1931 BTA LEXIS 2234">*2234 1. The turnover tax instituted by the law of the Republic of France of June 25, 1920, held to be an excise or sales tax and not an income or profit tax. The amounts so paid by the petitioners to France in the taxable years are, therefore, not allowable as credits against the income tax due the United States under section 238 of the Revenue Acts of 1921, 1924 and 1926.
2. On the facts, held, that the respondent erred in disallowing deductions as business expenses claimed by the petitioners (a) of the amount of $2,000 per month paid in lump sums to the petitioners' officers during the taxable years for entertainment and traveling expenses, an excess of that amount having been expended, and (b) of the amount of $37,500 paid in the same year to one Ahern in consideration of his covenant not to enter into competition with the petitioners, but did not err in disallowing a deduction of $25,750 contributed to the Charity Chest of the Fur Industry of the City of New York.
21 B.T.A. 1163">*1164 These are proceedings for the redetermination of deficiencies1931 BTA LEXIS 2234">*2235 in income tax determined by the respondent as follows:
| Docket | Taxpayer | Tax year | Deficiency |
| No. | |||
| 34128 | Eitingon-Schild Co | Period Jan. 1, 1922, to | $26,835.49 |
| Nov. 30, 1922 | |||
| 36930 | do | Fiscal year ended | |
| 14,647.72 | Nov. 30, 1923 | ||
| do | Fiscal year ended | 19,754.34 | |
| Nov. 30, 1924 | |||
| Moscow Fur Trading Co | do | 1,154.68 | |
| 47114 | Eitingon-Schild Co | Fiscal year ended | 49,109.43 |
| Nov. 30, 1926 | |||
| Bach Fur Co | do | 322.02 | |
| Funston Brothers Co. | do | 2,950.66 | |
| (Delaware) | |||
| Laclede Real Estate & | do | 1,175.86 | |
| Investment Co. |
The following issues are raised by the pleadings: (1) Whether or not the respondent erred in allowing as deductions in computing net income, under section 234 of the Revenue Acts of 1921, 1924, and 1926, instead of allowing as credits against the tax, under section 238 of said acts, the amount of certain French and British income taxes paid by the petitioners in the taxable years; (2) whether or not the respondent erred in allowing as deductions in computing net income, under said section 234, instead of allowing as credits against the tax, under section 238, the amounts of certain French turnover taxes paid by the1931 BTA LEXIS 2234">*2236 petitioner, Moscow Fur Trading Co., in the taxable years; (3) whether or not the respondent erred in disallowing deductions as business expenses of $2,000 per month paid during the taxable years by the petitioner, Eitingon-Schild Co., to its president and senior vice president for entertainment and traveling purposes; (4) whether or not the respondent erred in disallowing the deduction as a business expense of the amount of $25,750 paid by the petitioner, Eitingon-Schild Co., to the "Charity Chest of the Fur Industry" in the fiscal year 1926; (5) whether or not respondent erred in disallowing a deduction claimed as a business expense of the amount of $37,500 paid in the fiscal year 1926 by the petitioner's subsidiary, the United States Fur Exchange, Inc., to one Ahern in consideration of his refraining from entering into competition with the petitioners in the fur business; and (6) whether or not the petitioner failed to 21 B.T.A. 1163">*1165 allow reasonable deductions for depreciation to the petitioner, Laclede Real Estate & Investment Co., for the fiscal year 1926.
The first issue above set out has been settled by stipulation of the parties, and issue (6) was abandoned and no evidence1931 BTA LEXIS 2234">*2237 offered thereon.
The proceedings were duly consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioner Eitingon-Schild Co. is a corporation organized under the laws of the State of New York, with its principal office in New York City. The other petitioners are subsidiary corporations of the Eitingon-Schild Co., with principal offices as follows:
Moscow Fur Trading Co., New York, N.Y.
Bach Fur Co., Chicago, Ill.
Funston Brothers & Co. (Delaware), St. Louis, Mo.
Laclede Real Estate & Investment Co., St. Louis, Mo.
The petitioner Eitingon-Schild Co. was organized in 1914, and together with its subsidiaries, is engaged in the business of importing and exporting fur skins. Its business is world-wide, with buying and selling branches in the United States, France, England, Germany, Italy, Belgium, and Poland, and buying branches in China, South America, and Canada.
The petitioners were affiliated and filed consolidated income-tax returns for the fiscal period and years here involved.
For the purpose of these proceedings, certain French and British income taxes were properly accrued by the petitioners as follows:
| Taxable period | French | British |
| Period Jan. 1 to Nov. 30, 1922 | $2,387.21 | $2,843.82 |
| Fiscal year ended Nov. 30, 1923 | 8,868.31 | 15,176.78 |
| Fiscal year ended Nov. 30, 1924 | 10,040.75 | 17,616.32 |
| Fiscal year ended Nov. 30, 1926 | 2,035.68 | 13,711.23 |
1931 BTA LEXIS 2234">*2238 The petitioner Moscow Fur Trading Co. paid French turnover taxes as follows:
| For the period January 1 to November 30, 1922 | $399.96 |
| For the fiscal year ended - | |
| November 30, 1923 | 10,847.09 |
| November 30, 1924 | 14,316.96 |
| November 30, 1926 | 19,883.41 |
Said turnover taxes were imposed by and paid pursuant to articles 59 to 73, inclusive, of the law of the French Republic of June 25, 1920, and subsequent laws amendatory thereof and supplementary thereto, which read, in parts material here, as follows:
Art. 59. - From the first day of the month which follows the promulgation of this present law, a turn-over tax is instituted on the amount of business 21 B.T.A. 1163">*1166 done in France by persons who, habitually or occasionally, purchase for resale, or who accomplish such professional acts, which are subject to taxation on industrial and commercial profits, instituted by chapter 1 of the law of July 31, 1917, as also on exploits of enterprizes subject to proportional payments as provided for by article 33 of the law of April 21, 1810.
