*4023 Salaries of officers claimed by the petitioner as deduction from its gross income for the taxable year were authorized and paid or accrued within the year and were no more than reasonable compensation for services rendered.
*870 The respondent has asserted a deficiency in income and profits tax for the year 1920 in the amount of $3,160.80. The only issue here is whether the petitioner is entitled to deduct certain amounts from its gross income which it contends represent additional salaries of officers incurred and accrued in the taxable year.
FINDINGS OF FACT.
The petitioner is an Arkansas corporation, with its principal office at Rogers. During the taxable year it was engaged in the wholesale and retail hardware business. It had its wholesale store at Rogers and operated retail stores at Rogers, Bentonville, and Siloam Springs. The total business turnover for the taxable year was approximately $2,020,000, of which the amount of $1,250,000 represented sales at wholesale and the remainder sales at retail at its retail*4024 stores at Rogers, Bentonville, and Siloam Springs, in approximately the respective amounts of $300,000, $435,000 and $265,000. For the taxable year the income-tax return of the petitioner indicated a net profit of more than $82,000 after the payment of all salaries herein claimed.
The petitioner was established in 1893 with authorized capital stock in the amount of $10,000. Its business was generally prosperous and at the end of the taxable year it had outstanding common and preferred stock in the respective amounts of $500,000 and $184,400, and a surplus of $24,566.67. In the year 1920 it issued a stock dividend in the amount of $150,000.
Early in the year 1920 several of the executive officers of the petitioner expressed dissatisfaction with the amounts of the salaries they were receiving and indicated that they might accept advantageous offers from other concerns engaged in similar business unless the petitioner would increase their salaries. At a meeting of the board of directors on January 20, 1920, a resolution was adopted which fixed salaries of executives for the year 1920 in the following amounts:
| Conley Harrington, chairman of the board of directors and manager of the retail store at Siloam Springs | $10,500 |
| W. J. Doak, president and general manager of retail store at Bentonville | 10,500 |
| Morgan McMichael, vice president and general manager of wholesale store at Rogers | 10,500 |
| Marshall Douglas, treasurer and principal traveling salesman for | |
| Wholesale store at Rogers | 6,000 |
| E. B. Howard, secretary and general manager of retail store at Rogers | 5,000 |
*4025 *871 The salaries so authorized were reasonable compensation for the service rendered.
The stockholdings of the several executives and others at December 31, 1920, were as follows:
| Conley Harrington | $130,000 |
| W. J. Doak | 57,150 |
| E. B. Howard | 9,875 |
| Marshall Douglas | 28,575 |
| Morgan McMichael | 50,275 |
| Other sharesholders | 224,125 |
The salaries authorized and accrued for such year were not proportional to the stockholdings of the recipients thereof.
The petitioner kept its books and made its income and profits-tax return for the taxable year on the accrual basis.
Not all the salaries authorized in January of 1920 were paid during that year, but all were accrued on the books of the petitioner for such year. At the meeting of the board of directors, held in January, 1921, the payment of the balances due was ordered and such payment was made in full not later than March 31, 1921. The petitioner deducted the entire amount authorized for salaries for 1920 from its gross income for such year. The respondent disallowed such deduction in the amount of $13,600.
OPINION.
LANSDON: After a careful consideration of all the evidence adduced by the parties, *4026 we find that the salaries in question were authorized in January of the taxable year; that they were reasonable compensation for the services rendered by the several executives. Though not fully paid in the taxable year, they were liabilities for such year because the petitioner was on the accrual basis of accounting. The amounts disallowed by the respondent, in the total of $13,600, should be deducted from the petitioner's gross income for the taxable year and tax liability recomputed on the basis of the total salaries authorized.
Judgment will be entered on 10 days' notice, under Rule 50.