*21 Decision will be entered under Rule 50.
Certain bonus payments comprising a percentage of the net profits of the business were not ascertained until some five months after the end of the taxable year and the amounts thereof were not at any time during the taxable year available to the payees by the mere taking. Held, there is no constructive receipt by the payees and section 24 (c) of the Internal Revenue Code applies to preclude deduction thereof by petitioner in the taxable year.
*1262 This proceeding involves a redetermination of a deficiency in income tax for the calendar year 1941 in the amount of $ 5,253.
The only issue in controversy is whether petitioner is precluded by section 24 (c) of the Internal Revenue Code from deducting in the taxable year certain wages and compensation which were entered on his books on or about May 15, 1942, as of December 31, 1941, and paid by him on or about September 12, 1942, to his two daughters for services rendered by them in 1941.
One issue raised by petitioner was abandoned at the hearing. With respect to a third issue relating to a deduction for state income taxes, the parties have agreed to settle the question under a Rule 50 computation.
FINDINGS OF FACT.
Petitioner is an individual residing at Spartanburg, South Carolina. He is the sole proprietor of*23 a passenger bus line known as Carolina Scenic Coach Lines. His income tax return for 1941 was filed with the collector at Columbia, South Carolina. Petitioner's books were kept on a calendar year-accrual basis.
In January 1941 petitioner entered into an agreement with Hamish Turner (his son) and Martha Beth Turner Jackson and Nita Turner Scott (his daughters), under the terms of which he agreed to pay them, in addition to certain salaries which they were then drawing, a bonus for services to be rendered by them during that year of 25 percent of the net profits of the business, but not to exceed $ 15,000 in any event. The bonus was to be divided three-sevenths to Hamish, two-sevenths to Martha Beth, and two-sevenths to Nita. Hamish was the general manager of petitioner's business enterprise, and Martha Beth functioned as the business secretary and Nita as its treasurer. All three of petitioner's children were adults and all of them had been employed by him for several years prior to 1941.
During the calendar year 1941 Hamish was advanced and he withdrew almost entirely the total amount of the bonus due him. He was a married man and had need of more money than his regular salary*24 provided. Hamish included his share of the bonus in his tax return for 1941, and paid the tax thereon. The bonus paid to him was allowed by the Commissioner as a deduction in the return of petitioner for the year 1941, and that part of the bonus is not in question in this proceeding.
Petitioner employed a certified public accountant to audit his books at the close of the calendar year 1941 and, among other things, to determine the exact amount of bonus due. The books were kept open. *1263 In May 1942 the audit was completed and the appropriate entries were made as of December 31, 1941, to close petitioner's books for that year. The bonus was actually paid to Martha Beth and Nita in September 1942. Neither Martha Beth nor Nita had immediate need for the bonus in 1941 and each of them preferred to draw the same in a lump sum after the exact amount thereof had been determined by the auditor.
The bonus ascertained to be due was $ 15,000. Hamish's share (three-sevenths) amounted to $ 6,428.58, and the remaining four-sevenths, divided equally between Martha Beth and Nita, provided $ 4,285.71 for each of them.
The petitioner was financially responsible at all times material herein*25 and throughout the year 1941 he carried in a bank sufficient funds to have paid the bonuses to Martha Beth and Nita without in any way impairing the operation of his company. While the exact amount of the bonus to be due was not ascertainable until the end of the year in question, if Martha Beth or Nita had needed any part or all of the amount they were to receive as bonus, petitioner would have advanced it to them.
Martha Beth and Nita filed original income tax returns on March 14, 1942. The returns were filed on the cash receipts basis and reflected the regular salary received by them. The returns were prepared by the same accountant who was the auditor of petitioner's business. Under date of October 23, 1942, each filed an amended return reporting as additional income the amount of the bonus received by them, and paid the tax thereon.
In his deficiency notice the respondent determined:
It is held that bonuses entered on your books on or about May 15, 1942, as of December 31, 1941 and paid on or about September 12, 1942, in the amounts of $ 4,285.71, to each of your two daughters are not allowable deductions from gross income under Section 23 (a) and 24 (c) of the Internal Revenue*26 Code. Accordingly, your income for the year 1941 has been increased by the amount of $ 8,571.42.
