*2582 1. Distribution of treasury stock by closely held corporation to two officers, who were also the sole stockholders, held not to be in payment of special services rendered in taxable year.
2. Special assessment denied.
*847 This proceeding is brought for the redetermination of a deficiency in income and profits taxes for the year 1921, amounting to $10,471.16.
The issues are: (1) Whether there should be allowed, as a deduction from gross income for the year 1921, the sum of $32,700, which is the par value of stock claimed to have been issued to the president and to a director of the petitioner for services rendered during that year. (2) Whether the petitioner is entitled to have its profits taxes for 1921 computed under the provisions of sections 327 and 328 of the Revenue Act of 1921.
FINDINGS OF FACT.
The petitioner was incorporated in 1889 pursuant to the laws of the State of Pennsylvania and is engaged in the business of manufacturing glass specialties. It has an authorized capital stock of 1,000 shares of a par value of $100*2583 each, of which 840 shares only were issued and outstanding during the year 1921.
At the beginning of 1921 the stockholders of the corporation, together with the number of shares of stock held by each, were as follows:
| George R. West | 327 shares |
| Charles H. West | 192 shares |
| Ira F. Brainard | 331 shares |
*848 George R. West was president of the corporation, Charles H. West was secretary and treasurer and the two officers, together with Ira F. Brainard, the other stockholder, were the directors. George R. West and Charles H. West were brothers and had been the chief executives of the company for many years. Both were thoroughly familiar with the operations of the company. Ira F. Brainard was an elderly man who never was active in the business operations of the company, but he financed the company whenever it needed financial assistance.
In the early part of 1921 a difference of opinion arose between Charles H. West and Ira F. Brainard, on the one hand, and George R. West, the president of the company, on the other, with reference to the employment in the business of the company of two young sons of the president. Charles H. West and Ira F. Brainard claimed*2584 that these two sons were given too much responsibility by their father and that they were injuring the business of the company and creating disorganization in the plant. Mr. Brainard suggested that Charles H. West should be made general manager of the company in addition to being secretary and treasurer. George H. West threatened to resign if Charles H. West was chosen as general manager. Nevertheless, Charles H. West was elected general manager on February 9, 1921.
In April, 1921, George R. West tendered his resignation as president of the corporation, to take effect June 1, 1921, and at a meeting of the board of directors held May 9, 1921, his resignation was accepted and he was relieved of any further duty. Thereafter, he did not attend either formal or informal meetings of the board of directors, from which he resigned in December, 1921.
On May 12, 1921, at a meeting of the board of directors, Charles H. West was elected president of the corporation and James J. Brainard, son of Ira F. Brainard, was elected secretary and treasurer to serve for the balance of the year. Thereafter, until the end of the year, Charles H. West and James J. Brainard performed the duties of*2585 their respective offices. James J. Brainard had had no former experience in the glass specialty business. He had been connected with the hat-manufacturing business for a number of years but was inexperienced in duties similar to those devolving upon him as secretary and treasurer of the petitioner. Consequently, during the year 1921 George R. West advised him to a considerable degree as to the performance of his duties, which included the purchase of materials.
At some time between his resignation as president and December 22, 1921, George R. West offered to sell the 327 shares of the company's stock held by him at the price of $60,000. During the same *849 period the directors, at informal meetings, of which no minutes were kept, agreed that the corporation, acting through Charles H. West, should buy the stock at an opportune time and that the stock when purchased should be placed in the treasury of the company. It was further agreed between Ira F. Brainard and Charles H. West, directors of the corporation, to issue the 150 shares of additional stock authorized but which had not theretofore been isued, thereby making the total par value of issued stock $100,000. It*2586 was also agreed that 327 shares of the stock purchased from George R. West and the additional 150 shares of stock should be so divided that Charles H. West would have 500 shares of the company's stock and Ira F. Brainard and members of his family would have the same amount.
On December 22, 1921, at a special meeting of the board of directors Charles H. West was authorized to purchase, as agent for the corporation, the capital stock held by George R. West for $60,000, which stock, as stated in the minutes of the special meeting, was to be placed in the treasury of the company for future distribution at the discretion of the directors. The stock was acquired by Charles H. West as agent on December 31, 1921, and by him turned over to the corporation sometime after January 1, 1922. The check for $60,000 paid by Charles H. West to George R. West in consideration of the delivery of the said 327 shares of stock was drawn by the corporation on its bank account to the order of Charles H. West and endorsed by the latter.