* * *
Article 62. - For the liquidation of the tax instituted by article 59, the turnover is established as follows:
1) For1931 BTA LEXIS 2234">*2239 persons selling merchandise, groceries, furniture, or any objects, by the amount of actual sales that are definitely realized.
2) For intermediary persons: Proxies, Designers, Hirers of things, Contractors, or Hirers of services, Bankers, Discounters, Changers, by the amount of the brokerage, commissions, remittances, salaries, rentals, interests, discounts, premiums and other profits definitely acquired.
If a person effects operations which partly belong to the first category and partly to the second category, the turn over is determined by applying to each of the operations the above definitions.
If taxes have been collected on sales or services which are subsequently cancelled, or which remain unpaid, they will be deducted in the manner fixed by the regulation of the Public Administration as per article 67, from the taxes due on business done subsequently; or they will be refunded if the person who has paid them, has ceased to be subject to them.
Article 63. - The rate of the tax is fixed at one percent (1%) with a tenth for the benefit of the Departments and Communities, of the turn-over as defined in the preceding article.
It is however, increased to:
1) Three1931 BTA LEXIS 2234">*2240 percent (3%), without the tenth, on business done relating to lodgings, consumption on the premises of drinks and victuals of any kind, sold in establishments classed as belonging to the second category.
2) To Ten per cent (10%), without the tenth, on expenses relating to lodgings and to consumption on the premises of alimentary articles of any kind, sold in establishments classed as belonging to the first category.
3) To Ten percent (10%), without the tenth, on retail sales or consumption of merchandise, victuals, Supplies, or any objects classed as being de luxe.
The sums collected for the Departments (Counties) and Communities are distributed according to the rules established by the Financial law of 1921, at the rate of 2/3 for the Communities and 1/3 for the Departments.
* * *
Article 66. - Any person subject to the turn-over tax, if he has not habitually a bookkeeping system showing the amount of turn-over as defined in article 62 and the following ones, must have a book with numbered pages in which he enters day by day, without blanks or erasures:
a) if he sells merchandise, groceries, supplies or objects, each sale effected. b) if he sells services, each1931 BTA LEXIS 2234">*2241 amount of brokerage, commissions, remittances, salaries, rentals, interests, discounts, premiums, and other profits, constituting the remuneration for his services.
Each item must indicate the date, a summary description of the objects sold, or of the services rendered, as also the sales price or the amount of brokerage, commissions, remittances, salaries, the amount of rental, interests, discounts, premiums, and other profits. However, cash-transactions for amounts of less than 100 fcs. and not applying to objects "de luxe" may be entered in a total sum at the end of each day.
21 B.T.A. 1163">*1167 If the sale had been closed with another merchant and if the amount exceeds 500 frcs. the entry must, moreover, show the name and address of that merchant.
The amounts of the transactions made will be added up at the end of each month.
The book prescribed in the first paragraph of this article, or the bookkeeping system used instead, as well as all vouchers relating to transactions made by the persons liable to the tax, especially invoices for purchases made, must be kept intact for the space of 3 years from the 1st of January of the year in which the book has been started or during1931 BTA LEXIS 2234">*2242 which the vouchers were established.
* * *
Article 71. - If a public sale comprises merchandise, Groceries, supplies or objects of any kind, belonging to a person who is liable to the turn-over tax and classed as "de luxe" in accordance with article 64 of the present law, the tax of 10% will be collected at the time of the registration of the sale on the price of said objects.
July 11, 1925.
Article 39. - There will be considered as a Merchant & subject to the turnover tax and to the tax on industrial & commercial profits, any person or Company, acting as an intermediary for the purchase or sale of Real Estate, or negotiable securities, or who, habitually, buys the same in his name, thus becoming the owner of them with a view of reselling them.
* * *
They are subject to the tariff imposed by the fiscal law. However, for any person, who has declared in the bill of Sales, that such Real Estate is bought for resale, the tax will be brought up to 12% (plus the tenth). But in this case, the act of resale pays only half the ordinary tax if the resale takes place within one year.
Moreover, the first acquirer, who shall have paid the tax of 12% (plus the tenth), 1931 BTA LEXIS 2234">*2243 shall have recourse against the second Purchaser to have one half of the tax reimbursed to him.
* * *
Article 84. - Article 12 of the law of July 31, 1920 is repealed. Article 60 of the law of June 25, 1920 is supplemented as follows:
* * *
For those persons operating in France as agents or employees of persons not established in France, the amount of business serving as a basis for the tax instituted by article 59 of the law of June 25, 1920 is constituted by the amount of sales actually and definitely realized.
If the operations effected by Intermediaries or Proxies, concern merchandise presented at importation and which they introduce into France, the tax will be collected on the amount of purchase or sale thus realized, except as concerns products aimed at in paragraph 3 preceding, and under reservation of the proofs mentioned in the said paragraph.
If the merchandise presented for importation from abroad or from the colonies, are not introduced in France through the care of an agent or employee of persons who are not established in France, or through the care of an intermediary or Proxy, the tax will be due by the purchaser under the conditions 21 B.T.A. 1163">*1168 1931 BTA LEXIS 2234">*2244 provided for by the law of June 25, 1920 on the amount of the purchases actually and definitely realized, except if it is a matter of products aimed at in the preceding paragraph No. 3. This disposition concerns only the Buyer receiving goods from abroad or from the Colonies destined to his own use or for his own consumption and not for resale.
