*3075 Deductions for salaries of corporate officers determined.
*1300 Income taxes for the fiscal years ending October 31, 1921, and October 31, 1922, in the amount of $1,439.68 and $2,545.30, respectively, are in controversy. The sole error alleged is the action of the Commissioner in reducing the deduction taken for salaries paid.
*1301 FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation, organized in 1907, having its principal place of business in Pittsburgh. It sells sea foods both wholesale and retail. The business was originally started by Lawrence Knapp and his brother Henry Knapp as partners, the former receiving 80 per cent and the latter 20 per cent of the profits. They had a fish stall in a market in Pittsburgh. During the taxable years the petitioner had five stores or stands in markets and sold more sea food than any other concern in the city.
On December 23, 1907, the board of directors, passed a resolution electing Lawrence Knapp general manager of the corporation and authorizing the*3076 payment to him of 70 per cent of all net profits for salary and expenses. Thereafter up to and through the taxable years, in accordance with the resolution, he received 70 per cent of all net profits of the corporation. In July, 1922, the board of directors passed a resolution authorizing the payment of a salary of $4,000 to Anna Knapp. No dividends were paid in 1921. In 1922 a dividend of 20 per cent was paid.
At the time of the organization of the corporation, Lawrence Knapp paid in $8,000 in cash, Henry Knapp paid in $2,000 in cash, and the assets of the partnership were assigned a value of $90,000 to make up a total capitalization of $100,000. In 1913 the capitalization was reduced to $20,000.
From 1913 through the taxable years the stock in the petitioner was held as follows:
| Shares | |
| Lawrence W. Knapp | 199 |
| Henry Knapp | 199 |
| Anna Knapp (wife of Lawrence) | 2 |
The par value of each share during those years was $50. During the taxable years and for many years prior thereto, Lawrence Knapp was president, treasurer, and general manager, Henry Knapp was vice president and treasurer, and Anna Knapp was secretary of the corporation.
Henry Knapp was capable*3077 of performing and did perform manual labor only. He gave his entire time to the affairs of the corporation and for each of the taxable years was paid a salary of $1,560. This amount was reasonable compensation for personal services actually rendered by him.
Anna Knapp was familiar with the business of the corporation. Before her marriage she had been employed by the partnership. She has always been secretary of the petitioner, but prior to the year 1922, when she was paid $4,000, she received no compensation for her services. She kept the minutes of the meetings of the corporation and occasionally at her home checked the expenditures, bank balances *1302 and invoices. When her husband was not at his residence, she answered the daily evening telephone calls from lake fishermen, who reported their catch and then received the petitioner's order for fish to be shipped the next day. She gave her husband advice in regard to the business when occasionally he sought it. During the fiscal year 1922 she solicited and obtained for the petitioner the fish, oyster and sea food trade of three of the large department store restaurants of Pittsburgh. The petitioner thereafter made*3078 gross sales to these restaurants averaging over $1,000 per month. During the year 1922 as in other years she gave but a very small part of her time to the affairs of the corporation.
Personal services actually rendered by her during the fiscal year 1922 were not reasonably worth more than $1,500.
Lawrence Knapp was the executive head of the corporation. He was in complete charge of its affairs and was primarily responsible for its success. He ordered the articles to be sold, supervised the handling and sale of these goods, employed all of the fifty or more men and women who assisted him, and daily gave the business his close attention. On Fridays he was at his place of business at 3 a.m., on other mornings he arrived there at about 6 or 7 a.m., and each day he remained there until 6 p.m., except on Saturdays, when he remained until 10 p.m. From a small beginning he developed the business until in each of the taxable years gross sales amounted to over $600,000, and net profits, before deducting officers' salaries, amounted to over $27,500 for 1921 and to over $35,500 for 1922. The net income for each year after deducting officers' salaries was about $6,800.
For 1921 Lawrence*3079 Knapp was paid $19,616.65 and for 1922 he was paid $23,509.86. Each amount represented reasonable compensation for personal services rendered by him during the year.
Of the total deduction claimed for officers' salaries, $21,176.65 for 1921, and $29,069.86 for 1922, the Commissioner disallowed $6,176.65 for 1921 and $15,069.86 for 1922.
OPINION.
MURDOCK: The Revenue Act of 1921 in section 234(a) 1 allows the deduction of a reasonable allowance for salaries or other compensation for personal services actually rendered. The Commissioner in explanation of the disallowance of salaries states in the deficiency notice that salary in the form of a distribution of profits has been disallowed. It is not possible from this explanation to tell just how much of the salary paid to each of the three officers the Commissioner determined was properly deductible. However, we are satisfied that the salary of $1,560 paid to Henry Knapp in each of the taxable years should be allowed as part of the deduction. *1303 In a business such as that conducted by this corporation, where the product sold is of such a perishable nature, success or failure depends to a very large extent upon expert*3080 management. The expert management of Lawrence Knapp was largely responsible for the petitioner's success, and we are of the opinion that his salary was reasonable.
The amount of the salary paid by the corporation to Anna Knapp is in our opinion unreasonably large for the services which she rendered to the petitioner. We are satisfied from the evidence that Lawrence Knapp was entirely capable of managing the petitioner's business without any advice from his wife.
The latter was not regularly engaged in the petitioner's business. Occasionally, at the request of her husband, she gave a little of her time to some matters pertaining to the petitioner's business. Most of the things which she did for the corporation could have been done by almost anybody of average intelligence. It is true that in the taxable year 1922 she obtained for the petitioner three very valuable accounts and she was undoubtedly entitled to some compensation for her work during this year. It is difficult for us to determine an amount which would represent reasonable compensation for the services performed by her. However, we are satisfied that in no event would this amount exceed $1,500. Therefore, we*3081 hold that the total deduction for salaries to be allowed the petitioner for the taxable year 1922 should include $1,500 as her compensation.
Judgment will be entered under Rule 50.