appears to have resulted from increased working facilities and the installation of some modern equipment which, with less personal effort, permitted them to meet the growing demand for their products. Increased prices may have been an influence, but as to this fact we were not apprised.
Petitioner's claimed deduction of $ 33,000 for salaries paid the three executives in 1939 was not disallowed by the respondent. The failure to disallow a claimed deduction is not, we think, the equivalent of an allowance. Nor is the failure of respondent with respect to a claimed deduction in one taxable year binding in a subsequent and different tax period. Nevertheless, it is an evidentiary fact to be considered along with the other circumstances. The record does not convince us that petitioner has shown any logical reason for increasing the salaries of its executive officers in the taxable year 1940 over those paid in the preceding year. The only showing made is that of*320 increased sales and a larger gross profit. Such achievements were not the result of increased responsibilities or added effort. In fact, these officers actually devoted less time to petitioner's affairs. Giving proper consideration to all the circumstances presented, we conclude that a reasonable allowance for salary to each of petitioner's officers in the taxable year 1940 is $ 11,000.
Decision will be entered under Rule 50.