* * *
Article 142. - From the first day of the quarter which follows the promulgation of the present law, the collection of taxes instituted by the articles 59 and 72 of the law of June 25, 1920, will exclusively be carried forward so far as mineral coal is concerned, Lignites, coke and mixtures of gas-coke, in the business of sales effected by exploiters of coal mines, or manufacturers of coke, as also on the importation of such products, to the exclusion of all other business. The rate of the tax is fixed at 1.80%. This rate includes the part collected for the benefit of the Departments (Provinces) and Communities, which part is fixed at 0.15%. Excepted from the tax are the coals used for the consumption of the Mine and Miners, as also coal sold amongst (between) those subjected to the tax, or for the manufacture of coke, or for1931 BTA LEXIS 2234">*2245 direct exportation.
In the case of a Cokery, belonging to a metallurgic factory, the tax is due on the value of production supplied by the Cokery to the said factory.
Article 143. - From the 1st of October 1925 are exempt from the taxes instituted by articles 59 and 72 of the law of June 25, 1920 the business relating to the Commerce with Cattle, Oxen, calves, lambs, hogs, and horses, destined to be butchered, as also the commerce with fresh meats from those animals.
From the same date there is instituted at the slaughter house of animals designated above, a tax the amount of which is fixed as follows:
Veal and mutton, 0.15 fr. per kilo of the live-weight of the animal.
Hogs, Oxen and Horses, 0.10 fr. per kilo of the live-weight of the animal.
The importation of fresh meats, refrigerated or frozen, originating from the same animals, the tax is as follows: Veal and mutton 0.30 fr. per kilo of the net weight of the imported meat.
Hogs, oxen and horses, 0.20 fr. per kilo of the net weight of the imported meat.
A decree of the Public Administration will fix the manner of application of the tax at the Slaughter house.
Contraventions will be ascertained and1931 BTA LEXIS 2234">*2246 pursued under the same conditions as those relating to the turn-over tax.
The tax on importations will be liquidated and collected in conformity with the dispositions of article 72 of the law of June 25, 1920.
Article 57. - The transactions actually taxed at the rate of 1.30% by application of articles 59 and 72 of the law of June 25, 1920 and article 3 of the law of March 22, 1924, will from the first of April 1926 and until December 31, 1926, be taxed at the rate of 2%, of which 0.10% go to the benefit of the Departments and Communities.
However, the rate of 1.30% remains applicable to the business of retail sales, or consumption on the spot.
During the taxable periods here involved the petitioner Eitingon-Schild Co. paid to its president and senior vice president the sum of $1,000 each per month, to cover entertainment and traveling expenses on business trips to Europe made in behalf of the corporation. 21 B.T.A. 1163">*1169 Beginning prior to the taxable years and continuing to the present time, it has been the custom of said officers to make frequent trips to visit the European branches and there transact business for the company. The president of the corporation usually1931 BTA LEXIS 2234">*2247 spent from five to seven months of each year in Europe.
In January, 1920, the president, senior vice president, and secretary of the corporation discussed and considered the matter of adopting some convenient and proper method of handling expenses of the trips to Europe. It was finally agreed that the president and senior vice president should each receive from the corporations $1,000 per month in addition to their salaries to cover all European traveling and entertainment expenses, and that no charge for any such items should thereafter be made by either officer against the companies. They were not to be required to account to the corporations for the money spent. The payments were not charged as salaries of the officers receiving them, but were charged to a separate account designated "Entertainment Account."
This arrangement has never been made the subject of a formal resolution by the board of directors, and has never been embodied in a formal contract between the company and the officers.
However, this practice has continued for approximately 10 years and is still in effect, without any objection thereto having been made by any director or stockholder.
During the1931 BTA LEXIS 2234">*2248 years 1922, 1923, and 1924 the president and senior vice president were each paid a salary of $36,000 per year, which was increased in 1925 to $48,000. Subsequently, the president of the corporation declined an offer of the board of directors to increase his salary to $150,000 per year.
No detailed record of the expenditures was kept by the officers, but the amounts actually expended by them for entertainment and traveling expenses on European trips exceeded the amounts paid to them by the corporation.
The amount of common stock in the corporation held by the president varied from a minimum of 30 per cent to a maximum of 60 per cent of the total outstanding, while the amount of the common stock held by the senior vice president never at any time exceeded 10 per cent and went down to 6 per cent. The balance of the common stock was held by some 20 or 30 other stockholders.
It was the custom in the fur business to entertain customers, and this practice was regarded as a business necessity.
During the year 1926 the petitioner Eitingon-Schild Co. contributed the sum of $25,000 to a corporation organized in 1925 under the name of the "Charity Chest of the Fur Industry of the1931 BTA LEXIS 2234">*2249 City of New York." Prior to 1925 the petitioner was frequently solicited 21 B.T.A. 1163">*1170 by its customers to make contributions to various charities in which they, the customers, were interested and the petitioner felt obliged to comply with these requests in order to maintain friendly business relations. In 1922 the petitioner contributed in this way some $4,000 to $6,000; in 1923, approximately $10,000; and in 1924, approximately $17,000.
In 1925 certain members of the fur industry in New York, who were customers of the petitioner, started a movement to organize a central fund through which all charitable contributions of the industry were to be made. The result was the organization of a membership corporation known as the "Charity Chest of the Fur Industry of the City of New York." The petitioner was one of the 1,100 concerns engaged in the fur industry in New York City which subscribed to and became members of the charity chest corporation. The petitioner's president in 1926 served as a vice president of this corporation. The other officers and directors were prominent in the fur trade, and some of them were large customers of the petitioner. All of the leading concerns of1931 BTA LEXIS 2234">*2250 the fur trade in New York City having a capital of $5,000 or over were subscribers to the charity chest.
