*2415 1. The evidence does not establish that any larger salaries were authorized to be paid to petitioner's officers for 1921 than those claimed in the return and allowed by the respondent.
2. Special assessment denied.
*360 The respondent has determined a deficiency in income and profits taxes for 1921 in the amount of $3,155.96. The petitioner attacks this on the grounds that it is entitled to a larger deduction for salaries than that allowed by the respondent and that the profits tax should have been determined under the provisions of sections 327 and 328 of the Revenue Act of 1921. The respondent, by motion which was duly granted, invoked Rules 62(a) and (b), limiting the hearing to the trial of the issues specified by such rules.
FINDINGS OF FACT.
Petitioner, a New York corporation with its principal office at New York City, is engaged in selling and renting mortar-mixing machinery, wheel barrows, and mortar tubs.
The petitioner has 63 shares of capital stock outstanding, par value $100 per share, 38 shares*2416 being owned by Chester E. Matthews and the remaining 25 shares by Samuel Taylor and William Wendelken. These three men compose the board of directors.
The corporate minute book was kept by the attorney for the company. With the exception of a reference to salaries at the formation of the company, no corporate minutes relating to salaries are of record during the period 1912 through the calendar year 1921.
Matthews was the manager of the company and devoted all his time to the business. From seven o'clock in the morning until sometimes as late as eleven o'clock at night, he was engaged in selling and renting mortar machinery and equipment, in servicing rented machines and equipment, and in collecting accounts. He had made certain mechanical improvements on the mortar mixers which assured uninterrupted operation. He had a large personal acquaintance with construction contractors. The successful operation of the mortar machines, under all conditions, required special knowledge of the technique of construction and method of operating such machines. In securing sales and rentals, Matthews incurred certain expenditures, such as gifts to foremen, taking prospects to dinner, and*2417 furnishing cigars and entertainment of various kinds. Where the petitioner secured a rental contract, which formed the principal source of its income, Matthews attended to the delivery of the mixer and equipment at the job, looked after repairs and supplies while on the job, either secured a laborer who could operate the mixer or gave instructions as to the proper method of operation, removed it upon completion of the construction work, and *361 collected the rentals. Most of petitioner's business was with contractors handling small construction jobs. During 1921 Matthews received $70 a week from the petitioner as a drawing account.
Wendelken and Taylor had other interests, but they devoted approximately one-third of their time to the conduct of the petitioner's business. Wendelken spoke German and solicited business from German contractors. He had a wide acquaintance among foremen on construction jobs. Taylor devoted his time to interviewing foremen on the job and inducing them to use petitioner's machines and equipment.
Petitioner was advised by counsel that it was a personal service corporation, and accordingly filed a return as such for 1921, on Form 1065. This*2418 return showed a gross income of $56,617.88, total deductions of $42,703.72, and a net income of $13,914.16. There was included in the deductions, under item 13 - "Compensation of partners or stockholders in whatever form paid," the amount of $3,640. Attached to the return was the following statement:
SCHEDULE A-13
Services performed by Chester E. Matthews, General Manager, who devoted the whole of his time to the service of the company, and whose total compensation for the period was $3,640.00.
Mr. Samuel Taylor and William Wendelken acted as special solicitors for business, devoting such of their time to the interests of the corporation as was available when they were not otherwise employed in gainful occupations. These intervals were reasonably frequent, and the amount of compensation has neither been definitely agreed upon nor disbursed at this time. The earnings are entirely dependent upon the activities of the officers of the corporation, particularly Mr. Matthews, who is chief mechanician, collector and lathe operator, the principal knowledge and practical experience in the operation of the corporation being possessed by Mr. Matthews, Mr. Wendelken having heretofore*2419 been his chief collaborator in this respect.
There was also attached to the return a balance sheet as of December 31, 1921, showing the only liability at that date to be accounts payable of $338.
Under Schedule B of the return it was shown that the net income of the petitioner was distributable as follows:
| Samuel Taylor, 15 shares | $3,312.89 |
| Chester D. Matthews, 38 shares | 8,392.67 |
| William Wendelken, 10 shares | 2,208.60 |
| 13,914.16 |
The return was executed by Wendelken and Matthews, as vice president and treasurer of petitioner, respectively.
Matthews filed an original and an amended return for 1921. In the original return, he reported income from salaries, wages, commissions, etc., of $3,640. In the amended return, he reported income *362 from salaries, wages, commissions, etc., of $3,640, and income from "Interest in undistributed income of Green, Matthews, Taylor Co.," of $8,392.67.