On January 19, 1922, a meeting of the stockholders of the corporation was held and there were present Ira F. Brainard, Charles H. West and James J. Brainard, representing*2587 all the outstanding stock of the corporation. At this meeting it was voted to issue additional capital stock in the amount of $15,000. It was also voted that in consideration of "the sum of $1.00 and other valuable consideration" 308 shares of the capital stock of the corporation be allotted to Charles H. West out of the treasury stock and that for a similar consideration 169 shares of the stock of the company be allotted out of the treasury stock to Ira F. Brainard. These two allotments of treasury stock absorbed the 327 shares of stock bought by the corporation from George R. West and also the 150 shares of newly issued stock.
The whole transaction, including the purchase of George R. West's 327 shares and the issue of 150 new shares of stock, was entered in the books of the company as a capital transaction.
Thereafter, 308 shares of the stock purchased from George R. West were transferred on the books of the company to Charles H. West and 19 shares of the stock bought from George R. West, together *850 with the 150 new shares were entered in the books of the company in the name of Ira F. Brainard, or that of members of his family. After this transaction Charles*2588 H. West owned 500 shares of the company's stock and Ira F. Brainard and members of his family also owned 500 shares of the capital stock of the company.
During 1921 the compensation of officers paid by the corporation, as shown by its books, was as follows:
| Salary | Bonus | |
| George B. West, president (5 months) | $3,750 | |
| Charles R. West, secretary, treasurer, and president | 9,000 | $3,000 |
| James J. Brainard, secretary and treasurer (7 months) | 5,250 | 3,000 |
In the corporation's income-tax return for 1921, as filed, a total of officers' compensation amounting to $59,300 was deducted. This total amount includes the sum of $32,700, the par value of the 327 shares of stock purchased by the corporation from George R. West, 308 of which were reissued to Charles H. West and 19 to Ira F. Brainard.
The sales of the company during the months of January, February, March, April, and May, 1921, were approximately the same as those of the same five months in 1920. The total sales for 1921 were approximately $566,000. The net income for the year 1919 was $7,000; that of 1920, $62,425.54; and that of 1921, without deduction of value of stock here involved, $54,708.73.
*2589 During 1921 commissions at the rate of 10 per cent on sales were paid in the sum of approximately $23,000 to resident sales agents in New York, Philadelphia, Boston, and San Francisco. During the same year one R. B. Remick expended for travel in connection with the sales of the company approximately $7,300 and George R. West expended for travel expenses during 1921 while he was president approximately $700.
The deduction, as officers' compensation, of $32,700, the par value of 327 shares of stock distributed as stated, was disallowed by the Commissioner.
OPINION.
VAN FOSSAN: The fundamental question in this proceeding is whether the 327 shares of the capital stock of the Westmoreland Specialty Co. which were purchased from George R. West were reissued by the company to Charles H. West and Ira F. Brainard as compensation for services rendered by them during 1921.
Ira F. Brainard was not an officer of the company and there is no evidence that he performed any active service of any kind for the corporation during 1921, except in an advisory capacity as a director. *851 As a matter of fact, it is stated in the evidence that the reason the stock was issued to him was*2590 because for years he had loaned the company money when it was needed. Consequently, we can not hold that the value of any part of the stock delivered to him is deductible as compensation paid to him for services rendered in 1921.
As to the stock issued to Charles H. West, it is claimed that the services rendered by him during part of 1921 were of exceptional value; that the machinery at the plant had deteriorated badly; that the two sons of George R. West, who were placed in responsible positions, had retarded progress, destroyed valuable molds, caused unsalable articles to be manufactured and disorganized the employees and that George R. West had deliberately neglected the company's business. That there was a lack of harmony in the organization is clear, but that all of the conditions and effects claimed actually existed is not convincingly proven.