The charity chest corporation undertook to secure subscriptions by establishing a rating committee of three to five members, all in the trade, who decided what amount each firm should give. Each concern was thus given a quota which it was expected to subscribe, and if it failed or refused to subscribe such amount, when solicited to do so, the matter was reported to the rating committee and further efforts to secure the subscription were made. As the largest concern in the fur industry, the petitioner was given the highest rating. Originally, the subscription of the petitioner was fixed at $40,000, but the petitioner's president thought this amount was too high, whereupon it was determined that the corporation should contribute $25,000 and the president personally contributed the balance of $15,000. This was the only case in which an officer of a corporation contributed personally to the charity fund. The petitioner was the largest contributor to this fund.
Direct business benefits flowed to the petitioner as a result of meeting its contribution quota to the charity chest, 1931 BTA LEXIS 2234">*2251 in that it was enabled to maintain cordial relations with the directors who were representatives of big concerns which were customers of the petitioner. The contribution also possessed a definite advertising value. The amount of the petitioner's contribution was advertised in the papers by the charity chest corporation, and was made well known to the trade. It aided the petitioner in becoming known as a large and prosperous concern among present and prospective customers.
21 B.T.A. 1163">*1171 After the organization of the charity chest, all solicitors of charities were referred to the Chest, and the petitioner discontinued making individual contributions. The charity chest corporation contributed to the Fur Foundation, which takes care of employees in the fur industry who become sick or disabled or are otherwise in distress. The petitioner employed about 95 persons in New York City who were entitled to these benefits.
Under date of July 23, 1923, the petitioner's subsidiary, the United Fur Exchange, Inc., entered into a written contract with one Albert M. Ahern, which contract provided in the first, second, and third paragraphs for the sale by Ahern to said subsidiary of the stock1931 BTA LEXIS 2234">*2252 of certain corporations owned or controlled by him, with numerous representations and warranties by him as to the properties and assets of said corporations.
Paragraph third of said contract is concluded as follows: "All the foregoing provisions in Paragraphs First to Third, both inclusive, are entirely distinct from Paragraph Fourth following."
Paragraph fourth reads in part as follows:
You agree with the Purchaser that you will neither directly nor indirectly, within the period of ten years beginning at date hereof and ending July 23rd, 1933, engage, or be directly or indirectly interested in or connected with any firm, person or corporation which engages, in any part of North America, in the "Fur Receiving Business", as "Fur Receiving Business" is hereinafter defined, or, in St. Louis, Missouri, in the "Fur Auction Business", as "Fur Auction Business" is hereinafter defined, nor are you during said period to advertise or mention (except by word of mouth or in written or typewritten non-circular individual letters in the course of regular correspondence in some line of business other than the Fur Receiving Business in North America and other than, in St. Louis, Missouri, the1931 BTA LEXIS 2234">*2253 Fur Auction Business, (as hereinafter defined) your former connection with either of the Affiliated Companies; * * *
Paragraph fifth provides, among other things not here material, for the payment by the purchaser to Ahern of the sum of $403,484.42 for and in consideration of the sale and delivery by Ahern to the purchaser of the stocks of the corporations specified, "and the agreements, representations and gurantees (other than the agreements set forth in Paragraph Fourth hereof) by you entered into in this letter * * *."
Paragraph sixth reads as follows:
For and in consideration of your agreements set forth in Paragraph Fourth hereof, the Purchaser agrees to cause to be paid to MississippiValley Trust Company of St. Louis for you or your legal representatives (but if your wife Eulalie F. Ahern survive you, then for her or for her legal representatives, but she shall also have the power of disposition by will of any unpaid installments), the sum of $375,000.00, of which $18,750.00 shall be payable on the 3rd day of January, 1924, $18,750.00 on the 3rd day of July, 1924, $18,750.00 on the 3rd 21 B.T.A. 1163">*1172 day of January, 1925, $18,750.00 on the 3rd day of July, 1925, and $37,500.001931 BTA LEXIS 2234">*2254 on the 3rd day of July of each year from 1926 to 1933, both inclusive. Each installment not paid when due shall bear interest at 6% per annum from maturity until paid.
During the year 1926 the United Fur Exchange, Inc., paid to the said Ahern the sum of $37,500 under paragraph sixth of the contract above referred to, and this amount was claimed by the petitioners in the consolidated return for said year as a deduction from gross income for a business expense. The deduction claimed was disallowed by the respondent.
OPINION.
TRAMMELL: Section 234(a)(3) of the Revenue Acts of 1921, 1924, and 1926 provides that in computing the net income of a corporation there shall be allowed as a deduction taxes paid or accrued within the taxable year, except (a) income, war-profits and excess-profits taxes imposed by the authority of the United States, (b) so much of the income, war-profits and excess-profits taxes imposed by the authority of any foreign country or possession of the United States as is allowed as a credit under section 238, and (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Section 238(a) of said acts provides1931 BTA LEXIS 2234">*2255 as follows:
In the case of a domestic corporation the tax imposed by this title shall be credited with the amount of any income, war-profits, and excess-profits taxes paid or accrued during the same taxable year to any foreign country, or to any possession of the United States: Provided, That the amount of such credit shall in no case exceed the same proportion of the tax (computed on the basis of the taxpayer's net income without the deduction of any income, war-profits, or excess-profits taxes imposed by any foreign country or possession of the United States), against which such credit is taken, which the taxpayer's net income (computed without the deduction of any such income, war-profits, or excess-profits tax) from sources without the United States bears to its entire net income (computed without such deductions) for the same taxable year. * * *
The first issue raised by the pleadings and set out in our preliminary statement involves the action of the respondent in allowing as deductions in computing net income, under section 234(a)(3) of the statutes above quoted, instead of allowing as credits against the tax, under section 238(a) of the same statutes the amounts of1931 BTA LEXIS 2234">*2256 certain French and British income taxes accrued by the petitioners in the taxable years. The parties stipulated at the hearing that the amounts of such taxes were properly accrued as set forth in our findings of fact, above. Accordingly, the amounts so stipulated and found should, subject to the limiting provisions of section 238(a), 21 B.T.A. 1163">*1173 supra, be allowed as credits against the tax in recomputing the deficiencies herein under Rule 50.
