*137 Decision will be entered for the respondent.
Deduction -- Compensation -- Section 23 (a) (1) (A). -- The amount characterized as compensation under a bonus-stock purchasing arrangement adopted by General Motors to obtain and establish dealers is not determinative of reasonable compensation of the same officer after he becomes owner of all of the stock.
*1452 The Commissioner determined a deficiency of $ 6,896.61 in the income tax of the petitioner for 1946. The issue for decision is whether the Commissioner erred in holding that a reasonable allowance for 1946 as compensation for personal services rendered to the petitioner by Latham Davis, as its president, was only $ 14,643.24 of the $ 27,655.73 claimed on the return.
FINDINGS OF FACT.
The corporation income tax return of the petitioner for 1946 was filed with the collector of internal revenue for the district of Florida.
General Motors Corporation instituted in 1935 a nation-wide incentive bonus plan designed to secure the services of capable managers for retail*138 outlets for its products. The plan provided that a manager *1453 would receive 50 per cent of the profits of the business managed by him, after taxes, and after a portion of the profits equal to 15 per cent of the capital invested had been set aside. The manager had the option to purchase stock of the corporation organized to own the outlet provided that he would use for that purpose all dividends and one-half of the salary bonuses received by him. G. M. or a subsidiary retained control of the corporation until such time as all of its voting stock interests had been acquired by the manager. G. M. continued to use that method of establishing outlets through 1946.
The petitioner was organized in 1936 by a subsidiary of G. M. pursuant to the plan above described. The G. M. subsidiary originally owned all of the stock of the petitioner. The petitioner was organized to sell and service Chevrolet passenger and commercial vehicles in and near Gainesville, Florida, under a franchise granted by General Motors. Sales were made over an area extending 30 or 40 miles on all sides of Gainesville having a population of about 38,000.
The first president proved to be an unsatisfactory *139 manager, he resigned in November 1938, and the G. M. subsidiary was again the owner of all of the stock of the petitioner. It contributed $ 11,200 to eliminate the existing deficit.
Latham Davis then became president and general manager of the petitioner, in accordance with the plan above described, which was made effective by two contracts, one a contract of employment between Davis and the petitioner, and the other a contract between Davis and the G. M. subsidiary giving Davis the option to buy the stock of the petitioner. His original salary was $ 300 a month. He used his dividends and one-half of his bonuses to buy stock under the agreement and became the owner of all of the stock of the petitioner on May 26, 1944. He continued to own all of the stock of the petitioner thereafter. His son and an employee held one share each and constituted, with him, the Board of Directors.
Davis previously had been assistant zone manager of the Chevrolet Motors Division of General Motors at Charlotte, North Carolina. He became favorably known in the Gainesville territory and did a good job as president of the petitioner. Wartime conditions and shortages required substantial changes in the*140 business. Davis made successful efforts to overcome the new problems presented. He assumed additional duties in that connection. Those burdens began to be lessened in 1945 when he was able to hire some competent assistants previously unavailable.
Sales of new trucks and passenger cars for the period 1936 through 1946 ranged from a low of 32 in 1945 to a high of 371 in 1941, and *1454 amounted to 166 in 1946. Sales of used vehicles during the same period ranged from a low of 47 in 1946 to a high of 978 in 1941.
Davis devoted most of his time to the affairs of the petitioner.
The petitioner could sell all the new and used vehicles in 1946 which it could obtain. It was easy to sell accessories in that year.
The following table shows the net income reported by the petitioner, the deduction claimed as compensation for Davis, and dividends paid for the years 1940 through 1946:
| Year | Net income | Davis' compensation | Dividends |
| 1940 | $ 9,061.22 | $ 7,965.57 | $ 5,150.00 |
| 1941 | 13,215.81 | 10,761.08 | 7,550.21 |
| 1942 | 9,167.63 | 6,618.07 | 4,500.00 |
| 1943 | 19,412.82 | 9,116.16 | 13,829.71 |
| 1944 | 15,268.11 | 12,513.09 | 8,857.69 |
| 1945 | 18,067.56 | 14,643.24 | 1,500.00 |
| 1946 | 34,268.15 | 27,655.73 | None |
*141 The petitioner on its return for 1946 deducted $ 27,655.73, representing salary and bonus paid to Davis. The Commissioner, in determining the deficiency, allowed a deduction of $ 14,643.24 of that amount and disallowed the remainder of $ 13,012.49 with the explanation that the deduction claimed was excessive to that extent.
A reasonable allowance for 1946 for compensation for personal services rendered to the petitioner by its president, Latham Davis, was $ 14,643.24
The stipulation of facts is incorporated herein by this reference.
OPINION.
The petitioner has claimed a deduction of $ 27,655.73 under section 23 (a) (1) (A) of the Internal Revenue Code which allows a deduction "including a reasonable allowance for salaries or other compensation for personal services actually rendered." The determination of the Commissioner that a reasonable allowance for compensation of Davis was $ 14,643.24, and not more, is presumed to be correct until evidence is introduced showing that a reasonable allowance is a larger amount.
Counsel for the petitioner takes the position that the salary and bonus computed for 1946 under the incentive contract in effect before Davis became sole owner of the stock*142 must necessarily result in a reasonable allowance to be deducted under section 23 (a) (1) (A) even after Davis became sole owner of the stock. There are obvious weaknesses, however, in any such theory. The original contract between the General Motors subsidiary and Davis was an arm's length *1455 transaction from which each side hoped to benefit. General Motors adopted the method in order to give an incentive to men of promising ability, even though without sufficient funds, to undertake the operation of outlets which they were expected to build up and eventually own. General Motors furnished the original capital, but under the plan, if successful, it would recoup that capital and meanwhile receive dividends. It could well afford to allow a large part of the earnings to go to the manager as a salary bonus in order to obtain a man who would build up a profitable business at the location and buy the stock of the corporation, all at no ultimate cost but with great benefit to General Motors. However, it does not follow that such a contract would be entered into at arm's length under different circumstances. The circumstances differed vitally once Davis became sole owner of*143 the petitioner corporation. For a sole owner to pay himself a bonus as an incentive to do his best in managing his own business is nonsense. The G. M. plan was successfully completed when Davis became the sole owner of the stock in 1944. Thereafter, any contract between him and the corporation would not be a contract at arm's length between two persons with different interests, each dealing for his own best interest. Davis was then in position to fix his compensation as he saw fit, but the petitioner could claim as a deduction no more than a reasonable allowance for compensation for his services as manager, no matter what it agreed to pay. Thus, the petitioner benefits little, if any, from the incentive contract in meeting its burden of proof.
Davis was in position to pay himself whatever salary he chose, and any amount which he paid himself over and above reasonable compensation would represent the distribution of a dividend to the sole stockholder. His compensation requires careful scrutiny. The relationship of his compensation to net income, to capital, to compensation of others, and to other significant figures has been studied. The dividend record has been observed. *144 Opinion evidence and evidence of salaries paid elsewhere have been carefully considered. Salaries paid Davis in earlier years have also been considered. There is some evidence to indicate that a reasonable allowance for 1946 should exceed the amount of a reasonable allowance for 1945, but there is also evidence that the services performed in 1946 were less than those performed in 1945. The Court has considered all of the evidence in the case and has come to the conclusion that that evidence does not fairly preponderate in favor of a holding that a reasonable allowance for compensation for personal services of Davis for 1946 is in excess of the amount determined and allowed by the Commissioner.
Decision will be entered for the respondent.