*1064 1. Where petitioner kept its books on an accrual basis, and under a "Plan to Aid Employees to Become Stockholders" made arrangements with its eligible employees whereby they could make applications to purchase a limited number of shares of petitioner's authorized but unissued stock at a price substantially below the market, and make payments therefor at the rate of $1 per share per month, to be deducted from the employees' regular compensation, and petitioner agreed on its part to make certain credits to the employees' stock purchase account equaling the dividends paid on the company's common stock, which credits and delivery of the stock were specifically conditioned upon the employee remaining in petitioner's service until the stock was fully paid for in the manner provided for in the plan, it is held, that petitioner is entitled to deduct from its gross income during 1929 as additional compensation paid or incurred during the year, under section 23(a), Revenue Act of 1928, the amounts credited to employees' purchase accounts in 1929 and prior years on stock for which they subscribed in 1926 and 1927 but which was not delivered to the employees until 1929.
2. Under the*1065 facts as stated above petitioner is not entitled to a deduction from gross income under section 23(a) of the excess fair market value of the stock at the time it was delivered over the purchase price paid for it in the form of deductions from employees' salaries and the earnings credits to employees' purchase accounts.
*122 This proceeding involves a deficiency in income tax determined by respondent against petitioner for the year 1929 in the amount of $30,699.60, which amount respondent, for reasons hereinafter given, has affirmatively alleged should be increased to a redetermined deficiency of $65,964.92. The errors assigned by petitioner in its petition as amended are as follows:
(a) The respondent erred in failing to allow as a deduction from petitioner's gross income the fair market value of the shares of stock issued by the petitioner to its employees in the taxable year 1929 under employees' stock plans, in all totaling $842,802, less the total amount of $333,374 paid to the petitioner by its*1066 employees under the said plans in respect of such shares.
(b) If the respondent did not err as stated in (a) above, then he erred in failing to allow as a deduction from petitioner's gross income the amount of $276,631.48 paid to employees in 1929 as additional compensation.
(c) If the respondent did not err as stated in (a) or (b) above, then he erred in failing to allow as a deduction from petitioner's gross income the fair market value of the shares of stock applied for by petitioner's employees in the year 1929, under employees stock plans, in all totaling $650,420, less the amount of $44,511 paid to the petitioner by the employees under the said plans during 1929.
(d) If the respondent did not err as stated in (a), (b) or (c) above, then he erred in failing to allow as a deduction from petitioner's gross income the amount of $270,202.67 credited by the petitioner in 1929 to its employees under stock plans in respect to shares of stock applied for by the employees during the year 1929 and prior years.
The respondent's affirmative allegation is that under *1067 , decided since the mailing of the deficiency notice, the respondent erroneously allowed petitioner a credit for income tax paid a foreign country in the amount of $39,603.73, and that the elimination of such credit, together with such other adjustments as are incident thereto, will result in the increased deficiency, for which due claim has been made by the respondent. Regarding this affirmative allegation, the parties have stipulated "* * * that the petitioner erroneously claimed and was allowed a credit for taxes paid to a foreign country in the amount of $39,603.73 and that such credit may be eliminated in the final redetermination in this proceeding; and also that a deduction from income in this same amount shall be allowed the petitioner in such redetermination." Effect will be given to this agreement under Rule 50.
FINDINGS OF FACT.
The facts are set forth in a stipulation of the parties, which we adopt as our findings of fact. Only such of the facts as seem necessary to a discussion of the issues are stated herein.
Petitioner is a corporation, organized under the laws of the State of New Jersey, with its principal*1068 office in Philadelphia, Pennsyvania, *123 and is engaged in the business of manufacturing and selling electric storage batteries.
By resolution of the board of directors of petitioner, at a meeting held on February 10, 1925, the board adopted a "Plan to Aid Employees to Become Stockholders of The Electric Storage Battery Company", hereinafter referred to as "the plan." This resolution was approved by a resolution passed by the stockholders of petitioner at their annual meeting held on April 15, 1925. A complete copy of the plan is as follows:
PLAN TO AID EMPLOYEES TO BECOME STOCKHOLDERS OF THE ELECTRIC STORAGE BATTERY CO.
