*690 PHILLIPS: The petitioner seeks a redetermination of a deficiency of $2,649.35 in income and profits tax for 1920 asserted by the Commissioner. *691 It alleges that the Commissioner committed error in reducing the amount allowable as a deduction for salaries of its officers from $14,400 to $7,200.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office at Nashville. It was organized in 1919 as the Mid-West Coal Co. Shortly thereafter, its name was changed to the Clarkson Coal Co. It was engaged in the purchase and resale of coal.
The organizers of the company and the stock held by each was as follows:
| Shares. | |
| C. H. Johnson, secretary | 20 |
| E. E. Clarkson | 40 |
| Samuel Day, vice president | 20 |
| J. L. Clarkson, president and treasurer | 120 |
E. E. Clarkson was the wife of J. L. Clarkson and the 40 shares of stock nominally held by her belonged to J. L. Clarkson, making his total holdings 160 shares.
A branch office was established in St. Louis, Mo., and C. H. Johnson was placed in charge. A contract*3117 was entered into between Johnson and the petitioner in 1919 which recited in part:
It is understood and agreed that the Mid West Coal Co., a corporation of Illinois agrees to furnish the sum of Five Thousand Dollars (5,000.00) cash as a working capital to buy and sell coal on a wholesale basis,
That said C. H. Johnson is to act as General Sales Agent for the Mid West Coal Co. with the right to purchase and resell coal and coke, with offices in St. Louis, Mo., as agreed upon by the Mid West Coal Co. and C. H. Johnson,
* * *
It is understood and agreed between said Mid West Coal Co. and C. H. Johnson that for services rendered by said C. H. Johnson, C. H. Johnson will at the end of each calendar month have credited to his account one half, after all accrued expenses, such as office rent, help, telephone, stationery and all other office expense, of the remaining profit for the past months business.
* * *
(Signed) JOHN L. CLARKSON
(Signed) CHAS. H. JOHNSON
For Mid West Coal Company.
No change was made in this contract in 1920.
In the beginning the books were kept in St. Louis by Johnson, but he did not keep them in a manner satisfactory to Clarkson and in September, *3118 1919, Clarkson removed them to Nashville and a bookkeeper was employed to take care of them. Johnson developed a good business in St. Louis.
*692 Amounts paid to officers in 1919 as salaries were as follows:
| Per month | |
| C. H. Johnson, secretary | $30 |
| Samuel Day, vice president | $30 |
| J. L. Clarkson, president and treasurer | $240 |
Early in 1920, it became difficult to buy enough coal to supply the market. Clarkson had a wide acquaintance among mining men and it became necessary for him to devote a great deal of time in locating and buying coal. He also assumed general supervision of the business and accounts and of collections of the company. He took care of the correspondence, kept in touch with the St. Louis office, and in 1920 made frequent trips to mines to locate available coal, purchased it when he could, and in cases where Johnson had a better contact with the mining company, advised him of the availability of the coal. During that year about half of his time was used in the performance of his duties as general manager of the Nashville Mining Co. He worked about fourteen hours a day.
Clarkson made frequent trips to St. Louis and in his absence*3119 Samuel Day assumed his office duties at Nashville. Day spent about 5 per cent of his time on business of the petitioner.
In May, 1920, after consultation among the officers, who were also the directors and stockholders of the company, the amounts paid monthly as salaries were increased in the same proportion in which they were then being paid. This was in proportion to the stock held by each. The monthly payments, as increased, were as follows:
| Per month | |
| C. H. Johnson, secretary | $120 |
| Samuel Day, vice president | 120 |
| J. L. Clarkson, president and treasurer | 960 |
In 1921 conditions changed and it became easy to buy coal but difficult to sell it. The business dropped off and the amounts paid monthly as salaries were then reduced. Clarkson had no connection with selling coal, which duty was attended to by Johnson.
The gross sales for the year 1919 to 1922, inclusive, were as follows:
| Year | Amount |
| 1919 | $157,795.44 |
| 1920 | 413,654.33 |
| 1921 | 158,798.78 |
| 1922 | 41,332.90 |
The business was discontinued in 1923.
The total commission paid Johnson in 1920 was $17,965.07. The total salaries paid to officers in 1920 were $14,400. These salaries*3120 were not deducted from gross income in computing the net income, half of which was paid to Johnson under his contract. The balance *693 of 1920 earnings available for dividends after paying salaries and commissions was approximately $4,000. No dividends were declared, and this amount was credited to surplus. The paid-in capital was $5,000 in 1920.
The Commissioner allowed petitioner to deduct $7,200 as a reasonable allowance for salaries in 1920.
Decision will be entered for the respondent.
Considered by MARQUETTE and MILLIKEN.