*77 Decisions will be entered for the respondent.
An insolvent corporation, wholly owned by its officers and their families, was in default in the payment of a note secured by deed of trust on its principal asset, a hotel, and, after procuring advances for taxes and payment concessions from the creditor in 1937 and again in 1941, it paid no salaries to its officer-stockholders until after first realizing an operating profit in 1942. The deferment in salary payment, held, on the evidence not due to an event similar in nature to a receivership within the meaning of section 107 (d) (2) (A) (iv), Internal Revenue Code, there being no legally enforceable control of the corporation in any one other than its own officers. Norbert J. Kenny, 4 T. C. 750, distinguished.
*419 The Commissioner determined the following deficiencies in petitioners' income taxes:
| Petitioner | Docket No. | 1944 | 1945 |
| R. L. Langer | 16756 | $ 3,086.48 | |
| Eleanore Langer | 16757 | 3,099.06 | |
| C. Abbott Lindsey | 18396 | 2,041.07 | $ 2,867.32 |
| Pauline Lindsey | 18397 | 2,041.07 | 2,867.32 |
In so doing, he included in income taxable at current rates amounts received by R. L. Langer and C. Abbott Lindsey as back salary for prior years and reported by them and their wives, the other petitioners, as community income taxable at the prior years' rates under the provisions of section 107 (d), Internal Revenue Code. Respondent contends that the section is not applicable because (1) the deferment in payment was not caused by an event similar to receivership; (2) the employer was under no obligation to pay in prior years, and (3) the payments were less than 15 per cent of petitioners' gross incomes, which should be computed to comprise receipts undiminished by the expenses of businesses from which they derived income. Petitioners reported and defend the inclusion of net profit from such businesses.
The proceedings*79 were submitted upon a stipulation and exhibits, which we incorporate by reference as findings of fact, and oral testimony.
*420 FINDINGS OF FACT.
R. L. Langer, deceased, and his widow, Eleanore Langer, petitioner in Docket No. 16757, resided in 1944 in Los Angeles, California, and filed separate income tax returns for 1944 with the collector of internal revenue for the sixth district of California. Langer died on July 6, 1948; his widow was appointed executrix of his estate, and as such was substituted for him as petitioner in Docket No. 16756. C. Abbott Lindsey and his wife, Pauline Lindsey, petitioners in Docket Nos. 18396 and 18397, reside in Los Angeles, California, and filed separate income tax returns for 1944 and 1945 with the same collector. All the returns were prepared on the basis of cash receipts and disbursements.
Langer and family and Lindsey and family each owned one-half of the single class of outstanding stock of the Commodore Hotel Co., a California corporation. This corporation owned and operated the Commodore Hotel in Los Angeles, and it kept its accounts and filed its income tax returns on the basis of cash receipts and disbursements. Langer was president*80 and Lindsey secretary, and by resolution of April 14, 1937, the board of directors, which included Langer and Lindsey, voted that a salary of $ 600 a month be paid to each from January 1, 1937, and "every month hereafter." Pursuant to this resolution, there was paid to each a total of $ 4,800 during 1937, but the corporation fell into financial difficulties and no further payments were made until 1942 or 1943. From 1933 until 1942 the corporation each year sustained operating losses, which reached a maximum of $ 14,724.74 in 1939, and its balance sheets constantly indicated a deficit until 1946, reaching a maximum of $ 63,867.69 in 1941.
In 1933 the corporation had placed a deed of trust on its hotel building and a chattel mortgage on the furnishings, its principal assets, to secure its 6 per cent note for $ 241,581, payable in monthly installments of $ 2,000. By 1937 it was not only delinquent in the payment of interest on this note to the extent of $ 13,419, but the creditor had advanced funds for taxes on the hotel. On January 16, 1937, an agreement was reached with the then holder of the note, Pacific Mutual Life Insurance Co. (hereinafter called Pacific) whereby the corporation*81 agreed to pay off the total due of $ 255,000, with interest, over a ten-year period in monthly installments beginning at $ 500 and increasing to $ 1,250. The corporation made the required payments, with some slight delays, until June 30, 1939, but Pacific had to make further advances for taxes, and by the end of August 1941 the amount due the creditor had only been reduced to $ 240,750. On September 16, 1941, Pacific and the corporation entered into a new agreement, reducing the interest on the balance to 5 per cent and extending the payment period to 1956. The corporation agreed to make a fixed monthly payment of *421 $ 1,400 and to pay 50 per cent of its net income to Pacific within 30 days of the end of each year. Net income for this purpose was defined as gross income less $ 5,000, operating expenses "including usual and reasonable management charges," upkeep costs, taxes, interest, and the principal payments on a second note for $ 2,592.62 which the corporation gave to Pacific. This second note was paid off in 1942, and payments have since been made on the principal indebtedness substantially as required. Pacific refrained from foreclosing on the hotel because its *82 officers felt that the corporation's properties were being capably and honestly handled and that Langer and Lindsey would ultimately work out their difficulties.
