*1947 1. Amounts deducted by petitioner for salaries to officers and stockholder-employees for the taxable year 1920 held to have been reasonable compensation for services actually rendered during that year.
2. A written consent entered into between the petitioner, by its secretary-treasurer, and the Commissioner more than five years after the filing of its income and profits-tax return for the fiscal year ended February 29, 1920, but prior to the enactment of the Revenue Act of 1926, held valid.
*1214 In this proceeding the petitioner seeks a redetermination of its income and profits tax for the fiscal year ended February 29, 1920, for which year the respondent has determined a deficiency in the amount of $11,481.05. The petitioner raises no issue, however, except with respect to $10,930.28 of this amount. The petitioner alleges: (1) That the respondent erred in the disallowance of a portion, to the extent of $25,116.30, of the deduction claimed for salaries to officers and stockholders; (2) that the assessment of the proposed deficiency is barred*1948 by the statute of limitations.
FINDINGS OF FACT.
The petitioner was incorporated under the laws of the State of Washington in March, 1918, for the purpose of taking over and carrying on the general diversified farming business previously conducted by F. Benz and members of his family, consisting of his wife and seven sons.
The petitioner's books were kept on a fiscal year basis and the returns made on the accrual basis. The statutory invested capital for the year involved herein was $100,000.
For the fiscal year 1919 the petitioner's farming operations comprised a total of 225 acres. The total agreed salaries for the nine members of the Benz family for this fiscal year were $7,655, of which only $2,296.30 was withdrawn and the remainder, $5,358.70, was forgiven. The operations for that year were neither profitable nor satisfactory and at the close of the year the two elder sons, H. C. Benz and R. G. Benz, were dissatisfied with their situation and prospects and inclined to enter into more certain and profitable employment. The father desired them to continue the farming operations *1215 for at least another year, and as an inducement for them to do so outlined*1949 a program of enlarged activities which involved the more than doubling of the cultivated area and the institution of a produce and warehouse business on the theory that such enlarged operations would permit of the payment of adequate and satisfactory remunerations to the parties.
During the taxable year in question the petitioner was engaged in farming 625 acres of irrigated land in the Yakima Valley near Toppenish, Washington. The land is included in what is known as Wapita Project. Approximately one-half of the acreage farmed was owned by the petitioner and the remainder was leased, and the combined tract was eight separate farms extending three miles from north to south and one and one-half miles from east to west.
During the taxable year the petitioner raised principally potatoes, alfalfa and wheat. Of the 625 acres, 100 to 120 acres were planted in potatoes, 20 acres were planted as an apple orchard, some 20 acres devoted to sugar beets, and the remainder was about equally divided between alfalfa and wheat. In addition to the farming, the petitioner was conducting a produce shipping and produce warehouse business. The warehouse business was not established until November, *1950 1919, prior to which time the petitioner bought and sold only in carload lots.
It was the practice of the officers to determine at the beginning of the year, after due consultation with the stockholders, the compensation that should be paid. No formal record was made in the company's minutes, but actual meetings were held and agreements reached at the beginning of each year.
For the year 1919 the result had been so unprofitable that the petitioner was not in a position to pay the compensation decided upon in that year and in order to keep its credit good and avoid carrying the unpaid balance as a liability, such amounts were absolutely forgiven.
At the beginning of the fiscal year 1920 a meeting was held at the home on the farm, at which it was agreed what salaries should be paid, and it was further agreed that in the event of the petitioner having a successful year and being able to do so, a bonus would be paid equal to the amounts of undrawn and charged off salaries forgiven in the previous year. That part of the entire amount thus agreed upon which was not withdrawn in cash was entered in the books of petitioner as salary accrual before the end of the fiscal year ended*1951 February 29, 1920. The respective amounts not actually paid within the year were later entered in the individual accounts as accrued salaries.
*1216 The total amount agreed upon and claimed by the petitioner as salaries for the nine members of the Benz family for the taxable year was $37,758.70, made up as follows:
| Stipulated salary or wages | Provisional, or bonus | Total salary or wages | |
| Frederick Benz | $10,000.00 | $1,800.00 | $11,800.00 |
| L. C. Benz | 3,000.00 | 1,037.50 | 4,037.50 |
| H. C. Benz | 5,000.00 | 100.00 | 5,100.00 |
| R. G. Benz | 5,000.00 | 755.00 | 5,755.00 |
| I. C. Benz | 3,000.00 | 500.00 | 3,500.00 |
| Paul Benz | 3,000.00 | 347.00 | 3,347.00 |
| Luke Benz | 1,200.00 | 297.20 | 1,497.20 |
| Ezra Benz | 1,200.00 | 272.00 | 1,472.00 |
| Fritz Benz | 1,000.00 | 250.00 | 1,250.00 |
| Total | 32,400.00 | 5,358.70 | 37,758.70 |
The respondent allowed as a deduction for salaries, $12,642.40, which sum represented the total cash withdrawals of the officers and stockholders of the corporation, and disallowed the remainder. It was not shown what salary was allowed to each stockholder individually.
