*2870 1. INVESTED CAPITAL - GIFT OF STOCK. - The property paid in in 1907 for capital stock had a cash value equal to the par value of the stock issued therefor. In 1916 the majority stockholder made petitioner a gift of 100 shares, par value $100 each, which were immediately sold for $4,500 cash. Held, original paid-in capital not reduced by $10,000 because of said gift and that the $4,500 constitutes additional paid-in capital.
2. ADDITIONAL SALARIES, properly authorized during 1921 for services actually rendered during that year, and the total salaries being reasonable, held, deductible from 1921 gross income.
*396 The deficiency in controversy in this proceeding is income and profits tax in the amount of $2,701.39 for the calendar year 1921.
Petitioner alleges that respondent erred (1) in reducing its invested capital on account of a certain stock transaction, and (2) in adding the amount of $4,000 to taxable income, which amount is alleged to have been paid out as additional salaries.
*397 FINDINGS OF FACT.
Petitioner*2871 is a Wisconsin corporation with its principal office at Reedsburgh, and it is engaged in the business of buying and selling sweet cream and the manufacture of ice cream and dairy products.
Prior to 1907 the business had been conducted for several years by Henry Sorge under the trade name of Henry Sorge & Sons. Sorge's sons owned a minority interest in the business. Petitioner was organized in 1907 with an authorized capital stock of 500 shares of the par value of $100 each. The entire business of Henry Sorge & Sons and the property used therein was paid in to petitioner for its capital stock. The tangible property paid in consisted of plants located at Elroy, Union Center, Wilton, Ontario, Cashton, Ironton, Loganville, and North Freedom, including two churning stations and 25 skimming stations. The tangible property paid in had a cash value equal to the par value of petitioner's stock issued therefor. Henry Sorge received 75 per cent of the stock issued and continued to control the business until his death, early in 1921.
During 1915 petitioner had some financial difficulties and in 1916 the bank pressed petitioner for cash. To relieve the situation, Henry Sorge, in 1916, *2872 gave petitioner 100 shares of its original capital stock without any consideration, so that petitioner might sell the stock for cash to be used in the business. The 100 shares of stock so received were sold by petitioner in 1916 to M. J. Adams for $4,500 cash, which was received by petitioner. Petitioner subsequently repurchased that stock for $12,500 in 1920. The market value of petitioner's stock in 1916 was below par value, due to the financial difficulties encountered during 1915 and 1916.
Petitioner was a close corporation, and, besides the regular annual meeting held in April, informal meetings were held every week or two. The directors, officers and stockholders were engaged in the business and meetings were called at any time to determine business problems and corporate affairs. At a meeting held on April 8, 1921, a resolution was adopted authorizing salaries for the entire year of 1921. The salaries so authorized and the amounts actually withdrawn during 1921 were as follows:
| Salary | Withdrawn | |
| A. O. Sorge, president | $9,750 | $9,350 |
| H. A. Sorge, vice president and treasurer | 4,680 | 4,520 |
| Geo. Vander Ohe, foreman | 3,575 | 3,350 |
| O. D. Fox, secretary | 2,600 | 2,550 |
| Total | 20,605 | 19,770 |
*2873 *398 At an informal meeting held in the latter part of April, 1921, the four men above named agreed to put forth every effort to increase petitioner's business and its profits and they also agreed to pay to themselves additional salaries in proportion to the amount of extra work performed. A. O. Sorge, who controlled the business, estimated that about $4,000 in round figures would be paid in bonuses or additional salary if everyone worked hard as agreed. A. O. Sorge attended to the buying and selling of sweet cream, found new sources of supply, and sought out new eastern markets and greatly increased that line of petitioner's business. He also directed the work of the creameries and ice cream plant. H. A. Sorge, aside from the duties as treasurer, was petitioner's contract man. He solicited ice cream customers and covered petitioner's milk and cream territory, building and strengthening petitioner's good will, for the competition in the sweet cream business was keen and it was necessary to have a constant supply which could be bought at the right price. Petitioner's plants were run for 24 hours a day and George Vander Ohe superintended the plants. O. D. Fox performed*2874 the duties of secretary and also general office work. Ralph Sorge, who was a stockholder, owned and operated a grocery store in Reedsburg. He knew the farmers and dairymen well and made trips through petitioner's territory in behalf of its good will. A. O. Sorge and H. A. Sorge worked nights, Sundays and holidays in addition to their regular working hours, and all of the others worked extra hours in serving petitioner.
At an informal meeting held near the close of the year 1921 it was agreed that the services of A. O. Sorge and H. A. Sorge during 1921 were worth at least $2,000 and $1,000, respectively, in addition to their regular authorized salaries for 1921 and, also, that Ralph's services during 1921 were worth at least $400. It was further agreed that the amount of $4,000, including the $835 undrawn salaries, would be paid as bonuses. The division of the said $4,000 upon the basis of the amount of work performed so nearly equaled the division upon the basis of stockholdings that it was agreed to use the latter basis to prevent the possibility of any hard feelings. No minutes were made of that informal meeting.
