*1917 1. EXPENSES - COMPENSATION. - For 1927 the petitioner paid to its officers only a portion of the commissions earned by them respectively, upon insurance and surety bond business actually written by them. Such officers received no other compensation and waived the 10 per cent dividend declared for that year. Held, that the total amount paid to such officers constituted commissions earned by their personal efforts and deductible, and that respondent erred in determining a portion thereof to be dividends.
2. Id. - CLUB DUES paid for the purpose of obtaining a place for petitioner's annual employees' picnic held to be deductible expense.
3. Id. - CONTRIBUTIONS held to be gifts and not deductible as a business expense.
*161 The respondent has asserted a deficiency in the amount of $1,818.32 in this petitioner's income tax for the calendar year 1927, and the petitioner assigns as error the respondent's disallowance of a deduction of (1) the amount of $8,520 alleged to be a portion of salaries and commissions paid to officers*1918 and (2) the amounts of $49.50 club dues and $140 donations alleged to be business expenses.
FINDINGS OF FACT.
The petitioner is a Nebraska corporation whose principal office is in Omaha. Since its incorporation in 1921 petitioner has been *162 engaged in the insurance and surety business in Nebraska and western Iowa as general agent and also as local agent in Omaha. It represents old line insurance companies and writes all types of insurance except life contracts; adjusts losses, pays claims and does all of its own engineering, surveying and pay-roll auditing. The petitioner's business is carried on through five underwriting departments, a claim department, an inspection department and an auditing department. During 1927 the five underwriting departments were managed by the officers, who were also stockholders and the directors of the petitioner, each one being responsible for all of the details connected with the underwriting of their respective types of insurance. The petitioner employed subagents, who received the regular standard commissions authorized by the insurance and surety companies represented by petitioner and the officers received the same commissions*1919 on business actually written by them. The officers and directors received no commission on the business written by the subagents and their compensation depended upon their respective personal efforts in writing insurance and surety bonds. Each officer had a drawing account measured by commissions earned in the preceding year and at the close of the year the total commissions earned by each officer were computed and the amount thereof in excess of the drawing account was credited to them respectively. They were not paid regular salaries other than the said drawing accounts.
The petitioner, as district and local agent, received a standard commission on all business written by its officers and subagents and out of such funds it paid its various expenses, including salaries of clerks and other persons employed in the office. For the year 1927 such income of petitioner was not sufficient to meet all of its operating expenses and the officers received only a portion of the commissions actually earned by them on their respective personal production of business during 1927.
During 1927 petitioner had outstanding 888 shares of capital stock of the par value of $100 each and the five*1920 officers and directors owned 852 shares. The balance of the stock was owned by various employees. The directors of petitioner passed a resolution declaring a 10 per cent dividend on all paid up stock, and further providing, "That the following stockholders waive payment of dividends, for the reason that they participate in the profit sharing of the company: Harry A. Koch, Joseph H. Friedel, Joseph L. Adams, E. W. Devereux, and Lyman G. Cross." Stock had been sold to the employees for the purpose of stimulating a greater interest in the business and the dividends paid on their paid-up stock and amounting to $227.82 were for the same purpose. The petitioner followed the practice of paying dividends only to the small stockholders for the *163 years prior to and including 1927 and in each year the directors and officers waived dividends because the petitioner's earnings were not sufficient to pay dividends on all of the outstanding stock. The expression used in the resolution that dividends were waived for the reason that they participate in the profit sharing merely meant that the officers received amounts in excess of their drawing accounts referred to as salary and not that*1921 there was an actual distribution of petitioner's earnings as a bonus or dividend.
For 1927 the compensation paid to petitioner's officers totaled $37,881.20 and that amount was deducted from its gross income on its tax return for 1927. The respondent disallowed $8,520 of that amount representing 10 per cent of the stockholdings of the five officers who waived dividends and he determined that that portion of the amount claimed as compensation of such officers constituted dividends in the form of bonuses.
During the year 1927 the petitioner made the following contributions:
| St. Mary's College | $10 |
| North Side Methodist Church | 15 |
| Police Relief Fund | 15 |
| Commissioner of Public Works, campaign fund | 100 |
| 140 |
Those contributions were made because the petitioner's president felt that it was not good business to refuse the requests for the reason that it received business from the St. Mary's College, and from the members of the North Side Methodist Church; it received aid from the police by their protection of property insured by petitioner, and as to the contribution to the campaign fund, petitioner's president felt that the city of Omaha and the businesses located*1922 in that city would profit by the election of a certain candidate.
During 1927 petitioner paid $49.50 to the Crater Lake Club as dues on a membership standing in the name of one of petitioner's officers. The membership had to be held in the name of an individual, but was obtained and used solely for the purpose of holding, at the club grounds, the annual picnic given by the petitioner for the purpose of stimulating the interest, morale and good fellowship of its employees.
The petitioner deducted the said contributions totaling $140 and the said club dues of $49.50 as ordinary and necessary business expenses and the respondent disallowed such deductions.
OPINION.
TRUSSELL: The facts clearly establish that the amounts totaling $37,881.20, paid to the petitioner's officers during 1927 and deducted *164 upon its tax return as compensation of officers, constituted commissions earned by each of such officers by their personal efforts in writing insurance and surety bonds, and, further, that the amounts received by such officers were less than they had actually earned. The respondent erred in disallowing the amount of $8,520 as a deduction from petitioner's gross income*1923 for 1927.
The amount of $49.50 club dues was spent for the sole benefit of petitioner's employees and was a part of the expense of the annual picnic, from which petitioner's business received a direct benefit. Such expense falls within the class of an ordinary and necessary business expense and as such was deductible from petitioner's gross income for 1927. The respondent erred in disallowing such deduction.
The contributions totaling $140 constituted gifts and the benefits, if any, derived by petitioner's business were indirect and remote. The respondent properly disallowed the claimed deduction of the said $140 as a business expense.
Judgment will be entered pursuant to Rule 50.