The Electric Storage Battery Company has made arrangements by which employees may purchase shares of its Common Stock on the following terms:
PURCHASE
Section I
(a) Any employee who, on May 1st, of each year has been continuously in the service of the Company two years or more may purchase one share of Common Stock at a price per share to be fixed annually by the Board of Directors for each $500.00 of his or her annual compensation, but not exceeding 20 shares to any one employee, provided:
(b) All purchase-agreements must be filed with*1069 the Treasurer of the Company on or before May 31st, of each year.
PAYMENTS
Section II
(a) Payments for the stock must be made by installments at the rate of $1.00 per share per month, which shall be deducted from the employees' compensation until stock is paid for - the first payment will be deducted from July compensation and apply as of July 1st, of each year.
(b) All regular and extra dividends paid on the Common Stock will be credited to the employees' stock purchase account.
(c) In respect to stock dividends, if any, and also rights to subscribe to stock or other rights of a similar character, there shall be credited to the employees' Stock Purchase Account a sum or sums, not less than the market value thereof at the time of issue.
(d) When stock is fully paid for under the Plan, it shall be transferred to the purchaser. He shall then hold the stock without any restriction and with all of the rights of any other Common Stockholder.
TEMPORARY ABSENCE
Section III
(a) Absence on account of illness or reduction of force but not exceeding six continuous months shall be considered Temporary Absence. Temporary Absence shall not apply as a break in continuity*1070 of service. Absence of any duration for any other cause and absence exceeding six continuous months for any cause shall operate as a break in continuity of service.
(b) During Temporary Absence the employee shall not be deprived of any of the privileges under this Plan but upon return to active employment within *124 the prescribed limit of six months any arrears shall be made up by additional monthly payments in amounts not less than the amount of regular monthly payments.
LEAVING SERVICE OR WITHDRAWAL
Section IV
(a) In case an employee leaves the service of the Company before his stock is fully paid for, his purchase-agreement shall be canceled and the net amount paid in by him on the stock, that is - the amount deducted from his compensation, shall be repaid to him with interest at the rate of 5% per annum, in full settlement hereunder.
(b) If for any reason other than leaving the service of the Company, or death, any employee desires to withdraw from his purchase-agreement as to any or all shares, he may file application to that effect, and, as to each share given up, the amount withheld from his compensation, with interest at the rate of 5% per annum, *1071 shall be repaid to him and the purchase-agreement canceled, to the extent of the shares given up.
(c) No employee shall pledge or in any manner alienate any interest held by him in stock purchased under this Plan until such stock is fully paid for and transferred to him. A violation of this provision by an employee shall constitute a withdrawal by him for the purchase of the stock in question, and the purchase-agreement shall be canceled in accordance with the provisions of clause (b) of this Section.
DEATH
Section V
In case an employee dies before his stock is fully paid for, the amounts paid in by him shall be paid to his legal representatives together with such regular dividends, extra dividends and all accumulations which may be credited to his stock purchase account at the time of death and the purchase-agreement shall be canceled.
PENSIONERS
Section VI
Pensioners shall not be entitled to purchase stock under this Plan, but any employee who becomes a pensioner after filing his purchase agreement may elect to continue payments on his stock, or to cancel his purchase-agreement and to receive the amount to which he would be entitled as if leaving the service*1072 of the Company.
GENERAL PROVISIONS
Section VII
(a) Stock purchased will, until fully paid for, be held by the Company.
(b) The decision of the Company shall be final with respect to the rights or interests under this Plan of the employees, collectively or individually.
(c) The Company reserves the right to modify, discontinue or revive the Plan in future years.
The printed blank on which employees applied for and offered to acquire stock under the plan was captioned "APPLICATION TO PURCHASE SHARES UNDER PLAN TO AID EMPLOYEES TO BECOME STOCKHOLDERS", and read in part as follows:
I hereby apply for and offer to purchase from the Electric Storage Battery Company shares of its Common Stock under and pursuant to * * * [the plan] * * * and upon acceptance of this application * * * I *125 direct that * * * the proper sum for each share of stock hereby applied for shall be deducted from my compenstion in accordance with said Plan and applied on the purchase price of the number of shares of stock covered by the application until such stock is fully paid for under the terms and conditions of said Plan.
