*3799 An individual keeping his books of account on the accrual basis, and setting aside on those books amounts to be held by him in trust and to be paid to his sons at a future date, under the circumstances stated herein, is not entitled to deduct such amounts from gross income in income-tax returns as ordinary and necessary expenses.
*466 This is a proceeding for the redetermination of deficiencies in income taxes for the years 1920 and 1921 in the amounts of $3,886.75 and $2,417.39, resulting in large part from the refusal of the respondent to treat certain income from partnerships either as income received by the petitioner as trustee for his three sons or as payments to the sons for services.
FINDINGS OF FACT.
Prior to 1919 the petitioner had been engaged in the wholesale wall paper business for many years and was a member of a partnership in Washington, D.C., Capital Wall Paper Co., having a one-third interest; of a partnership in Baltimore, West Baltimore Wall Paper Co., having a one-third interest; and was the sole owner of an individual*3800 business in Baltimore, the National Wall Paper Co. He also owned approximately one-third of the shares in the Stahl Wall Paper Co., Inc., of Richmond, Va. Under date of January 1, 1919, the petitioner entered into the following agreement with his three sons:
THIS AGREEMENT, Made as of January 1st, 1919, by and between Louis Cohen, of the first part, and Jacob Cohen, Samuel Cohen and Benjamin Cohen, of the second part, all of Baltimore City, in the State of Maryland.
WHEREAS the said Louis Cohen is engaged in the wholesale wall paper jobbing business in Baltimore and is holding certain interests in similar enterprises, viz: in the West Baltimore Wall Paper Co., of Baltimore, Md., the Capital Wall Paper Co., of Washington, D.C., and the Stahl Wall Paper Co., Inc. of Richmond, Va., and whereas the several parties of the second part are employed by and working with the said Louis Cohen and are actually engaged in promoting the prosperity of the business and allied enterprises conducted by said Louis Cohen, their father, and whereas said Louis Cohen, is desirous to make the employment of his said sons as attractive as possible and to furnish special incentive, in addition to the*3801 salary they are now receiving, and in order to foster their interests in the business and interests held and owned by their said father, and whereas it is the desire of the said Louis Cohen, that the inducements and interest given by him to said sons in consideration of their services *467 and efforts, shall enure to the benefit of his said sons at certain times as herein after provided.
NOW THEREFORE THIS AGREEMENT WITNESSETH, That in consideration of the premises and the promise and agreement on the part of said sons, to continue their active work and interest for the continuous welfare and prosperity of the business and interests built up by said Louis Cohen from very small beginning and to insure a continuance of said business, and allied interests by binding said sons to said business, the said Louis Cohen, doth hereby convenant and agree to pay unto each of said three sons, viz: Jacob, Samuel and Benjamin, twenty-five per cent of the net amount received annually by him from his interest in the said West Baltimore Wall Paper Co., Capital Wall Paper Co. and the Stahl Wall Paper Co., Inc., to begin with the earnings for the year 1919, and to affect no prior earnings whatsoever.
*3802 AND the said Louis Cohen hereby covenants to open accounts on his regular business ledger for his said three sons, and that the amount due them under the terms of this agreement shall be credited to them in the ordinary course of business as the said Louis Cohen receives the share in the profits from the several concerns hereinbefore mentioned, but shall be no later than February 15th in each and every year, and the said sons shall have the right to inspect said accounts at any and all times, but neither of them shall have the right to draw upon any amount standing to their credit, except as hereinafter provided, it being agreed and understood, that said accounts shall be held in trust by said Louis Cohen for the several sons, parties of the second part, hereto, until such time as each of them shall marry, at which time, the amount standing to the credit of said son or sons shall be paid over to him, together with interest at the rate of 3 per centum per annum.
Provided, however, that it is required of each son, that when he or they do marry, that they marry or contract marriage, with a party of Jewish faith and Jewish parentage, subject to the approval of the said Louis Cohen*3803 and his wife, Sara Cohen. This provision is made a part of this agreement, because it also constitutes a part of the last will and testament of said Louis Cohen and is fully agreed to and understood by the said sons.
And provided, further, in the event, that any or all of said parties of the second part, shall not marry prior to arriving at the age of thirty-five years, then and in that event, such son or sons, shall be entitled to receive payment of the amount standing to his or their credit as hereinbefore provided.
And further provided, in the event, that the said Louis Cohen shall deem the conduct, behavior, and endeavors of his said sons, in and about the business and allied enterprises, insufficient and unsatisfactory, and therefore on account of the lack of interest and zeal, on the part of any or all of said sons, decide that such son or sons is no longer entitled to share in the profits as hereinbefore provided, then and in that event, the question whether or not such son or sons is or are doing his or their best to further the interest of the (of) said business and allied enterprises, shall be submitted to a Board of Arbitration to consist of three men, to be selected*3804 as follows: one by said Louis Cohen, one by such son or sons, and the two so selected shall choose an umpire between themselves, and a Board of Arbitration selected in a similar manner, shall be called, in the event that said Louis Cohen and his wife shall object to the person selected as bride by any one or all of said sons, and such son or sons shall feel aggrieved by said objection, but in the latter event, it shall be a condition agreed upon and accepted by all the parties hereto that such Board of Arbitration shall consist solely of men of Jewish Faith.
