*168 Decision will be entered for the respondent.
Respondent disallowed under section 24 (c) of the Internal Revenue Code additional salaries for petitioners' sons. Petitioner reported his income on the accrual basis, while his sons were on the cash basis. Petitioner's contention is that the contested salaries were constructively paid or constructively received to nullify condition 24 (c) (1) or (2), respectively. Held, that constructive payment does not constitute payment under section 24 (c) (1). Held, further, that under the facts there was no constructive receipt during the taxable years as required by section 24 (c) (2). Therefore, all conditions of section 24 (c) are present and the deduction is not allowed.
*512 The respondent has determined deficiencies in income taxes against petitioners as follows:
| Year | Deficiency |
| 1946 | $ 43,656.28 |
| 1947 | 97,050.65 |
| 1948 | 49,643.14 |
The explanation of the principal adjustment for 1946 is made in the deficiency notice as follows:
(a) It is held that the deduction of $ 59,708.39 claimed on *170 your return for accrued but unpaid salaries to your two sons, Mr. Harry G. McKee and Mr. Clifford R. McKee, is not allowable for the reason that the prohibitions contained in Section 24 (c) of the Internal Revenue Code have not been overcome. Also it is held that the deduction for compensation for your sons' services is excessive to the extent of the accrued but unpaid salaries and that for this further reason the deduction of $ 59,708.39 is not allowable under the provisions of the Internal Revenue Code. * * *
A similar adjustment and explanation was made for each of the taxable years 1947 and 1948. By appropriate assignments of error, petitioner contests the adjustment explained above for each year involved here. The other adjustments are not contested.
In the event that the Court shall hold that petitioner is entitled to deduct the additional salaries in question, the parties have stipulated that additional salaries in amounts only as set forth below are considered reasonable compensation for services rendered by the two sons:
| Clifford R. McKee | $ 25,000 | |
| 1946 | Harry G. McKee | 30,000 |
| Clifford R. McKee | 38,000 | |
| 1947 | Harry G. McKee | 48,000 |
| Clifford R. McKee | 30,000 | |
| 1948 | Harry G. McKee | 35,000 |
*171 *513 The only issue remaining before the Court is whether petitioners' deductions for the additional salaries are not allowable under section 24 (c) of the Internal Revenue Code.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
The petitioners are husband and wife and reside in Muscatine, Iowa. Petitioners filed their joint individual income tax returns on the calendar year basis for the years 1946, 1947, and 1948 with the collector of internal revenue for the district of Iowa at Des Moines, Iowa.
During the taxable years involved and for many years prior thereto, L. R. McKee, hereinafter referred to as petitioner, was engaged in the wholesale and retail feed and grain business. He conducted his business as a sole proprietorship under the names of McKee Feed and Grain Co., Hawkeye Soy Products Co., and Ladora Feed and Grain Co. Petitioner's sons Harry G. McKee and Clifford R. McKee worked in his business.
Petitioner kept his books and filed his income tax returns on the accrual basis for the calendar years 1946, 1947, and 1948. However, both sons filed their returns for the calendar years 1946 through 1949 on the cash basis.
Petitioner's*172 son Harry came into the business about 1927 or 1928 and Clifford about 1939. At the end of World War II, in 1945, the sons came out of military service and a contract bearing the date February 1, 1946, was drawn up. This contract was not formally executed. Under the agreement the sons were to be paid compensation in addition to regular salaries, rather nominal in amount. The additional compensation was to be a percentage of the profits, after payment of petitioner's percentage of profit and petitioner's income tax. This contract was motivated by petitioner's desire to reduce his duties and impose upon the sons responsibilities of managing the business. During the taxable years involved, Harry was the general manager of the whole business and Clifford was the superintendent of the grain elevator and soy bean plant.
During the taxable years involved petitioner paid his sons a regular salary as follows:
| 1946 | 1947 | 1948 | |
| Harry G. McKee | $ 3,922.80 | $ 5,974.80 | $ 6,089.70 |
| Clifford R. McKee | 1,945.83 | 3,931.20 | 4,006.80 |
Petitioner claimed these regular salaries as deductions on his income tax returns for 1946, 1947, and 1948, and respondent, in his notice of deficiency, *173 allowed these regular salaries as deductions.