The following are the minutes of a meeting held on January 21, 1922:
*2875 Special meeting of Board of Directors of the Central Wisconsin Creamery Company, held in the Company's offices on the above date. Directors present: A. O. Sorge, H. A. Sorge and George Vander Ohe. Meeting called to order by President A. O. Sorge, who stated that this meeting was called for the purpose of going over the balance sheet for the year 1921, also income report. Moved by A. O. Sorge and seconded by H. A. Sorge that accrued salaries as to agreement on account of business done in 1921 be paid; carried. Moved by A. O. Sorge and seconded by George Vander Ohe, that a five per cent cash dividend *399 be declared; carried. Moved by H. A. Sorge, seconded by George Vander Ohe, that we adjourn; carried. O. D. Fox, Secretary.
The bonuses paid by petitioner and its stockholders for the year 1921 were as follows:
| Shares | Bonus | |
| A. O. Sorge | 247 | $2,138.54 |
| H. A. Sorge | 124 | 1,073.75 |
| Ralph Sorge | 42 | 363.43 |
| Geo. Vander Ohe | 39 | 337.70 |
| O. D. Fox | 10 | 86.58 |
| Totals | 462 | 4,000.00 |
These bonuses were entered upon the books as of December 31, 1921, as salaries accrued. The journal entry as of December 31, 1921, was "Salaries Accrued, $4,000 P. & L. *2876 " The entries were made in closing the books for 1921, and the bonuses were paid by petitioner as accrued compensation for services actually rendered during 1921. The fixed salaries plus the bonuses constituted reasonable salaries for the services actually rendered, which services resulted in a material increase in the volume of petitioner's business and its profits earned during 1921.
Respondent reduced petitioner's invested capital by $10,000 on account of the said gift of 100 shares of its capital stock in 1916; added $4,500 to invested capital on account of the sale of the same stock for that amount of cash in 1916, and disallowed a deduction of $4,000 as accrued salaries, considering the latter amount to have been paid as dividends. Those adjustments, and others not in controversy, resulted in the deficiency asserted by respondent.
OPINION.
TRUSSELL: Section 326(a) of the Revenue Act of 1921 provides that there be included in invested capital "(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, * * *" and "(3) Paid-in or earned surplus * * *." The tangible property paid in to petitioner*2877 for its original capital stock issued in 1907 had a cash value equal to the par value of the stock issued and accordingly such value must be included in petitioner's invested capital, as there has been no return of that capital embarked in the enterprise at the outset. .
In 1916 Henry Sorge gave petitioner 100 shares of its original capital stock which had been paid for at par in 1907, and the capital so paid in remained in the business. The result of the gift was a reduction of petitioner's outstanding capital stock by 100 shares, but *400 its paid-in capital remained the same. Respondent erred in reducing petitioner's invested capital by $10,000, because of the said gift of 100 shares. Upon the resale of those 100 shares of stock in 1916 the proceeds therefrom, namely $4,500 cash, became additional paid-in capital which was properly included in invested capital by respondent. The net result of respondent's action was a reduction of petitioner's paid-in capital by the amount of $5,500 which was erroneous. We are of the opinion that petitioner's invested capital as computed by respondent for 1921*2878 should be increased by the amount of $10,000.
No issue has been raised as to the effect of the repurchase of the said 100 shares for $12,500 in 1920, and no facts have been submitted as to how either petitioner or respondent treated the same, and we express no opinion relative thereto.
The second issue involves the respondent's disallowance of the claimed deduction of $4,000 as additional salaries for services rendered during 1921, for the reason that said amount was divided among all of petitioner's stockholders on the basis of the number of shares of stock held by each and that the said amount constituted dividends. However, $835 of the said $4,000 constitutes a portion of the regular, authorized salaries, totaling $20,605, but not withdrawn at the close of the year 1921, so that the actual amount of additional salaries in controversy is $3,165.
The salary question is primarily one of fact, and we are of the opinion that the uncontradicted testimony establishes the facts as set out above but which need not be repeated here. Those facts lead to but one conclusion, which is that additional salaries in the amount of $3,165 were properly authorized during 1921 for services*2879 actually rendered during that year. The division of the lump sum of $4,000 was made on the basis of stockholdings, but only because such division at the same time was a fair division on the basis of services rendered. Before the division was made it was agreed that A. O. and H. A. Sorge were entitled to at least $2,000 and $1,000, respectively, as additional salary, and that Ralph Sorge was entitled to about $400 for his services. We are of the opinion the division on the basis of stockholdings is immaterial in the case at bar in view of the facts and circumstances which actually transpired. Cf. . The salaries authorized by petitioner for the year 1921, and totaling $23,770, constituted reasonable salaries for services actually rendered and such amount is deductible pursuant to the provisions of section 234(a)(1) of the Revenue Act of 1921. The $835 of undrawn salaries was included in the bonuses, and petitioner claimed a deduction of $4,000 as additional salaries and respondent disallowed the *401 whole amount. In addition to the salary deduction already allowed, this petitioner is entitled to a deduction*2880 of $4,000 from its 1921 gross income.
Judgment will be entered pursuant to Rule 50.