Coincident with petitioner's acceptance of an application*1073 for stock by an employee there was mailed to the employee an acceptance, a specimen copy of which is as follows:
Philadelphia, Pa., June 25, 1927
To
Your application for purchase of shares of Common Stock of this Company under 1927 Plan "To aid Employees to become Stockholders of The Electric Storage Battery Company", has been received and accepted.
shares of Common Stock have been allotted to you under said Plan. The sum of $ per month, will be deducted from your compensation beginning July, 1927.
THE ELECTRIC STORAGE BATTERY CO.
Treasurer.
During 1929 petitioner issued 10,342 shares of its common stock to its employees under the plan. Of this total number, 5,100 shares had been applied for during May 1926 and 5,242 shares during May 1927. The 5,100 shares applied for in 1926 were issued to the employees on June 17, 1929; and the 5,242 shares applied for in 1927 were issued on November 22, 1929. Each employee receiving a certificate of stock on November 22, 1929, also received a printed notice from petitioner, a copy of which is as follows:
NOTICE
There is enclosed herewith a stock certificate together with a check on the basis of $4.94 per share, representing*1074 your full paid subscription under the "plan to aid Employees to become Stockholders of The Electric Storage Battery Company", subscribed for by you in 1927, at $55.00 per share. The detail of your cash payments and the Company's credits, per share, are as follows:
| Paid by Employee: | ||
| Cash installments | $29.00 | |
| Credited by Company: | ||
| Cash dividends | $11.25 | |
| 10% stock dividend | 8.69 | |
| Special distribution from Surplus | 11.00 | |
| 30.94 | ||
| Total | 59.94 | |
| Subscription price | 55.00 | |
| Excess for which check is enclosed | 4.94 |
Under the regulations of the Commissioner of Internal Revenue the amount of $30.94 per share credited by the Company is extra compensation to you and must be so reported by the Company to the Commissioner. In making your *126 income tax return, therefore, for the year 1929, it should be included in your taxable income subject to normal and surtax.
This is given for your information and guidance.
WALTER G. HENDERSON, Treasurer.
A similar notice, except as to dates and amounts, was mailed to each employee receiving stock on June 17, 1929.
Stock was issued under the plan only when the amount supplied by the employees*1075 and the amounts credited to the employees' account by petitioner under the plan equaled the price fixed by the board of directors. The stock issued as aforesaid was from authorized but not previously issued or outstanding stock.
On February 9, 1926, the board of directors of petitioner passed a resolution which provided as follows:
RESOLVED, that the President of this Company be and he hereby is authorized, empowered and instructed to fix the price of the Common Stock of this Company, to be allotted during the current year to the employees under the "Plan to Aid Employees to Become Stockholders of The Electric Storage Battery Company," at Fifty-eight ($58.00) Dollars per share.
A similar resolution was passed on March 15, 1927, wherein the board of directors fixed the price for stock to be applied for under the plan in 1927 at $55 per share.
The fair market value of petitioner's common stock on February 9, 1926, and March 15, 1927, was $77.50 and $71.50 per share, respectively. The fair market value of petitioner's common stock during May 1926 when the stock was applied for by petitioner's employees ranged from $75.25 to $78.25 per share. The fair market value of petitioner's*1076 common stock during May 1927 when the stock was applied for by petitioner's employees ranged from $63.25 to $71.875 per share. The fair market value of petitioner's common stock which it issued to its employees on June 17, 1929, and November 22, 1929, was $82 and $81 per share, respectively.