*514 In his income tax returns for the years 1946, 1947, and 1948 petitioner claimed as deductions additional salaries to his sons as follows:
| 1946 | 1947 | 1948 |
| $ 59,708.59 | $ 108,700.99 | $ 69,096.89 |
Respondent in his notice of deficiency disallowed these additional salary deductions. The parties have stipulated that the reasonable additional salaries are as follows:
| 1946 | 1947 | 1948 | |
| Clifford R. McKee | $ 25,000 | $ 38,000 | $ 30,000 |
| Harry G. McKee | 30,000 | 48,000 | 35,000 |
| Total | $ 55,000 | $ 86,000 | $ 65,000 |
Additional compensation for the sons was to depend upon the annual net profits. Petitioner determined the net profits at the end of the calendar years involved. The additional compensation due the sons was computed between January 15 and 20 for the preceding calendar year, and credited between those dates to various ledger accounts on petitioner's records in the names of the sons. The additional compensation was recorded as of December 31 of the year in which the compensation was accrued.
The net worth of petitioner's business on December 31, 1946, was $ 223,893.99; on December 31, 1947, $ 278,008.71; *174 on December 31, 1948, $ 277,111.50; and on December 31, 1949, $ 306,187.77.
All of petitioner's gross receipts from his business were deposited in his bank accounts and all business expenses were paid by check. The bank balances of petitioner varied during the periods from January 1 to March 16 in each of the years 1947 to 1949, inclusive. The largest bank balance and the smallest bank balance during those periods were as follows:
| 1947 | Largest balance | Smallest balance | |
| Jan. 4 | $ 80,340.32 | ||
| March 14 | $ 5,931.81 | ||
| 1948 | |||
| Jan. 1 | 200,871.05 | ||
| Jan. 28 | 58,303.87 | ||
| 1949 | |||
| Jan. 3 | 125,417.47 | ||
| March 1 | 45,297.13 |
During the years 1946 to 1949, inclusive, petitioner, his son Harry, and the bookkeeper Anna Kent were authorized to draw checks on petitioner's bank accounts for McKee Feed and Grain Co. and Hawkeye Soy Products Co. Petitioner, his son Harry, and Ithel Gillespie were authorized to draw checks on petitioner's bank account for *515 Ladora Feed and Grain Co. The salary checks for the sons were drawn by petitioner, Harry, or Anna Kent.
Clifford R. McKee was not authorized to draw checks on petitioner's bank accounts. Petitioner orally instructed Harry G. McKee, *175 Anna Kent, and Ithel Gillespie to draw checks for Clifford R. McKee's salary at his request.
During the years 1946 to 1949, inclusive, petitioner had a line of credit with the Muscatine Bank & Trust Co. of Muscatine, Iowa, in the amount of $ 125,000. Additionally petitioner had an open line of credit from the MississippiValley Trust Company of St. Louis of a half million dollars and an open line of credit at Jefferson Bank and Trust Co. of St. Louis of not less than $ 100,000. Harry G. McKee and Clifford R. McKee had full authority to use such credit or to cause it to be used.
Reference to the ledger accounts of the salaries accrued in the individual credit of the two sons, Harry and Clifford, will show that the amounts due them were actually withdrawn after the 15th of March in each of the years succeeding their accrual, but during the year. The individual tax returns of Harry G. McKee and Clifford R. McKee introduced in evidence by respondent as exhibits for the years 1947, 1948, and 1949, show that each of the sons included in his return of income for the years succeeding the years of accrual the additional salary so accrued to his individual credit upon the books and paid the*176 tax thereon. L. R. McKee testified that he had no knowledge of any provision of law requiring his sons to actually reduce to possession salaries so accrued to their credit upon the books, nor to his knowledge did anyone else in the business know of such provision.
Petitioner could and would have paid the additional salaries here in question prior to March 15 of each of the years following the earning of such additional salaries by his two sons, Harry G. and Clifford R., if he had known about the provisions contained in section 24 (c) of the Internal Revenue Code.
OPINION.
The single question presented here is whether respondent erred in disallowing deductions under section 24 (c) of the Code of additional compensation payable to petitioners' two sons. The applicable statute provides:
SEC. 24. ITEMS NOT DEDUCTIBLE
* * * *
(c) Unpaid Expenses and Interest. -- In computing net income no deduction shall be allowed under section 23 (a), relating to expenses incurred, or under section 23 (b), relating to interest accrued --
*516 (1) If such expenses or interest are not paid within the taxable year or within two and one half months after the close thereof; and
(2) If, by reason*177 of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and
(3) If, at the close of the taxable year of the taxpayer or at any time within two and one half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24 (b).
