1930 BTA LEXIS 1923">*1923 1. DEDUCTIONS - EXPENSE - REASONABLE SALARIES. - Petitioner, a corporation, all of whose stock was owned in equal amounts by its three general officers, credited in equal amounts to such officers as salaries and deducted as an xpense, all net earnings in excess of its corporate exemption of $2,000. There being no evidence that fixed salaries were voted, held, that such action indicated merely an intended distribution of earnings to these individuals as stockholders and petitioner was entitled to take credit as an expense for only such portion of the amounts credited as represented reasonable compensation for services actually rendered.
2. Id. - Reasonable compensation for services rendered by petitioner's officers determined.
21 B.T.A. 91">*91 This appeal is from the determination of a deficiency of $2,110.44 in income tax for the calendar year 1923, arising from the disalloiwance by the respondent of deductions taken by petitioner in making its return for that year of $1,500 as representing depreciation on contracts and $15,383.52 of a total of $33,383.521930 BTA LEXIS 1923">*1924 claimed by respondent to represent officers' salaries. At the hearing petitioner presented only the issue in respect to the item of $15,383.52.
FINDINGS OF FACT.
Petitioner is a Missouri corporation organized in 1922, and has carried on since organization, a general real estate and insurance business at St. Louis. In the calendar year 1923 its outstanding capital stock was 2,200 shares of $22,000 par value which was owned in equal amounts by its three officers, August C. Hilmer, president, Joseph B. Dutton, vice president and secretary, and Edward Kehlenbrinck, treasurer, who actively managed its affairs and carried on its business. These three individuals were experienced real estate men and Hilmer was also a lawyer.
In the calendar year 1923 the gross income of petitioner from all sources was as follows:
| Real estate commissions | $30,653.77 |
| Insurance commissions | 5,294.39 |
| Rental commissions | 4,647.42 |
| Attorney fees | 2,341.87 |
| Notary fees | 433.70 |
| Interest | 1,725.65 |
| Commissions on loans | 4,472.61 |
| Cash overz | 24.22 |
| Total | 49,593.63 |
21 B.T.A. 91">*92 In making its return for that year petitioner took credit for the following deductions:
| Gross income | $49,593.63 | |
| Compensation of officers | $33,383.52 | |
| Rent | 360.00 | |
| Interest paid | 1,408.49 | |
| Bad debts | 110.78 | |
| Depreciation | 2,25o.00 | |
| Expenses | 10,077.84 | |
| Total | 47,593.63 | |
| Net income reported | 2,000.00 |
1930 BTA LEXIS 1923">*1925 The item of $10,077.84 deducted as a total of the expenses consisted of the general expenses of the business, including the salaries of a clerk, bookkeeper, stenographer, and collector, who were the only other individuals besides the three stockholders employed in the business. The $2,000 net income reported there was offset by the $2,000 corporate exemption, resulting in no tax being computed as due on the return.
Upon audit of this return respondent disallowed $1,500 of the total of $2,253 deducted as depreciation. This amount of $1,500 represented alleged depreciation on the capital value of certain real estate sale contracts paid into the business on organization for capital stock. Respondent also disallowed $15,383.52 of the total for which petitioner took credit as officers' salaries. All of this total in the sum of $33,383.52 represented credits in equal amounts to the three officer-stockholders as salaries. Respondent determined as reasonable salaries for each of these individuals the sum of $6,000, allowing a deduction on this account of $18,000.
The three officers of petitioner managed and directed all of its affairs and their individual work and solicitation1930 BTA LEXIS 1923">*1926 brought in all of the items of busines from which the corporate income was derived. Had petitioner, after obtaining this business, employed real estate and insurance salesmen on commission, it would have had to pay for such services approximately 50 per cent of the gross commissions derived from its sales and rentals.
OPINION.
TRUSSELL: The sums credited by petitioner in the taxable year as salaries to its three officers, who owned all of its stock in equal amounts, were in proportion to their stockholdings, and in a total sum amounting to its entire net income without deduction of these amounts and in excess of $2,000, which was the sum of its corporate exemption. There was no evidence of the amount of $11,127.84 credited to each of these officers being voted them as salaries by petitioner, or any arrangement agreed upon for determining salaries 21 B.T.A. 91">*93 upon the basis of earnings, and under which they would have been entitled to the sums credited to them. It is apparent that the allocation of these credits to the three individuals was merely the distribution to them of corporate earnings including such amounts as would represent reasonable salaries for their services. 1930 BTA LEXIS 1923">*1927 We agree with respondent that petitioner is not entitled to deduct, as expenses, these amounts as credited, but only such portion as would, under the facts of the case, represent reasonable salaries. Respondent has allowed the sum of $18,000 as salaries of $6,000 each to these officers, but under the facts proven it is our opinion that the services in question justify more compensation. The circumstances are unusual. The invested capital of the business is small, and played little part in producing the income which was quite substantial and due to the individual efforts of these officers. Practically all of it represented commissions and fees on business acquired and transacted by them individually or jointly. It is shown that, on the one item of commissions collected on sales made of real estate, had petitioner employed salesmen on commission to close the deals it would have been required to pay for such services almost the amount which respondent has allowed, and had it also employed agents to transact the business from which its additional income was derived, the compensation paid would have been materially in excess of that amount, yet, in addition to performing this service, 1930 BTA LEXIS 1923">*1928 these three individuals, by their personal efforts, procured the business for petitioner, and furnished the direction and executive management of all of its affairs.
We think salaries of $10,000 each for the services of these three individuals are reasonable and justified and represent proper deductions from gross income by the petitioner. We note that after payment of such salaries the business would show a net earning of more than 25 per cent upon the capital invested.
Judgment will be entered under Rule 50.