*2679 Certain stock received by petitioner in 1920 held not to have been issued in payment for salary and should not be included in gross income for that year.
*1372 This is a proceeding for the redetermination of a deficiency in income tax for the year 1920, in the amount of $4,567.29. The deficiency arises from the respondent's inclusion in income, as salary, at its par value, of certain stock received by the petitioner during the year 1920. The petitioner asserts that the stock mentioned was issued to him in reimbursement of business expenses he had incurred and paid on behalf of the issuing corporation.
An issue relating to the statute of limitations has been waived by the petitioner.
FINDINGS OF FACT.
The petitioner is a resident of Dowagiac, Mich.
In 1902 a partnership of which he was a member commenced the manufacture of fishing tackle at Dowagiac. Subsequently, this partnership was incorporated as the James Heddon's Sons Co. The petitioner was president of that company during the years herein mentioned. From it he derived his principal*2680 source of income.
The petitioner was interested in the game of billiards and he engaged in various amateur billiard tournaments, becoming national amateur billiard champion in 1922. He desired the establishment somewhere in the State of Michigan of a billiard room suitable for the playing of tournaments, but because of his amateur status he believed that he should not appear to have a commercial connection with the game.
In 1911 the petitioner proposed to the Huston Brothers, proprietors of a billard and bowling business at Ann Arbor, that if they would *1373 establish a billard business in Detroit and maintain it free of the objectional features sometimes associated with such places, i.e., the sale of liquor and the countenance of gambling, he would assist them to finance the project. One of the Hustons and a Mr. Sweeney of Detroit accepted the proposal and the Sweeney-Huston Co. was organized to conduct the business. The petitioner advanced $35,000 on unsecured notes. The total initial investment of the company was $105,000. It appears that another of the Hustons later became interested in the business. The Detroit business was conducted by the Sweeney-Huston Co. *2681 for about two years. The name of the company was then changed to the Recreation Company and a new building was purchased and equipped at a cost of over $1,000,000. During the organization of the Sweeney-Huston and the Recreation Companies, and for several years thereafter, the petitioner devoted considerable time to their affairs. He participated in the sale of stock, the planning of the building, and the selection of equipment. He also negotiated a mortgage loan on the new plant of the Recreation Company and secured an open five-year credit of $250,000 from the Brunswick-Balke-Collender Co. The extension of this credit was influenced by the grantor's interest in the establishment of high-class billiard and bowling businesses. The petitioner was never an executive officer of the Recreation Company, but he was a director. Prior to 1920 the only money received by the petitioner from the Recreation Company, excepting small dividends on stock owned by him, was the sum of $30, paid either as reimbursement for expenses or as a director's fee.
While engaged in the activities above described, the petitioner maintained his residence at Dowagiac. During the years from 1911 to 1919, *2682 and especially during the years 1911, 1912, 1913, and 1916, he spent a considerable proportion of his time in Detroit in connection with business of the Recreation Company and its predecessor. He estimates, upon information given him by his secretary and from certain records, that during the four years especially mentioned above he made one hundred trips to Detroit, usually spending about one week there and returning to Dowagiac for Sundays. He further estimates that between 1916 and 1919, he spent about fifty weeks in Detroit. The round-trip railroad fare between Dowagiac and Detroit is approximately $15. In addition, there were expenses on each trip arising from Pullman and dining-car service, taxis, tips, and other minor items. While in Detroit the petitioner stayed at the Hotel Statler, where his personal expenses for room and meals were about $100 per week. Over the whole period herein mentioned the petitioner was occasionally the guest of a business associate while in Detroit. The total time spent as such a guest was about one month. *1374 Other expenditures arose from the entertainment of guests and prospective purchasers of stock of the Recreation Company. Between*2683 1911 and 1919, the petitioner made trips to New York, Chicago, and St. Louis on behalf of the companies. He also engaged in billiard tournaments in each of the cities named. The petitioner bore all of the expenses mentioned without reimbursement from the Recreation Company, excepting possibly the one instance when he received $30. The petitioner never kept a record of his expenses for travel, hotels, entertainment, etc. It was not his policy to require salesmen of the James Heddon's Sons Co. to keep such records.
In 1919 differences of opinion arose between the petitioner and the Hustons. Thereafter, the petitioner was not active in affairs of the Recreation Company, the management being left to the Hustons.
In 1920 the Recreation Company issued to the petitioner certain of its preferred A, preferred B, and common stocks, having a total par value of $16,390. The respondent included these stocks in the petitioner's 1920 income at par value as salary, and determined the deficiency appealed from. Subsequently, he determined that the fair market value of the stocks when issued was less than par and accordingly the parties now agree that the amount of the deficiency in controversy*2684 should be reduced to $4,148.39, in the event the determination of the Commissioner be sustained. When the stock was issued the petitioner's differences of opinion with the Hustons continued and he was taking no part in the affairs of the company. He was not aware that the stock had been issued to him for many months afterward. He has never been specifically advised by the company why the stock was issued.
OPINION.
LOVE: The respondent has determined that the stock issued to the petitioner during 1920 was in payment of salary and has included it in income for that year. He has denied the petitioner's claim for the deduction of traveling and associated expenses because they were incurred and paid prior to the taxable year and because the amounts of such expenditures are alleged to be mere estimates. The petitioner asserts that the stock was issued to him solely in reimbursement of expenditures he had made on behalf of the issuing corporation and in pursuance of an agreement that he would be so reimbursed. We have no evidence upon which to base a finding as to what was in the minds of the directors of the corporation when they issued the stock in question to the petitioner. *2685 The evidence, however, justifies the conclusion that petitioner declined to accept any compensation for services rendered, and that it was understood by all concerned that he would accept stock in reimbursement of actual cash expenditures made by him in the promotion of the enterprise in question. The *1375 stock was issued without his being consulted, as to amount or consideration. He accepted it as in part a reimbursement of cash expenditures made by him. In view of the evidence in the case, the conclusion seems amply justified, if not irresistible, that the stock was issued to him, either as a gift, or as partial reimbursement of cash expenditures; in either case it is nontaxable.
Judgment will be entered for the petitioner.