*2041 1. Period of limitation for 1922 begins to run from the date of filing of the completed return and not from date tentative return was filed.
2. Total compensation paid in 1922, 1923, 1924, and 1925 to stockholder-employees of the petitioner, held to be reasonable compensation for personal services actually rendered.
3. Disallowance of amount designated on return "Reserve for Discounts and Commissions" sustained for lack of sufficient evidence to show error on part of Commissioner.
*893 In these proceedings, which were consolidated for hearing and decision, the petitioner seeks a redetermination of its income tax for the following years and in the following amounts:
| 1922 | $5,601.77 |
| 1923 | 26,558.40 |
| 1924 | 10,121.18 |
| 1925 | 6,778.48 |
The errors alleged are that: (1) the respondent erred in failing to allow the petitioner to deduct as ordinary and necessary expenses the following amounts, which were paid and/or incurred to employees as compensation for personal services actually rendered*2042 during the respective years:
| 1922 | $64,950.00 |
| 1923 | 210,000.00 |
| 1924 | 77,010.00 |
| 1925 | 51,597.37 |
(2) the respondent erred in refusing to allow as a deduction from gross income for the year 1922 the sum of $1,966.46, which amount represented a liability fixed, accrued and determined as at December 31, 1922, to the Pacific Mutual Door Company of Tacoma, under the terms of a sales contract with that company; (3) the respondent erred in determining a deficiency in income tax for the calendar year 1922, more than four years after the filing by the petitioner of a tax return on or before March 15, 1923, and after the expiration of the statutory period of limitation.
A further assignment of error involving depreciation disallowed for the years 1922, 1923, 1924, and 1925 was withdrawn by the petitioner at the hearing.
FINDINGS OF FACT.
A small group of men conceived the idea of organizing a cooperative association composed entirely of workmen, for the purpose of building a plant and engaging in the manufacture of veneer. Under the leadership of E. E. Westman, who obtained contracts with a majority of the men, the petitioner, Olympia Veneer Company, was organized*2043 as a commercial corporation under the laws of Washington early in 1921. During all the years in question, it maintained its plant and offices in the city of Olympia, Wash. The original capital stock was divided into 200 shares of the par value of $500 each. It was increased in July, 1921, to $125,000, divided into 125 shares of $1,000 each, and in January, 1925, to $300,000, divided into 300 shares of the par value of $1,000 each.
The organizers sought to interest men of proven ability from different parts of the State. None of the stockholders of the petitioner *894 during the years 1922 to 1925, inclusive, had had any previous experience in the manufacture of veneer products, nor had they worked in a plant which manufactured veneer products, but they were men experienced in the logging industry, men skilled as mechanics, engineers, carpenters, hardwood floor layers, electricians, etc., and were industrious and serious workers.
When the company was organized, the manufacture of veneer for commercial use was practically unknown in the Pacific Northwest, as most of the companies manufactured it for their own use in connection with other manufacturing.
Each of the*2044 men whom the organizers interested in the corporation subscribed to and paid for one share of stock upon the understanding that each man, whether president or officer or serving in any capacity, should receive the same wages, small in amount, but to be increased to a fair compensation as conditions justified. It was believed that if all men received the same wages they would give better cooperation and do better work, even though some might thereby receive more and others less than they could have obtained elsewhere. The organizers were aware of the fact that a cooperative shingle plant in Olympia, which did not pay uniform wages, had failed.
Each man was required to sign a contract of employment wherein he agreed to devote his entire time to the company's business, to waive all lien claims, and to offer his stock to the company in the event he desired to sell. This contract provided:
Contract No.
OLYMPIA, WASHINGTON.
For the consideration of $1,000, the Olympia Veneer Company, Inc., agrees to give work in their plant and give said one pro rata share of all profits arising from the manufacture and sale of wood products, and shall own one undivided pro rata share of all*2045 stock held, owned or controlled by Olympia Veneer Co., Inc. agrees to do any kind of work in or about the plant in a creditable manner not to work for his personal interest but for the interest of all concerned. agrees to work without any compensation whatsoever other than stated above.
And said further agrees that he will waive any and all claims of lien on any of the property herein contemplated or to be acquired by the Olympia Veneer Co., Inc., for and on account of performing the labor herein agreed to be done, and this waiver of rights of lien shall be as binding as if a separate and distinct indenture or waiver had been signed by .
If is absent from duty from an unavoidable cause he, his heirs or assigns shall receive his share of the profits, etc., less the cost of a capable person to fill his position. Olympia Veneer Co., Inc., and jointly agree that it is the purpose and intention of this contract to be fair and just to all concerned.