The second issue raises the question of the correctness of the respondent's action in allowing as deductions in computing net income, under section 234, instead of allowing as credits against the tax, under section 238, the amounts of certain French "turnover" taxes paid by the petitioner Moscow Fur Trading Co. in the taxable years. The amounts so paid were stipulated by the parties at the hearing, and are set out in our findings of fact, above. The parties agree also that if the said taxes are in fact in the nature of income or profits taxes, the petitioners are entitled to have said amounts applied as credits against the tax for each of the years here involved, instead of allowed as deductions in computing net income. The precise1931 BTA LEXIS 2234">*2257 question presented for decision, therefore, is whether or not the French "turnover" tax is an income or profits tax.
The French law of June 25, 1920, instituting the tax here in controversy, designates it in article 59 as "a turnover tax." The phrase "turnover tax" at once suggests the idea of a tax based on the amount of the turnover or business transacted, or in other words, a tax computed upon the amount of the gross sales. That such is the meaning of the term as used in the French law is indicated by the language of article 59, as follows: "* * * a turnover tax is instituted on the amount of business done in France by persons who, habitually or otherwise, purchase for resale, or who accomplish such professional acts, which are subject to taxation on industrial and commercial profits * * *." The turnover tax, then, is in the first place instituted on the amount of business done in France by persons who purchase for resale, and is limited to professional acts which are subject to taxation on industrial and commercial profits, thus indicating that the turnover tax itself is not a profits tax.
That the turnover tax is a sales tax and not a tax on income or profits is further1931 BTA LEXIS 2234">*2258 indicated by article 62, which provides that:
For the liquidation of the tax instituted by article 59, the turnover is established as follows:
(1) For persons selling merchandise, * * * by the amount of actual sales that are definitely realized.
(2) For intermediary persons: Proxies, designers, hirers of things, contractors, or hirers of services, bankers, discounters, changers, by the amount of the brokerage, commissions, remittances, salaries, rentals, interests, discounts, premiums and other profits definitely acquired.
While paragraph (2) of article 62 refers, among other things, to "salaries, rentals, interests, discounts, premiums and other profits," it seems clear that the intermediary persons mentioned are regarded as being in the business of selling services and it is on the basis of the gross sales of such services that the tax is determined. This is none 21 B.T.A. 1163">*1174 the less true because of the fact that gross sales of services may be equivalent to gross income or profits. The tax in effect is not laid upon but is merely measured by the amount of the gross sales. Such interpretation is supported by the further provisions of article 62, as follows:
If a person1931 BTA LEXIS 2234">*2259 effects operations which partly belong to the first category (sales of merchandise) and partly to the second category (sales of services), the turnover is determined by applying to each of the operations the above definitions.
If taxes have been collected on sales or services which are subsequently cancelled, or which remain unpaid, they will be deducted in the manner fixed by the regulation of the Public Administration * * *. (Italics supplied.)
Article 63 provides that: "The rate of the tax is fixed at one per cent * * * of the turnover as defined in the preceding article." And since the "turnover" is defined in the preceding article 62 as the "amount of actual sales," either of merchandise or services, "definitely realized," the statute thus imposes a tax equal to one per cent of the actual or gross sales "definitely realized." Article 63 further provides that the tax of one per cent is increased to "Three per cent (3%) * * * on business done relating to lodgings," etc., and "To Ten per cent (10%) * * * on retail sales or consumption of merchandise, victuals, supplies, or any objects classed as being de luxe." (Italics supplied.)
Article 66 provides that:
1931 BTA LEXIS 2234">*2260 Any person subject to the turnover tax, if he has not habitually a bookkeeping system showing the amount of turnover as defined in article 62 and the following ones, must have a book with numbered pages in which he enters day by day, without blanks or erasures:
(a) If he sells merchandise, groceries, supplies or objects, each sale effected;
(b) If he sells services, each amount of brokerage, commissions, remittances, salaries, rentals, interests, discounts, premiums, and other profits, constituting the remuneration for his services. (Italics supplied.)
We deem it unnecessary to make further detailed references to the provisions of the French law. The provisions above pointed out clearly establish, we think, that the law in question imposes an excise tax on the privilege of carrying on in France businesses of the kinds enumerated, which tax is measured by the amount of the gross sales "definitely realized." The tax essentially and fundamentally is an excise tax as distinguished from a tax laid upon income and profits. We find no provision in the French statute in question which we are able to construe as imposing a tax on income or profits, either gross or net.
1931 BTA LEXIS 2234">*2261 In ; ; ; and , we had before us the question whether the French law of July 15, 1914, imposed an income tax. In each of the 21 B.T.A. 1163">*1175 cases cited, we held that the tax imposed by the said law was in effect an income tax, notwithstanding the fact that, in the case of persons not domiciled in France, but who possessed one or more residences there, the tax was computed on the basis of a taxable income arbitrarily fixed at a sum equal to seven times the rental value of the residences. With respect to whether the tax so imposed was in its nature an income tax, we said in , supra:
The statute imposing the French tax states that "The taxable income is fixed at a sum equal to seven times the rental value of this or these residences * * *." Whatever may be the nature of the tax, it is imposed upon what the French Government determines to be income. It is in no sense of the word imposed upon the ownership of property. It is a1931 BTA LEXIS 2234">*2262 part of a statute which imposes income taxes upon citizens and residents of France. In view of this situation, we think that the tax was an income tax * * *. The fact that under the law the taxable income is determined in a manner different from the taxable income under the Revenue Act of 1921 does not change the nature of the tax.
