*3334 1. L. S. Ayers & Co.,1 B.T.A. 1135">1 B.T.A. 1135, followed.
2. Increase in ordinary and necessary expense deduction over amount allowed by Commissioner denied.
3. Increase in invested capital over amount allowed by Commissioner, on account of the issuance of capital stock as a bonus for services, denied.
*1413 Income and profits taxes for the calendar years 1919 and 1920, are in controversy. The Commissioner determined a deficiency of $2,911.99 for 1919, and a deficiency of $322.80 for 1920. The petitioner contends that the Commissioner committed error:
(1) In deducting a so-called tentative tax from 1920 current earnings to determine the amount of current earnings available on March 3, 1920, for the payment of dividends;
(2) In refusing to allow any amount in excess of $6,250 as a deduction from 1920 income on account of stock issued in 1920, to the general manager in payment for services rendered; and
(3) In failing to increase 1920 invested capital by $6,250 as of February 14, 1920, which amount*3335 represents the excess of the value of services rendered to the company over the par value of stock issued February 14, 1920, in payment therefor.
FINDINGS OF FACT.
The petitioner is an Indiana corporation with its principal office at Evansville.
In 1903 two pottery companies were consolidated to form the petitioner. Arthur Davidson had been with one of the predecessor companies and he continued with the petitioner as general manager and secretary in entire charge of the business. He devoted his entire time to the petitioner's business, assisted in the sale of its stock, in the sale of its goods, and in keeping of its books.
Arthur Davidson continued as general manager and secretary until sometime after the year 1920, when he was made president and general manager. In 1919 he was paid a salary of $5,400 a year. On February 14, 1920, at a meeting of the board of directors the following motion was unanimously adopted:
(1) That the salary of Arthur Davidson as Secretary and Manager of the Company be Twelve Thousand Dollars ($12,000.00) per year.
(2) That as a further compensation for extraordinary services rendered by him, there be issued to him the Treasury Stock*3336 of the Company amounting to Sixty-two hundred and Fifty Dollars ($6,250.00).
During 1920, the petitioner paid Arthur Davidson total compensation as follows:
| Salary | $12,000.00 |
| Commissions | 2,961.45 |
| Par value of stock given as bonus | 6,250.00 |
| Total | 21,211.45 |
The petitioner's capital stock consists of 8,000 shares of common stock, each share having a par value of $50. At one time the petitioner *1414 issued bonds having a par value of $200,000. The last of these bonds were retired in 1920, and thereafter the petitioner had no other indebtedness.
The following is a statement for each year, showing the book profits of the company, the bonds retired and the rate at which dividends were paid.
| Year | Book profit | Bonds retired | Dividends paid |
| Per cent | |||
| 1916 | 31,168.00 | $25,000.00 | 1 |
| 1917 | 69,264.79 | 18,500.00 | 2 |
| 1918 | 88,853.15 | 21,000.00 | 4 |
| 1919 | 80,036.04 | 28,000.00 | 6 |
| 1920 | $134,609.82 | $39,500.00 | 6 |
| 1921 | 115,489.86 | 10 | |
| 1922 | 31,458.78 | 25 | |
| 1923 | 108,095.34 | 25 |
The petitioner shut down for about four months in 1922, due to a strike.
The petitioner's books as of December 31, 1919, showed total assets, *3337 including good will, in the amount of $762,363.77, a depreciation reserve of $134.945.37, and a surplus of $168,362.57. As of December 31, 1921, the books showed total assets, including and will, of $817,470.88, a depreciation reserve of $131,322.85, and a surplus of $188,644.39. During 1920, a fund of $75,000 was set up on the books for future improvements. The petitioner's books from 1903 to 1917 carried a good will account in the amount of $287,741.54. In 1917, $37,741 was charged off this account. In 1918, $25,000 was charged off this account.
In all of the book entries made by the petitioner pertaining to the bonus given to Arthur Davidson, the par value of the stock was used. The petitioner used the par value of the stock given to Arthur Davidson for all purposes incidental to its income-tax return for the year 1920. The Commissioner allowed $6,250 as a deduction from 1920 income on account of the issuance of 125 shares of the petitioner's stock to Davidson, and allowed an addition to invested capital for 1920 of $6,250 prorated from February 14, 1920, or an average amount of $5,498.63 on account of the value of services received for the 125 shares of stock.
In computing*3338 the current earnings available for a dividend on March 3, 1920, the Commissioner deducted a tentative tax for the year in the amount of $58,061.72.
OPINION.
MORRIS: The Commissioner was in error in deducting a tentative tax from current earnings in computing the amount of current earnings *1415 available for the payment of dividends. .
Under section 234(a)(1) of the Revenue Act of 1918, the petitioner is entitled to deduct a reasonable allowance for salaries or other compensation for personal services actually rendered. During the year 1920 the petitioner paid its general manager a salary and certain commissions, and also gave him a bonus of 125 shares of its stock. Apparently, the Commissioner has allowed the petitioner to deduct $21,211.45 on account of these payments as a reasonable allowance for salaries or other compensation for personal services actually rendered by Arthur Davidson.
The petitioner now contends that in addition to the amount allowed by the Commissioner it should be allowed at least $6,250, representing the excess of the actual value of the shares of stock issued to Davidson over the par value*3339 of those shares, but the evidence does not indicate that reasonable compensation for personal services actually rendered by Davidson during the year 1920, exceeds the amount already allowed by the Commissioner. The vice president of the petitioner states that in his opinion Davidson's services in 1920, were worth $12,500 a year. From the evidence we could not determine that his services were worth any greater amount. The Commissioner has already allowed a deduction in excess of this amount and we will certainly not increase the allowance.
Petitioner's next contention is that invested capital for 1920 should be increased by $6,250 prorated from February 14, 1920. Invested capital is a statutory creation. The Revenue Act of 1918, section 326(a) defines the term. We fail to find any authority in that section for including the contested amount in invested capital on account of the issuance of stock to Davidson as a bonus for services rendered by him as secretary and general manager of the business. Furthermore, the important consideration in the determination of invested capital is the value of the property which forms the consideration for the issuance of the stock and the value*3340 of the stock is unimportant except as it may indicate the value of the property. In the present case we are unable to determine the value of the services performed by Davidson in consideration of which the stock was issued to him, and for this additional reason the petitioner's contention fails. .
Reviewed by the Board.
Judgment will be entered under Rule 50.