*2338 1. ACCOUNTING - BONUS. - Where petitioner accrued on its books during a taxable year certain sums for the payment of a bonus to employees, but the liability for payment thereof was dependent on the continuance of the employee in petitioner's service until a date in the following year, held that the bonus is not deductible in the year in which accrued, but in year when liability became fixed and payment was made.
2. COMMISSIONS paid to agents for securing a loan on mortgage are not deductible in full in the year when paid, but should be spread proportionately over the life of the mortgage.
*704 Respondent determined deficiencies against the petitioner of $2,028.74 for the fiscal year ended September 30, 1924, and $8,623.06 for the fiscal year ended September 30, 1925.
Petitioner alleges that respondent erred in not allowing as deductible expenses amounts accrued by it during both taxable years to provide for the payment of bonuses to employees during December following the end of each fiscal year, and also his*2339 failure to allow as an expense for the fiscal year ended September 30, 1925, the sum of $53,750 commissions paid by it to brokers for selling its $3,750,000 mortgage bonds.
Petitioner is a New Jersey corporation with its principal office at 208 South Warnock Street, Philadelphia, Pa.
It is engaged in the baking and restaurant business and operates about fifty dining rooms and stores in Philadelphia and its vicinity. In order to encourage its employees and reward those faithful and continuous in service, it has for many years had a regular bonus system of extra compensation paid in December of every year. Originally it was fixed at one week's wages, but in 1922 this was changed to a basis of a percentage of the employees' wages for the entire year.
This was explained to prospective employees and became part of the contract of employment.
The petitioner kept its accounts on the accrual system and on a fiscal year basis ending September 30 of every year. It made its tax returns accordingly. Its method of accruing this bonus charge was to estimate the amount monthly based on the amount paid the previous year. Thus for the fiscal year ending September 30, 1924, *705 *2340 the amount accrued was based and estimated on that paid the previous year, and the same system was followed in other years.
For the year ending September 30, 1924, petitioner accrued $80,066.70, which included approximately $22,000 which should have been accrued for 1923 and for 1925 accrued $53,424. The books of the petitioner were closed as of September 30, but the correct amounts of the bonuses were not figured until in December following the close of the fiscal year and the liability for and amount of the bonus to each employee was contingent on the employee remaining in service until December 1. In the event any employee left or was discharged from service between September 30, the end of the fiscal year, and December 1, such employee was not entitled to any bonus. There were some cases of this kind.
Respondent allowed the amounts actually paid as deductible expenses in the year when paid and not in the year accrued by petitioner, to wit, payment of $44,460.64 made December 15, 1923, for the fiscal year ending September 30, 1924, instead of $80,066.70 claimed as accrued by petitioner, and payment of $51,005.39 made December 15, 1924, for the fiscal year ended September 30, 1925, instead*2341 of $53,424 claimed as accrued by petitioner.
During the fiscal year ended September 30, 1925, petitioner raised additional funds for business purposes by placing a 20-year mortgage for $3,750,000 on its various properties and selling bonds secured thereby. The expenses connected therewith were, legal expenses, $7,517.83; title expense, $5,597.75; acknowledgment fee, 50 cents, making a total of $13,116.08. This expense was spread over the life of the mortgage by the respondent and a proportionate part thereof allowed as a deduction for the taxable year 1925, which action is accepted by the petitioner. In addition there was a commission of $53,750 paid a firm of investment brokers for selling the bonds to the Metropolitan Life Insurance Co.
Respondent determined this commission to be a capital expense and not deductible in full in the year when paid, but to be spread proportionately over the life of the bonds. Petitioner contends this is an ordinary and necessary expense deductible in full in the year in which paid.
OPINION.
BLACK: The facts plainly show that the amounts accrued by petitioner for the payment of bonuses for the fiscal year ending September 30, 1924, were*2342 not paid and did not become a liability during such fiscal year, but only after December 1, 1924, and were actually incurred and paid in the fiscal year following that in which they were accrued, to wit, the fiscal year ended September 30, 1925. *706 The accruals made for the fiscal year ended September 30, 1925, were not paid nor was any liability incurred therefor until after December 1, 1925, which was in the fiscal year ended September 30, 1926, which is not before us.
Section 234(a)(1), Revenue Act of 1924, provides:
(a) 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, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity.
It will be observed that the Act provides that in order to be deductible the ordinary*2343 and necessary expenses must be paid or incurred. In the instant case petitioner does not claim to have paid the amounts accrued for bonuses during the year in which it accrued them, and it is equally clear that liability therefor was not incurred until December 1 of the following year. In order to be deductible or accruable for tax purposes, the liability must be fixed or incurred during the taxable year. Here the right to the bonus and the liability therefor did not arise until the year following that in which accrued and claimed by petitioner, for it was dependent on the employee remaining in petitioner's service until December 1 in the following fiscal year. The action of respondent in allowing the actual amounts paid in the year in which they were incurred and paid was correct and is approved. ; ; ; ; ; *2344 ; affd., .
Relative to the claim for deduction for the fiscal year ended September 30, 1925, of the sum of $53,750 paid as commissions for sale of mortgage bonds secured by mortgage of petitioner's properties, it is sufficient to say that we have recently had this question before us in the case of , which is practically on all fours with the instant case. It was there held that such an expense is a capital expenditure and that it was not deductible in full in the year when paid or incurred, but should be spread over the life of the bonds. That case is controlling here. This is what the respondent did and his action is approved. Cf. ; .
Judgment will be entered for the respondent.