The agreed salary of the petitioner's president, Frederick Benz, for the fiscal year 1919*1952 was $2,400. He drew no salary for the fiscal year 1921.
The petitioner's books for the fiscal year ended February 28, 1919, reflected a loss of approximately $5,000 as a result of the operations for that year. For the fiscal year ended February 28, 1921, the books reflected a profit of approximately $600. For the fiscal year 1922 a loss of approximately $2,000 was shown and for the fiscal year 1923 a profit of approximately $2,100.
A large proportion of the petitioner's profits for the taxable year involved herein was due to the fact that the price of potatoes took an exceptional rise in the fall of 1919. The net profit on potatoes exclusive of any allowance for a portion of the salaries was $25,000. The average price usually received for potatoes in the petitioner's vicinity was around $25 a ton and that was the price prevailing in the summer of 1919, but by fall the price had increased so that in November, 1919, potatoes were selling from $50 to $60 a ton. The petitioner disposed of most of its potatoes at from $50 to $55 a ton. It had from 100 to 120 acres of potatoes, which yielded from 12 to 16 tons an acre.
The petitioner, in reporting the net income for the taxable*1953 year, reported $5,133.79 as income from the sale of real estate. The gross income from crops raised amounted to approximately $75,000 and the gross income from its trading operations $290,000 and its taxable net income, after full allowance for all of the compensation in controversy, was $16,000, or 16 per cent of its invested capital.
*1217 Frederick Benz, the petitioner's president, was to receive a compensation of $11,800, which included a bonus of $1,800. In 1920 he was 58 years of age. He was born and raised on a farm and educated in agriculture. He had been advisor to the Agricultural Department of the Northern Pacific Railway Co., had an intimate acquaintance with production and markets, had studied farming from its theoretical and scientific sides, as well as its practical operation and had a wide acquaintance with producers. During the year under consideration he gave his undivided attention to the petitioner's business as president. He had general supervision of all of its business operations, determining its general policies, such as the enlargement of the farming operations and its entrance in the produce and warehouse business, decided upon the tracts to*1954 be purchased or leased, looked after the acquisition of the necessary equipment for the conduct of the farm and shipping business, attended to the finances, and decided upon the general crop program. He made a particular study of crop conditions, taking trips over the country to get first-hand information, and in September made an extensive trip extending from Montana to New York for that purpose.
H. C. Benz, the vice president, was to receive a compensation of $5,100, which included a bonus of $100. At the time in question he was 31 years of age, and had had nine or ten years of farming experience, including a short course at the State Agricultural College. Just prior to the taxable year in question, he had started out for himself in the commission business and in two months had made a profit of $1,500 and had received an offer from a substantial wholesale fruit and produce company to go with them as a buyer at a salary of $5,000 a year. He acted as sales manager of the produce and shipping department conducted by the petitioner, which during the year in question handled approximately 400 carloads of produce, with gross sales of $290,000. He had one or two men under him doing*1955 buying in the field and in the latter part of the year a warehouse was added, which was also under his charge.
R. G. Benz, the secretary and treasurer, was to receive compensation of $5,755, which included a bonus of $755. In 1920 he was 28 years of age, had had some 10 years experience in irrigated farming, working both for his father and others in the Yakima Valley, and had had 2 1/2 years of university schooling. In addition to acting as secretary and treasurer of the petitioner, he kept its books of account and acted as general superintendent of the farming operations, having charge of the planting of crops, hiring help, pay rolls, repair of equipment, program of farming activities, and the packing and shipment of produce raised on the farms. He was actively *1218 engaged for long hours each day and had under him from 10 to 50 men, the crew averaging from 20 to 25 men the year round.
Mrs. L. C. Benz, the wife of Frederick Benz, was to receive a compensation of $4,037.50, which included a bonus of $1,037.50. She had full charge of the boarding house maintained for the crew, consisting of a main or central boarding place, and, during harvest, of cooking shacks on*1956 wheels. She had under her supervision other women doing the cooking in the cooking shacks and helping in the boarding house. She was in charge of the preparation of the meals, supervised and attended to the purchasing of all supplies, planned the meals, and looked after the raising of a large part of the poultry and eggs used. The meals were furnished economically from the standpoint of the petitioner and satisfactorily from the standpoint of the employees, so that the company had a favorable reputation in this regard and its labor turnover was comparatively low.
