*64 Decision will be entered for the respondent.
Petitioner is a Minnesota corporation. Its president died on July 7, 1939. Petitioner, pursuant to a resolution adopted unanimously at the annual meeting of its stockholders on November 14, 1939, paid to his widow the remainder of her husband's salary for the month of July 1939 and thereafter $ 300 each month through the fiscal year ended September 30, 1943. Held, payments made by the petitioner subsequent to November 30, 1941, were not deductible by it as ordinary and necessary business expense under section 23 (a) of the Internal Revenue Code or the provisions of section 29.23 (a)-9 of Regulations 111.
*569 This proceeding involves corporate*65 income tax deficiencies for the fiscal years ended September 30, 1942, and September 30, 1943, in the respective amounts of $ 1,403.89 and $ 1,230.90, a total of $ 2,634.79.
*570 The sole issue is whether the respondent erred in disallowing deductions claimed by petitioner for the fiscal year ended September 30, 1942, in the amount of $ 3,000 and for the fiscal year ended September 30, 1943, in the amount of $ 3,600, paid by petitioner as a pension to the widow of its late president, on the ground that such payments did not constitute ordinary and necessary expenses of the business within the provisions of section 23 (a) of the Internal Revenue Code. The facts stipulated by the parties are incorporated herein and, in so far as necessary to a disposition of the issue, are set forth in our findings of fact.
FINDINGS OF FACT.
Petitioner McLaughlin Gormley King Co. is a corporation organized and existing under the laws of the State of Minnesota, with its principal office in Minneapolis, Minnesota. The returns for the fiscal years involved herein were filed with the collector of internal revenue for the district of Minnesota.
In 1901 Alexander McLaughlin founded a business which*66 consisted primarily of producing and selling ground botanical drugs. In 1904 he formed a partnership with John Gormley and Samuel S. King and carried on the same business under the firm name and style of Twin City Drug Mills. In 1908 McLaughlin Gormley King Co., the petitioner, was incorporated and continued the business of the partnership.
From the incorporation of McLaughlin Gormley King Co. in 1908 until 1935, Alexander McLaughlin served as president of the corporation. In 1935 he resigned as president, but continued as chairman of the board of directors and, although less active in the business, he still contributed substantially to its management until his death. He died on July 7, 1939. He had operated the company as "a one man business" from the time he started out in 1901 until he resigned as president of petitioner in 1935. The hiring and firing of all personnel except the laborers and the fixing of salaries was under his direct control. He managed the company's sales, going on the road selling and calling on customers. The financial affairs of the business were managed by him. From 1908 to 1920 the net worth of the petitioner was increased from $ 40,000 to $ 500,000, *67 principally because of McLaughlin's management. During these years his salary was never more than $ 5,000 per year.
The amounts of annual salary paid to Alexander McLaughlin by McLaughlin Gormley King Co. from 1927 until the time of his death and the net income of the company, as shown by its income tax returns for those years, were as follows: *571
| Year | Annual | Year | Net income |
| salary | |||
| 1927 | $ 6,799.92 | 1927 | $ 19,580.00 |
| 1928 | 7,800.00 | 1928 | 56,376.00 |
| 1929 | 7,800.00 | 1929 | 68,880.00 |
| 1930 | 7,800.00 | 1930 | 54,246.00 |
| 1931 | 7,800.00 | 1931 | 78,520.00 |
| 1932 | 7,800.00 | 1932 | 18,217.00 |
| 1933 | 7,085.00 | 1933 | 37,515.00 |
| 1934 | 7,800.00 | 1934 | (1,200.00) |
| 1935 | 7,768.75 | 1-1-35 to 9-30-35 | (60,135.00) |
| 1936 | 7,081.25 | Fiscal year 9-30-36 | 9,808.00 |
| 1937 | 7,050.00 | Fiscal year 9-30-37 | 3,812.00 |
| 1938 | 7,050.00 | Fiscal year 9-30-38 | 3,153.00 |
| 1939 | 3,660.58 | Fiscal year 9-30-39 | (8,518.00) |
| Fiscal year 9-30-40 | 1,544.00 | ||
| Fiscal year 9-30-41 | 19,790.00 | ||
| Fiscal year 9-30-42 | 49,383.00 | ||
| Fiscal year 9-30-43 | 18,200.00 |
A letter from C. B. Gnadinger, vice president and general manager of the petitioner, was read into the minutes of a meeting of the board of directors held at *68 the company's offices on August 8, 1939. That letter, addressed to G. A. McLaughlin, president of the petitioner, read in part as follows:
In view of the long and arduous services that the late Alexander McLaughlin performed for McLaughlin Gormley King Company, which he founded and further, in view of the fact that he reinvested nearly all of his earnings in the company and drew a salary which was only a fraction of what his services were worth, I believe that the Board of Directors of the company should provide for Mrs. A. McLaughlin by voting her a pension.