At the time the stock was applied for in the years 1926 and 1927, entries were made on petitioner's books of account debiting, respectively, "Employees' Stock Subscriptions - 1926" and "Employees' Stock Subscriptions - 1927", and crediting, respectively, "Capital Stock - Common - Allotted to Employees under Subscription Plan - 1926" and "Capital Stock - Common - Allotted to Employees under Subscription Plan - 1927" in amounts equal to the total number of shares applied for under the plan at the price fixed under the plan for each of such years. From time to time entries were made in the aforementioned accounts to record reversals of such original entries in part, due to cancelation of applications for stock by employees by reason of death, resignation, or withdrawal by employees of their applications under the plan, and for other reasons. As monthly deductions from salaries of employees were*1077 made under the plan and *127 regular and special dividends were declared by petitioner, entries were made on petitioner's books debiting cash and surplus, respectively, and crediting "Employees' Stock Subscription - 1926 - Collections and Dividends" or "Employees' Stock Subscriptions - 1927 - Collections and Dividends", depending upon whether the deductions from salaries or dividends pertained to stock applied for in 1926 or 1927, respectively. The entries as to dividends were for amounts equivalent to cash dividends which would have been payable if such stock had been issued and outstanding. A credit with a corresponding debit to surplus was also made of an amount equivalent to the market value of a stock dividend paid on January 2, 1929.
On June 30, 1929, a journal entry was made on petitioner's books recording facts as follows:
| Debit | Credit | |
| Capital Stock Common - Allotted to Employees under Subscription Plan - 1926 | $295,800.00 | |
| Capital Stock Common without Nominal or Par Value | $295,800.00 | |
| To transfer to Capital Stock Common without nominal or par value the above amount representing 5100 shares at $58.00 per share, subscribed by employees under Subscription Plan of 1926. Payments were completed by employees in the month of June 1929. |
*1078 A similar journal entry was made at the close of November 1929 with respect to the 5,242 shares at $55 per share subscribed by employees under the subscription plan of 1927.
On July 31, 1929, a journal entry was made on petitioner's books recording facts as follows:
| Debit | Credit | |
| Employees' Stock Subscription Collection & Dividends - 1926 | $295,800.00 | |
| Employees' Stock Subscription - 1926 | $295,800.00 | |
| To transfer from the former to the latter account above amount representing completed collection and accrued dividends on 5100 shares of Employees' Stock Subscription - 1926 plan. | ||
| Payments began July, 1926, and were completed June, 1929. | ||
| Paid by Employees 5100 Shares at $35.56 per share | $181,356.00 | |
| Dividends Credited 5100 Shares at $22.44 per share | 114,444.00 | |
| $58.00 | $295,800.00 |
On December 31, 1929, a journal entry was made on petitioner's books recording facts as follows:
| Debit | Credit | |
| Employees' Stock Subscription Collection & Dividends - 1927 | $288,310.00 | |
| Employees' Stock Subscription - 1927 | $288,310.00 |
*128 To transfer from the former to the latter account above amount, representing completed*1079 collection and accrued dividends on 5242 shares of Employees' Stock Subscription - 1927 Plan. Payments began July, 1927, and were completed November, 1929.
| Paid by Employees | $29.00 per share for 5242 shares | $152,018.00 |
| Dividends Credited | 30.94 per share for 5242 shares | 162,187.48 |
| 59.94 | 314,205.48 | |
| Refund to Employees | 4.94 per share for 5242 shares | 25,895.48 |
| $55.00 | $288,310.00 |
In its income tax return for the taxable year 1929 petitioner deducted $276,631.48 ($114,444 of dividends credited on the 5,100 shares at $22.44 per share plus $162,187.48 of dividends credited on the 5,242 shares at $30.94 per share) as additional compensation paid to employees in the year 1929. Petitioner had not in any year prior to 1929 taken or been allowed a deduction from taxable income for any part of the aforesaid total of $276,631.48. The respondent in his final determination disallowed as a deduction from 1929 income the aforesaid $276,631.48, and a portion of the deficiency arises from such disallowance. The amount of $276,631.48 was reported by petitioner on Treasury form 1099 as representing compensation paid to petitioner's employees during the calendar*1080 year 1929.
