*2118 Amount paid to officers of petitioner held to be a distribution of profits and not compensation for services rendered.
*426 Respondent has determined a deficiency of $9,360 in income tax against petitioner for the year 1925. The issue is whether respondent erred in disallowing the amount of $70,000 claimed as a deduction for salaries.
FINDINGS OF FACT.
Petitioner, a New York corporation, was organized in January, 1924, with an authorized capital stock consisting of 200 shares of common stock of no par value. All of the stock, exclusive of shares to qualify other directors, was issued to Louis Gold, president, treasurer, and a director, and Charles Frost, secretary and a director, one-half to each, for a consideration of $60,000. The wives of Gold and Frost were the remaining directors.
In 1924, prior to the organization of petitioner, Gold and Frost acquired, at a cost of about $225,000, a piece of property in Albany, N.Y., for the purpose of building thereon a hotel of about 400 rooms. Each individual contributed one-half of the initial payment. Gold and Frost transferred the property*2119 to petitioner, and thereafter petitioner paid the outstanding obligations under the contract of sale from a loan of $165,000 made to it by the City Savings Bank of Albany, N.Y., on the security of a first mortgage on the property and the endorsement of Gold and Frost.
*427 Within a month of its organization petitioner received two offers for the purchase of the property, one of which was from the Mark Strand Theater Corporation. The offers were rejected because of the belief of petitioner that its plan of erecting a hotel on the site would be more profitable.
In July, 1925, petitioner, due to the financial condition of Frost, commenced negotiations with the Mark Strand Theater Corporation for the sale of the property, and after several conferences the property was sold to it at a price of $325,000.
During the time the petitioner owned the property, Gold and Frost held a great many conferences with architects, attorneys, propective buyers, and members of financial concerns, concerning the hotel project of petitioner. Their activities required frequent trips to and from New York City and Albany. The time they spent performing such duties averaged two days per week.
*2120 In 1925 Gold owned seven stores for the sale of ladies' apparel. The gross sales of the stores in that year amounted to about $2,000,000. Part of Gold's time in 1925 was devoted to the management and operation of these stores.
In 1925 Frost, a certified public accountant, was actively engaged in the practice of accountancy, from which business he had gross income in 1925 of between $35,000 and $40,000. In addition thereto he was engaged in conducting the affairs of the Excluso Spare Tank Specialty Corporation, a corporation engaged in the business of manufacturing tanks for automobiles, in which Frost owned a controlling interest. For a perod of about 18 weeks commencing the latter part of 1924 or the first part of 1925, Frost was very active in the management of the corporation because of a strike of its employees. The gross sales of the corporation in 1925 were about $500,000.
In 1925, pursuant to a resolution adopted by its directors on August 10, 1925, petitioner paid Gold and Frost each the sum of $35,000 for services rendered it from the date of its organization to the date of the resolution.
Petitioner reported no income in 1925 other than the amount of $5,665.17*2121 returned as profit on the sale of the Albany property. In arriving at this amount of gain, petitioner deducted the sum of $70,000 as salary and commission paid to Gold and Frost, one-half to each.
Respondent refused to allow any part of the amount paid Gold and Frost on the ground that it was a distribution of earnings.
OPINION.
ARUNDELL: Under the provisions of section 234(a)(1) of the Revenue Act of 1924 petitioner is entitled to deduct from gross *428 income "a reasonable allowance for salaries or other compensation for personal services actually rendered."
In , we said:
The fact that salaries paid to its officers by a corporation are in direct proportion to the stockholdings of the respective officers is strong evidence of an intent to distribute profits as salaries and must be overcome by clear evidence showing that the salaries are reasonable in amount and actually represent compensation for personal services rendered.
During the period for which the alleged salaries were paid the petitioner conducted no business transactions other than negotiations with architects and others with a view to erecting a*2122 hotel on, and for the sale of, the Albany property, and in carrying out these activities Gold and Frost devoted only an average of two days a week of their time. The officers had other business activities. Gold owned, managed and operated seven stores for the sale of ladies' apparel and Frost, in addition to conducting an accounting business, devoted part of his time to the activities of a corporation in which he held the controlling interest. Petitioner had no income in 1925 other than the profit realized on the sale of the Albany property, all of which, excepting $5,665.17, was paid to Gold and Frost in direct proportion to their stockholdings. The sum paid was duly voted by petitioner's directors, consisting of Gold and Frost and their wives, but the authorization does not appear to have been one resulting from negotiations conducted at arm's length such as is ordinarily done between employer and employee. We think the evidence sustains the conclusion of respondent that the payments were distributions of profits in the guise of salaries.
Decision will be entered for the respondent.