*895 Any stockholder desiring to sell his stock in the company shall notify the Secretary in writing, at least thirty days, of his intention and shall in the same notice offer to sell same to the company at the market value*2046 of the same at the time, the market value being determined by the stockholders. The Board of Trustees shall have ten days after the Secretary receives such notice in which to decide whether the company shall purchase the same.
Provided, that no stockholder shall represent that he controls any particular job of work in the company and it shall become his duty to advise any person desiring to purchase his stock that only persons working for the company may become stockholders.
Provided, further, that if such retiring stockholder quits work before sale of his stock is adjusted the Board of Trustees may fill his vacancy and charge the wages so paid to his stock.
Provided further, that the company shall have not less than thirty days after accepting such offer in which to make payment for such stock.
OLYMPIA VENEER COMPANY, INC.
Pres.
Sec.
The by-laws provided that no member should own more shares of stock than any other member. This provision was to prevent any one from securing control of the company and to assure uniform participation in the company's profits. Originally, each member owned only one share of stock, but in 1925, the capital was increased*2047 and the increase was subscribed and paid for by the members so that each member owned three shares.
The by-laws also provided that the affairs of the company should be managed by a board of trustees and that no one could become a stockholder without being elected to membership by a majority vote of the trustees and that every stockholder desiring to sell his stock must offer it to the company. There was nothing in the articles of incorporation contrary to the provision in the by-laws that the affairs of the company should be managed by a board of trustees. No amendment to the by-laws was made changing this provision.
The stockholders built the plant, installed the machinery and equipment, and in August, 1921, began the manufacture of plywood, also known as laminated wood, which consists of three or more pieces of veneer glued together. Between every two pieces of veneer there is a crossband, the grain of which runs the opposite way to the grain in the two sheets of veneer.
At the end of six months the members had succeeded in putting out an excellent product. In the early part of 1922, the Pacific Mutual Door Company of Tacoma, Wash., a company engaged in millwork, particularly*2048 the making of doors and inside trim for houses, took over the entire output of the petitioner under a verbal contract. At the time the verbal contract was made the president and sales manager of the Pacific Mutual Door Company attended *896 a meeting of the stockholders of petitioner and told them that they were making a good product and that if they would continue to keep up the standard, the door company would enter into a written contract to take over the entire product and sell the same. The standard was kept up and a written contract was executed in the latter part of 1922, effective January 1, 1923. From that time on, through all the years involved, the petitioner sold its product through the Pacific Mutual Door Company on the basis of a 5 per cent commission. This company has never had any diffculty in disposing of the entire output of the petitioner. Complaints as regards grades and quality of the veneer produced have been very exceptional. The petitioner had acquired such a reputation for its product by the year 1923, that the door company was able to pick and choose the orders it gave the petitioner to fill. From 1923 on, the petitioner was manufacturing veneer*2049 to order, which is more difficult than manufacturing to stock, and requires a greater degree of skill.
During the years 1921 and 1922, the company operated two shifts. From the latter part of 1922 or early part of 1923, and through 1923, 1924, and 1925, the company operated three shifts. These shifts were from 7 a.m. to 3.30 p.m., from 3.30 p.m. to 12 p.m., and from 11 p.m. to 7 a.m. The last shift mentioned was known as the "graveyard" shift and only the lowest grade of plywood was put through on this shift.
The stockholders, after building and equipping the plant, were able to do all of the work until the latter part of 1922, when it became necessary to obtain additional unskilled help. The number of stockholder-employees during the years involved was:
| 1922 | 118 |
| 1923 | 108 |
| 1924 | |
| 93 | |
| 1925 | 92 |
Throughout the years in question, stockholders had charge of all the machines in the plant and were placed on all the important and pivotal positions. The log buyers, the log pond and drag-saw men, steam-vat operators, lathe men, clipper men and spotters for the clipper, operators of the drier machines, graders of sheet veneer, gluers, press-men operators, saw operators, *2050 panel graders, sanders, patchers, shipping clerk, foremen, and firemen, were stockholders. Most of the men who proved to be unsatisfactory workers were weeded out during the year 1921, and the early part of the year 1922. The others who did leave, left because they could not stand the hard work, or to accept better positions with other firms.
The stockholders worked harder than the average employees in other plants. As a rule, they worked eight hours a day, but very *897 frequently worked longer. Overtime was paid on the basis of straight time, while other plants paid time and one-half for overtime. The stockholders were much more industrious and worked faster and harder than the employees of other plants, turning out more footage per man, and with greater accuracy. An honor system of keeping time was employed at the plant, each stockholder taking his own card and marking his own time.
In addition to the other work, the stockholders were required to attend several informal meetings each month, at which they would discuss ways and means of improving the methods of manufacture and other branches of the business. These meetings, called report meetings, were often held*2051 on Sunday and would last from two to five hours, no compensation being paid for attendance, and nonstockholders did not attend. The officers and all the trustees of the company were stockholders, all of whom worked in the plant the same as the others. Trustees' meetings were held every Monday evening, no compensation being paid.