If the company's attorney is of the opinion that the Directors have the right and power to do so, I would suggest that, at the August, 1939 monthly meeting of the Board, the Treasurer be instructed to pay the entire month of July salary of A. McLaughlin to his wife and that a pension of $ 300 per month be voted her for August and September, 1939. I would also suggest that the Directors should continue this pension from year to year, changing the amount, according to any dividends paid, to insure Mrs. McLaughlin a minimum of $ 3600.00 a year.
The board of directors of petitioner on August 8, 1939, voted to pay to Mrs. Elizabeth*69 J. McLaughlin, widow of Alexander McLaughlin, a pension of $ 300 per month from and after August 1939, such monthly payments, however, to be reduced from time to time by the amounts of any dividends paid to the trustees of a trust on certain shares of McLaughlin Gormley King Co. stock held in such trust, income from which was payable to said Mrs. Elizabeth J. McLaughlin. That action of the board of directors was ratified at the meeting of the stockholders of petitioner held on November 14, 1939.
The pertinent provisions of the resolution unanimously adopted at the annual meeting of the stockholders held on November 14, 1939, are as follows:
* * * *
Whereas, Alexander McLaughlin, the founder of McLaughlin Gormley King Company, died on the 7th day of July, 1939; and
*572 Whereas, the said Alexander McLaughlin, who was the Chairman of the Board of the Company at the time of his death, did, during the 38 years of his association with the Company, invest substantially all of his capital in the Company and devoted his full time to its welfare, but received only a small salary which was not commensurate with his services to the Company; and
Whereas, the greater part of the assets of*70 the estate of the said Alexander McLaughlin consists of stock in the Company, which some time prior to his death was placed in an inter vivos trust; and
Whereas, the said Alexander McLaughlin carried very little life insurance, his widow, Elizabeth J. McLaughlin, receiving less than half as much life insurance money as the Company received from the policy of insurance which it held on his life; and
Whereas, the chief asset now held by Elizabeth J. McLaughlin is a beneficial interest for life in the income from said inter vivos trust created by the said Alexander McLaughlin, which trust embraces 1,213 shares of the capital stock of the Company and no other property; and
Whereas, in consequence of the matters hereinbefore recited and the fact that dividends have not been paid by the Company on its stock during the past four years, Elizabeth J. McLaughlin has been left with practically no income; and
Whereas, the facts concerning the estate of the said Alexander McLaughlin and the insurance on his life, as well as the present need of Elizabeth J. McLaughlin, have been fully disclosed to the stockholders present at this meeting; and
* * * *
Whereas, the proposed pension plan is deemed*71 to be for the best interests of the McLaughlin Gormley King Company and of all its stockholders.
Now, Therefore, it is hereby resolved that the Treasurer of McLaughlin Gormley King Company (and his successor in office) be and he hereby is directed to make pension payments to Elizabeth J. McLaughlin as follows:
* * * *
(3) The sum of $ 300.00 on the last day of each month, beginning with the month of November, 1939, and continuing during the life of Elizabeth J. McLaughlin; provided, however, that such monthly payments shall be reduced, from time to time, by the amount of any dividends paid to the trustees of said trust upon the McLaughlin Gormley King Company shares held in said trust, and that the Board of Directors may from time to time for such period as they may determine reduce the amount of payments to be made pursuant to this resolution whenever the continuance of such payments in the amount herein specified is, in their sole and uncontrolled discretion, deemed to be too burdensome to the Company.
