*3144 Reasonable allowance for officers' compensation determined.
*926 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1920 in the sum of $28,939.11, resulting from the determination of the Commissioner that a deduction of $67,418.60, paid to officers of the petitioner corporation during 1920, was not allowable. By an amendment to is pleadings, the petitioner also, as an alternative, alleged that the tax should be computed under the special assessment provisions if its contention as to officers' compensation should be denied.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal place of business in or near Gillespie, and prior to and in 1920 owned and operated a coal mine. It filed its income and profits-tax returns for the year 1920, reporting a net income of $87,479.47, and paid a tax thereon of $29,836.17. Included in the deductions from gross income was the amount of $9,185 foir fixed salaries of its officers and*3145 additional compensation, referred to as a bonus, of $67,418.60. The *927 respondent, in determining the deficiency herein, disallowed the deduction of $67,418.60, added the amount to income and determined a deficiency of $28,939.11.
On January 12, 1920, the board of directors of the petitioner duly adopted the following resolution:
The president, Mr. Westwood then requested that four of the other members of the Executive Committee jointly and as individuals continue to assist him to carry the $67,000 they were carrying for the company as the stockholders declined to raise funds to aid him to finance the company on the best terms possible that he would arrange for the stockholders.
R. H. Isaacs moved, and W. E. Schmidt seconded the motion that in consideration of financing for services the compensation be made as follows:
| S. M. Westwood, President | $1,000 per year. |
| D. E. Aylward, Vice-Pres | 1,000 per year. |
| Geo. W. Schmidt, Secretary | 1,000 per year. |
| R. H. Isaacs, Treasurer | 1,000 per year. |
| W. E. Schmidt, Chairman of Exec. Committee | 1,000 per year. |
For the year 1920 and during the year 1920 and any other year when the earnings of the corporation*3146 exceed five per cent of the capital stock thereof that a bonus that is the same per cent of the earnings as the earnings is of the capital stock of the said corporation be paid, one-fifth to each of the above named officers, * * * the bonus to cease when it reaches fifty per cent of the earnings and the payment of bonus in any year when the amount paid equals fifty per cent of the capital stock.
Pursuant to the terms of the above resolution, the petitioner paid to its officers, in 1920, the sum of $9,185 as fixed salaries, set up the further sum of $1,668.60 upon its books as a liability of said officers, and paid said officers $65,750 as a bonus or contingent compensation based upon the earnings of the petitioner during the year.
In 1921 the owners of the majority of the capital stock of the petitioner sold such stock to John Henderson, a coal operator, who demanded payment back to petitioner corporation of at least a portion of the additional compensation paid by way of bonus in 1920. As the result of his demand, the liability of $1,668.60 was canceled upon the books of the petitioner and the further sum of $25,000 was paid back to the petitioner by individuals who had received*3147 it.
In January, 1920, when the above resolution was adopted, the financial outlook of the petitioner was desperate and the five officers named who received additional compensation during 1920 had no reasonable basis for believing that any additional compensation would accrue under the provision for contingent compensation.
During the year 1920 the five officers of the petitioner were in conference at least once a day and sometimes two or three times a day, held frequent meetings day and evening, and were compelled to procure funds to enable the purchase of equipment and supplies by *928 the personal endorsement of the notes and accounts of petitioner, borrowing as much as $65,000 to $70,000 at one time. Liability upon the endorsements was joint and several and not limited to each endorser. The officers spent their own money for traveling expenses and performed substantial and extensive services throughout the year 1920 on behalf of the petitioner. Such services were unusual in character and, combined with the more favorable condition in the coal industry, made it possible for the petitioner to earn a net income of $87,939.47 in 1920.
The payments of compensation, *3148 both fixed and contingent, during 1920 were made as the result of a free bargain between the petitioner and its officers and such payments were a part of the ordinary and necessary expense of the petitioner in the maintenance and operation of its business in 1920.
The gross sales of the petitioner, less returns and allowance as shown by its return for 1920, amounted to $477,348.86. Its gross income reported amounted to $195,956.72. Its net income reported amounted to $87,939.47 and the invested capital as determined by the respondent was $191,663.94.
OPINION.
SIEFKIN: Except for the alternative proposition of special relief, the sole question at issue is the deduction by the petitioner as ordinary and necessary expense of its business in 1920, the total sum of $76,603.60, consisting of $9,185 fixed salaries of officers and $67,418.60 either paid or credited in 1920 as the result of a resolution of the board of directors entered into in January, 1920, providing for a contingent compensation. While the amount of contingent compensation is extremely large as compared to the corporation's net earnings during the year 1920, there is abundant reason for concluding that if these*3149 officers had not performed extraordinary services during 1920 there would have been no net income at all and the company would have discontinued business.
From all the evidence in the case it is our opinion that the amount actually retained by the petitioner's officers, a total of $49,935, was reasonable compensation for the services rendered in 1920, and the petitioner is entitled to a deduction in that amount. We are unable to go to the extent of holding that the further amount of $26,608.60 was reasonable. Evidently there was some doubt in the minds of the officers or they would not have returned it, whether or not there was a legal liability.
In view of our decision on this point we deem it unnecessary to consider the question of special assessment. In any event, there is no evidence which would justify special assessment.
Judgment will be entered under Rule 50.