In each of the years 1926, 1927, and 1928 employees' stock applied for under the plan, or under a plan similar to the plan involved in this proceeding, was issued to employees. The method of accounting followed by the petitioner in all of such years was the same in all respects to that followed by the petitioner with respect to stock which was issued to employees in 1929. For such years the respondent allowed as a deduction from petitioner's gross income the following amounts with respect to stock issued in each of such years under such plans:
| 1926 | $59,566.50 |
| 1927 | 54,841.50 |
| 1928 | 62,212.50 |
The number of employees applying for stock in May 1926 and the number of shares applied for were 1,756 and 6,498, respectively. The number of employees finally receiving stock and the number of shares finally issued in connection with the 1926 applications were 1,242 and 5,100, respectively. The number of employees applying for stock in May 1927 and the number of shares applied for were 1,684 and 6,237, respectively. The number of employees finally receiving stock and the number of shares finally issued in connection with the 1927 applications were 1,330 and*1081 5,242, respectively.
*129 The aggregate of amounts set aside by petitioner in 1929 and applied against the price fixed for employees' stock applied for under the plan was $270,202.67. All of the $270,202.67 was not applicable to stock applied for in 1926 and 1927, and all of it is not included in the $276,631.48 claimed as a deduction from petitioner's income on its 1929 income tax return. The above amount of $270,202.67 is the total amount set aside in 1929 for all applications for stock under the plan,, whether the stock was issued to employees in 1929 or in some subsequent year. No part of this $270,202.67 has been allowed as a deduction by respondent in his determination of petitioner's 1929 taxable income or as a deduction in any year.
In petitioner's taxable year 1929, 7,652 shares of stock were applied for under the plan by 2,086 employees, at the price of $60 per share fixed under the plan by the board of directors of petitioner on February 19, 1929. The fair market value of petitioner's common stock on February 19, 1929, was $84.50 per share. The fair market value of that stock during May 1929 when the stock was applied for ranged from $78.625 to $85.875*1082 per share. In the year 1929 and with respect to such applications made in 1929 under the plan petitioner credited on such applications the total amount of $100,226.50 toward the price of $60 per share, and the employees applying for the stock had deducted from their salaries under the plan the total amount of $44,511. At the time the board of directors fixed the price for stock applied for under the plan, petitioner advised employees that it was estimated that applicants would supply $42.50 and that petitioner would supply $17.50 for each share issued.
The stock applied for by employees under the plan was not shown as outstanding stock of the company or as treasury stock in reports to the New York Stock Exchange, or in reports to stockholders, until the stock was issued to the employees under the plan. In applications to the New York Stock Exchange dated March 24, 1926, and March 6, 1930, respectively, to list on the exchange in each case an additional 25,000 shares of petitioner's common stock, petitioner, in each application, stated "The purpose of this issue will be to carry out contracts with the Company's employees for the purchase of stock on an installment basis under*1083 the Company's 'Plan to Aid Employees to Become Stockholders of The Electric Storage Battery Company.'" Similar applications were made to the Philadelphia Stock Exchange. Such stock for employees was not listed under such applications until official notice of issuance and payment in full pursuant to the plan.
The issued and outstanding common capital stock of the petitioner on December 31, 1928, was 809,131 shares, and on December 31, 1929, was 900,511 shares. The increase of 91,380 shares was made up of the 5,100 shares issued to employees on June 17, 1929, 5,242 shares issued *130 to employees on November 22, 1929, and 81,038 shares issued as a 10 percent stock dividend paid on January 2, 1929, on 809,131 shares of common stock and 1,256 shares of preferred stock outstanding on December 31, 1928.
After an employee applied for stock under the plan and during the period intervening from such date to the date the stock was issued, no interest was charged the employee by petitioner on the unpaid balance of the price fixed for the stock.
At all times the plan or a similar plan was in effect, petitioner kept its accounts on the accrual basis and made its income tax returns*1084 on such basis.
The parties have agreed that, in the event the Board sustains petitioner's contention or contentions that the sums claimed in the petition as amended constitute the payment or accrual of compensation to employees in 1929, such payment or accrual, plus the regular compensation, constitutes reasonable compensation for services rendered.
OPINION.
