*118 Decision will be entered under Rule 50.
Petitioner is a New York corporation incorporated in 1925. It began business in a small way which increased as time went on, and it became prosperous. It had two stockholders, one of whom was Israel Putnam, and much of the success of the corporation was due to his services. In 1940, because of his age and failing health, he retired from active duties. His salary was continued at reduced rates to the time of his death on June 6, 1942. He was receiving at the time of his death $ 6,500 per annum, payable weekly. Pursuant to resolutions adopted prior to Putnam's death, the payments of $ 6,500 per annum were continued to his widow for a period of 40 1/2 months after his death. The Commissioner allowed petitioner a deduction of these payments for a period of 18 months under the provisions of Regulations 111, section 29.23 (a)-9 and disallowed them for the taxable years 1944 and 1945, to the extent paid. Held, the payments should be allowed as deductions to petitioner under the provisions of section 29.23 (a)-9 for a period of 24 months after Putnam's death, including the 18 months already allowed by respondent. Held, further, *119 that the Commissioner is sustained in his disallowance of the payments as deductions for the remainder of the period during which they were paid.
*86 The Commissioner has determined deficiencies in petitioner's excess profits tax for the year 1944 of $ 3,698.75 and for the year 1945 of $ 5,825.40. The deficiency for 1944 results from the action of the Commissioner in adding to the net income reported by petitioner on its return: "(a) Payments to widow of deceased officer $ 6,500.00." The Commissioner also at the same time allowed the petitioner an additional deduction of "(b) New York State Franchise tax $ 2,173.97." Adjustment (a) is explained in the deficiency notice as follows:
(a) Payments of $ 6,500.00*120 in the taxable year to the widow of Israel Putnam, the former president of your company, under an arrangement providing no limitation as to the period of time involved, are held not to be allowable deductions as ordinary or necessary business expenses under the provisions of the Internal Revenue Code.
The deficiency for 1945 results from the action of the Commissioner in adding to the net income reported by petitioner on its return the following adjustments:
| (a) Withholding taxes | $ 583.82 |
| (b) Capital stock tax | 500.00 |
| (c) Payment to widow of deceased officer | 5,750.00 |
At the same time the Commissioner allowed the petitioner an additional deduction of "(d) New York State Franchise tax $ 19.83." *87 Adjustment (c) above is explained in the deficiency notice in the same manner as adjustment (a) was explained for the year 1944. Petitioner assigns error as to the foregoing adjustments for 1944 and 1945, as follows:
Four The determination of the tax set forth in the Notice of Deficiency was based upon the following errors:
| For the year 1944: | |
| Failure to allow deduction of payments to widow of deceased | |
| officer | $ 6,500.00 |
| For the year 1945: | |
| Failure to allow deduction of payments to widow of deceased | |
| officer | $ 5,750.00 |
*121 FINDINGS OF FACT.
The petitioner, a New York corporation, filed its returns for the taxable years with the collector of internal revenue for the 28th district of New York.
In 1912, I. Putnam and Charles E. Hart formed a partnership, the business of which consisted of manufacturing stoves and brooder heaters for use in the poultry business.
In 1922 or 1923, Putnam developed a secret formula for a product which causes dentures to be held more tightly in the mouth. The product is called "Klutch" and at the time of this proceeding the secret formula, for the use of which a royalty is being paid by the corporation, was owned by Putnam's family.