Examination of the corporation's balance sheet for 1921 shows that during that year no plant additions or changes of a capital nature were made, and in the corporation's income and profits report for that year only the sum of $3,327.68 was deducted for repairs, which are stated as "ordinary and incidental repairs." The books of*2591 the corporation contain entries of cash paid to George R. West for expenses on various business trips taken between January 1 and the latter part of May, 1921. The books of the company also show that the sales made by the company in January, February, March, April, and May, 1921, during which George R. West was president of petitioner, were approximately the same in amount as those for the same months of 1920. There is some testimony, it is true, that Charles H. West, after he became president, made a few trips in 1921 to get in touch with some of the petitioner's important customers but there is no specific evidence that he personally made any extraordinary efforts to increase sales during 1921 beyond those that should have been made by one in his position. In fact, the book entries as to commissions paid to resident sales agents and as to travel expense indicate that a large part of the sales for 1921, which amounted in total to approximately $566,000, was negotiated by persons other than Charles H. West. It can not be said, therefore, that the evidence leads to the conclusion that the plant or the business was in a precarious condition in May, 1921, when Charles H. West was*2592 elected president of the petitioner, or that extraordinary efforts above and beyond those reasonably to be expected of him were necessary or were performed by him.
Moreover, the evidence impels us to the conclusion that the 308 shares of treasury stock issued to Charles H. West were not issued *852 to him as payment for services rendered. There is no entry in any of the petitioner's books indicating the reason for such issuance. The minutes of the meeting of December 22, 1921, at which the directors authorized Charles H. West to buy George R. West's stock for the petitioner, state that the stock, when purchased, should be placed in the treasury of the company to be disposed of at the discretion of the directors. The minutes of the stockholders' meeting of January 19, 1922, set forth that the treasury stock was issued to Charles H. West in consideration of $1 and other valuable considerations. Neither the minutes of the meeting of December, 1921, nor those of the meeting of January 19, 1922, contain any suggestion that the distribution of the stock was for the purpose claimed in this proceeding and nowhere else in the minutes of meetings of the directors or stockholders*2593 does there appear any reference to the transaction in question.
The preponderance of evidence convinces us that the treasury stock was distributed in the amounts stated in the findings of fact for the purpose of dividing the 1,000 authorized shares equally between Charles H. West and the Brainard family, and for no other purpose. In a deposition made by Ira F. Brainard on December 7, 1926, and admitted in evidence at the hearing, the witness stated in substance that after the resignation of George R. West, Charles H. West was the only one remaining who understood the business in all its details and that he, Ira F. Brainard, thought that Charles H. West should, therefore, own a larger amount of the petitioner's stock.
In the same deposition the witness, speaking of George R. West and his 327 shares of stock said:
We found that he wanted to sell the stock outside, but we didn't want him to sell it outside. That's why we bought it.
The following questions and answers also appear in the deposition:
Q. And you say that after you acquired the stock of George R. West, that you and the remaining stockholder, C. H. West, agreed to reorganize?
A. Yes, sir.Q. And it was*2594 in pursuance of that agreement to reorganize that you distributed the stock so that Charles H. West would have fifty per cent of it?
A. Fifty per cent of it, yes, and it was so divided.During his cross-examination Charles H. West, who was sworn as a witness at the hearing, testified as follows:
Q. Is this the substance of your agreement entered into at the time your brother retired from the presidency that you and Mr. Brainard would issue treasury stock so as to equalize the ownership of the company between you?
A. Yes, sir.*853 Q. From then on you would be equal partners, so to speak, in the business?
A. Yes, sir.In our opinion the foregoing quotation from the testimony contains the reasons for the distribution of the treasury stock to Charles H. West and Ira F. Brainard. When Charles H. West and the family of Ita F. Brainard each held 500 of the 1,000 authorized shares of the company the agreement respecting the treasury stock was fully performed and the sole purpose of the distribution was effected.
We are, therefore, of the opinion that the respondent did not err in disallowing the deduction of the par value of stock as a payment to officers*2595 of the petitioner for services rendered during 1921.
Turning to the second issue, the proof is wholly insufficient to establish petitioner's alleged error. No abnormality in capital or income prerequisite to relief under sections 327(d) and 328 of the Revenue Act of 1921 is proven. Nor does our denial of petitioner's first contention, in our opinion, create such an abnormality as alternatively argued by petitioner. The total deductible compensation paid to petitioner's officers during 1921 was $24,000. The evidence does not prove that the compensation was unduly low for the business done by the company or an inadequate reward for the services rendered by the officers. It follows, therefore, that in respect to the second issue, the petitioner's claim should be denied. ; ; ; .
Decision will be entered for the respondent.