The stockholders developed improvements in the system of logbuying, grading, steaming, rolling, and peeling. They also developed improvements in the lathe machine, which were patented and adopted by the St. Joe Machine Company, improvements on the clipper-table, perfection of the patching process, and other improvements, most of which have been generally adopted in the veneer industry in the Northwest. No additional compensation was paid for these improvements, which saved the company substantial amounts.
During the years 1923, 1924, and 1925 the total number of hired men, nonstockholders, employed by petitioner, and the average number of hired men employed at one time, were:
| Year | Total number hired men during year | Average number hired men employed at one time |
| 1923 | 93 | 33.6 |
| 1924 | 109 | 40 |
| 1925 | 104 | 48.7 |
The wage paid to*2052 nonstockholders who were employed by petitioner during 1923 was from $3.60 to $4.40 per day; during 1924, from $4 to $4.40 per day, and during 1925 the wage was $4 per day.
The nonstockholders were mostly unskilled workmen and were given minor jobs such as cleaning up, off-bearing from machines, piling up veneer, feeding the driers, and working in the fuel house. As many as could be used were placed on the "graveyard" shift. *898 When they were placed on more important work, they were always under the supervision of a stockholder. There was a considerable turnover among the nonstockholders, only two or three of whom have worked for the company during all the years in question. There were three skilled workmen among the nonstockholders to whom the above is not applicable, namely, the superintendent, the electrician, and a mechanic. The superintendent had experience as a lathe man, and received $300 per month at first and later $350, and was not docked for absence. He worked under a contract, going with the company when it first began manufacturing, and left in 1923 to become manager for the Tacoma Veneer Company, at better pay. The electrician was employed in 1925, *2053 first at 50 cents per hour and later at $175.50 a month. A mechanic was hired in 1925 at $200 per month.
The grade and quality of the product of the petitioner was superior to that of any other plant in the Northwest, and the output per man was much more than in any other plant. On an average, the stockholders of the petitioner delivered 50 per cent more work than the men in other plants.
On June 1, 1921, the wages of all stockholders were placed upon an equality at $4 per day. Only those who absolutely needed the money drew the full $4 per day. As late as January, 1922, the company was unable to establish a regular pay day. At a stockholders' meeting, held on January 10, 1922, the secretary reported that it was the sacrifice in wages that the members were giving, that was helping the company to meet the heavy expenses.
The original wage scale for 1922 was fixed at $4 per day, but it was understood by all that this was not to be the full compensation, but that the members were to receive more pay at the end of the year when the company could afford it. A wage of $4 per day was unreasonably low pay for the work done by the stockholders during the year 1922. The reason*2054 why a low wage scale was established with the understanding that additional compensation would be paid near the end of the year, was to enable the company to use the money for extension and operation and also to induce the members to stay with the company and work harder.
Under date of December 20, 1922, the board of trustees voted to each stockholder-employee additional compensation in the sum $50 per month for the time during which he actually worked in the plant of the company in the year 1922. This action was ratified at a meeting of the stockholders held January 13, 1923. The resolution of the stockholders reads as follows:
WHEREAS, during the year from January 1, 1922, to December 31, 1922, the stockholders of the Olympia Veneer Company employed in the plant of said company worked and received wages at the rate of only $4.00 per day, which *899 scale of wages was less than the wages paid in many other places for the same class of service performed, and
WHEREAS, it was the understanding among the stockholders of said company that when the business and financial condition of the company would make it possible for the company to pay such additional sum as would make*2055 the scale of wages more nearly a just and equitable scale in view of services performed, and
WHEREAS, it appears to the stockholders from the facts presented, that the financial condition and assets of the company at this time warrant additional pay being granted to the stockholders for such services so performed as recited in the paragraphs immediately preceding,
Now THEREFORE BE IT RESOLVED BY THE STOCKHOLDERS OF THE OLYMPIA VENEER COMPANY, that there be and there is, hereby voted to each individual stockholder employed and laboring in the plant of the Olympia Veneer Company during any portion of the time included between January 1, 1922 and December 31, 1922 in the sum of $50.00 per month for the time during which he was actually working in the plant of the Olympia Veneer Company between January 1, 1922 and December 31, 1922 as additional compensation to the amount heretofore paid or credited to said stockholders in said company.
BE IT FURTHER RESOLVED, that the Board of Trustees of the Olympia Veneer Company be and they are, hereby authorized and empowered to pay out and disburse to the several individual stockholders the amount respectively due to them at such times and*2056 in such amounts as to the Board of Trustees seems most in keeping with the best interests of the business and financial affairs of said Olympia Veneer Company.