At a directors' meeting held January 2, 1942, Langer, the president, brought up the subject of officers' salaries, "adjusted at $ 600 a month" but not "paid since the year 1937," and the repayment of a $ 2,000 loan which he and Lindsey had each made to the corporation. Payment of the salaries and loans was authorized "as soon as there is sufficient net money available," and in the event of nonpayment of the salaries, authority was voted the officers "to execute the Corporation's promissory note to pay said sums at a later date * * * when the assets of the Corporation will permit." On January 2, 1943, the directors resolved that the salary of the president and of the secretary "be again set at $ 600.00 per month for the current year of 1943," and salaries of $ 7,200 were paid to each of them in that year.
After the corporation realized an operating income of $ 9,755.23 in 1942 and of $ 24,666.17 in 1943, the board of directors on January 3, 1944, mentioning that some salary payments were made in 1942, authorized the payment*83 of back salaries to the officers, and recognized that there was owing to each $ 1,200 for 1937 ($ 2,400, as later corrected); $ 7,200 for each of the years 1938, 1939, 1940, 1941, and $ 3,900 for 1942. They then resolved that the corporation "pay all said back salaries to the respective officers * * * as soon as it is able to do so." Pursuant to this resolution, the corporation paid $ 17,200 to Langer and $ 17,200 to Lindsey in 1944 and $ 18,700 to Lindsey in 1945. Of the 1944 payments, $ 10,000 to each was on account of back salary; of the 1945 payments, $ 11,500 was on account of back salary to Lindsey. Near the close of 1944 the directors instructed Langer to address to the Salary Stabilization Unit of Treasury a letter requesting permission to pay officers' salaries for prior years. In the letter it was stated that "salaries for all years were authorized," but payments had been irregular because "the corporation, on a 'cash basis,' suffered losses for most of the years in question, and did not have the necessary cash available for salary payments." The Salary Stabilization Unit replied that payment of back salaries did not require its approval, *422 "provided there was*84 a bona fide contractual liability on October 3, 1942."
At a directors' meeting held January 5, 1945, Langer, as president, stated that:
* * *$ 10,000 had been paid to each of the respective officers in 1944 as back salaries applied as follows, to-wit: $ 2,400 as owing for the year 1937; $ 7,200 as owing for the year 1938, and $ 400 as part payment and owing for the year 1939 * * * .
At a directors' meeting held December 5, 1945, the president was specifically authorized to pay $ 3,000 of surplus on account of officers' back salaries.
On their separate income tax returns for 1944 Langer and wife and Lindsey and wife each reported $ 5,000 as the community share of the $ 10,000 paid as back salary to each husband in 1944, and each computed a tax on this share by reference to rates applicable to years for which the salary was paid, invoking the benefits of section 107 (d), Internal Revenue Code. Among items of gross income Langer and wife each reported $ 15,610.36, set forth in schedule C as "Profit from Business or Profession." As explained in the schedule, they owned a half interest in the Clifton and Figueroa Hotels. From total receipts of $ 22,311.71 of the Clifton Hotel they *85 subtracted "business expenses" under itemized headings of schedule C and determined a "net profit" of $ 14,498.01, of which one-half, or $ 7,249, was treated as their community income. Each included a half of the latter figure, or $ 3,624.50, in gross income, item 4, of the individual return in arriving at the total gross income from which they subtracted the statutory deductions. In like manner they reported total receipts of $ 271,987.99 of the Figueroa Hotel, deducted business expenses, and arrived at a net community profit of $ 31,220.71, of which each included a half, or $ 15,610.35, in item 4 of gross income. Total gross income for 1944, as reported by Langer, was $ 30,729.45; as reported by his wife, $ 31,854.43.
On their income tax returns for 1945 Lindsey and wife each reported one-half of the $ 11,500 received by Lindsey as back salary in 1945, and each computed a tax on that by reference to section 107 (d), attributing $ 6,800 to 1939 and $ 4,700 to 1940. Each reported on the 1944 return $ 23,667.65 as an item of gross income, set forth in schedule C as "Profit from Business or Profession." As explained in the schedule, they operated the Commodore Cafe, from which each*86 reported total receipts of $ 131,547.39, cost of goods sold, $ 50,493.85, and other business deductions, $ 57,385.88, resulting in a net profit of the $ 23,667.65, which each included in gross income. For 1945 each similarly computed and included in gross income a net profit of $ 20,421.44 from operation of the cafe. (Apparently the receipts, costs, and expenses reported by each was a half of the business gross.)
