*2247 SALARIES. - The evidence shows that the petitioner paid the premiums on certain life insurance policies on the lives of its officers, and the petitioner was not a beneficiary thereunder. It also is shown that the payments were duly authorized as additional compensation for the services of the officers, and that the aggregate salaries paid were reasonable in amount. Held, the salaries are allowable as deductions from income, and the amounts are to be computed on the accrual basis.
*1111 This is a proceeding for the redetermination of a deficiency in income tax for 1926, determined by the respondent in the amount of $378.39.
*1112 The petitioner, upon motion duly made and granted, was permitted to amend the petition, leaving the issue as follows: the petitioner claims that certain premiums paid on insurance policies upon the lives of two of its officers were part of the compensation to such officers for services, and as such are deductible from income.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation with principal*2248 office at Minneapolis, and is engaged in the business of conducting an insurance and mortgage loan agency. During the taxable year the president of the petitioner was Robert D. Brown, hereinafter referred to for convenience as Brown, and its secretary-treasurer was William M. Haslett, hereinafter referred to as Haslett.
At a meeting of the board of directors held on June 30, 1925, salaries were authorized as follows: to its president, at the rate of $200 per month; to its secretary-treasurer, at the rate of $200 per month. At this same meeting the board of directors authorized the officers to take out life insurance policies in amounts of $20,000 each, and directed that the premiums on said policies should be paid by the petitioner as additional compensation to the officers.
Under date of October 30, 1925, policies in the Security Mutual Life Insurance Co. were issued as follows: Policy No. 188613 on the life of Brown in the principal amount of $20,000, naming as beneficiary the executors or administrators of said insured, with annual premium in the amount of $631.20 payable on October 30 of each year, with participation in annual dividends, if any, and Policy No. 188612 on*2249 the life of Haslett in the principal amount of $20,000, with beneficiary named in the policy as executors or administrators of said insured, with annual premium in the amount of $566.408 payable on October 30 of each year, with participation in annual dividends, if any. The beneficiaries were subject to change at the direction of the insured, and in 1928 they were changed on the two policies, respectively, to Florence L. Brown and Florence Cecelia Haslett, the wives of the insured.
At a meeting of the board of directors on January 12, 1926, salaries were authorized as follows: for the president, at the rate of $300 per month; for the secretary-treasurer, at the rate of $300 per month. At this meeting the board of directors approved and confirmed the action of the officers in taking out life insurance policies Nos. 188613 and 188612, and they authorized the payment of the premiums on the policies as additional compensation for the services of the officers.
Under date of April 28, 1926, the petitioner entered upon its books of account a credit in the amount of $838.80 to an account reflecting *1113 earnings from commissions as representing the commissions due to the petitioner*2250 from the insurance company for obtaining this business. This commission was included in the net profits according to the books reported in the return for 1926. On the same date the petitioner issued a check payable to the order of the insurance company for the remainder of the initial premiums due on the policies, after deducting the commissions as described above due to the petitioner.
Under date of November 30, 1926, the petitioner issued a check to the order of the insurance company for $1,197.60, and entered the payment upon its books, covering premiums on the policies which were due on October 30, 1926.
In the return filed by the petitioner for the taxable year no deduction was claimed for the premiums paid or incurred on the life insurance policies. In determining the deficiencies, the respondent has computed a net income in the amount of $4,802.86 without any allowance of a deduction for life insurance premiums. As adjusted by the respondent the return reflects the following gross income: insurance commissions and brokerage, $7,778.03; commissions on loans, $5,517.25; recoveries of expenses, $443.43; income from interest, $1,804.07, or an aggregate income of $15,542.78. *2251 Deductions are allowed in the amount of $3,539.92 of various expenses, exclusive of compensation to officers, and a deduction is allowed of officers' salaries in the amount of $7,200. The gross income for the taxable year was approximately 50 per cent greater than the gross income in the preceding year.
At the end of the taxable year the outstanding capital stock of the petitioner was owned and held as follows: Brown, 42.5 shares; Florence L. Brown, wife of Brown, 5 shares; Haslett, 27 shares. Brown has enjoyed an experience of 16 years in this business, and previous to the organization of the petitioner he conducted this same business under the name of "The Brown Agency." Until 1924 Haslett was employed as credit manager for a corporation in another line of business at a salary of $6,000 per annum. In 1924 the local office of that corporation was closed, whereupon Haslett entered the employ of the petitioner as secretary-treasurer. Petitioner also employed one person acting as cashier and stenographer, and one person as solicitor. The solicitor brought in some business, but the income of the petitioner's business was mainly due to the personal activities of Brown and Haslett. *2252 The salaries authorized by the board of directors for the taxable year for Brown and Haslett, inclusive of the life insurance premiums on policies 188612 and 188613 were reasonable in amount.
*1114 OPINION.
TRUSSELL: The evidence shows and there has nowhere in this case been any question but that the services of the officers of the petitioner were actually rendered. At the hearing the respondent admitted that evidence adduced at the hearing, which had never been previously put before the respondent, lead unavoidably to the conclusion that the officers' salaries were duly authorized by the board of directors of the petitioner, and the issue is now reduced to the question whether the salaries are reasonable in amount. After a careful consideration of the facts before us we have included in the findings the fact that the salaries authorized are reasonable. This concludes the case. Reasonable allowances for salaries or other compensation for personal services actually rendered are specifically allowable as deductions under section 234(a)(1) of the Revenue Act of 1926. It must be observed, however, that the petitioner reported on the accrual basis, so that neither the*2253 initial premiums incurred in 1925 nor the income from commissions on these premiums earned in 1925 are to be considered in determining the net income for 1926. The premiums which are allowable as deductions were incurred and, it so happens, were also paid in the fall of the taxable year in the amount of $1,197.60. Net income should be recomputed accordingly.
Judgment will be entered pursuant to Rule 50.