This resolution also directed that Mrs. McLaughlin be paid the sum of $ 451.92, the salary which would have been due her husband as chairman of the board for the period from July*72 8 to July 31, 1939, and the sum of $ 900 representing the monthly pension of $ 300 for the months of August, September, and October, 1939.
McLaughlin Gormley King Co. paid to Elizabeth J. McLaughlin $ 1,051.92 during the fiscal year ended September 30, 1939, and $ 3,600 per year for the fiscal years ended September 30, 1940, 1941, 1942, and 1943.
No dividends were paid by McLaughlin Gormley King Co. during the period from 1934 to September 30, 1943. Petitioner's surplus as *573 of September 30, 1940, was $ 28,867.19, which surplus was increased to $ 87,928.29 as of September 30, 1943.
At the time of the death of Alexander McLaughlin, Elizabeth J. McLaughlin, his widow, was 69 years old. She rendered no services to petitioner during the years here involved. The life expectancy, based on American experience mortality tables of a woman of the age of 69, is 8.97 years.
There was in existence no contract between Alexander McLaughlin and McLaughlin Gormley King Co. calling for any payments to his widow in the nature of a pension or otherwise.
The shares of stock of McLaughlin Gormley King Co. outstanding at the time of the stockholders' meeting November 14, 1939, were held as follows: *73
| Stockholders | Shares |
| held | |
| Alexander McLaughlin Trust | $ 1,213 |
| G. A. N. King | 560 |
| C. A. Clark and Virginia P. Clark | 10 |
| Donald Gormley | 31 |
| M. L. King | 405 |
| John M. Gormley | 23 |
| George A. McLaughlin | 255 |
| J. L. Gormley | 29 |
| Mary A. Gormley | 30 |
| F. J. Radeck | 15 |
| C. B. Gnadinger | 30 |
| Richard Gormley | 29 |
| C. L. Schroeder and H. G. Cant | 1 |
| Margaret A. Peterson | 30 |
| Eleanor R. Wheeler | 30 |
| Martha Findlay | 35 |
The beneficiaries of the Alexander McLaughlin trust are Alexander McLaughlin's widow, Elizabeth J. McLaughlin (who receives ten-twelfths of the trust income), and his three children; George A. McLaughlin is Alexander McLaughlin's son; G. A. N. King is Elizabeth J. McLaughlin's brother; and M. L. King is Elizabeth J. McLaughlin's sister-in-law.
No pensions have been paid to other retired employees of McLaughlin Gormley King Co. or to their widows, nor has any plan therefor been adopted except as provided in a retirement plan and pension trust established by the petitioner in September 1944.
The deficiency notice explains the disallowance of the payments made by the petitioner to Elizabeth J. McLaughlin subsequent to November 30, 1941, as follows:
Mr. McLaughlin died on July 7, 1939, *74 and periodic payments to his widow have been allowed as deductions for a limited period under the provisions of Section 23 (a) of the Internal Revenue Code and Section 29.23 (a)-9 of Regulations 111. It is held that such limited period terminated not later than November 30, 1941. Accordingly, amounts paid to Mrs. McLaughlin after that date have been disallowed.
OPINION.
The single issue herein is whether certain pension payments made by the petitioner to the widow of its founder and former *574 president may be deducted by it during the taxable years involved as ordinary and necessary business expense within the provisions of section 23 (a) of the Internal Revenue Code.
Payments to the widow of a deceased officer pursuant to a contract providing for a pension payable to the widow of the employee have been held deductible as ordinary and necessary expenses of the business. Seavey v. Flarsheim Brokerage Co., 41 B. T. A. 198. But no such contract is involved in the present case, nor do we have here an established pension plan whereby the widows and dependents of the deceased officers and employees are provided with pensions. The deductibility*75 by an employer of pension payments to employees and their dependents has nevertheless been recognized where the sums paid are in the nature of extra compensation for past services and do not exceed, when added to the salary formerly paid, reasonable compensation for services heretofore rendered. Flood v. United States, 133 Fed. (2d) 173. The lack of legal obligation to make such payments is not determinative. Moreover, it is now well established that reasonable compensation paid for services rendered in past years may be deducted as an ordinary and necessary expense under section 23 (a). Lucas v. Ox Fibre Brush Co., 281 U.S. 115">281 U.S. 115; Taylor-Logan Co. v. White, 62 Fed. (2d) 336.