BE IT FURTHER RESOLVED, That no stockholder of the Olympia Veneer Company shall claim or receive any interest on any amount due or to become due to him, according to the terms and conditions of this resolution.
BE IT FURTHER RESOLVED, That this resolution take effect and be in force, and have reference only to the business of the year beginning January 1, 1922 and closing December 31, 1922.
BE IT FURTHER RESOLVED, that this resolution is adopted by the stockholders of the Olympia Veneer Company for the purpose of ratifying and confirming the action of the Board of Trustees of said Olympia Veener Company, heretofore taken on December 20, 1922.
The additional compensation of $50 per month was based on services rendered and was paid only for the actual time each stockholder worked. The compensation voted to the stockholder-employees for 1922, plus the additional compensation, makes approximately $6 per day. The stockholders could have received $6 per day in 1922 by working on the outside. The total amount paid was*2057 reasonable compensation for the services performed. This additional compensation for 1922 was paid during 1923.
Under date of January 5, 1923, the board of trustees voted that stockholders working at the plant should receive $5 per day for the year 1923, upon the understanding that they would receive more at the end of the year, if production justified it. During that year, production increased about 10,000 feet per day. This was an unusually large output for a plant of this size and was more than that at any other similar plant.
*900 Under date of November 20, 1923, the trustees allowed a bonus of $100 for the month of November, payable to every member who worked in the plant. This bonus was paid in cash on November 28, 1923.
Under date of December 20, 1923, the trustees allowed a bonus of $100 for the month of December, on the same plan as for the month of November. This bonus was paid on December 22, 1923.
At the meeting held on December 20, 1923, which was a regular meeting, the board of trustees, by formal resolution, authorized the payment to each stockholder of additional compensation of $175 per month for such time as the stockholder was employed and*2058 working for the company, during the first ten months of that year. This resolution reads as follows:
WHEREAS, during the ten months of the year from January 1, 1923 to October 31, 1923, the Stockholders of the Olympia Veneer Company employed in the plant of said Company received wages at the rate of only $5.00 per day, which scale of wages was less than they might have received employed in similar work for other companies and received no dividend or compensation for the money invested in said plant. And,
WHEREAS, it has not only been the understanding among the stockholders of the Company employed in the plant but also the intention and policy of the Company that when the business and financial condition of the Company would make it possible to do so, for the Company to pay such additional sum as would make the scale of pay received by the men more nearly a just and equitable scale and return for the services rendered and performed by them to the Company. And,
WHEREAS, it appears to the Board of Trustees from the records of the Company and the facts appearing thereon that the financial condition and assets of the Company at this time warrant additional pay being granted to*2059 such of the stockholders as devoted their time, energy and attention exclusively to the promotion and carrying on of the business of the Company and rendering valuable services to the Company for such services so performed as is recited in the paragraph immediately preceding, NOW, THEREFORE,
BE IT RESOLVED BY THE BOARD OF TRUSTEES OF THE OLYMPIA VENEER COMPANY, That there be and there is, hereby voted and alloted to each individual stockholder employed and laboring in the plant of the Olympia Veneer Company, devoting his time, energy and attention to the promotion and upbuilding and conducting the business of said Company during the months January 1, 1923 to October 31, 1923 or any portion thereof, the sum of One Hundred Seventy Five ($175.00) Dollars per month for such time as he was actually engaged in working in said plant and devoting himself exclusively to the promotion and carrying on the business of said Olympia Veneer Company, as additional compensation for such services so rendered in addition to the amount heretofore paid or credited to said stockholder in said Company.
BE IT FURTHER RESOLVED, That it is the sense and judgment of the Board of Trustees of the Olympia*2060 Veneer Company that the amount alloted to the stockholders as additional compensation for services rendered as set forth hereinabove be disbursed and paid out to the stockholders entitled to the same at such times and in such amounts and in such manner as to the Board of Trustees seems most in keeping with the best interests of the business and financial affairs of said Olympia Veneer Company.
*901 BE IT FURTHER RESOLVED, That no Stockholder of the Olympia Veneer Company is entitled to or shall claim or receive any interest on any amount due or to become due to him according to the terms and conditions of this Resolution during such time or any portion of such time as may intervene between the date of adopting this Resolution and the date of disbursing the allotment herein made.
BE IT FURTHER RESOLVED, That this Resolution shall take effect and be in force only with reference to the business during the ten months of the year beginning January 1, 1923 and closing October 31, 1923.
This action was ratified by the stockholders at a meeting held on January 19, 1924.
