*4079 Payments by petitioner in 1921 to three individuals for services rendered to petitioner by such individuals and by a corporation which they controlled held ordinary and necessary expenses.
*523 This is a proceeding for the redetermination of a deficiency in income and excess-profits taxes for the calendar year 1921 in the amount of $6,966.65.
The error assigned is that in determining the taxpayer's net income for 1921, the amount of $19,800 was erroneously added to the taxable income as representing a distribution of earnings not deductible from gross income for income-tax purposes.
FINDINGS OF FACT.
The petitioner is an Indiana corporation with its principal office at Fort Wayne.
The deficiency letter is dated April 10, 1925.
During the year 1921, R. I.Fisher, M. B. Fisher, and S. S. Fisher were paid $6,600 each by the petitioner, and said payments were entered on the petitioner's books and treated as salaries. Said amounts were paid in sums of $550 to each of the said men at the end of each*4080 month throughout the year. In addition to said sums, salaries to the amount of $20,033.84 were paid to the three officers of the petitioner.
Said men were not officers of petitioner corporation but controlled a majority of the stock of the company, holding in the names of themselves and their wives stock of the par value of $26,200 out *524 of the total capital of $50,000 prior to the declaration of a stock dividend by the taxpayer in July, 1921.
Said amounts treated as salaries were not authorized by the minutes but an understanding was arrived at between said men and the petitioner's president, with the approval of the directors at or just prior to the beginning of the year 1921, that said salaries would be paid.
Said three men also held a controlling interest in the Fisher Brothers Paper Co., another corporation, also of Fort Wayne, and in business of the same nature as the petitioner, and were officers of the said Fisher Brothers Paper Co.
The petitioner had storage facilities much smaller than were needed for its volume of business and maintained no elaborate purchasing organization. Purchasing for the petitioner, to the extent of more than 50 per cent of*4081 its total purchases, was done through the Fisher Brothers Paper Co., which financed all such purchases, received and stored all such goods purchased, delivered such goods to the petitioner as the latter needed them, and billed the petitioner for such goods at cost, less cash discount, which was allowed whether the petitioner made payment as required for the cash discount or not. Fisher Brothers Paper Co. made no charge to the petitioner for commissions, for services in purchasing, for handling or storing the goods, or for interest on the money.
The petitioner also made sales of goods which were carried by the Fisher Brothers Paper Co. Such goods were furnished by Fisher Brothers Paper Co. to the petitioner and billed in the same way as the other goods above mentioned.
Said three men aided the petitioner in its financial affairs, in part by advances of money and in part by assisting the petitioner in obtaining loans from a bank. On December 31, 1920, the amount of $3,366 was due petitioner from said three men and on December 31, 1921, the amount of $12,476.71 was due to said men from the petitioner. On December 31, 1920, bank loans amounted to $40,000 and on December 31, 1921, to*4082 $10,000.
Said men also maintained contact with the management of petitioner to give it the benefit of their advice and counsel, but no definite or regular amount of time was devoted by any of the said men to any of petitioner's affairs.
Petitioner made no payments of any kind to Fisher Brothers Paper Co. in return for those benefits above described, which were conferred by Fisher Brothers Paper Co.
Petitioner was organized in 1914 and was engaged in the wholesale paper business. Its balance sheet as of December 31, 1920, was as follows:
*525
| Assets | Books | Liabilities | Books |
| 1. Cash | $764.49 | 9. Accounts payable | $11,126.76 |
| 2. Accounts receivable | 58,600.66 | 10. Trade acceptances | 1,268.39 |
| 3. Inventory | 38,766.81 | 11. Notes payable | 40,000.00 |
| 4. Land | 5,991.97 | 12. Depreciation reserve | 810.00 |
| 5. Buildings | 6,266.26 | 13. Bad accounts receivable | 3,354.17 |
| 6. War Savings stamps | 1,284.56 | 14. Surplus | 22,824.49 |
| 7. Deferred expenses | 25.50 | 15. Capital stock | 50,000.00 |
| 8. Good will | 17,683.56 | ||
| 129,383.81 | 129,383.81 |
Its balance sheet as of December 31, 1921, was as follows:
| Assets | Books | Liabilities | Books |
| 1. Cash | $4,881.87 | 10. Accounts payable | $21,902.61 |
| 2. Accounts receivable | 43,307.62 | 11. Notes payable | 10,000.00 |
| 3. Notes receivable | 2,009.37 | 12. Depreciation reserve | 935.33 |
| 4. Inventory | 25,690.75 | 13. Bad debts reserve | 1,969.34 |
| 5. Land | 5,991.97 | 14. Income tax reserve | 3,035.67 |
| 6. Buildings | 6,266.26 | 15. Surplus | 5,689.30 |
| 7. War savings stamps | 1,284.56 | 16. Capital stock | 75,000.00 |
| 8. Deferred expenses | 37.69 | ||
| 9. Good will | 17,683.56 | ||
| 107,153.65 | 107,153.65 |
*4083 The volume of business done in 1921 is indicated by the following statement:
| Gross sales | $351,113.56 |
| Cost of goods sold | 259,569.32 |
| Gross income | 91,544.24 |
| Expenses | 61,082.59 |
| Compensation of officers | 20,033.84 |
| Dividends paid during 1921: | |
| Cash dividends paid January 19, 1921 | 4,000.00 |
| Stock dividends paid July 20, 1921 | 25,000.00 |
| Net income (shown by return) | 4,554.65 |
The amounts paid to each of the three individuals bore no relation to their stock holdings.