It is well established that all three conditions set forth in section 24 (c) of the Code must coexist to prevent the deductions. Akron Welding & Spring Co., 10 T. C. 715; Michael Flynn Manufacturing Co., 3 T. C. 932, 936. The relationship of father and sons satisfies condition 24 (c) (3), which is conceded by petitioner.
Petitioner argues that condition 24 (c) (1) is not met because of constructive payment. The salaries were not paid by petitioner within two and one-half months after the close of the taxable years involved here in cash, notes, or in any other form whatsoever. Constructive payment does not constitute payment*178 under section 24 (c) (1). P. G. Lake, Inc., 4 T.C. 1">4 T. C. 1, affd. 148 F. 2d 898, certiorari denied 326 U.S. 732">326 U.S. 732; Ashe Electric Co. v. Commissioner, 153 F. 2d 295, affirming a Memorandum Opinion of this Court, August 11, 1944; Granberg Equipment, Inc., 11 T. C. 704, 717. Petitioner relies on Musselman Hub-Brake Co. v. Commissioner, 139 F. 2d 65, reversing on this point a Memorandum Opinion of this Court, November 10, 1942, which we distinguish because there the creditor received demand promissory notes which were worth their face value and constituted payment. We hold that condition 24 (c) (1) is present here.
Petitioner argues that condition 24 (c) (2) is not met because the additional compensation was "includible in the gross income" of his sons, even though the sons were on the cash basis, under the theory of constructive receipt. For purposes of section 24 (c) (2), sums are includible in the gross income of a cash basis taxpayer if the doctrine of constructive receipt is applicable. Ohio Battery & Ignition Co., 5 T. C. 283;*179 Michael Flynn Manufacturing Co., supra.
In this case the additional salaries were not accrued on petitioner's books during the taxable years in which he claimed deductions. The additional salary due each son was computed annually, after making an allowance for paying petitioner's percentage of annual profit plus petitioner's income tax. The sons were not entitled to the additional salaries until the end of the respective calendar years. The salaries were computed and placed on the books between January 15 and 20 of each subsequent year. Both petitioner and his sons filed their returns *517 on the calendar year basis. Petitioner contends that the book entries plus the sons' unrestricted right and ability to obtain cash constitute constructive receipt.
The above facts place the instant case within the ambit of McDuff Turner, 5 T. C. 1261, which held that condition 24 (c) (2) is applicable as follows:
* * * The credits were included on the books only upon the completion of the audit of petitioner's books on or about May 15, 1942. Moreover, until the audit was completed the amount of the bonuses to be paid was not*180 ascertained. Under the agreement the bonuses were not due until after the end of the taxable year and only then could the profits of the business be computed.
During the taxable year there was no affirmative action on the part of petitioner or on the part of his daughters which can serve as a basis for constructive receipt of the money by the daughters. Neither of the daughters was authorized to withdraw against the bonus under any circumstances. The money was not available to them by the mere taking at any time prior to the completion of the audit. Though it may be, as the petitioner now says, that they could have drawn the money at any time they had need for it or asked for it, that, with nothing more, may not be construed as placing the payees in the position of having constructively received their money.
Section 24 (c) (2) provides expressly that to allow the salary deduction, the salaries must be includible in the sons' incomes "for the taxable year in which or with which the taxable year of the taxpayer ends."
In both the instant case and McDuff Turner, supra, the taxpayer's adult children had been employed for several years and were entitled*181 to receive stipulated percentages of the net profit. Similarly sufficient funds were available, in either cash or potential credit, to pay those bonuses. In both cases, the credits to the children were recorded on the books as of December 31 of the taxable year. Had the children requested the additional salaries in advance in McDuff Turner, they could have received advances. In the instant case petitioner's son Harry could have written checks and petitioner's son Clifford could authorize checks drawn to him, after the credits were on the books. However, we do not think that these latter circumstances would serve to distinguish the instant case from McDuff Turner, supra.
We hold that the additional salary expense is not includible in the gross income of the sons for the taxable year in which or with which the respective taxable year of petitioner ends. Therefore, condition 24 (c) (2) is also satisfied and the contested salary deductions are not allowed.
Decision will be entered for the respondent.