In the instant case a wholly different situation is presented. The law here involved is not part of a statute which imposes an income tax upon citizens and residents of France, or any one else. The tax is not laid upon income or profits, either actual or fictitious, nor is the determination of the amount of the tax in any wise dependent upon the amount of income derived or profits earned.
Having reached the conclusion that the tax here in question is not an income or profits tax, the action of the respondent on the second issue is approved.
The third issue brings into question the correctness of the respondent's action in disallowing deductions claimed by the petitioners for entertainment and traveling expenses of its officers on business trips to Europe. The petitioners maintained a number of buying and selling agencies in Europe and apparently1931 BTA LEXIS 2234">*2263 transacted a large amount of business there. At any rate, the evidence shows that the business of the foreign branches required the principal executive officers to spend a considerable portion of their time in the countries where such branches were located. The president was in Europe on an average of five to seven months in each year. On such trips, the officers entertained customers, which is a recognized and common practice in the fur trade, and a necessity from a business standpoint.
Beginning prior to the taxable years, the petitioners adopted the plan of paying to its president and senior vice president $1,000 each per month, in addition to their salaries, to reimburse them for traveling and entertainment expenses on the European trips made in connection with the business affairs of the corporations. This practice was originally instituted by the said officers in conference with 21 B.T.A. 1163">*1176 the secretary, and while it was never formally authorized by the board of directors nor embodied in a formal contract, the arrangement has been continued down to the present time, extending over a period of approximately 10 years, without objection from any stockholder or director. 1931 BTA LEXIS 2234">*2264 After adoption of the lump-sum allowance plan, the officers paid their own expenses for travel and entertainment, making no charges for such items against the corporations, and they were not required to account for the money so spent.
There is nothing in the records before us to suggest that the amounts in question represent in any degree a distribution of profits under the guise of expenditures for expenses. Each officer received a salary of $36,000 per year until 1925, when the salary of each was increased to $48,000. The president owned from 30 to 60 per cent of the outstanding common stock, while the senior vice president held from 6 to 10 per cent. Yet each received the same allowance for entertainment and traveling expenses, and the amounts actually expended for such purposes exceeded the aggregate amount of the allowances.
We are of the opinion that the amounts paid by the petitioners to the president and senior vice president during the respective taxable years, under the circumstances here shown, constituted ordinary and necessary expenses paid or incurred during those years in carrying on the business of the petitioners, and are proper deductions in computing net1931 BTA LEXIS 2234">*2265 income.
In , where we considered the same question under substantially similar facts, we allowed the deductions, saying:
The fact that the president and vice president were not required to keep itemized expense accounts is not material, as the evidence shows that the sums were authorized by the petitioner; were expended by the officers in carrying on the business and were, in fact, less than the amounts actually expended by said officers. .
Apparently, the respondent disallowed the deductions here claimed because of lack of satisfactory proof as to the nature of the expenditures. Having so explained his position, counsel for the respondent stated at the hearing: "We frankly approach that question in anticipation of proof on the point." The evidence now presented in the record, we think, is sufficient to establish the deductibility of the amounts in controversy. On the third issue, the action of the respondent is reversed.
The fourth issue concerns the action of the respondent in disallowing a deduction claimed by the petitioners as a business expense in the amount of $25,7501931 BTA LEXIS 2234">*2266 representing a payment made in 1926 to the Charity Chest of the Fur Industry of the City of New York, under the circumstances set out in our findings of fact.
21 B.T.A. 1163">*1177 Individuals are permitted by the statute to deduct the amount of contributions or gifts made to religious, charitable, scientific, literary or educational organizations within certain limitations (sec. 214(a)(10)), but such deductions concededly are not allowable in the case of corporations, nor is the deduction here in controversy claimed as such. However, corporations as well as individuals are permitted to deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business (sec. 234(a)(1)), and it is under this provision of the statute that the petitioners claims the deduction, contending that the amount was an ordinary and necessary expense paid or incurred in carrying on their business in the taxable year.
We have consistently adhered to the rule that a donation or contribution made by a corporation, of the kind here in controversy, is deductible as a business expense when, and only when, it bears some reasonable relation to the conduct of the1931 BTA LEXIS 2234">*2267 corporation's business. ; ; ; ; ; ; ; ; .
In , we said:
In our opinion, neither the deduction of an item by a corporation nor its disallowance depends upon whether it is a donation. The Board has frequently held that the deductibility of items such as this depends in each case upon the particular evidence to prove its relation to the proper conduct of petitioner's business. Items which may colloquially be called donations, because perhaps the recipient is a charity or the occasion is beneficent or the transaction is not approached in a formal manner with express legal consideration, may still have such a business significance as to justify their outlay and1931 BTA LEXIS 2234">*2268 their recognition as business expenses. When by adequate evidence they are shown to be such, they are deductible as any other ordinary and necessary expense; and when the evidence fails to establish this or shows in fact that the donations are not reasonably motivated by or related to the proper conduct of the business, the deduction must fail.
There is no substantial disagreement respecting the correct rule of law, nor is there conflict of authorities. The difficulty arises in applying the rule to the facts of a given case in determining whether the donation bears such reasonable relation to the business of the corporation that it constitutes an allowable deduction as a business expense.
In , the corporation made a contribution to a church maintained in its mill village, 90 per cent of the congregation of which was composed of employees of the corporation. We 21 B.T.A. 1163">*1178 held that the donation was made for purposes reasonably connected with the operation of the petitioner's business, that it represented a consideration for benefits flowing directly to the corporation, and was deductible as a business expense. See also 1931 BTA LEXIS 2234">*2269
In , the corporation contributed $3,430 to a fund to be used to purchase a tract of land to be given to the Government for the establishment of an Army Post. The business success of the corporation depended upon the demand for lots and acreage which it was offering for sale. The establishment of the Army post stimulated such demand, and thus increased sales of the petitioners property, which in turn resulted in increased profits for the company. We held that the contribution had in a direct sense a reasonable relation to the petitioner's business and allowed the deduction as a business expense.