The petitioner was incorporated in 1925, its stock being owned equally by Putnam and Hart. It continued to carry on the poultry appliance business of the partnership and also began to sell "Klutch." Profits from the poultry business and the sales of "Klutch" were used to develop the further sales of "Klutch." The profits from the poultry business were negligible at the time of the hearing. On account of changes which had occurred in the raising of poultry that part of petitioner's business had greatly decreased. Both Putnam and Hart were active*122 in the development of the petitioner's business. The total volume of sales of the petitioner and the annual salary paid to Putnam for the period 1927 to April 1, 1940, were as follows:
| Year | Volume | Salary |
| 1927 | $ 87,448.43 | $ 5,000 |
| 1928 | 76,629.04 | 5,000 |
| 1929 | 84,575.51 | 5,000 |
| 1930 | 96,134.37 | 5,000 |
| 1931 | 89,186.09 | 5,000 |
| 1932 | 78,726.90 | 7,200 |
| 1933 | 77,842.81 | 8,600 |
| 1934 | 85,839.15 | 8,600 |
| 1935 | 100,515.25 | 8,960 |
| 1936 | 118,665.65 | 10,960 |
| 1937 | 118,129.69 | 12,000 |
| 1938 | 128,365.30 | 12,000 |
| 1939 | 142,298.44 | 12,000 |
| 1940 | 152,322.56 | 1 3,000 |
Putnam began to fail in health in 1940 and did not feel that he could spend as much time at the office of the petitioner as he had previously *88 done. He filed his resignation with the petitioner early in 1940, and on March 13, 1940, the board of directors of the petitioner adopted the following resolution:
On motion duly made, seconded and carried, it was
Resolved, That in recognition of valuable services to this corporation, Israel Putnam be voted a pension at the rate of $ 5000.00 per year, payable weekly, beginning April 1, 1940. And be it further resolved: That, upon his death, said pension is to be paid to*123 Florence M. Putnam, his wife, during her lifetime, in the same amount and in the same manner.
Putnam continued to come to the office of the petitioner from time to time thereafter and the petitioner continued to receive the benefit of his experience. At a meeting of the board held on June 11, 1941, the following resolution was adopted:
On motion duly made, seconded and carried, it was
Resolved: That in recognition of valuable services to this corporation, Israel Putnam be voted an unlimited annuity at the rate of $ 6500.00 per year, payable weekly, beginning July 1, 1941, and cancelling the pension voted to him March 13, 1940. And be it further resolved: That, upon his death, said unlimited annuity is to be paid to Florence M. Putnam, his wife, during her lifetime, in the same amount and in the same manner. In event of the death of both Israel Putnam and Florence M. Putnam, this unlimited annuity is to be equally divided among and paid to the surviving heirs of either party and in the same manner.
Putnam died June 6, 1942, at the age of 80 years. The amounts paid to him pursuant to the foregoing resolutions were as follows:
| 1940 | $ 3,750 |
| 1941 | 5,750 |
| 1942 | 2,975 |
Subsequent*124 to the death of Putnam the petitioner made payments to his widow pursuant to the foregoing resolution of June 11, 1941, until June 13, 1945, at which time the board adopted the following resolution:
The resolution relating to the unlimited annuity made under date of June 11, 1941, was submitted to counsel for a legal opinion. The corporation was advised that the manifest intent of the resolution was to provide a voluntary pension, therefore,
Upon motion duly made, seconded and carried, it was
Resolved: That the resolution recorded in the minutes of the monthly meeting of the Board of Directors on June 11, 1941, and referred to above, be amended by striking out the words "unlimited annuity" wherever they appear and substituting the words "voluntary pension."
The petitioner made payments to the widow pursuant to the foregoing resolution of June 13, 1945, until November 14, 1945, at which time the board adopted the following resolution:
Upon further advice of counsel, the resolution relating to a pension payable to Israel Putnam and his heirs made under date of March 13, 1940; the resolution made under date of June 11, 1941, establishing an unlimited annuity in place of *89 the*125 pension, and the resolution made on June 13, 1945, amending the second resolution, should all be rescinded, therefore
Upon motion duly made, seconded and carried unanimously, it was
Resolved: That the three resolutions referred to in a paragraph above be rescinded and that such pension, now payable to Florence M. Putnam, be terminated as of November 17, 1945, and shall no longer be in force and effect.
The petitioner, in November 1945, discontinued making payments to the widow because Putnam's family was disturbed over a discussion of the possibility that something might be included in Putnam's estate by reason of these payments and upon the further advice of its counsel that all resolutions relating to the widow and Putnam's heirs be rescinded. The payments made by the petitioner to the widow over a period of 40 1/2 months pursuant to the foregoing resolutions were in the following annual amounts:
| 1942 | $ 3,250 |
| 1943 | 6,500 |
| 1944 | 6,500 |
| 1945 | 5,750 |
Florence M. Putnam, the widow, has treated these pension payments as income, not as a gratuity, and has paid federal income taxes thereon. At the time of the death of Putnam his widow was about 79 years old.