OPINION.
This proceeding poses the question of whether the bonus payments made by petitioner to his daughters are to be disallowed as business expense deductions in the taxable year. The respondent disallowed the deductions by reason of section 24 (c) of the Internal Revenue Code. 1 That statute operates to preclude *1264 deduction for accrued business expenses where the three conditions to its application coexist. Michael Flynn Mfg. Co., 3 T.C. 932">3 T. C. 932, and cases cited therein.
*27 The bonuses in question were not paid within the taxable year or within two and one-half months after the close thereof. Since both Martha Beth and Nita, the payees, reported their income on a cash basis, the amounts of the bonuses in question were not, unless paid, includible in their gross income for the taxable year in which or with which the taxable year of petitioner ended. The payees were petitioner's daughters and are persons between whom losses would be disallowed under section 24 (b). Hence, in its literal application it is apparent that the statute prohibits the allowance of the claimed deductions.
The petitioner, while conceding that conditions (1) and (3) of the statute apply here, contends that condition (2) is not applicable by reason of the fact that the payments were constructively received by the daughters in the taxable year and that the daughters were compelled to and did report said income for the calendar year 1941. It is pointed out that Hamish Turner, who was participating in the bonuses under the same agreement, made withdrawals against the bonus from time to time during 1941 and that petitioner's daughters enjoyed the same privilege, although neither of*28 them took advantage of it.
We think the petitioner may not prevail. The facts and circumstances herein do not lend themselves to the concept of constructive receipt. The bonuses in question were not credited on the petitioner's books in favor of the daughters, nor were the amounts otherwise made available to them, within the taxable year or within two and one-half months thereafter. The credits were included on the books only upon the completion of the audit of petitioner's books on or about May 15, 1942. Moreover, until the audit was completed the amount of the bonuses to be paid was not ascertained. Under the agreement the bonuses were not due until after the end of the taxable year and only then could the profits of the business be computed.
During the taxable year there was no affirmative action on the part of petitioner or on the part of his daughters which can serve as a basis for constructive receipt of the money by the daughters. Neither of the daughters was authorized to withdraw against the *1265 bonus under any circumstances. The money was not available to them by the mere taking at any time prior to the completion of the audit. Though it may be, as the petitioner*29 now says, that they could have drawn the money at any time they had need for it or asked for it, that, with nothing more, may not be construed as placing the payees in the position of having constructively received their money.
The situation herein is quite different from that in Michael Flynn Mfg. Co., supra. There the salaries were actually accrued on the corporation's books during the taxable period in favor of the Flynn brothers, and those individuals had access to the cash by the mere taking. The instant proceeding is more comparable to P. G. Lake, 4 T. C. 1; affd., 148 Fed. (2d) 898; certiorari denied, 326 U.S. 732">326 U.S. 732. In that case the amounts of interest involved were not credited to the account of the proposed payee and were not payable in the taxable year. In the case at hand, the bonuses were not credited to the payees' accounts until May 1942, and, while they might have been payable during the taxable year had the correct amount thereof been timely ascertained, the fact remains that they were not so paid or credited.
In passing, it may not be amiss to point*30 out that it was not until the daughters actually received their bonus payments on or about September 12, 1942, that they regarded the bonuses as representing taxable income to them and only at that time did they file amended returns including the amounts thereof as income for 1941.
The question relating to the amount of deduction for South Carolina state income tax may be settled on the basis of our disposition above and, in accordance with the agreement of the parties, will be taken care of under a Rule 50 computation. It is so ordered.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 24. ITEMS NOT DEDUCTIBLE.
* * * *
(c) Unpaid Expenses and Interest. -- In computing net income no deduction shall be allowed under section 23 (a), relating to expenses incurred, or under section 23 (b), relating to interest accrued --
(1) If such expenses or interest are not paid within the taxable year or within two and one half months after the close thereof; and
(2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and
(3) If, at the close of the taxable year of the taxpayer or at any time within two and one half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24 (b).
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