*1440 Amounts paid by a corporation to the estate of a deceased officer equal to the salary formerly paid him during his life held not deductible.
*1031 Respondent determined deficiencies of $5,338.78 and $2,700 in petitioner's income taxes for 1930 and 1931. He disallowed the deduction as a business expense of an annual payment of $22,500 to the estate of a deceased officer.
FINDINGS OF FACT.
Petitioner is a Pennsylvania corporation, with principal office at Philadelphia. It owned a 24-story building having 200 tenants and yielding an annual gross income of over a million dollars. Half of its capital stock was owned by Samuel M. Clement, Jr., at the time of his death, December 21, 1926. Clement was then petitioner's vice president, and received for his services as such an annual salary of $22,500. On April 23, 1925, decedent and B. M. Saul, petitioner's president and owner of the other half of its shares, entered into an agreement (to which petitioner was not a party) that each of them should draw*1441 equal salaries from petitioner, not in excess of $22,500 annually, for 30 years or until a purchase of petitioner's stock by the Pennsylvania Co. for Insurances on Lives and Granting Annuities. The second paragraph of the agreement provided that:
In the event of the death of either Clement or Saul prior to the termination of this agreement, there shall be paid yearly to the legal representatives of the deceased a sum equal to the amount of salary paid to the survivor.
In January 1927 Robert F. Irwin, Jr., and the said Pennsylvania Co. qualified as executors and trustees of decedent's estate. After a discussion with the Pennsylvania Co.'s trust officer concerning the agreement between decedent and Saul, Irwin, who was a practicing lawyer, consented to serve as director and vice president of petitioner and to have the $22,500 paid by petitioner to Clement's estate. Irwin was elected a director in January 1927, and vice president the following May. In these capacities he attended the directors' meetings and conferred with the manager of petitioner's building. He received no salary, although in 1931 he received $2,500 which was voted and paid as "additional compensation" to all*1442 petitioner's officers in 1931. The president's annual salary in 1930 and 1931 was $22,500; that of the secretary and treasurer, $10,000.
Petitioner paid $22,500 to Irwin, as trustee of decedent's estate, in 1930 and the same amount in 1931. Respondent disallowed these payments as deductions in said years.
OPINION.
STERNHAGEN: We are of opinion that the payments made by petitioner to the estate of its deceased officer were not "salaries or other compensation for personal services actually rendered," nor were they in any other respect "ordinary and necessary expenses paid or *1032 incurred during the taxable year in carrying on any trade or business," section 23(a), Revenue Act 1928. The estate as such could render no "personal services" as an officer or director of the corporation; but, more important, the evidence here shows none. Irwin was performing some service for the corporation and was at the same time an executor of the estate, but we find it impossible to say that the estate was performing the service. See *1443 ; ; . The fact that Clement and Saul, the two shareholders, agreed with each other that their estates should draw the stated amount from the corporation after their deaths cannot fix an obligation upon the corporation or determine the character or deductibility under the revenue act of the payment when made. This would be clear if there had been other shareholders; and the fact that there were no others gives strong support to the view that this was a method of distributing corporate earnings in the guise of salaries. ; .
If however, the $22,500 should be regarded as compensation for Irwin's services, the evidence of the nature and extent of such services still fails to show that such amount was no more than a reasonable allowance therefor. It shows, in our opinion, that it was more than reasonable for what Irwin did for the corporation. Recognizing as we do the right of a corporation to exercise a flexible judgment*1444 in such matters, , we must also recognize the Commissioner's function and duty to confine such deductions within the limits of reasonable compensation for services actually rendered. And this question is always present when the deduction is at issue. ;; ; ;
If the deductibility of this payment be judged not by the law applicable to salaries, but as a more general expense, it seems to us to be neither ordinary nor necessary as those statutory terms have been considered by the Supreme Court in its most recent opinion on the subject, .
The payment is one of those nondescripts which are not within the deductions provided by statute, cf. ; *1445 .
Judgment will be entered for the respondent.