The compensation allotted to the stockholders for the year 1923, together with the additional compensation, *2061 makes approximately $11 per day, which is about $275 per month. The stockholders would not have received on an average of $11 per day by working for someone else, during that year, but they would not have had to work as hard, nor was there any institution that afforded the same opportunity for work. No other veneer plant had anywhere near the same output per man as petitioner. In ordinary employment during that year they could have received on an average of $8 per day.
The services that were performed for the petitioner by the stockholders during the year 1923, considering the manner in which they worked, and the results accomplished, were reasonably worth the total compensation paid.
Part of the additional compensation allowed for the first ten months of 1923 was paid in cash to the members, and the balance was later applied by the members in payment of additional stock for which they subscribed in the year 1925, when the capital stock of the company was increased to $300,000.
Under date of January 7, 1924, the board of trustees fixed the wages of stockholders at $6 per day for the year 1924.
Under date of December 22, 1924, the board of trustees voted to each stockholder-employee*2062 additional compensation in the sum of $85 per month for the time during ten months which he actually worked in the plant of the company in the year 1924. No additional compensation was voted for July and August, since the plant was not running during those months. This action of the board of trustees was approved by the stockholders at a meeting held January 24, 1925. The resolutions of the board of trustees and of the stockholders approving such resolution are similar to those with respect to the year 1923. The additional compensation, together with the amount previously paid, made a wage scale of approximately $9.50 a day. The stockholders could have secured on an average of $8 per day during the year 1924 by working for someone else, and if they had put in the same overtime for someone else they could have received $9.50 per day. The compensation allowed *902 to the stockholders for the year 1924, including the additional compensation, was reasonable, considering the class of work done by the stockholders, the manner in which they worked, and the amount of work done.
By proper action by the board of trustees in January, 1925, the wages of the stockholders for the*2063 year 1925 were fixed at the rate of $8 per day. They could have earned this amount by working for someone else during this year. The services of the stockholders were reasonably worth this amount in 1925.
At several meetings of the board of trustees and of the stockholders during the year 1924 the question of increasing the capital stock of the company was discussed.
At the annual stockholders' meeting held on January 24, 1925, the stockholders voted to increase the capital stock of the company to $300,000, and each stockholder agreed to subscribe and pay for two additional shares of stock. A part of the additional compensation for 1923, but none of the additional compensation for 1924, had been paid to the stockholders, and it was voted to apply the extra compensation due each stockholder to the payment of the additional stock subscribed for by such stockholder, the balance, if any, to be paid in cash. Certain stockholders who left the company in June, 1924, to start another veneer plant had received their full amount of additional compensation for the year 1923 in cash.
Checks for the amount of compensation due each stockholder were issued. The checks at the time they*2064 were issued bore the following notation on the back: "Pay to the order of Olympia Veneer Co." Each stockholder immediately endorsed his check and turned it back to the corporation. The journal entries on petitioner's books, which reflect this transaction, are as follows:
| General Ledger Accounts | |
| $101,275.00 | Additional Comp. 1923 |
| 75,395.00 | Additional Comp. 1924 |
| Subscription to Capital Stock | $173,670.00 |
| Treasury Stock | 3,000.00 |
| Cash | ||
| $176,670.00 | Additional Compensation | |
| $176,670.00 | Compensation Checks |
Under date of February 6, 1925, the Commissioner of Internal Revenue, after negotiations with the taxpayer, allowed the additional compensation claimed for 1922 as a deduction from net income for that year. Later, as the result of a revenue agent's investigation, Commissioner disallowed the $50 per month additional compensation for 1922, the entire additional compensation for the years 1923 and 1924, and $2 per day of the $8 authorized and paid for 1925.
*903 No sick compensation was paid during 1922. At a stockholders' meeting held on January 13, 1923, the stockholders instructed the board of trustees to carry*2065 out the provisions of the by-laws with reference to sick compensation, with the understanding that no compensation be given for the first seven days and that the members in case of sickness prove their right to compensation. No part of the additional compensation voted to the members was paid as sick benefit at any time. None of the stockholders received the difference between the stockholders' pay and the pay of a nonstockholder if they were away from work for any other reason than sickness. The petitioner paid out only small amounts as sick compensation.