*423 As to each petitioner the Commissioner determined that section 107 (d) was not applicable, and, adding the amounts received as back salary to other income reported, he recomputed the tax at the rates in effect for the year of receipt.
OPINION.
Under the view that Langer and Lindsey each received the $ 10,000 paid in 1944 and that Lindsey received the $ 11,500 paid in 1945 as back salary attributable to prior years' services, petitioners claim the benefit of section 107 (d), which provides:
(1) In General. -- If the amount of the back pay received or accrued by an individual during the taxable year exceeds 15 per centum of the gross income of the individual for such year, the part of the tax attributable to the inclusion of such back pay in gross income for the*87 taxable year shall not be greater than the aggregate of the increases in the taxes which would have resulted from the inclusion of the respective portions of such back pay in gross income for the taxable years to which such portions are respectively attributable, as determined under the regulations prescribed by the Commissioner with the approval of the Secretary.
Section 107 (d) (2) defines "back pay" as:
* * * (A) remuneration, including wages, salaries * * * received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which would have been paid prior to the taxable year except for the intervention of one of the following events: (i) bankruptcy or receivership of the employer; (ii) dispute as to the liability * * *; (iii) if the employer is the United States, a State * * *, lack of funds appropriated to pay such remuneration; or (iv) any other event determined to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary; * * *
Petitioners contend that the corporation would have paid the salaries in the years when the services were rendered except for the intervention*88 of an event similar in nature to bankruptcy or receivership. They argue that the corporation's continued operation of the hotel was by Pacific's suffrance; that if salaries had been paid to the officer-stockholders, that suffrance would have ceased, as Pacific kept close watch over the corporation's affairs for protection of its loan, even advancing funds needed for taxes. Admitting that no specific agreement forbade the payment of salaries to officers, they assert that any such payment made in the corporation's precarious financial condition would have invited foreclosure by the creditor. Respondent stresses the absence of any contractual or legal restriction on payment, and argues that a straitened financial condition is not similar in nature to bankruptcy or receivership, and that in any event no salaries were authorized after 1937, and the corporation was under no obligation to pay.
The issue raised squarely presents for decision whether or not financial difficulties and a factual (but not a legal) necessity which restricts *424 a corporation's freedom of action may be deemed an event similar in nature to a receivership under regulations prescribed by the Commissioner. *89 Section 29.107-3, Regulations 111 as amended, which relates to section 107 (d) (2) of the code, adds nothing to the language of the statute in this respect.
We agree with petitioners that very cogent circumstances deterred the corporation from paying its officer-shareholders any salary during the period of financial distress. Pacific was in a position to foreclose on the hotel and furnishings at any time. It forebore to do so, and even aided the debtor by paying taxes on the hotel in substantial amounts and agreeing to more favorable loan terms on two occasions. In the words of Pacific's loan officer, this consideration was shown because he felt "that the properties were being capably and honestly handled," and he expected that Langer and Lindsey "ultimately would work out their difficulties." We can not believe that he would have felt so if they had increased the corporation's steady operating losses by annual withdrawals of $ 14,400 as salaries for themselves.
Nonetheless we do not perceive in their voluntary restraint any resemblance to the restriction imposed by a receivership. Financial distress would normally induce a corporation's officers to adopt policies more cautious*90 and conservative than those followed under conditions of prosperity, and, by their forebearance to deplete corporate funds by salary payments, petitioners' officer-shareholders displayed a prudence clearly indicated as necessary by existing circumstances. But the decision was theirs to make, and they made it. Under a receivership the decision would not have been theirs. Although the receiver might well have made the same decision, in so doing he would have exercised a control conferred on him by law to the exclusion of the corporate officers and legally enforceable without reference to them. It is this legally enforceable control in another that we deem to be the essential characteristic of a bankruptcy or receivership. In Norbert J. Kenny, 4 T. C. 750, the creditor held it to a limited extent by virtue of contract. But here the corporation's officers were restricted only by the dictates of prudence. We are of opinion that their decision and the corporation's straitened circumstances were not similar in nature to a receivership within the meaning of section 107 (d) (2), and accordingly hold that the section is here inapplicable.
This holding makes*91 it unnecessary to decide whether or not the corporation was under an obligation to pay the salaries in controversy during the preceding years and whether or not the amounts of the payments made in 1944 and 1945 were less than 15 per cent of the recipient's respective gross incomes for those years.
Decisions will be entered for the respondent.
Footnotes
*. Proceedings of the following petitioners are consolidated herewith: Eleanore Langer; C. Abbott Lindsey; and Pauline Lindsey.↩