Fritz Benz was to receive compensation of $1,250, which included a bonus of $250. He worked on the farm one month and for four months was in charge of the warehouse. In the latter position he had charge of the storage of the produce as it came in from the farm and from the different localities from which it was purchased. He also had charge of shipping and loading the produce as it went out, with the duty of seeing that the cars were properly loaded and manifested, and also had charge of loading and shipping records.
I. C. Benz was to receive a compensation of $3,500, which included a bonus of $500. He was 25*1957 years of age, had had a high school education and seven or eight years experience in irrigated farming. He acted as chief irrigator and foreman of a crew of men and in addition was an expert mechanic and gas engine man and supervised the maintenance of the motor equipment on the farm.
Paul Benz was to receive a compensation of $3,347, which included a bonus of $347, and Luke Benz a compensation of $1,497.20, which included a bonus of $297.20. These men were expert irrigators and competent to take charge of the growing of crops and the handling of men. Ezra Benz's compensation was $1,472, including a bonus of $272. He was of the same ability and performed substantially the same services as Paul and Luke Benz, acting as general irrigator and foreman for a period of approximately 7 1/2 months.
The capital stock of the corporation was divided into 1,000 shares of the par value of $100 each, and was owned as follows: Each of the seven sons owned 50 shares; Mrs. L. C. Benz, their mother, owned 80 shares; and the balance, or 570 shares, was owned by their father, F. Benz. The salaries agreed to be paid to the officers and stockholders of petitioner bore no relation to the amount*1958 of stock held by them.
*1219 The petitioner's original return for the fiscal year ended February 29, 1920, was filed with the collector on May 24, 1920. A waiver dated April 17, 1925, was executed and filed with the respondent, which by its terms states that it "is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessment of taxes may be made * * *." This waiver was not signed by the respondent or on his behalf.
Another waiver dated November 16, 1925, was signed by both parties and was filed with the respondent, which waiver by its terms states "This waiver of the time for making assessment as aforesaid shall remain in effect until December 31, 1926," except that if an appeal is filed then the time is extended beyond the final decision of the Board in the appeal.
The deficiency letter was mailed to the petitioner on August 4, 1926, and this appeal was filed on September 14, 1926. No part of the proposed deficiency has been assessed.
OPINION.
MATTHEWS: Two questions are presented for consideration: First, whether the Commissioner erred*1959 in disallowing as a deduction from corporate income for the taxable year involved herein a portion of the amount claimed by petitioner to represent a reasonable allowance for salaries paid and/or accrued to officers and stockholder-employees, as provided in section 234(a)(1) of the Revenue Act of 1918; second, whether the assessment and collection of the deficiency determined by the Commissioner are barred by the statute of limitations.
With respect to the statute of limitations, which will be first discussed, it appears that petitioner's original income and profits-tax return for the fiscal year ended February 29, 1920, was filed with the collector on May 24, 1920. On April 17, 1925, a waiver was executed by the petitioner which purported to extend for one year the period of limitation upon assessment of taxes for the taxable year ending February 29, 1920. This waiver was not signed by the Commissioner, or on his behalf, and is not relied upon by the respondent to extend the period of limitation.
Another waiver for the fiscal year ended February 29, 1920, bearing the date of November 16, 1925, was signed in the name of petitioner by Reuben G. Benz, secretary-treasurer, and*1960 was also signed on behalf of the Commissioner.
Petitioner asserts that the second waiver is invalid because it was not executed prior to the expiration of the period of limitation prescribed by the statute. It is further claimed on behalf of petitioner *1220 that Reuben G. Benz signed the waiver as secretary-treasurer of the corporation without the knowledge or approval of the other officers of the corporation and that he did not know, when the second waiver was executed, that the first waiver was ineffective because it had not been signed by the Commissioner.
This question was considered in the case of , where it was held that written consents entered into between petitioner, by its president, and the Commissioner after the expiration of the statutory period of limitation, but before the enactment of the Revenue Act of 1926, are valid to extend the period for assessment and collection. See also ; *1961 ; ; ; .
The petitioner's position that the officer who signed the waiver had no authority to do so and that the respondent must show that the waiver was executed by the Commissioner or his authorized agent, can not be sustained. ; ; affd., ; See also , from which the following quotation is taken:
The court below held as untenable, the objection that the waivers were not properly executed by the plaintiff or by the Commissioner of Internal Revenue; that the signing of such a waiver, by one or more executive officers, with the corporate seal affixed, given as it was to secure further consideration of corporate tax liability, comes within the ordinary powers of corporate officers; that as*1962 to the acceptance by the Commissioner, waivers being filed in his office bearing what purports to be his signature and acted upon by that officer, giving repeated consideration to the plaintiff's claims for further reductions, which resulted in withholding collections while the plaintiff's books were being examined, these facts preclude the plaintiff from now controverting the validity of the waivers. The objection that the waivers were without consideration cannot be sustained. The Statute requires nothing but "consent", and it would be unconscionable to allow the taxpayer to afterwards repudiate a consent upon which the Commissioner has acted and relied. It appears that in the circumstances, the execution of the waivers was a necessary incident to the securing of further consideration of the plaintiff's tax liability.