R. T. Nichols, one of the stockholders, died during the latter part of 1922. Petitioner wanted to buy his share of stock from his widow, but she refused to sell except at an exorbitant price and was so insistent upon receiving the wages which would have been due her husband if he had lived, that, beginning in June, 1923, certain amounts were paid to her by the petitioner. These payments represented the difference between the wages of a hired man and the wages of a stockholder, not including any of the additional compensation. Mrs. Nichols later brought suit claiming (1) that the additional compensation voted to the stockholders*2066 in 1923 was a dividend in which she was entitled to share, and (2) that of the $8 wage voted in 1925, $4 was a dividend to which she was entitled. Mrs. Nichols won on the first count and lost on the second count in the trial court. She appealed to the Supreme Court of Washington from the adverse part of the judgment. The Olympia Veneer Company, the petitioner herein, appealed from the judgment on the first count. The Supreme Court of Washington held in Mrs. Nichols' appeal that $2 of the $8 wage voted in 1925 was a dividend. The same Court held on the appeal of petitioner that for the year 1923 Mrs. Nichols was entitled, as a stockholder, to the amounts of additional compensation that were voted to be paid to the other stockholders, since such was a division of profits, but that she was not entitled to the amount which the petitioner had paid her in 1923, based on the difference in wages of a stockholder and a hired man, and as such amount was greater than the amount the Court found to be due as dividends, the judgment was reversed.
No dividends, as such, were declared and paid until 1925. The dividends declared in that year and later are as follows:
| Declared | Rate | Amount |
| Per cent | ||
| July 23, 1925 | 4 | $11,000.00 |
| Dec. 23, 1927 | 1 | 2,910.00 |
| June 30, 1928 | 2 1/2 | 7,300.00 |
| Sept. 21, 1928 | 2 1/2 | 7,300.00 |
| Oct. 26, 1928 | 2 1/2 | 7,300.00 |
| Dec. 7, 1928 | 2 1/2 | $7,300.00 |
| Dec. 22, 1928 | 5 | 14,600.00 |
| Feb. 23, 1929 | 5 | 14,600.00 |
| Mar. 23, 1929 | 2 1/2 | 7,300.00 |
*2067 *904 The outstanding capital stock of petitioner on the last day of December of each of the years in question, together with the net income for each of said years, after allowing the additional compensation claimed, and the ratio of net income to capital stock outstanding, is as follows:
| Year | Capital stock outstanding | Net income after deducting additional compensation | Ratio of net income to capital stock outstanding |
| Per cent | |||
| 1922 | $118,000 | $14,062.17 | 11.89 |
| 1923 | 108,000 | 27,250.58 | 25.23 |
| 1924 | 93,000 | 23,571.82 | 25.35 |
| 1925 | 275,000 | 54,391.09 | 19.78 |
The gross sales of petitioner for the years in question and the amounts disallowed by respondent as being distributions of dividends, are as follows:
| 1922 | 1923 | 1924 | 1925 | |
| Gross sales | $526,346.11 | $925,288.56 | $698,469.19 | $725,526.47 |
| Amounts disallowed | 64,950.00 | 210,000.00 | 77,010.00 | 51,597.37 |
The books of the petitioner were kept on the accrual basis during all of the years in question. The tax returns for each of the years in question were made upon the accrual basis and were accepted by the Commissioner on said basis. The additional compensation*2068 voted for the years 1922, 1923, and 1924 was credited to the stockholders on the books of the petitioner for each of the respective years.
On March 14, 1923, the petitioner filed with the Collector of Internal Revenue, District of Washington, a form entitled by it "Tentative Return," for the year 1922, showing only the estimated tax due.
The petitioner filed its completed income tax return for the year 1922 on June 15, 1923. This return shows in detail the sources from which the petitioner received income during said year 1922, and the various expenditures made by the petitioner during the year.
On May 19, 1927, the respondent notified the petitioner, by registered mail, of a deficiency in tax for the year 1922, and on June 27, 1927, the petitioner filed with this Board a petition for a redetermination of the said deficiency.
OPINION.
MATTHEWS: We will first dispose of petitioner's contention that the tentative return filed for the year 1922 was sufficient to start the running of the statute of limitations and that assessment and collection *905 of the tax for that year is barred. This contention is denied on the authority of the Supreme Court decision in *2069 Florsheim Bros. Dry Goods Co. v.. The Court held that a tentative return showing no specific items of income or deductions could not be considered a return as required by statute and was not sufficient to start the running of the statute of limitations. The fact that the estimated tax was greater than the tax due on the completed return is not material. The case of White v. Hood Rubber Co., relied on by the petitioner, was consolidated with the Florsheim case and the Supreme Court made no distinction, due to the fact that the tax shown on the tentative return was greater than that shown to be due on the final return.
The respondent in computing the tax for 1922, 1923, and 1924, disallowed the entire amounts of additional compensation voted at the end of each year on the ground that such amounts were dividends and not compensation for services rendered. For the year 1925, the respondent disallowed $2 of the $8 per day voted at the beginning of the year to be paid as compensation for that year, on the ground that this amount was a dividend.
The petitioner contends that all of the*2070 amounts disallowed which were paid to stockholder-employees as compensation for personal services actually rendered are deductible under the provision of section 234(a) of the Revenue Acts of 1921, 1924, and 1926, which allows 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. * * *
Whether the amounts disallowed by the respondent in the respective years were reasonable compensation for personal services, is a question of fact to be determined from all the evidence. ; ; .