BLACK: Upon the facts as above recited petitioner contends primarily that it is entitled to deduct from its gross income for 1929 as additional compensation the difference between the fair market value ($842,802) of the 10,342 shares of its common stock which it issued to its employees under the plan during 1929 and the amount ($333,374) paid to petitioner by its employees under the plan in respect to the 10,342 shares. This difference amounts to $509,428. The respondent contends that the issuance of stock in 1929 under the plan should, as far as petitioner is concerned, be regarded merely as the delivery of stock previously "purchased" by petitioner's employees in 1926 and 1927 at a total purchase price of $584,110, and that in so purchasing the stock no element of additional compensation was involved and petitioner*1085 is entitled to no deduction by reason thereof. The applicable statute is section 23(a) of the Revenue Act of 1928, the material part of which is set out in the margin. 1
We do not think petitioner's primary contention contained in assignment of error (a) can be sustained, nor do we think respondent's position that petitioner is entitled to no deduction as additional compensation paid to its employees by reason of the stock transactions with its employees is sound. For reasons which we shall state later on in this opinion, we think petitioner's assignment of error (b) should be sustained.
*131 There are many Board and court cases which deal with various phases of the question which we have here to decide and with other questions related to it. Some of these cases are cited by petitioner in its brief and*1086 some are cited by respondent in his brief. We have read all the cases cited in both briefs and other later cases which are not cited in either brief. We do not think it would be profitable to undertake to discuss all of these cases in detail or to endeavor to reconcile some apparent conflicts in them. Each such case, as has often been said, depends upon its own particular facts.
However from a reading of these various cases we think their holdings may be classified in about this way:
(1) Where the facts show that the stock transaction between the corporation and the employee is an outright sale of the stock to the employee, no income results to the employee by reason of the purchase even though the fair market value of the stock is greater than the price which the employee paid for it. And by the same reasoning the corporate employer is not entitled to a deduction, as compensation paid to the employee, of the excess fair market value of the stock over the price which the employee paid for it. Cf. ; *1087 ; ; certiorari denied, ; ; .
(2) Where the form of the contract is that of an outright sale of the stock from the corporate employer to the employee such as an agreement of sale, with the execution by the employee of his promissory note to pay for the stock, but the facts show that nothing was to be paid by the employee from his own funds for the stock but that it was to be paid out by dividends or earnings credited to the employee from time to time as payments on the stock, such a transaction is treated as extra compensation paid by the corporation to the employee, and if the amounts when added to other payments made to the employee represent reasonable compensation, the corporate employer is entitled to take as a deduction the fair market value of the stock when delivered to the employee. *1088 ; ; .
(3) Where the contract shows that the employee is to make part of the payment for the stock which is to be acquired by him out of his own funds, either in the form of cash payments or by periodical deductions from his regular salary, and the remainder of the agreed price is to be paid in the form of credits to the employees' accounts, such credits to be measured in some cases by dividends which are paid upon issued and outstanding stock, in other cases by proportionate *132 net earnings of the corporation to be applied to the purchased stock, the contract is treated as one of composite purchase and sale and of compensation. In such a case, without more, the employee is not taxed with the excess fair market value of the stock over the price paid for it in the form of cash payments and the application of credits to his account. He is taxed as income with the actual credits made to his account on the purchase price, but does not pay any tax on*1089 the excess fair market value over the price paid for the stock, unless this excess fair market value is actually realized in the form of a sale. Cf. ; .
In the Gordon M. Evans case we pointed out in our findings of fact that the Kelvinator Corporation, which was the corporate employer, made no deduction on its books and claimed no deduction on its Federal income tax returns as compensation paid with respect to the stock sold under the option agreements. It did deduct as extra compensation, however, the amounts of the "earning credits" entered on its books to the accounts of the employees. On the facts of that case, we held that the taxpayer, Evans, who was the employee who had purchased the stock, was not taxable on the $26,500 which the Commissioner had added to his gross income on account of the fact that the 3,000 shares of Kelvinator stock which Evans had purchased under the plan at $8 per share, had a fair market value $26,500 greater at the time the stock was delivered to Evans than the purchase price which he had paid for it.
