*2518 1. Where the original petition related to deficiencies for the years 1923 and 1925 and was amended and the amended petition alleged error as to only 1925, and trial is had upon the issue joined as to the year 1925, a motion by respondent at the close of the hearing to dismiss the proceeding in so far as it related to 1923 is proper and will be granted.
2. The evidence is insufficient to show that the respondent erred in disallowing salaries as being excessive.
*1124 The respondent by notice dated June 13, 1927, notified petitioner of the determination of an overassessment for the year 1922 and of deficiencies in income tax for each of the years 1923, 1924, and 1925. A petition was timely filed alleging that the respondent erred in certain particulars as to the years 1923 and 1925. Respondent moved to dismiss this petition for failure to conform to the rules of the Board, which motion was denied and the petitioner was granted time to file an amended petition. Within the time allowed petitioner filed an "amended and supplemental petition" wherein*2519 the single allegation of error is the disallowance of salaries for the year 1925. At the hearing counsel for respondent abandoned his claim for affirmative relief which was set up in his answer and by which he sought to reduce the amount of salary allowed for petitioner's secretary.
The deficiencies determined by the respondent for 1923 and 1925 are $448.34 and $2,959.39, respectively.
FINDINGS OF FACT.
Petitioner is a corporation with principal office at Louisville, Ky., and in 1923 and 1925 was engaged in the mixture and sale of wall plaster. In 1925 a coal department was added.
In the taxable years petitioner's capital stock consisted of 100 shares of a par value of $100 each. J. F. W. Selke, president, owned 48 shares; his wife, Lydia Selke, who was secretary and treasurer, owned 49 shares; and H. H. Hopper, vice president, owned the remaining 3 shares.
The business was acqiored by J. F. W. Selke in 1907 by purchase, at a cost of $5,600. At that time it was not on a paying basis. There were several other concerns engaged in the same business and competition was very keen. Both Mr. and Mrs. Selke were active in furthering the interests of the corporation. Selke, *2520 the president, devoted all of his time to the affairs of the corporation. He arranged the financing of the corporation and used his personal credit for that purpose. At times he purchased property for which the petitioner had sold plaster in order to prevent the petitioner from suffering a loss. In 1923 and 1924 he worked at the business from 5.30 o'clock in the morning until 5.30 or 6.00 at night, and in 1925 he sometimes worked until 11 or 12 o'clock at night. Mrs. Selke was active in soliciting orders for wall plaster and coal. When the *1125 coal department was added in 1925 she wrote some 500 letters soliciting orders. She took care of such matters as could be handled over the telephone; she signed the corporate checks; on an average of once or twice a week she visited the plant, went over the corporate books, and inspected the plant and equipment.
The business began to make money about 1922 and thereafter dividends of 6 per cent were paid. When Selke acquired the business in 1907 it was being operated in a building 30 feet wide. In 1925 the business occupied a building 75 feet wide and 480 feet deep.
Gross sales, officers' salaries, and net income after deducting*2521 salaries, for 1923, 1924, and 1925 were as follows:
| 1923 | 1924 | 1925 | |
| Gross sales | $168,392.99 | $205,281.71 | $301,644.20 |
| Net income | 14,142.00 | 18,671.42 | 12,191.22 |
| Salaries: | |||
| President | 12,600.00 | 12,600.00 | 24,600.00 |
| Secretary-treasurer | 1,480.00 | 7,480.00 | 15,880.00 |
| Vice president | 200.00 | 200.00 | 200.00 |
For the years 1923 and 1924 the respondent allowed the deductions for officers' salaries claimed. For the year 1925 he disallowed $12,000 of the salary paid the president and $8,400 of the salary paid the secretary-treasurer, which reduced the amounts allowed to the same amounts as were allowed for 1924.
The assets of the corporation were sold in 1929 for $90,000.
OPINION.
ARUNDELL: We have set out in our preliminary statement something of the history of the pleadings in this proceeding. At the close of the hearing counsel for the respondent moved that the proceeding in so far as it relates to the year 1923 be dismissed for lack of prosecution, with a finding that there is a deficiency for that year in the amount determined by the respondent. Petitioner resisted the motion and argues that the amended petition entirely supersedes the original, *2522 and the abandoned cause of action for 1923 falls away by waiver and no order is necessary.
We think the respondent's motion should be granted. The original petition covered the two years 1923 and 1925. When respondent's motion to dismiss for failure to conform to the rules was denied and an amended petition was filed covering only 1925, the proceeding as to 1923 which was initiated by the filing of original petition was left pending on our docket and must be disposed of sometime. The present motion, having been made at the first hearing after amendment of the petition, was in our opinion timely, and will be granted.
*1126 For the year 1925 respondent disallowed a part of the salaries paid petitioner's president and secretary-treasurer on the ground, as stated in the deficiency notice, that the amounts "are deemed excessive." In the case of a close corporation such as we have here, while considerable weight will be given to the judgment of the officers and directors as to what constitutes reasonable salaries (), still we may very properly examine the facts to determine whether the amounts claimed are reasonable or*2523 excessive and in effect a distribution of profits. . If the amounts paid are excessive and have no substantial relation to the measure of services they are not "ordinary and necessary expenses." .
The evidence here is that Selke took over this business when it was not on a paying basis and that he and his wife built it up to a point where in the taxable years it earned substantial profits. Selke himself put in long hours in the corporation's service and aided it financially. His wife solicited some business, took care of telephone calls and sometimes visited the plant. This, however, does not tell us whether the salaries were reasonable compensation for the services rendered or whether they were excessive. One of petitioner's witnesses was connected with a Louisville bank with which the Selkes had had business relations. He knew of petitioner's competitors but did not know what salaries they paid their officers. Another witness, a certified public accountant, expressed familiarity with salaries paid officers of other corporations but made no comparison of*2524 such salaries with those paid by petitioner. See .
In our opinion the evidence does not overcome the presumption of correctness attaching to the respondent's determination.
The proceeding for 1923 will be dismissed, and decision will be entered for the respondent for the years 1923 and 1925.