This case is unique in that each stockholder owned the same amount of stock in the corporation, each stockholder was entitled and required to work for the corporation, each stockholder-employee was to receive the same rate of compensation, regardless of the job to which he was assigned, no person could become a*2071 stockholder without being elected to membership by a majority vote of the trustees, and any stockholder desiring to sell his stock was required first to offer to sell it to the company at the market value at that time, the market value being determined by the stockholders. Another unusual feature is that the stockholders who were elected as trustees *906 and officers of the corporation received no more for their services than did the stockholder-employees engaged on the various jobs in the plant, and such officers and trustees also worked in the plant along with the other members as much as their official duties would permit. Furthermore, the stockholders met often to discuss the problems of the manufacture of veneer.
Petitioner was the pioneer in the manufacture of veneer for commercial use in the Pacific Northwest, and by its methods of operation and the improvements in the system of manufacture and in the machinery used, developed by its stockholder-employees, it has revolutionized the plywood industry in the Northwest. It was successful from the very beginning.
The board of trustees properly authorized the compensation and the additional compensation claimed for*2072 each of the respective years. In , we said:
The amount of compensation which a corporation shall pay its officers for their personal service is, in the first instance, a matter within the judgment and discretion of its board of directors, and the only limitation upon the deduction of such amount for income-tax purposes is that the amount must be reasonable.
See also ; ; and .
The additional compensation was not voted or paid on the basis of stockholdings, but on the basis of time worked in the plant. There were some stockholders who received no additional compensation, and in the case of those who did, the amounts varied, showing that some did not work the entire time.
It is clear, from the resolutions adopted at the time the additional compensation was voted, that there was no intention of declaring a dividend on the stock of the corporation and that what the trustees had in mind (and also the stockholders, when they ratified the action of the trustees) was to pay as*2073 near adequate compensation for the services the stockholder-employees had rendered as the financial condition of the corporation would justify.
The regulations of the Treasury Department under the income tax acts provide that in general it is just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. There were no like enterprises or like circumstances in the Pacific Northwest during the years in question.
Judge by results, the total compensation paid was reasonable. The company had a fair return on its outstanding capital stock for each of the years in question after payment of the additional compensation: *907 11.89 per cent in 1922, 25.23 per cent in 1923, 25.35 per cent in 1924, and 19.78 per cent in 1925. In , where the net income after deduction of salaries claimed represented a return on the invested capital of 7.97 per cent, 8.59 per cent, and 10.31 per cent, we held that this indicated that the salaries were not too high. In *2074 , we held that where the ratio of net profits to capital was 16.94 per cent, the salaries claimed were reasonable, taking into consideration the nature of the services, etc.
The evidence was undisputed that the output per man of petitioner was greater than in any other veneer plant in the Pacific Northwest and that the grade and quality of the veneer was far superior to that of any other manufacturer in the Pacific Northwest. Edward E. Westman, the only witness for respondent, who was one of the chief organizers of the petitioner and who was secretary-treasurer until early in 1923, and who was president of petitioner from then until his retirement from the corporation in June, 1924, corroborated the testimony of petitioner's witnesses to this effect. He also testified that the compensation allowed in all the years was no more than reasonable for the amount of work done, that the petitioner received full value for the compensation and bonus allowed while he was with the company, and that the stockholder-employees of the petitioner were more valuable than the average employees in other plants.
*2075 When the amount of additional compensation paid in 1923 is compared with the amounts paid in other years, the question might be raised as to the reasonableness of the amount paid in that year; but when we consider that the output was increased 10,000 feet per day, that the gross sales were nearly doubled, and that after payment of the additional compensation the company had a return of 25.23 per cent on its outstanding capital stock, we do not think the amount unreasonable. See ; ;
Respondent has raised some question about the authorization of the additional compensation after the close of the year in which such additional compensation was accrued on the books of the corporation. The by-laws provide that the affairs of the corporation shall be managed by the board of trustees, and in each instance the additional compensation was voted by the board of trustees just prior to the close of the year for which such additional compensation was voted. At the annual stockholders' meeting in January of*2076 each succeeding year, the action of the board of trustees was ratified. We do not find that the by-laws were ever amended to require ratification *908 by the stockholders of the action of the board of trustees in determining the amount of compensation to be paid, and in our opinion the action of the stockholders was not necessary in order to fix the liability of the corporation to pay the amounts voted as additional compensation by the board of trustees.
