*2416 1. Special assessment for the year 1919 denied on failure of petitioner to show the existence of abnormalities affecting its capital or income.
2. An amount representing a portion of petitioner's income and profits tax for 1919 paid by the petitioner in 1920 and by agreement charged to certain of its employees as a part of their compensation for 1919, held to constitute taxable income to the petitioner in the year 1919.
*1269 This proceeding involves a deficiency in income and profits tax for the calendar year 1919 in the amount of $13.42. The only issue *1270 raised by the original petition and answer is whether the petitioner is entitled to have its tax for 1919 determined under the provisions of sections 327 and 328 of the Revenue Act of 1918. The respondent has filed an amended answer alleging affirmatively that the petitioner's income for 1919 has been understated by the amount of $12,497.62, representing a portion of its income and profits tax for 1919 charged to its employees*2417 as compensation for the year 1919 in accordance with the terms of existing agreements. The petitioner denies the allegation.
FINDINGS OF FACT.
The petitioner is a corporation organized in 1910 under the laws of the State of New York. During the taxable year 1919 it was engaged in wholesale trading in silks and nettings. It has since merged with another corporation and is now doing business in the corporate name of Goldstein & Wilkins.
During the taxable year 1919 S. M. Goldstein was the principal stockholder and president and treasurer of the petitioner. Of the capital stock outstanding he held 73 shares; Beulah Goldstein, vice president, held one share, and A. M. Steiner, secretary, held 20 shares. S. M. Goldstein was very active in the business. He personally managed both the buying and selling and was responsible for a large portion, probably half, of the sales made during the year 1919. He directed the financing of the business and frequently gave his personal guarantee on bank loans and other obligations of the company.
It is the custom in the trade to allow selling agents a commission of 4 per cent of their gross sales.
The petitioner's income and profits-tax*2418 return for the calendar year 1919 shows the following items:
| Gross sales | $1,481,579.93 |
| Net income | 109,567.83 |
| Labor | 58,967.07 |
| Other expenses | 74,130.67 |
| Compensation for officers | None. |
| Interest | 4,002.01 |
The return shows a total tax of $43,790.62 which amount has been paid. In his audit of the return the respondent has allowed the deduction of compensation for officers in the amount of $26,284.50 for S. M. Goldstein and $12,609.29 for A. M. Steiner. This action of the respondent has not been protested by the petitioner. The salaries allowed as deductions by respondent were duly authorized at a meeting of the board of directors held during the year 1919. Petitioner's invested capital for the year 1919, as shown on its return, was $116,479.75. In his audit the respondent reduced this amount to $114,031.37.
*1271 Prior to and during the year 1919 the petitioner had contracts with certain of its employees that they would pay out of their compensation for 1919 a proportion of the petitioner's income and profits tax for that year. In its books the petitioner charged to such employees $12,497.62 as compensation for 1919, representing the percentage*2419 of the 1919 tax that they had agreed to pay.
The petitioner's books of account were kept on the accrual basis in 1919 and 1920 and the returns were filed on the same basis of accounting. Such amount of employees' compensation as may have been accrued and paid for 1919 and allowed by the Commissioner as a deduction in the audit of the 1919 return was not offset by any repayment of the tax due on account of payment of the compensation that may have been allowed for the said year in 1919.
The amount of $12,497.62 charged to employees as a percentage of the total tax was reported as income in 1920 and not in 1919 and the audit as now made reflects the item of $12,497.62 as income in the year 1920.
OPINION.
SMITH: The petitioner bases its claim for special assessment for the taxable year 1919 on the alleged inadequacy of salaries paid to officers and the abnormal amount of credit extended to it on account of the individual endorsements of its officers.
The facts above set forth, which are all that we are able to find from the record before us in so far as material to the issues presented, fail entirely to support the petitioner's claim. We can find in the evidence no proof*2420 of any abnormality affecting either capital or income which would entitle the petitioner to the relief sought. So far as we are able to determine, the compensation paid to S. M. Goldstein and A. M. Steiner was ample for the services rendered by them. We have no very definite knowledge of just what their services consisted. The evidence does not show whether there were any services performed by other officers.
It appears from the evidence that S. M. Goldstein did lend his individual endorsement to some of the financial obligations incurred by the petitioner during the year 1919, but no specific instance has been proven. We do not know the extent or nature of the obligations or the value to the petitioner of the endorsements by the officers.
Two of the witnesses, S. M. Golstein and A. M. Steiner, both officers of the petitioner, upon whom subpoenas duces tecum were served on motion of respondent, failed to produce the petitioner's books and records called for. Their oral testimony, especially that *1272 of S. M. Goldstein, who was in the position to best furnish the facts relating to the conduct of the petitioner's business, was particularly uninformative. The*2421 information contained in our findings of fact was gained principally from the stipulations of counsel, the petitioner's tax return for the year in question, and the revenue agent's report, which was admitted in evidence for a limited purpose only. Upon the evidence adduced the petitioner's claim for special assessment it denied.
With respect to respondent's affirmative allegation that petitioner's income for the year 1919 has been understated in the manner above described by the amount of $12,497.62, we think that the evidence establishes that certain of the petitioner's employees had agreed with the petitioner prior to the close of the taxable year 1919 to pay a proportionate part of its 1919 tax out of their compensation for that year, and that the amount of $12,497.62, representing the agreed portion of the petitioner's taxes, was charged to the employees in the petitioner's books and was reported by the petitioner as income in the year 1920. The specific contracts were among the records and papers called for in the subpoena duces tecum above mentioned, which the witnesses stated they were unable to find. However, the witness, S. M. Goldstein, admitted upon cross-examination*2422 that there were probably such contracts. It is stipulated that the amount of $12,497.62, representing a percentage of the petitioner's 1919 tax, was charged to the employees' accounts and reported by the petitioner as income in the year 1920. We think that the respondent has sustained the burden of proof with respect to these facts. The petitioner kept its accounts and made its returns on the accrual basis. Under these circumstances the amount in question constituted taxable income to the petitioner in the year 1919. .
Judgment will be entered under Rule 50.