The petitioner has*126 never had any trust or pension arrangements for any of its other employees and no employee of the petitioner has ever received payments similar to those received by Putnam and his widow.
The Commissioner allowed the petitioner to deduct the payments made to the widow in 1942 and 1943 in the total amount of $ 9,750, but disallowed as deductions the payments made in 1944 and 1945 on the ground that they were not ordinary and necessary business expenses under the provisions of the Internal Revenue Code. Under the facts of this case a period of 24 months is a "limited period" after the death of Israel Putnam in which to make payments of the salary he was receiving at the time of his death to his widow in recognition of the services rendered by him to petitioner during his lifetime within the meaning of section 29.23 (a)-9 of Regulations 111.
OPINION.
The petitioner states in its brief the only issue which we have here to decide, as follows:
On its returns for 1944 and 1945 the taxpayer deducted as an expense a pension paid to the widow of its deceased president and co-founder in the amount of $ 6500 in 1944 and $ 5750 in 1945. The Commissioner of Internal Revenue has disallowed these*127 items, asserting that they are improper deductions. The taxpayer takes exception to this disallowance.
The question for decision is:
Was the taxpayer correct in deducting these pensions as ordinary and necessary business expenses?
*90 The applicable statute and regulations are printed in the margin. 1
*128 The substance of petitioner's contentions as urged in its brief, as we understand them, is that these payments which we have here in controversy are deductible as ordinary and necessary business expenses because: (1) they were made in pursuance of contractual obligations and such payments represented additional compensation for services rendered to the petitioner by Israel Putnam during his lifetime and for which services he was inadequately compensated during his life, and (2) if petitioner is in error in contending that such payments were made to the widow of decedent Putnam in pursuance of contractual obligations, nevertheless, such payments are deductible by petitioner under the provisions of Regulations 111 which say:
* * * When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such payments may be deducted. * * *
Petitioner further contends that under the facts and circumstances in this particular case the period of 40 1/2 months for which the payments were made is a reasonable period and falls within the meaning of "limited period" as used in the*129 applicable regulations.
Respondent, on his part, contends that the payments in question were not made by petitioner in pursuance of any contractual obligation but were voluntary payments made to the widow of Israel Putnam after his death and are only deductible for "a limited period" as provided in section 29.23 (a)-9, Regulations 111, and that respondent's action in allowing such payments as deductions for 18 months complies with the applicable regulations.
We have no question here, of course, as to petitioner's right to deduct the retirement payments made to Israel Putnam during his lifetime. These are not before us in any way.
Both parties in their briefs discuss cases which they contend uphold their respective points of view as to the deductibility of the payments made to the widow. We have carefully examined all these cases but *91 we shall not undertake to discuss them all. There are two cases cited and discussed by the parties which, we think, merit out attention and discussion.
The first of these cases is Seavey & Flarsheim Brokerage Co., 41 B.T.A. 198">41 B.T.A. 198. In that case, in 1928, the taxpayer in order to retain the services of a valuable *130 employee who was not a stockholder agreed, in addition to the compensation he was then receiving for his services, to pay to his widow after his death $ 12,000 per annum from the net earnings attributable to its St. Louis office. Under these circumstances we held the payments made to the widow of Milton Flarsheim in 1934 under the terms of the agreement were an ordinary and necessary expense paid or incurred during the year 1934 by the taxpayer in connection with its business and were deductible. After reciting the circumstances under which the agreement to make such payments was made, we said:
In this situation petitioner sought to retain Milton's services if possible, and in order to meet his requirements agreed, in addition to the compensation which he was then receiving for his services, to pay to his wife, if she survived him, $ 12,000 a year during her lifetime. Obviously, this was additional compensation for his services. There is no contention that the $ 12,000 was a gift by petitioner or that it was in excess of what Milton's services were reasonably worth. * * *
Manifestly, we do not have any such facts here. When all the facts are taken into consideration, we do not*131 think that it can be said that the payments made to Florence M. Putnam after her husband's death were contractual as was the case in Seavey & Flarsheim Brokerage Co., supra. In our findings of fact we have given the several corporate resolutions under which these payments were made. The resolution of June 13, 1945, reads:
The resolution relating to the unlimited annuity made under date of June 11, 1941, was submitted to counsel for a legal opinion. The corporation was advised that the manifest intent of the resolution was to provide a voluntary pension, therefore,
Upon motion duly made, seconded and carried, it was
Resolved: That the resolution recorded in the minutes of the monthly meeting of the Board of Directors on June 11, 1941, and referred to above, be amended by striking out the words "unlimited annuity" wherever they appear and substituting the words "voluntary pension."