Petitioner urges that the sums paid McLaughlin's widow are in recognition of the inadequate salary paid her husband during the many years he was employed by petitioner and further claims that section 29.23 (a)-9 of Regulations 111 1 specifically recognizes the deductibility of the sums in question. The corporate resolution set forth in our findings leaves little doubt why the pension was paid, and it seems*76 to us that the action taken was prompted more by the needs of Mrs. McLaughlin than by a belated recognition on the part of petitioner that it had not adequately compensated its former president. The petitioner is a closely held corporation. A trust established by the deceased officer, the income of which is primarily payable to his widow, held the largest block of stock. The widow's brother and sister-in-law and her son, the present president of petitioner, were the other large stockholders, and together they owned approximately 89 per cent of the total outstanding shares of the company. The corporate resolution made clear the needs of the widow and the fact that her present financial *575 distress arose largely by reason of the fact that petitioner had not for several years paid dividends on its stock. The pension was to be reduced in proportion to the dividends paid and was payable only so long as the payment did not constitute a burden on petitioner. There was no recognition of a sum certain to be paid for past services rendered by the deceased officer. It was the widow's needs, rather than a corporate obligation due the deceased officer, that the resolution emphasized. *77
It is argued by petitioner's counsel that the statement in the resolution that the former president was inadequately compensated must be taken as establishing that fact. Taylor-Logan Co. v. White, supra.But, even so, we do not think the resolution, worded as it*78 was, would serve to establish that the sums paid the widow, when added to the past compensation of McLaughlin, constituted reasonable compensation for past services rendered by him as president of petitioner. The determination of the Commissioner places on the petitioner the burden of establishing the reasonableness of the total compensation. Mobile Bar Pilots Association, 35 B. T. A. 12; reversed on other grounds, 97 Fed. (2d) 695. Certainly, we can not find from the evidence before us what would have constituted the fair value of McLaughlin's services during the years he served as an officer of petitioner. We would have to know a great deal more about petitioner's business than is provided by the stipulated facts and oral testimony before we could determine in dollars what was an adequate salary during the past years.
It is our conclusion that, in the absence of a contract liability, an established pension policy, or a showing that such payments were for past compensation and were reasonable in amount, the payments may not be deducted under section 23 (a). We do not understand that petitioner claims that any business *79 benefits flowed to it as a result of the payments in question.
The deficiency notice states that the "limited period" for which the petitioner could claim deductions for the payments made to Elizabeth J. McLaughlin terminated not later than November 30, 1941, 29 months after they were initiated, by virtue of section 29.23 (a)-9 of Regulations 111.
Petitioner argues that the Commissioner has no authority to discontinue the allowance of deductions upon his own determination of what constitutes a "limited period" under these regulations, and that Congress alone grants deductions and not the respondent. We think no one would deny at this late date the fact that income tax deductions are a matter of legislative grace. We think it equally true that the right to take the deductions sought by petitioner must be found in section 23 (a) and they are to be justified as ordinary and necessary expenses of carrying on a trade or business. The provision in the regulations providing that the salary of a deceased officer may be *576 paid to his widow for a "limited period" first appeared in Regulations 45 under the Revenue Act of 1918, and this provision has continued more or less without change*80 in subsequent regulations. This provision was, no doubt, a recognition on the part of the Commissioner of the very general custom of business to make such payments for a reasonable time when death occurred to a faithful officer or employee, but the fundamental right to this deduction when demanded by a taxpayer must be established within the language of section 23 (a).
It is our opinion that the petitioner has failed to sustain its burden of proving its right to the deductions in issue under section 23 (a), and it follows that the determination made by the respondent must be approved.
Decision will be entered for the respondent.
Footnotes
1. SEC. 29.23 (a)-9. PENSIONS -- COMPENSATION FOR INJURIES.
Amounts paid by a taxpayer for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such payments may be deducted. As to deductions for payments to employees' pension trusts, see section 23 (p)↩.