A question was also raised by respondent as to whether the resolution of the trustees authorizing additional compensation for 1922 was actually written up in 1922. Westman, respondent's witness, who was secretary-treasurer of petitioner at the time, was uncertain as to whether the resolution of the trustees as to the additional compensation allowed for 1922 was actually passed on December 20, 1922, and stated that he believed the resolution was written up in January, 1923. He admitted that the question of paying the additional compensation for 1922 was discussed at the December meeting of the trustees. We do not think it is material when the resolution was actually written up. The minutes of the trustees' meeting held*2077 on December 20, 1922, state that such resolution was adopted then and the minutes of the annual stockholders' meeting, held in January, 1923, record the adoption of a resolution ratifying and confirming the action of the board of trustees "heretofore taken on December 20, 1922," authorizing the payment of additional compensation for 1922.
The fact that amounts were not determined until the end of the year, when the profits of the company could be determined, does not establish that they were dividends. In , we said:
* * * Additional compensation or "bonus" payments have become, especially since this country entered the World War, a recognized form of salary payment, used for the purpose of retaining the interest of the employees in the business without at the same time incurring any obligation in advance of the payment. Services are performed for salaries which would otherwise be inadequate, the person rendering them expecting to receive such a bonus but the employer being under no obligation to pay it. Such payments also have in them an element looking to future services, the recipient anticipating a further*2078 similar payment if the business justifies it.
In the case of , a corporation agreed to pay a percentage of its earnings to its officer-stockholders. In this case the Court said:
The policy of agreeing to pay a percentage of the earnings before they are earned, or even a sum in the nature of a bonus after they are earned, is based primarily upon sound business principles. It stimulates the activity, diligence, and ambition of the employees in the case of a percentage of the profits, and in both the case of a percentage and of a bonus it enables the corporation to justly compensate its employees without beforehand incurring the obligation. * * *
The action of the board of directors under ordinary circumstances in fixing the salaries raises a fair presumption of reasonableness in such case, and this presumption is the stronger in this case because the practice of compensating *909 on what may be called a contingency was a settled policy of the corporation extending over a period of years prior to the years in question here and after these years, and in each year it was based upon the profits for*2079 that year. If the profits were small, the sum realized from the percentage was small, and if the profits were large, the sum so realized was larger, depending in each year upon the loyalty, vigilance, and intelligent effort, and the stimulated ambition of each of the parties. The success of the business was largely due to the individual efforts of these men, and the diligence they displayed and attention they gave to the particular branch of the business allotted to them. Its earnings did not depend upon the activities and efforts of a large number of subordinates.
In the instant case the success of the business was wholly due to the individual efforts of each stockholder-employee and the diligence each displayed and the attention each gave to the particular job allotted to him.
The fact that the time of payment of such amounts was left to the discretion of the board of trustees does not affect the deductibility thereof. ; . In the latter case we said:
After a careful consideration of all the evidence we are of opinion that the salaries were reasonable and they were*2080 ordinary and necessary expenses of the business. We are unable to agree with the contention of respondent that the provision for deferment of the payment in cash of the liabilities of petitioner for these salaries until such time as the petitioner was possessed of sufficient cash to retire all its current liabilities operated to relieve petitioner of the liabilities. Petitioner was on the accrual basis and in our opinion, whether it quickly discharged in cash its liabilities for salaries is immaterial. We therefore conclude that the salaries of the three officers accrued upon the books and claimed as deductions from income should be allowed.
Certified copies of two opinions of the Supreme Court of Washington in the cases of Matie E. Nichols v. Olympia Veneer Co., Inc., a corporation, and Matie E. Nichols v. Olympia Veneer Co., Inc., and a copy of the judgment rendered in one of these cases were introduced into evidence. The Court held that all of the additional compensation for 1923 constituted dividends and that of the $8 paid in 1925, $2 constituted dividends. It is not contended by either party that the decisions of the Court are res adjudicata of the*2081 question before the Board, which is, "Were the additional compensation voted by the trustees to the stockholder-employees for the years 1922, 1923, 1924, and all of the wages paid in 1925, reasonable compensation for the services performed?" In , we said:
Stating the rule generally, it is that in order to render a matter res adjudicata there must be identity of the thing sued for, identity of the cause of action, and identity of the parties in the character in which they are litigants. ; . * * *
On *910 this question see also ; ; and . Neither the parties nor the causes of action in the courts of Washington are identical with the parties and causes of action in this case.
We do not think it out of place to state that it appears to us, from a reading of the decisions of the Supreme Court of Washington, *2082 that the evidence introduced in those cases must have been materially different from that introduced at the hearing before the Board.
The only remaining assignment of error is the disallowance by the Commissioner of $1,966.46, designated "Reserve for Discounts and Commissions." The revenue agent testified that he disallowed this reserve because it was contingent. The evidence is indefinite and too meager to establish any error on the part of the Commissioner.
Reviewed by the Board.
Judgment will be entered under Rule 50.