We conclude that there was no error in sustaining the validity of the waivers.
We hold, therefore, taht the second waiver dated November 16, 1925, is valid and served to extend the period of limitation upon assessment of taxes for the taxable year involved herein.
The second issue for determination relates to the disallowance by the Commissioner of a portion, *1963 to the extent of $25,116.30, of the deduction of $37,758.70 claimed by petitioner for salaries to officers and stockholder-employees.
*1221 The Revenue Act of 1918 provides for the deduction of salaries as follows:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, * * *.
Before a salary may be deducted under the statute it must be shown that it is reasonable in amount and that it is for personal services actually rendered. It is a question of fact whether amounts paid constitute compensation for personal services actually rendered or amount to a distribution of profits as salaries. . There is no definite test to be applied in determining the reasonableness of salaries. As was said in *1964 :
* * * The fact that the compensation is large in amount is no bar to the deduction of the amount as an ordinary and necessary expense provided that it is paid in pursuance of an agreement to pay the compensation, is for personal services actually rendered, and constituted only reasonable compensation for such services. .
We also held in that case:
The question of the reasonableness of the salaries must be determined with reference to the volume of business, the profits made, the character of the services for which the compensation was paid, and all other pertinent facts shown.
If it can be shown that they were incurred during the taxable year, salaries may be deductible although they were not actually paid within the year. ; . It is essential that the compensation be reasonable for the services rendered, but such services may have been performed in part during a preceding year. As was said by the Supreme Court of the United States in *1965 , in affirming the decision of the :
The statute does not require that the services should be actually rendered during the taxable year, but that the payments therefor shall be proper expenses paid or incurred during the taxable year.
In times of stress a corporation may seek additional time to meet its obligations and may decide to defer or charge off the payment of full compensation to its employees. Additional compensation may be deducted the following year in an amount equal to that which was authorized but not paid for services actually rendered, if it can be shown that the amount so deducted was paid or incurred during the year for which the deduction is claimed and that such compensation *1222 is reasonable, within the meaning of the statute. See , and cases cited therein.
In the instant case the books of petitioner were kept on the accrual basis and we have found that the entire amount sought to be deducted on account of salaries for services rendered was properly*1966 entered in the books of the corporation before the end of the taxable year either as cash withdrawn or as salaries accrued. There is no question that the compensation was authorized at the beginning of the taxable year, although no formal record was made in the company's minutes. Petitioner is a close family corporation and the entire capital stock outstanding for the taxable year was owned by F. Benz, his wife and their seven sons. Closely held corporations, as is well known, often make decisions in conversations, which decisions are not always recorded in the minutes but by action. It is well established that a corporation can act through its directors informally without written minutes or formal resolutions. See , and cases cited therein; ; .
The action of the board of directors of a corporation in authorizing salaries for a given period is entitled to the presumption that such salaries are reasonable and proper. *1967 ; ; . See also the opinion of the Circuit Court of Appeals in the Ox Fibre Brush Co. case, referred to above. This presumption of correctness is not inconsistent with the principle that the burden of proof rests upon the taxpayer. See , where it was held that a salary vkted in one year for services performed in a preceding year and disallowed as a deduction for such preceding year is not allowable in the year in which voted, in the absence of proof to sustain its reasonableness.
We think the petitioner in this case has fully sustained the burden of proof. There is no evidence that the corporation attempted to dispose of its profits for the year in question in the guise of salaries. The bonus agreed to be paid to each member of the family was not voted because they were stockholders, but because they all performed services as officers or employees of the corporation which the trustees (directors) believed to have been peculiarly*1968 valuable. The compensation paid to the officers and stockholders bore no relation to their stockholdings. The petitioner's return showed a net income, after deducting the full amount of compensation claimed to represent reasonable salaries, of more than $16,000, which is a return of over 16 per cent on the capital invested. The evidence justifies the conclusion that the services rendered to the corporation by the different members of the Benz family were commensurate with the *1223 compensation paid and/or accrued to them, and that the salaries authorized by the trustees were not unreasonable or excessive in view of the duties performed, the responsibilities assumed, the volume of business handled, and the profits to the corporation arising therefrom.
We hold that the amount deducted by the petitioner was a reasonable compensation for the services actually rendered to the corporation by its officers and stockholder-employees, and that the liability therefor was incurred during the taxable year. The deficiency will be recomputed, allowing the deduction claimed by petitioner in the sum of $37,758.70.
Judgment will be entered under Rule 50.