Although in the *1090 Evans case we did not have the corporate employer, the Kelvinator Co., before us claiming a deduction as compensation paid out to an employee, this $26,500 in question, it seems certain that, if we had had the Kelvinator Co. before us, the same logic that holds that $26,500 was not income to Evans would compel a holding that it was not an allowable deduction as compensation paid out by the corporation.
The facts in the instant case show that petitioner, like the Kelvinator Co. in the Evans case, did not deduct from its income tax return the excess fair market value of the stock at the time it was delivered over the price which the employee had paid for it, including the credits placed to his accounts. Petitioner in the instant case, like the Kelvinator Co. in the Evans case, has deducted from its income tax returns the earnings credit entered on its books to the accounts of the employees.
In our findings of fact it is shown that in 1929 when the stock was delivered to the employee-purchasers petitioner sent each of them a statement which showed just how much of the agreed purchase price had been paid by deductions from the stockholders' regular salary *133 *1091 and just how much had been paid by earnings credits placed to the credit of the purchasing employees' accounts. This notice called the employees' attention to the fact that the earnings credits which had been placed to the credit of the purchasing employees' accounts should be returned as taxable income. Nothing was said in these notices to the employees to the effect that the excess fair market value over the purchase price was to be treated as increased compensation to the employee. In fact there is nothing in the stipulated facts which shows that there was any agreement or understanding between petitioner and its employees that it should be so treated.
In this respect the instant case appears to differ in this important respect from the facts in (issue No. 22), and is therefore distinguishable. In the latter case, in distinguishing it from the case of , we said:
* * * However in the present controversy, the circumstances and conditions surrounding the execution of each contract disclose that the intention of the parties was not only a purchase and sale of*1092 stock but in addition thereto and primarily, the payment by the Ritter Co. of a stock bonus, as compensation for services actually rendered. The amount of this bonus was predetermined to be the difference between the purchase price and the market value of the number of shares allotted to each employee.
While we recognize of course that the treatment by the parties of the transactions on their books and income tax returns is by no means conclusive, nevertheless in the instant case, taken in connection with other facts and circumstances, it is persuasive as to the agreement and understanding between the parties. As has already been pointed out, petitioner took the sum of $276,631.48 as a deduction on its income tax return for compensation paid to its employees in the form of credits to their accounts on the stock which was delivered to the employees in 1929. Petitioner now wants to increase this deduction to $509,428, which, if allowed, would not only include the $276,631.48 actually credited to the employees' accounts but would also include the excess of fair market value of the stock at the time it was delivered over the $333,374 which had been deducted from the employees' accounts*1093 and the $276,631.48 which had been credited as above stated.
For reasons which we have endeavored to state, we think this additional deduction should not be allowed. Petitioner kept its books and made its income tax returns on an accrual basis and under ordinary circumstances the deduction to which petitioner would be entitled in 1929 would be the $270,202.67, mentioned in petitioner's assignment of error (d). This amount was what petitioner actually credited in 1929 to employees' accounts on stock purchases for all years including the year 1929. The $276,631.48 which we have *134 said should be allowed as a deduction represents not only the amounts credited in 1929 to employees' accounts on the 10,342 shares of stock actually delivered in that year, but credits which had been made in former years to this same stock. The credits in former years respecting these 10,342 shares had not been deducted from petitioner's income tax returns because they were only tentative. If the employee quit the service of the company, as actually a good many of them did, then the credits lapsed back into the company's treasury and the retiring employee received only the amounts which had*1094 actually been deducted from his pay plus 5 percent interest.
Therefore the credits were not regarded as final and complete until the agreed purchase was completed. Then the stock was turned over to the employee and it was unconditionally his property. As stated in our findings of fact, 10,342 shares of stock were delivered in 1929 to employees by virtue of their subscriptions in 1926 and 1927. As to these shares, $276,631.48 had been credited to employees' accounts in 1929 and prior years to apply on the purchase price. It is this amount which we hold petitioner is entitled to deduct from its gross income in the taxable year under the provisions of section 23(a) of the Revenue Act of 1928. On this point, as of what time the deduction should be allowed, cf. ;;
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses.↩ - 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 * * *.