In , the question was whether a contribution of $25,000 to the building fund of a hospital, made by the corporation in part to avoid enlarging the dispensary facilities at its factory, was deductible as a business expense. The court held that the contribution was reasonably incidental to the carrying on of the company's business for the company's benefit, and therefore allowable as a deduction.
1931 BTA LEXIS 2234">*2270 In , the president of the petitioner corporation in the latter part of 1919 presented to the chamber of commerce of the city a plan to raise the sum of $1,000,000 for civic betterment. The underlying purposes of the plan were to make the city more desirable to live in and to encourage the employees of the petitioner to purchase homes. It was determined that $600,000 of the fund should be allocated to the industries of the city, and that each industry should contribute to the fund upon the basis of its invested capital, the number of employees, and the volume of sales. All of the industries of the city except two joined in the plan, and upon the basis indicated, $360,000 of the $600,000 was allocated to the petitioner. The question was whether the amount so contributed by the petitioner was deductible as a business expense.
The petitioner in that case employed about one-half of the wageearning population of the city, and contributed 36 per cent of the total fund, which was to be distributed among the following beneficiaries: American Legion, board of education, Boy Scouts, city commission, community1931 BTA LEXIS 2234">*2271 building, Girl Scouts, hospital, girls' club, public library, park commission, Road of Remembrance, recreation association, Y.M.C.A., contingent. With the exception of the amount distributed to the city commission, and that allocated to the contingent 21 B.T.A. 1163">*1179 fund, the court held that the contribution of the petitioner was deductible as a business expense. The court pointed out that the business of the petitioner had been successfully operated for twenty years under a policy looking to the contentment, and well-being of its employees, and that it was in pursuance of that policy that the petitioner determined to make the contribution in question. In its opinion, the court further observed:
The question always is whether balancing the outlay against the benefits to be reasonably expected, the business interest of the taxpayer will be advanced. The answer must depend, among other things, upon the nature and size of the industry, its location, the number of its employees as compared to the entire community, the type of its employees, and what other employers similarly situated are doing. * * *
We can not accept the contention that to permit the petitioner to make this contribution1931 BTA LEXIS 2234">*2272 would give to a corporation the right to make donations which is given exclusively to individuals. * * * The contention overlooks the fact that the contribution was not a philanthropy, but was a business expenditure to be reflected in increased earnings. The right to make such expenditures is not confined to corporations, but is also given to individuals. The individual has the additional right, under the statutes, to make gifts to charity that have no relation to business expenses.
From the foregoing decisions, it appears that a correct application of the rule requires that the deduction be allowed where the evidence shows that the contribution was not a matter of charity or philanthropy, but was made as a necessary incident to the business.
The instant case, in our opinion, does not come within the rule. The relation of the payments to the proper conduct of the petitioner's business was too remote and incidental. The fund to which the contribution was made was to be distributed among various charities, including the Fur Foundation. The evidence does not disclose what proportion of the contribution went to that organization, or what ratio the number of petitioner's employees1931 BTA LEXIS 2234">*2273 has to the total number which might possibly be beneficiaries of that foundation. There does not appear any direct benefit, so far as the petitioner is concerned, from the contribution. The petitioner's employees were entitled to benefits through the Fur Foundation in case of sickness or for other reasons, but other charities gave assistance to people generally and apparently would not exclude employees of the fur industry merely because they were or had been such.
In the American Rolling Mill Co. case and the Corning Glass case the employees of the taxpayers there involved contributed a substantial proportion of the total number of persons who were direct beneficiaries and the so-called contributions in those cases were very substantially and directly for the benefit of the corporations themselves, but here the petitioner's place of business was in New York, where the number of employees of the petitioner was inconsequential 21 B.T.A. 1163">*1180 in comparison to the population or number of people to be benefited. The petitioner's employees were benefited so slightly and the corporation so indirectly and remotely that we do not think the situation comes within the principle of1931 BTA LEXIS 2234">*2274 the American Rolling Mills case and other cases cited. Nor do we think that the situation here presented comes within the principle of the Anniston City Land Co. case, supra, where the contribution was made with the reasonable expectation of increasing sales and profits. It may well be true that the contribution was made for the purpose of maintaining good will on the part of purchasers, but this may well be true in the case of many unquestioned contributions to charity. It may also be true that the failure to make the contributions would have been bad business on the part of the petitioner, but this might be said in connection with other contributions to charities. The failure to make a contribution to a needed charity when competitors make such contributions might arouse some criticism on the part of a portion of the public or even some customers, but we do not think that this fact changes a charitable contribution into a business expense. We must keep in mind the fact that the statute does not authorize a deduction of such a contribution by a corporation. Doubtless Congress had a purpose in denying such deductions on the part of corporations while allowing them1931 BTA LEXIS 2234">*2275 when the contribution is made by an individual. The fact that some pressure is brought to bear upon corporations to make charitable gifts is not, in our opinion, enough to change their character to business expenses.
We do not think, under the circumstances, that the contribution in question was so incidental to or connected with the carrying on of the petitioner's business as to be considered an ordinary and necessary business expense. The action of the respondent on this issue is affirmed.
The fifth issue raises the question whether the respondent erred in disallowing the deduction claimed as a business expense of the amount of $37,500 paid in the fiscal year 1926 by the petitioner's subsidiary, the United Fur Exchange, Inc., to Albert M. Ahern in consideration of his refraining from entering into competition with said subsidiary in certain restricted territory and for a specified period of time.
