*4184 1. Additional salary claimed as a deduction, disallowed.
2. Petitioner held to be affiliated with the Borwn-McPhee Lumber Co.
*106 The Commissioner has determined deficiencies for the years 1919 and 1921 in the respective amounts of $961.10 and $3,459.29. For the year 1919 the petitioner cites as error the action of the Commissioner in denying it the right to deduct from gross income the sum of $2,400 as compensation incurred in favor of its officers, but not paid during the taxable year, and as error for 1921 the Commissioner's refusal to regard the petitioner as affiliated with the Brown-McPhee Lumber Co. for the purpose of filing a consolidated return.
*107 FINDINGS OF FACT.
The petitioner is an Oregon corporation, with principal offices in Portland and is engaged in the business of forest engineering. It kept its books on the accrual basis. In 1912 its capital stock was increased from $5,000 to $20,000, divided into 200 shares of a par value of $100 each, of which, in 1917, 1918, and 1919, Theodore B. Brown and Horatio*4185 J. Brown, brothers, held 98 shares each and James B. Kerr held 4 qualifying shares as trustee for T. B. B. Brown and H. J. Brown.
At a meeting of the directors, consisting of all of the stockholders, on January 8, 1919, Theodore B. Brown and Horatio J. Brown, president and manager, and secretary and treasurer, respectively, of the petitioner, were voted salaries of $10,000 each per annum, effective January 1, 1919. Of the salary voted only $6,000 was entered on the corporate books to the credit of each officer and paid in 1919. The remainder was neither accrued on the petitioner's books nor paid in subsequent years. In 1919 the petitioner returned net income of $5,764.45 as a personal service corporation after deducting the sum of $12,000 as compensation for its officers in that year.
H. J. Brown was a graduate and experienced forester and an expert timber cruiser, and performed the field work of the business. He died in December, 1920. T. B. Brown's activities in behalf of the petitioner consisted of soliciting new business, managing its office and handling its financial affairs.
The Brown-McPhee Lumber Co., hereinafter sometimes referred to as the Lumber Company, was*4186 incorporated in October, 1918, under the laws of the State of Oregon, to engage in the business of logging and manufacturing lumber, and to carry into effect ideas of the petitioner concerning the cost and methods of logging and manufacturing lumber, and to conduct experiments in connection therewith, particularly in the manufacture of cross-ties and grading of lumber. The results obtained from the experimental work proved to be beneficial to both the petitioner and the Lumber Company.
Its capital stock of $20,000 was divided into 200 shares of a par value of $100 each. Subscriptions for the stock, and the amounts paid on the subscriptions in 1918 and subsequent thereto, were as follows:
| Number of shares | Amount paid | |
| Theodore B. Brown | 65 | $3,324 |
| Horatio J. Brown | 67 | 5,922 |
| By Theodore B. Brown, his attorney in fact. | ||
| Berton McPhee | 67 | 3,300 |
| By Theodore B. Brown, his attorney in fact. | ||
| Charles E. McCulloch | 1 | |
| Qualifying for T. B. Brown. |
*108 T. B. Brown held a written power of attorney to make the subscription he made for his brother. The subscription he made for B. McPhee was without written or verbal authority but with knowledge that McPhee*4187 was interested in becoming a stockholder. The Lumber Company did not keep a stock certificate book or issue certificates for stock subscribed and paid for or for shares transferred by the original holder.
At the organization meeting of the stockholders on October 21, 1918, Theodore B. and Horatio J. Brown, and C. E. McCulloch were elected directors of the Lumber Company to serve until their successors were elected and qualified. At this meeting T. B. Brown acted as proxy for H. J. Brown under a written power of attorney. He also acted as proxy for B. McPhee without authority beyond a tacit understanding on the subject. At a subsequent meeting on the same day the directors elected T. B. Brown president and H. J. Brown secretary and treasurer. The directors at a meeting held on October 28, 1918, elected B. McPhee a director, vice C. E. McCulloch, resigned, and also vice president and general manager. There was no change in the directorate or the official personnel of the Lumber Company until December 27, 1921, when C. E. McCulloch was elected a director and secretary to fill vacancies caused by the death in December, 1920, of H. J. Brown. The stockholders did not hold a meeting*4188 after October 21, 1918, and the directors did not have another meeting until January, 1923.
