1929 BTA LEXIS 2954">*2954 SALARIES OF OFFICERS - READJUSTMENT DURING YEAR. - In canceling by agreement with the officers an excess of salaries entered upon the books but never paid, the petitioner is held to have incurred a liability for no more than the amounts actually paid, and the excess is not deductible from income under the provisions of section 234(a)(1) of the Revenue Act of 1924.
14 B.T.A. 1335">*1335 This proceeding results from the determination of deficiencies in income taxes amounting as follows: for 1924, $2,406.48; for 1925, $658.63.
The petitioner alleges error with reference to three issues: (1) The failure to allow the deduction from net income for 1924 of a net loss for 1923 of $3,394.27; (2) the disallowance of a deduction from income in 1924 of accrued salaries of officers amounting to $11,200; (3) additions to income for 1925 of Federal Taxes, $5,999.83, and donations, $225.33.
At the hearing the petitioner abandoned the first and third issues.
14 B.T.A. 1335">*1336 FINDINGS OF FACT.
The petitioner is a corporation with its principal place of business at Providence, 1929 BTA LEXIS 2954">*2955 R.I. For income-tax purposes the petitioner has been consolidated with the following affiliated companies: Rochester ester Playhouse, Inc., Rochester, N.Y., and Knickerbocker Playhouse, Inc., Philadelphia, Pa. The corporations named are engaged in the operation of theatres.
In 1924 the books of account of each of the affiliated corporations included expense accounts for officers' salaries. By a series of journal entries these accounts were charged with allowances amounting respectively to $200 per week for the salaries. The charges during the taxable year aggregated as follows:
| Name of corporation | Date of last entry | Aggregate |
| Arcadia Amusement Co | July 26, 1924 | $6,000 |
| Knickerbocker Playhouse (Inc.) | June 28, 1924 | 5,200 |
| Rochester Playhouse (Inc.) | July 26, 1924 | 6,000 |
In July, 1924, all of the officers disposed of their stockholdings in and severed all connections with the affiliated corporations. The amount of $6,000 was actually paid by the Arcadia Amusement Co.; the remaining charges, aggregating $11,200, were never paid and the officers released the corporations from liability therefor in 1924 when they severed connections with the corporations.
1929 BTA LEXIS 2954">*2956 The expense accounts for the salaries were closed into the separate profit and loss accounts maintained on the books for each of the affiliated corporations. The books showed the following results for the year's operations: Arcadia Amusement Co. gain, $28,123.10; Knickerbocker Playhouse, Inc., loss, $9,806.91; Rochester Playhouse, Inc., gain, $35,076.73. The deficiency for 1924 is computed upon the basis of an aggregated net income for the consolidated group amounting to $67,250.51. The amount of $6,000 salaries actually paid has been allowed by the respondent as a deduction from income, but the aggregate of $11,200 unpaid, has not been allowed.
OPINION.
TRUSSELL: The petitioner abandoned two issues raised in the pleadings, leaving only one to be decided in this proceeding. The question is whether, as contended by the petitioner, an amount of salaries of officers, in excess of the deduction which has been allowed by the respondent, is deductible under the provisions of section 234(a)(1) of the Revenue Act of 1924 wherein, among other things, it is provided that salaries to be deductible must have been paid or incurred within the taxable year. The salaries were regularly1929 BTA LEXIS 2954">*2957 accrued upon the books, weekly, until a time a little later than the 14 B.T.A. 1335">*1337 middle of the year, when all of the officers disposed of their stockholdings in the affiliated corporations, discontinued their services, and released the affiliated corporations from liability for the amounts of the salaries which were then unpaid. The petitioner claims the forgiveness of the indebtedness was a gift from the officers.
We had under consideration in , the contention of the Commissioner that an amount of salary accrued upon the books of a corporation was constructively received by the officer and a cancellation of the unpaid part thereof was a gift to the corporation rather than a modification of the amount of compensation incurred.
We held in that case, under facts comparable to those of the instant case, that no amount of salary greater than that actually paid was received by the officer or incurred by the corporation.
A readjustment during the year of the amounts of salaries is not unusual in corporation procedure. The amounts incurred are those finally agreed upon during the year. 1929 BTA LEXIS 2954">*2958 . In the instant case we think that the amounts of the salaries of the officers were reduced by mutual understanding at a time when the officers were divesting themselves of all interest in the corporations and they were severing connection therewith. The failure of the bookkeeping to entirely accord with the facts is immaterial. We conclude that the salaries actually paid and allowed as deductions by the respondent were all that were incurred during the year, consequently no greater amount is deductible. Cf. ; .
Judgment will be entered for the respondent.