By written contract dated July 23, 1923, the subsidiary purchased from Ahern the stock of certain corporations owned or controlled by him, for the sum of $403,484.42. By entirely separate and distinct provisions of the contract, unrelated to the sale and purchase of the stock1931 BTA LEXIS 2234">*2276 of the corporations, Ahern agreed that he would not directly or indirectly engage or be interested in or connected with any firm, person or corporation which might engage, in any part of North 21 B.T.A. 1163">*1181 America in the "fur receiving business," or in St. Louis, Mo., in the "fur auction business," within a period of ten years beginning with the date of the contract and ending July 23, 1933. In consideration of Ahern's covenant not to compete, the subsidiary agreed "to cause to be paid to Mississippi Valley Trust Co. of St. Louis for you (Ahern) or your legal representatives (but if your wife Eulalie F. Ahern survive you, then for her or her legal representatives, but she shall also have the power of disposition by will of any unpaid installments), the sum of $375,000, of which $18,750 shall be payable on the 3rd day of January, 1924, $18,750 on the 3rd day of July, 1924, $18,750 on the 3rd day of January, 1925, $18,750 on the 3rd day of July, 1925, and $37,500 on the 3rd day of July of each year from 1926 to 1933, both inclusive."
During the year 1926 the petitioner's subsidiary paid to Ahern the sum of $37,500 pursuant to the terms of said contract, and this amount was claimed1931 BTA LEXIS 2234">*2277 as a deduction from income in the consolidated return filed by the petitioners for said year. The deduction so claimed was disallowed by the respondent on the theory that the payments to Ahern constituted expenditures "strictly of a capital nature, the benefit derived being a business untrammelled and free from interference by Ahern's good will or competing activities in the trade."
In support of his position, the respondent cites ; ; ; . The decisions cited are not in point, and on the facts are readily distinguishable from these proceedings. Only the case of Market Supply Co., involved a contract to refrain from entering into competition, and the deduction in that instance was disallowed for lack of proof of the amount paid as consideration for such covenant.
We can not agree with the respondent's contention that the payments to Ahern represent part of the cost of the businesses acquired by the petitioner through the purchase of the stock of the corporations. The1931 BTA LEXIS 2234">*2278 petitioner, through its subsidiary, paid a definitely stated amount for the stock, and agreed to pay in addition a definitely specified consideration for Ahern's covenant not to enter into competition. The fact that provisions constituting in effect two separate contracts were embodied in one written instrument is not material. The provisions of the contract are clear on this point, and specifically indicate that the consideration paid for the stock was "entirely distinct" from the consideration paid for the covenant.
In , the petitioner acquired or entered into several contracts with corporations and individuals for the purchase of assets, including good will and 21 B.T.A. 1163">*1182 covenants not to engage in a competing business in specified territory and for a specified time. The question was whether the respondent erred in failing to make a reasonable allowance for the exhaustion of the contracts, based upon the cost to the petitioner of said covenants. In our opinion, we said:
The record shows very clearly that the motivating cause for the acquisition of all of the contracts hereinbefore discussed, either by the1931 BTA LEXIS 2234">*2279 petitioner or its predecessor, was not to acquire additional tangible assets or to broaden the field of its manufacturing activities, but to stifle and render impossible the recurrence of competition in the manufacture of feed from brewers' grain, and it shows further that, notwithstanding that the amounts paid as consideration for those various contracts were written off to profit and loss, the values remained the same as when they were entered into. That they were of immense value to the petitioner can not be doubted. * * *
* * * The petitioner's business was protected by the various contracts and agreements which it entered into for the periods of years specified therein. As each year passed the protection afforded by those contracts was diminished, and as the expiring date drew nearer the value became less because then, and only then, could the covenantors to the contracts proceed safely into the field of competition with the petitioner again. * * * These contracts are made for specified periods of time and we can attach no value to them beyond the period so specified and we, therefore, see no reason why they should not be exhausted in the normally accepted manner.
The1931 BTA LEXIS 2234">*2280 foregoing case differs from the facts here in that the consideration for each covenant was paid in a lump sum when the contract was entered into or acquired.
In , after holding that the respondent erred in disallowing a deduction of the amount paid for certain services rendered, we said:
Nor do we see any reason why the deduction of the amount paid Gallup for his covenant to refrain from competition should not be allowed. * * * We have held in , that the taxpayer there was entitled to amortize the cost of contracts similar to the one here. In that case the cost was paid upon the acquisition of the contracts. In this proceeding payment was made ratably over the life of the contract and, therefore, the annual payment equals the amount of yearly exhaustion on the cost of the contract.
In the instant case, the petitioner's subsidiary acquired valuable rights under its contract with Ahern, at a total cost of $375,000, payable at the rate of $37,500 annually for the period of ten years. The contract has a life of ten years, upon the expiration of which its value will1931 BTA LEXIS 2234">*2281 be exhausted. Hence its value was and is being exhausted ratably by the passage of time. The provisions of the contract relating to the payment to other persons of any remaining installments in the event of Ahern's death prior to 1933, we think, are immaterial. This in no wise affects the total cost of the contract to the petitioner, which is the basis for computing the exhaustion 21 B.T.A. 1163">*1183 allowance. A somewhat similar situation existed in the Black River Sand Corporation case, supra. But if the payment of the amount be held to be an ordinary and necessary expense instead of a capital expenditure to be amortized, the same result would be reached, the same amount would be allowable as a deduction in each year. In our opinion, the respondent erred in disallowing the deduction claimed, and his action on the fifth issue is, therefore, reversed.
Issue six was abandoned and no evidence offered in respect thereto. Accordingly, the action of the respondent on this issue is affirmed.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK concurs in the result only.