*2792 Compensation voted and paid by a corporation to an individual in the year 1920 for services rendered in prior years in securing the extension of a leasehold, floating of bond issues, selling capital stock the securing of credit in connection with the erection and equipping of a building and for advice relating to the design and arrangement of the building and the character and arrangement of the equipment, is not deductible from income in the fiscal year ending April 30, 1921.
*757 In this proceeding petitioner seeks a redetermination of the income and profits taxes for the fiscal year ending April 30, 1921, for which the Commissioner determined a deficiency of $15,628.37. Of this amount, $13,460.27 has been placed in controversy by the appeal. Petitioner alleges error on the part of the Commissioner in failing to allow as a deduction for the year ending April 30, 1921, an amount of $49,190 representing the undisputed value of certain shares of stock which the petitioner designated as compensation paid to an individual*2793 for services rendered.
FINDINGS OF FACT.
Petitioner is a corporation organized and existing under the laws of the State of Michigan with principal office on the corner of LaFayette Boulevard and Shelby Street, Detroit. Petitioner, formerly called the Sweeney-Huston Co., was organized in 1915, and *758 was engaged in the operating of bowling alleys and billiard rooms in the City of Detroit.
The Sweeney-Huston Co. secured a lease on a certain tract of ground for the purpose of erecting a large building for installing billiard and bowling equipment which it intended to operate in conjunction with the business then being carried on. The company enlisted the services of Charles Heddon, one of its stockholders, to assist it in financing the project. It was understood that in the event the project proved successful and financially profitable Heddon would be compensated in a suitable manner for the services rendered. No amount or form of compensation was discussed or agreed on.
Heddon thereupon secured an extension of the lease from a 40-year term to a 99-year term. He assisted and was the leader in all negotiations with the Detroit Trust Co. for the sale of a first*2794 mortgage bond issue. He induced one of the most successful financial companies in Detroit to place a leasehold loan on a building built especially for bowling, a financial arrangement which had not previously been carried out in the City of Detroit. He also assisted with the selection and installment of equipment, and used his influence in perfecting an arrangement whereby the Brunswick-Balke-Collender Co. installed between $250,000 and $300,000 worth of bowling and billiard equipment in the building without an initial cash payment. He was also of assistance in working out a creditors' agreement by which it was possible for the petitioner to carry on business during the years 1919 and 1920 without interference from the creditors.
Heddon also induced various financial people to become stockholders of the petitioner, 13 of whom were bankers, and was responsible for the sale of capital stock of about $100,000 par value.
While the new building was being constructed, business was being carried on in a rented building under the management of Irvin Huston, general manager, and Roscoe B. Huston, assistant manager. After the new building was completed the entire operations of the*2795 business were under the management of these same two individuals. Heddon rendered no services in the actual operation of the business.
Irvin Huston was president and Roscoe B. Huston was secretary-treasurer of the petitioner. Under the by-laws of the petitioner the officers or directors were not entitled to a salary. Irvin Huston, as general manager, received a salary for the year ending April 30, 1920, of $6,833.35, and Roscoe B. Huston, as assistant manager, received a salary for the year ending April 30, 1920, of $5,785.34. Heddon received no regular compensation or salary for the services he rendered. On August 9, 1918, at a meeting of the board of directors, the following resolution was adopted:
*759 Resolved that the Sweeney-Huston Company pay Charles Heddon for the preliminary and organization services to date as follows: cash, $6,422.90, (b) $13,333.33 par value of common stock at such future date as the Sweeney-Huston Company might have had net earnings for a period of one year past amounting to 10% paid up to capitalization.
The Huston brothers received an equal compensation for their services in the organization of the company.
In August, 1920, after*2796 receiving the annual audit of the petitioner's books for the year ending April 30, 1920, the petitioner considered that its business project was in such condition that it would be justified in reimbursing Heddon for the services he had rendered.