OPINION.
SIEFKIN: In this case three men, who were not officers of petitioner but who held $26,200 of the $50,000 stock of the petitioner, were paid $6,600 each by the petitioner during the year 1921. These amounts, which were treated as salaries by the petitioner, were not authorized by the minutes but were given as the result of an understanding reached between the president of petitioner and the three men, with the approval of the directors of the petitioner at or just prior to the beginning of the year 1921. The three men also held a controlling interest in the Fisher Brothers Paper Co., a concern in a business of *526 the same nature as that of the petitioner, and were officers*4084 of that company.
Purchasing for the petitioner to the extent of more than 50 per cent of its total purchases was done through the Fisher Brothers Paper Co., which financed all purchases received and stored all such goods purchased, delivered such goods to the petitioner as the latter needed them, and billed the petitioner for such goods at cost, less cash discount, which was allowed whether the petitioner made payment as required for the cash discount or not. Fisher Brothers Paper Co. made no charge to the petitioner for commissions, for services in purchasing, for handling or storing the goods, or for interest on the money. The three men aided the petitioner in its financial affairs, in part by advances of money and in part by assisting the petitioner in obtaining loans from a bank. These men also maintained contact with the management of petitioner to give it the benefit of their advice and counsel, but no definite or regular amount of time was devoted by any of them to any of the petitioner's affairs.
The respondent contends, (1) that the sum of $19,800 was paid either as a distribution of profits or (2) as payments to the three men in order to procure various services*4085 without charge from the Fisher Brothers Paper Co., which services could not otherwise have been secured except at great expense and which the controlling stockholders of that company had no right, as against minority interest, to cause the corporation to furnish without compensation; and (3) that in any event the payment was not a payment for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business as contained in section 234(a)(1) of the Revenue Act of 1921.
With regard to the first contention, we find no evidence which would indicate that this payment was a distribution of profits, the respondent expressly admitting in his answer that the amount paid to the three individuals bore no relation to their stockholdings.
The second contention is based upon the theory that it was ultra vires of the Fisher Brothers Paper Co. to furnish services to petitioner and (presumably) for petitioner to pay stockholders of that company, as individuals, for such services. Such contention overlooks the fact that the individuals themselves, as such, rendered services to the petitioner. It would also require us to declare a transaction *4086 ultra vires without the presence before us of the party primarily interested. We do not feel justified in so holding.
This leads us to consider whether this payment of $19,800 was for ordinary and necessary expenses incurred during the taxable year, under section 234(a)(1) of the Revenue Act of 1921.
*527 In , we allowed as a deduction the amount paid by the petitioner to a customer whose officers assisted in establishing the business of the petitioner and which gave the petitioner considerable work and created a large field for the use of religious calendars which the petitioner printed.
In , we held that when the payment of a bonus in addition to regular salary is determined by contract between employers and employees, and if payments under such contract are reasonable in amount, they are allowable deductions from the income of the employer.
In , we held that where the board of directors of a corporation voted additional compensation to its officers and employees, *4087 such additional compensation is properly deductible from gross income, although no formal minutes of the meeting were preserved.
In , it was held that the petitioner was entitled to deduct reasonable extra compensation to officers and employees agreed upon by the directors before the end of the taxable year. In that case it was pointed out that formal action on the part of the corporation was not necessary to render it liable for salaries agreed upon informally by the directors.
We are of the opinion that the payment of $19,800 by the petitioner was an ordinary and necessary expense in carrying on the business of the petitioner. In view of the volume of the business of the petitioner and the apparent worth of the benefits flowing to the petitioner as the result of the agreement with these individuals we hold that this expenditure was reasonable, and an allowable deduction.
Judgment will be entered for the petitioner.