The Lumber Company lost between $11,000 and $12,000 in 1919 and had a deficit of about $21,000 at the end of 1920. It ceased operations in August, 1920, and in the latter part of 1921 or the first part of 1922, Brown and McPhee verbally agreed to liquidate the affairs of the company.
The business relationship between the petitioner, T. B. Brown, and McPhee was always friendly. Brown & Brown, Inc., kept in constant touch with McPhee after its organization and often employed him to perform special duties as a timber estimator. A short time after the Lumber Company discontinued operations, McPhee obtained a position as general manager of the mill and woods of the Doty Lumber & Shingle Co., primarily upon the recommendation and through the efforts of T. B. Brown.
No enforceable agreement was ever entered into by T. B. Brown and McPhee, the terms of which would have prevented the latter from voting the stock held by him. They had an understanding, however, that whenever the occasion required it, Brown should act for McPhee without first receiving his consent. The result of this understanding*4189 was that T. B. Brown always handled McPhee's stock as he did his own holdings.
*109 At the time of the organization of the Lumber Company the stockholders agreed that, in order to continue the corporation as a close one, none of them would sell any part of his holdings to outside parties without offering it to the other stockholders. There was no change of ownership of stock until September 22, 1921, when McPhee transferred 8 shares to Brown for the sum of $1 and other valuable consideration. At that time McPhee expressed a willingness to transfer all of his holdings to Brown because of his indebtedness to him for advances. Brown, however, believing that 8 shares would be sufficient to entitle Brown & Brown, Inc., to file a consolidated return, declined to accept more than 8 shares.
In 1921 the paid-up stock of the petitioner and the Lumber Company was held as follows:
| Brown & Brown, Inc. | Brown-McPhee Lumber Co. | |||||
| To Sept. 22, 1921 | After Sept. 22, 1921 | |||||
| Shares | Per cent | Shares | Per cent | Shares | Per cent | |
| T. B. Brown | 100 | 50 | 33 | 26.4 | 41 | 32.8 |
| Estate of H. J. Brown | 100 | 50 | 59 | 47.2 | 59 | 47.2 |
| B. McPhee | 33 | 26.4 | 25 | 20 |
*4190 The timber used by the Lumber Company for the operation of its plant at LaCamas, Wash., was purchased from the Western Timber Co. for a small initial payment and the balance as the timber was logged. T. B. Brown was able to negotiate the contract on such advantageous terms because of his relationship with the owner of the timber.
Due to the necessity of financing its lumber in pile, the amounts received by the Lumber Company for its stock proved to be insufficient working capital. Additional money necessary to finance its affairs was arranged for by T. B. Brown by the establishment of a reasonable amount of credit with the Ladd & Tilden Bank. Such other money as was necessary in the business was provided by the petitioner. At one time the Lumber Company owed the Ladd & Tilden Bank $23,000 for money borrowed. When the loan was made, the note evidencing it was endorsed by H. J. Brown and T. B. Brown and B. McPhee. Subsequently, only the endorsement of T. B. Brown was on the paper and he eventually paid the indebtedness.
From the date of its organization in 1918 the business of the Lumber Company has been conducted from the offices of the petitioner in Portland. Brown & *4191 Brown, Inc., made all of its sales and paid all of its office expenses. As president of the Lumber Company, T. B. Brown did its buying, handled the financial matters and *110 directed the policies of the company. B. McPhee had charge of the activities of the company at its plant in LaCamas, Wash.
OPINION.
ARUNDELL: From the detailed facts set forth in the findings we have no difficulty in reaching the conclusion that substantially all of the stock of petitioner and the Brown McPhee Lumber Co. was, during the year 1921, owned or controlled by the same interests. It follows that these corporations should be permitted to file consolidated returns.
While the directors appear to have authorized the salaries in the amount of $10,000 each for Theodore B. Brown and Horatio J. Brown for the year 1919, only $6,000 was paid to each and no additional amount was accrued on the books of petitioner nor claimed by it as a deduction in its income-tax return for the year 1919. Neither the difference between the amount authorized and the sum paid in 1919 nor the figure here claimed as a deduction has ever been accrued on its books or paid. For this situation we are offered no satisfactory*4192 explanation. We conclude that petitioner's expense for officers' salaries in the year 1919 was not in excess of $12,000.
Judgment will be entered on 15 days' notice, under Rule 50.