*468 AND in the event that such Board of Arbitration shall determine that such son or sons has failed in his or their performance of the conditions and agreements herein provided for, and is no longer entitled to the profits and emoluments as herein specified to be received by him or them, then and in that event, this agreement shall cease and terminate as to such son or sons, and that share or shares to which he or they would have been entitled in accordance with the provisions herein contained, shall again be and become the sole property of said Louis Cohen, and it is agreed and understood that the decision of said*3805 Board of Arbitration shall be accepted by all the parties hereto and it is agreed that such decision, if necessary, may be made the order or decree of any Court of Record of Baltimore City. And provided further that such decision shall always date back to the last division or entry of profits for the preceding year, so that such son or sons shall be excluded from his participation in the profits for the year during which it may be decided that he or they have broken their agreement, but all such amounts as may stand to the credit of such son or sons at the time the decision is rendered by the Board of Arbitration, shall be held by said Louis Cohen in trust for such son or sons until the time arrives which he or they shall be entitled to receive same in accordance with the provisions hereinbefore contained.
The special inducement and interest hereinbefore provided by said Louis Cohen, for his said sons, is not made solely for the purpose of accelerating the interest in his business by the said sons, for pecuniary reasons alone, but because it is the heartfelt desire of said Louis Cohen, that the large business and the same he has established in the wall paper business, may be continued*3806 by his sons as a monument to the genius of the father, who through poverty and adversity, by unfailing zeal and hard labor established the business and allied enterprises and made the name of Louis Cohen, a by-word in the wall paper business.
The circumstances under which the agreement was executed were that the three sons, at that time, had been in the petitioner's employment for from four to nine years. Samuel was receiving $4,000 a year, Benjamin and Jacob were each receiving $25 a week. Samuel, the oldest son, attended to the advertising; all three sons assisted their father, who could neither read nor write, in selecting manufacturer's samples and in compiling sample books for use in the jobbing trade of the petitioner. While their time was primarily spent in Baltimore with the National Wall Paper Co., their efforts were also directed to the advantage of the two partnerships and the corporation in which the petitioner was interested. The sons were dissatisfied with the compensation they were receiving and demanded more money. As a result the agreement above was executed. After the agreement was executed, and in the years 1920 and 1921, the petitioner credited the individual*3807 accounts of each of his three sons with 25 per cent of the earnings of interest in the partnerships and the corporation and notified the sons of the amounts. In making financial statements to his banks in 1920 and 1921, the petitioner included the amounts credited to the sons as a liability on his part, but he also listed among his assets the value of his interest in the two partnerships and the corporation. He made similar reports to the mercantile *469 agencies. One of the sons married after 1921 and withdrew the amount standing to his credit on the petitioner's books, including the amounts credited in 1920 and 1921.
The petitioner's business increased materially in 1919 and 1920 and it would have been impossible for the petitioner to conduct the business without the assistance of the sons or of some one to take their places. The sons were very active in the business and often worked at night.
The amounts credited to the sons on the books of the petitioner during the years 1920 and 1921 were not returned as income by the petitioner.
OPINION.
SIEFKIN: This proceeding involves an interpretation of the same contract involved in *3808 , which related to similar contentions made as to the year 1919. The evidence introduced in this proceeding, which involves the years 1920 and 1921, is substantially similar with only slight differences, which we regard as immaterial, such as the evidence that in financial statements the petitioner included the amounts credited to his sons as liabilities and the evidence offered, but rejected, that the sons reported in their income-tax returns the amounts so credited.
The brief of the petitioner in this proceeding is addressed primarily to the second assignment of error, that he is entitled to deduct the amounts of the credits to his sons as ordinary and necessary expenses of business. In our prior decision we said:
The taxing statute permits an individual to deduct from gross income in his income-tax return:
"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 * * * (Section 214(a)(1), Revenue Act of 1918.)"
This language is explicit and unambiguous. The simplicity*3809 of the language should be preserved in its interpretation. The petitioner paid his sons certain amounts to compensate them for their services. The amounts that were actually paid undoubtedly constituted ordinary and necessary expenses of doing business. The father was, however, interested in the future welfare of his sons and desired that they should marry girls of Jewish parentage. In order to accomplish this result, the agreement of January 1, 1919, was entered into. The agreement was not solely one of compensation for services rendered. We think that amounts set aside by the petitioner upon his books of account in fulfillment of the agreement were not ordinary and necessary expenses of the individual in the conduct of his business.
The facts were no different in 1920 and 1921, and we hold the same as in the prior proceeding on the question of the credits being ordinary and necessary expenses of doing business. As to the exclusion of the credits from gross income, the respondent was even more *470 clearly correct and we reiterate what we said in the first part of our prior opinion and further point out that, since that opinion was written, the Circuit Court of Appeals*3810 for the Second Circuit has affirmed the judgment of the District Court in , affirmed in , certiorari denied by the .
Judgment will be entered for the respondent.