Therefore, considering all the facts in the instant case, we think we must conclude that the payments made to Florence M. Putnam after her husband's death were not contractual as in the Seavey & Flarsheim Brokerage Co. case but were voluntary payments to be made for a *132 limited period.
The payments made to Florence M. Putnam being voluntary and not contractual, it seems to us fall within the ambit of McLaughlin Gormley King Co., 11 T. C. 569. In that case the taxpayer was a Minnesota corporation. Its president died on July 7, 1939, and the *92 taxpayer, pursuant to a resolution adopted unanimously at the annual meeting of its stockholders on November 14, 1939, paid to his widow the remainder of her husband's salary for the month of July 1939, and thereafter $ 300 each month through the fiscal year ended September 30, 1943. We held that payments made by the petitioner subsequent to November 30, 1941, were not deductible by the taxpayer as ordinary and necessary business expenses under section 23 (a), I. R. C. or the provisions of section 29.23 (a)-9 of Regulations 111. Thus the payments made to the widow of Alexander McLaughlin, founder of the business of McLaughlin Gormley King Co., after his death which had been allowed as deductions by the Commissioner to the corporation for a period of 29 months after the death of the deceased officer of the corporation were not disturbed by us but we declined to allow the*133 deduction for any additional period. In that case we said:
It is our conclusion that, in the absence of a contract liability, an established pension policy, or a showing that such payments were for past compensation and were reasonable in amount, the payments may not be deducted under section 23 (a). We do not understand that petitioner claims that any business benefits flowed to it as a result of the payments in question.
The deficiency notice states that the "limited period" for which the petitioner could claim deductions for the payments made to Elizabeth J. McLaughlin terminated not later than November 30, 1941, 29 months after they were initiated, by virtue of section 29.23 (a)-9 of Regulations 111.
The effect of our decision in that case was to sustain the determination of the respondent.
Regulations 111, section 29.23 (a)-9, as we have pointed out, provides for the deductibility of salary payments to the widow or heirs of a deceased officer or employee for a limited period in recognition of past services rendered. This provision first appeared in Regulations 45 under the Revenue Act of 1918 and it has remained more or less without change in subsequent regulations. But*134 the limitation on the period within which deductible payments may be made has not been expressly defined. We think what is "a limited period" within the meaning of the regulations will depend upon the facts of each particular case. In the instant case the Commissioner has allowed the deduction for a period of 18 months. After careful consideration of all the facts, we think that a period of 24 months is "a limited period" within the meaning of Regulations 111, section 29.23 (a)-9. The Commissioner has already allowed deductions for a period of 18 months in prior years. In a recomputation under Rule 50 the payments to Florence M. Putnam for the first six months of 1944 should be allowed as deductions so as to complete the period of 24 months as "a limited period." The Commissioner is sustained in his disallowance of the deductions for the remainder of the period in which the payments were made.
Decision will be entered under Rule 50.
Footnotes
1. 1/4 year.↩
1. INTERNAL REVENUE CODE.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
(1) Trade or business expenses. --
(A) In general. -- 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. * * *
REGULATIONS 111.
Sec. 29.23 (a)-9. Pensions -- Compensation for Injuries. -- Amounts paid by a taxpayer for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such payments may be deducted. As to deductions for payments to employees' pension trusts, see section 23 (p)↩.