*3207 Held, That the amount of $28,000, authorized and paid the general manager of the petitioner for personal services rendered, was no more than reasonable compensation and is a proper deduction from petitioner's gross income for the taxable year, under the provisions of sections 234(a) and (a)(1) of the Revenue Act of 1918.
*635 This proceeding results from the determination of a deficiency in income and profits taxes for the year 1920, amounting to $11,189.70.
Petitioner alleges error in that the deduction from income has not been allowed of an amount of $8,000 paid for personal services.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office at Rock Island, Ill., and is engaged in the manufacture and sale of doors, windows and other mill work. Another corporation, known as the St. Louis Sash & Door Works, of St. Louis, Mo., sells the products of the petitioner in southern territory. The two corporations filed a consolidated return for the taxable year, and the tax has been determined upon a consolidated basis.
*3208 In the year 1906 Charles Esplin entered the employ of Weyerhaeuser & Denkmann in the capacity of auditor. In March, 1910, Esplin was sent to Rock Island, Ill., to audit the accounts of the petitioner and also of the St. Louis Sash & Door Works, hereinafter referred to as the affiliated company. In June, 1910, he was directed to return to the office of the petitioner, and in June or July, 1910, he was appointed secretary and treasurer and general manager of the petitioner. At the annual meeting in 1911, in St. Louis, he was made second vice president and manager of the affiliated corporation. Since that time Esplin has been in full charge of the management of both corporations.
In 1918 the local manager of the St. Louis corporation died and Esplin took over the local management there. In the year 1919 Esplin spent practically all of his time in St. Louis, but he remained in control of both corporations, and maintained management of the affairs of the petitioner mainly by telephone and by mail. In 1920 it was not necessary for Esplin to spend so much of his time in St. Louis, although he visited that city about every week, and he continued as manager of both corporations.
*3209 *636 At meetings of the boards of directors of both corporations on January 27, 1919, Esplin was authorized to fix the amounts of the officers' salaries.
Esplin received a salary of $12,000 per annum from the petitioner in 1919, and none from the affiliated company. At this time Frederick C. Denkmann was a director and president of the petitioner. Esplin discussed several times with Denkmann a suggestion to increase Esplin's salary. Nothing was done, however, in this connection until after a conference between Denkmann and Weyerhaeuser, another director at Tacoma, Wash., in the middle of 1920, when it was decided, and Esplin was accordingly later instructed by Denkmann, to pay an annual salary to Esplin of $20,000, with a further payment to Esplin in 1920 of an amount of $8,000 for services rendered in 1919. Denkmann directed Esplin to distribute the expense of his annual salary of $20,000 in the proportions of $8,000 to the affiliated company and $12,000 to the petitioner. Denkmann and Weyerhaeuser owned or controlled through affiliated interests 80 per cent of the capital stock of petitioner. Esplin held the remaining 20 per cent of the stock of petitioner. The*3210 increases in salary were accrued upon the books in 1920. It was not the custom to discuss matters of salary at the meetings of the directors or of the stockholders and no formal action has ever been taken relative to the salary of Esplin, other than approval of the annual financial statements to the stockholders.
In 1920 the plant of the petitioner at Rock Island, Ill., covered four city blocks with 3-story buildings, and employed approximately 400 people. At that time the St. Louis corporation had about 100 employees. The gross income reported in the consolidated return for 1920 amounted as follows: to petitioner, $668,407.41; to the affiliated company, $436,481.40. The net income was reported in the return as follows: for petitioner, $400,880.10; for the affiliated company, $218,811.22 (after deducting the entire amount of compensation for services entered upon the books). For 1920, a deduction was claimed in the return for salaries as follows:
| Schedule A-13, Compensation of officers. | |
| Rock Island Sash and Door Works, Charles Esplin, Secretary Treasurer and General Manager | $12,000.00 |
| St. Louis Sash and Door Works, Charles Esplin, President, Treasurer and General Manager | 8,000.00 |
| A. A. Behrens, Assistant Secretary and Assistant $5Treasurer,600.00 | |
| Schedule A. Deductions. | |
| Line 13. Compensation of officers | 33,600.00 |
*3211 Note: The additional payment of $8,000 was not specified in Schedule A-13.
Petitioner reported on the accrual basis.
*637 OPINION.
LANSDON: The sole question to be decided in this case is whether, in addition to the deduction of salaries which has been allowed by the respondent, the taxpayer is entitled to deduct from income an amount of $8,000 additional salary for the preceding year which was determined during the taxable year to be due to the general manager of the affiliated companies.
Petitioner claims the right to the deduction under the provisions of the Revenue Act of 1918 reading as follows:
SEC. 234 (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which*3212 it has no equity.
The facts are undisputed. In the middle of the taxable year after oral discussions which had begun in the previous year, the salary of the general manager was advanced by appropriate though informal action of the directors to $20,000. The deduction of this amount has been allowed by the respondent in the taxable year. Cf. . In addition, in recognition of the fact that he had performed signal service in a dual capacity during 1919, a payment of $8,000 to the same party was authorized as and for salary for the year 1919. Respondent disallowed this latter payment as a deduction from petitioner's income in 1920.
Petitioner contends that even though the payment of the $8,000 was for services in 1919, it is deductible in 1920, since it was actually incurred in 1920, and furthermore, the deduction of salaries claimed for 1920 is "reasonable." In support of the contention that the deduction claimed is reasonable, petitioner relies upon the opinions of the recipient of the salary and of another who was president of petitioner in the taxable year, and also upon financial statistics of the operations during the taxable*3213 year, including the gross receipts, net profits, and aggregate amount of salaries of officers deducted in the return.
Entirely regardless of the motives that prompted the action of the petitioner in this proceeding, the amount of $8,000 was a liability for personal services incurred and paid in the taxable year. In our opinion, the facts we have found sustain the petitioner's contention that such amount was no more than reasonable compensation for the services rendered by Esplin in the taxable year. The petitioner is entitled to deduct the amount of $28,000 from its gross income in the *638 taxable year as ordinary and necessary business expense. ; ; ; ; .
Decision will be entered for the petitioner.