Upon audit of the return filed by the petitioner, the respondent held that the petitioner was not entitled to classification as a personal service corporation. The respondent accepted the net income of $13,914.16 reported in the return as correct. He computed*2420 the profits tax, in the first instance, under section 301 of the Revenue Act of 1921, upon the basis of a net income of $13,914.16 and an invested capital of less than $10,000, but since the profits tax as thus computed was greater than the tax as computed under the limitations of section 302, the respondent determined the profits tax under the latter section.
OPINION.
MORRIS: Petitioner contends that it is entitled to a deduction of $17,500 on account of compensation paid to officers in lieu of the deduction of $3,640 which was claimed in the return and allowed by the respondent. The contention is based upon the grounds that total salaries of $17,500 were authorized to be paid to officers for 1921, at an informal meeting of the directors held in midsummer of that year, and that the salaries authorized to be paid are reasonable in amount.
Matthews was the only witness called to testify as to the facts of the alleged authorization of officers' salaries. He testified that salaries of $2,200, $3,300, and $12,000 were authorized to be paid for 1921 to Wendelken, Taylor, and himself, respectively, at an informal meeting of the directors held in midsummer of that year. He attributes*2421 the fact that a deduction of only $3,640 was claimed in the return to advice of counsel that, the petitioner being a personal service corporation and not subject to tax, the amount of the deduction was not important, since the stockholders would pay tax upon the amounts distributed or distributable to them, whether as salaries or as profits. He explains the absence of any record of such authorization in the minute book by the fact that the petitioner's attorney, who prepared the minutes and kept the book, was not advised as to the directors' action in that respect.
The testimony of Matthews does not convince us that any obligation existed on the part of the petitioner to pay the salaries alleged to have been authorized for 1921. It does not explain the unequivocal statements in the return that Matthews's "total compensation for the period was $3,640," and that "the amount of compensation has neither been definitely agreed upon nor disbursed at this time," in the cases of Wendelken and Taylor. That return was filed on or about May 13, 1922, four and a half months after the close of 1921, and almost a year after the meeting at which the larger salaries are *363 alleged to*2422 have been authorized; and it was executed by Matthews and Wendelken under oath. Nor does Matthews' testimony explain the failure to record the alleged obligation of the petitioner for the larger salaries, or the unpaid portions thereof, on the books, as is evidenced by the balance sheets attached to the return. There is no evidence that the petitioner ever paid the salaries alleged to have been authorized for 1921 in excess of the amount stated in the return. Under the circumstances, we find no error in the respondent's action in the matter of the deduction for compensation of officers.
Petitioner contends that its liability for profits tax should be determined under the provisions of sections 327 and 328 of the Revenue Act of 1921. The reason given for this is that the net income is "entirely disproportionate to the capital of the petitioner due to the disallowance of the proper salaries for officers." Our decision on the first issue is to the effect that the respondent allowed the deduction of all of the salaries authorized to be paid for 1921. While no allowance was made for salaries to Taylor and Wendelken, it is impossible from the meager evidence at hand to say that this*2423 created an abnormal condition affecting income. It was stated in the return that these two individuals "acted as special solicitors for business, devoting such of their time as was available when they were not otherwise employed in gainful occupation," and Matthews estimated this to be "one-third of thier time." However, there is no evidence in the record tending to show the value of the services rendered by these two officers. Nor does it appear that the salary paid to Matthews, all circumstances considered, was not adequate compensation for the services he rendered.
In attempting to establish the fact of an abnormal condition a double burden rests on the petitioner. He must prove the facts of his own situation, and, unless upon such proof the abnormality is self-evident, he must submit evidence of what constitutes a normal condition. . Failure to pay salaries to Taylor and Wendelken is not per se proof of such an abnormality in income as to cause exceptional hardship; and the record contains no evidence as to what might be considered a normal condition in the matter of compensation of officers, employed under similar conditions, *2424 by a corporation carrying on a business similar, or as nearly similar as may be, in nature and volume, to that in which petitioner was engaged. The fact of payment of a low salary to Matthews, even if proven, would not, standing alone, require a conclusion of existence of an abnormality. The standard of salaries is not definitely fixed and there is a wide field within which they *364 may vary without constituting an abnormal condition. . The evidence does not warrant a conclusion that the petitioner is entitled to special assessment.
Decision will be entered for the respondent.