At a special meeting of the board of directors on August 16, 1920, a resolution was passed, which read as follows:
Moved by Joseph T. Schiappacasse as follows: that the balance of the Recreation Company's stock now in the treasury, viz, 644 shares of common stock, 2,132 shares of class (a) preferred stock and 143 shares of class (b) preferred stock be voted to Mr. Charles Heddon of Dowagiac, Michigan, as compensation to him for the executive services heretofore rendered the company without stipulated salary.
The motion was seconded by William S. Sweeney and unanimously carried.
Pursuant to this resolution and shortly thereafter a stock certificate was made out to Heddon for capital stock of a par value of $49,190. On the following day this stock was canceled and new certificates were issued distributing the $49,190 of stock one-third each to Heddon and the two Hustons.
The books of the petitioner during the period when the company*2797 was being refinanced and the new building constructed and equipped, and up to and including the fiscal year ending April 30, 1921, were kept on an accrual basis.
The petitioner, in its income-tax return filed with the Commissioner of Internal Revenue for the fiscal year ending April 30, 1921, charged to expense for that fiscal year $49,190 par value in stock of the petitioner given to Charles Heddon as his compensation for services in financing the company, and deducted that amount from the earnings as an expense for the fiscal year ending April 30, 1921.
The Commissioner in computing the taxable income of the petitioner for the fiscal year ending April 30, 1921, disallowed the deduction of $49,190 as an expense for that fiscal year.
OPINION.
VAN FOSSAN: Petitioner deducted and respondent disallowed as an ordinary and necessary expense for the year ending April 30, 1921, an item of $49,190, the amount representing the par value of certain stock issued to one of its stockholders pursuant to the resolution *760 of its board of directors April 16, 1920, quoted in full in the findings of fact. Said stock was voted "as compensation to him for the executive services heretofore*2798 rendered to the company without stipulated salary." The services to which reference was made began in 1916, when the company was expanding its activities, and consisted particularly of negotiations conducted by Heddon in securing the extension of a lease from a 40-year term to a 99-year term; his assistance in floating a bond issue; the sale by Heddon to influential persons of $100,000 of petitioner's stock; arranging for favorable credit terms on equipment purchased, and assisting in adjusting relations between petitioner and its creditors. Substantially all of these services were rendered during 1916, 1917, and 1918. There is no evidence from which we can draw any conclusion of fact as to the nature, extent or value, if any, of Heddon's services subsequent to 1918. The inference is that they were minor or negligible.
When Heddon's active assistance was first enlisted there was an oral understanding between him and the Hustons that if the business proved successful Heddon would be appropriately compensated. Whether this understanding attained to the dignity of a binding legal obligation it is not necessary to decide. However, no terms were fixed; no standards of value were*2799 set up; no payment was to be made unless and until success was achieved; there was no obligation that could be accrued each year on petitioner's books. Cf. . The obligation first became fixed in 1920, pursuant to the resolution of the board of directors. Though the compensation was voted in 1920, the facts show that there was no causal or direct relation between it and the services rendered in the taxable year. It was actually in consideration of services rendered in prior years and by no stretch of reasoning could be held, on the record before us, to be reasonable compensation for services rendered in the year 1920. See ; .
Furthermore, it is fundamental that to be allowable not only must the expense be incurred in the taxable year, but, if in compensation for services, it must be reasonable in amount. We have considerable evidence of the nature of the services performed but we are furnished no gauge or standard by which they should be tested to ascertain their value of the reasonableness of the amount allowed. Were this the*2800 only question confronting us we would be left very largely to conjecture as to the reasonable worth of the services.
Yet another obstacle besets petitioner's path in the nature and character of the services rendered. So far as the record shows the services were chiefly of aid in perfecting petitioner's capital structure and fall within the category of capital expenditures. See J. Alland& *761 Bro., inc.,; . In any event, it is impossible on the record to segregate clearly the services of a capital nature from those which might be classed as expense.
In view of our conclusion indicated above it is unnecessary to discuss the legal effect of the cancellation, on the day following its issuance to Heddon, of the stock certificate and the reissuance of the same aggregate amount to Heddon and the two Hustons in equal shares.
Judgment will be entered for the respondent.