*3563 1. A bonus for the year 1920 was authorized and paid to petitioner in 1921. Petitioner kept his books on the basis of cash receipts and disbursements. Held, that such bonus was income to petitioner in 1921 and taxable in that year.
2. In February, 1921, a personal service corporation voluntarily authorized and paid a bonus to an employee for services performed in 1920, said bonus being entered on the corporation's books as an expense and credited to the employee's accounts as of December 31, 1920. In 1920 the corporation was under no legal or enforceable obligation to pay a bonus. Held, that this action did not change the amount of the distributive shares of 1920 income to be reported by the stockholders for 1920.
*365 This proceeding is for a redetermination of a deficiency in income taxes for the calendar year 1920 amounting to $5,600.22, of which only a part is in controversy.
FINDINGS OF FACT.
Philip J. Mosenthal, the taxpayer, died November 18, 1924, leaving a last will and testament which was*3564 duly probated in the Surrogates' Court, New York County, State of New York. Walter J. Mosenthal, the petitioner herein, was duly appointed an executor of said last will and testament; and in due course he entered upon the discharge of his duties as such executor and is now acting as such executor.
About 1868 one H. Mosenthal established an insurance-brokerage business in New York City. Mosenthal continued that business until about 1884 when his son Philip J. Mosenthal became a partner in the business, the firm name being H. Mosenthal & Son. That partnership continued until the father's death December the business under after Philip J. Mosenthal, as sole owner, continued the business under the name H. Mosenthal & Son until March, 1916.
In March, 1916, the business was taken over and continued by H. Mosenthal & Son, Inc., a corporation organized under the laws of the State of New York. Philip J. Mosenthal became and until his death continued to be the principal stockholder in and the president *366 of said corporation. The stock not owned by him was owned by other officers and employees of the corporation.
While he was individually the owner of the business Philip*3565 J. Mosenthal instituted the custom of paying to some of the principal employees after the end of a fiscal year bonuses as a recognition of the services which they had rendered and to stimulate them to further effort for the benefit of the business. No employee was entitled to a bonus as a matter of right. On the contrary such payments were made voluntarily by Philip J. Mosenthal, who himself determined the amounts thereof.
After the incorporation of the business the custom of paying bonuses was continued. Such bonuses were paid to the officers and principal employees of the corporation. However, no officer or employee was entitled to a bonus as a matter of right. None of them had a contract whereby he was assured of a bonus as part of his remuneration for services rendered by him. The amounts of such bonuses were determined by the executive officers. Such determinations were made after the close of the year when the executive officers had before them the results of a year's business. The bonuses were not proportioned to stock holdings but were proportioned to value of services. When the amounts of the bonuses were determined they were entered in the books of the corporation*3566 as of the last day of the year for which they were awarded. For example, bonuses were awarded to several officers and employees for the year which ended December 31, 1919. The entries in the corporation's books with respect to such bonuses were made as of December 31, 1919, but such entries were not actually made until the latter part of February, 1920, at which time the closing entries for 1919 were made.
In his income-tax return for the calendar year 1920 Philip J. Mosenthal reported that the amount of salary and bonus received by him from H. Mosenthal & Son, Inc., was $33,050. The salary which Philip J. Mosenthal received from said corporation during the calendar year 1920 was $25,000. Said corporation awarded to Philip J. Mosenthal a bonus of $8,050 for his services to the corporation in the year which ended December 31, 1919. The amount of said bonus of $8,050 was entered on the corporation's books as an expense of the corporation and credited to the account of Philip J. Mosenthal as of December 31, 1919; but the amount of that bonus was not actually determined and said entries were not made until the latter part of February, 1920, at which time Philip J. Mosenthal's services*3567 to the corporation for the year which ended December 31, 1919, were considered, the amount of bonus therefor fixed at $8,050, and the closing entries for the year 1919 were made on the corporation's books. The *367 said $33,050 returned by Philip J. Mosenthal for the year 1920 included his said salary of $25,000 and said bonus of $8,050.
For his services to said corporation in the calendar year 1920, the corporation awarded to Philip J. Mosenthal a bonus of $20,078.52. Said bonus of $20,078.52 was entered on the corporation's books as an expense of the corporation and credited to the account of Philip J. Mosenthal as of December 31, 1920. The amount of said bonus of $20,078.52 was not determined and the entries on the corporation's books with respect thereto were not made until the latter part of February, 1921, at which time Philip J. Mosenthal's services to the corporation for the year which ended December 31, 1920, were considered, the amount of bonus therefor fixed at $20,078.52 and the closing entries for the year 1920 were made in the corporation's books. Philip J. Mosenthal reported said bonus of $20,078.52 as a part of his income for the year 1921.
In computing*3568 the deficiency here in question the respondent determined that the petitioner received taxable salary of $45,078.52 from the corporation in 1920.
Philip J. Mosenthal kept his books on the basis of cash receipts and disbursements.
The income of H. Mosenthal & Son, Inc., for the year 1920 was ascribed primarily to the activities of its principal owners or stockholders who were regularly engaged in the active conduct of the affairs of H. Mosenthal & Son, Inc., and during the year 1920 H. Mosenthal & Son, Inc., had no capital which was a material incomeproducing factor. The Commissioner of Internal Revenue in considering the tax liability of H. Mosenthal & Son, Inc., for the year 1920 held it was a personal service corporation.
OPINION.
PHILLIPS: This proceeding was presented to the Board upon the pleadings and a stipulation of facts. The single question raised by the pleadings is whether the Commissioner committed error when he determined that the decedent received in the taxable year from H. Mosenthal & Son., Inc., salary and bonus totaling $45,078.52. This amount is made up of salary of $25,000 and an alleged bonus of $20,078.52, which however was not voted or paid to*3569 the decedent until the following year. It is clear that the Commission did commit error in determining that such bonus was taxable to the decedent as salary in 1920 and this is substantially admitted in the brief filed by counsel for the respondent. See ; ; .
In his brief counsel for respondent contends that since the decedent was a stockholder of a personal service corporation and it *368 was from this corporation that the salary and bonus in question were received, the amount of the bonus determined in 1921 was a part of decedent's distributive share of the 1920 profits of the corporation. Section 218 of the Revenue Act of 1918 provides:
* * * Amounts distributed by a personal service corporation during its taxable year shall be accounted for by the distributees; and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for by the stockholders of such corporation at the close of its taxable year in proportion to their respective shares.
Under the provisions of this section decedent*3570 was required to report as income the amount actually distributed to him in 1920 and his portion of the undistributed net income of the corporation proportioned upon his stockholdings. It is clear that the bonus voted in 1921 was not an amount distributed to the decedent in 1920 and it is equally clear that the distributive shares of the stockholders were determinable at the close of 1920 without reference to the subsequent action of the directors. For purposes of taxation the action taken in 1921, not being pursuant to any legal or enforceable obligation, did not change the amount of the distributive shares of 1920 income to be reported by the stockholders upon their 1920 income-tax returns. The respondent committed error in treating as 1920 income the bonus paid to the decedent in 1921 and in eliminating from his income in 1920 the bonus voted and paid him in that year.
Reviewed by the Board.
Decision will be entered for the petitioner under Rule 50.