*2704 Additional compensation for services of corporate officers disallowed.
*1007 Before STERNHAGEN, TRAMMELL, and PHILLIPS.
This appeal involves income and profits taxes for 1919 and 1920 in the amount of $5,185.39. The question involved is the propriety of the disallowance by the Commissioner of $8,888.88 for 1919, and $8,888.90 for 1920, as additional compensation designated as bonuses paid by the corporation to its officers during those years. The appeal was submitted on an agreed statement of facts, which is set out in the following
FINDINGS OF FACT.
Pomeroy Brothers, Inc., is a corporation organized December 26, 1917, under the laws of the State of Illinois, with outstanding capital stock of $100,000, consisting of 1,000 shares of the par value *1008 of $100 each, and has its principal office in Chicago. It was engaged in the business of manufacturing men's neckwear and as jobbers in men's neckwear, belts, handkerchieft, and similar furnishings.
The following is a complete list of the stockholders, together with the amount of stock held by each, *2705 during the years involved:
| Shares | |
| J. P. Pomeroy | 450 |
| G. S. Pomeroy | 450 |
| W. A. Reidl | 100 |
J. P. Pomeroy was president of the corporation, G. S. Pomeroy was secretary-treasurer, and W. A. Reidl was vice president.
In December, 1917, the board of directors, by resolution, fixed the salary of the president and secretary-treasurer at $6,000 each per year for a period of three years. At the same time, another resolution was passed authorizing the corporation to enter into an agreement with the president and secretary-treasurer that their salaries should not be increased for a period of three years. In 1918 the president and secretary-treasurer each received a salary of $6,000, and the vice president received $3,734.26 as commissions, but no salary.
On June 2, 1919, the following resolution was passed by the board of directors:
Resolved that the salary of the president be increased to the sum of $8,000 payable in monthly installments of $500.00 per month for the months January to June, inclusive, and $833.33 per month for the months of July to December, incl. A bonus of $4,000 to be paid on December 1, 1919, if the funds in the business will permit a withdrawal*2706 of that amount.
A similar resolution was passed by the board of directors at the same time with respect to the salary of the secretary-treasurer. The following resolution was passed at the same time with respect to the salary of the vice president:
Resolved that the salary of the vice-president be one-tenth the above amount of the increase over $6,000.00 each (total $12,000) was drawn by the president, and secretary-treasurer.
All three of the officers devoted their entire time and services to the corporation during the years involved. They constituted all the executives of the company. J. P. Pomeroy, president, spent 50 per cent of his time on the road selling, and 50 per cent of his time in connection with the Chicago office. While on the road he received a commission of 10 per cent of all sales made by him, which is the same commission paid to other salesmen. He received $4,051.80 in 1919, and $3,152.09 in 1920, as commissions. He supervised the buying of materials for the corporation and was in charge of all of the company's salesmen. He had been a salesman of men's furnishings for many years.
G. S. Pomeroy devoted his time and services to the general management*2707 of the Chicago office, including supervision of the shop for manufacturing the company's product and the supervision of credits and collections.
Reidl devoted all of his time to selling on the road. He received a commission of 10 per cent on all sales made by him. In 1919 he received $6,294.25, and in 1920 $6,246.29, as commissions.
*1009 The following is a table of salaries, commissions, and bonuses credited to the three officers during 1918, 1919, and 1920, together with the amounts allowed and disallowed by the Commissioner:
| 1918 | 1919 | 1920 | |
| J. P. Pomeroy | $6,000.00 | $6,000.00 | $6,000.00 |
| Increase | 2,000.00 | 2,000.00 | |
| Commissions | 4,051.80 | 3,152.09 | |
| Allowed | 12,051.80 | 11,152.09 | |
| Disallowed bonus | 4,000.00 | 4,000.00 | |
| G. S. Pomeroy | 6,000.00 | 6,000.00 | 6,000.00 |
| Increase | 2,000.00 | 2,000.00 | |
| Allowed | 8,000.00 | 8,000.00 | |
| Disallowed bonus | 4,000.00 | 4,000.00 | |
| W. A. Reidl | 3,734.26 | 1 6,294.25 | 1 6,246.29 |
| Increase | 444.44 | 444.44 | |
| Allowed | 6,738.69 | 6,690.73 | |
| Disallowed bonus | 888.88 | 888.88 |
In 1919 and 1920 the taxpayer took as deductions on its incometax returns $1,333.32 as salary to Reidl, which*2708 amount was arrived at by taking one-ninth of the increased salaries and bonuses amounting to $12,000 credited to the Pomeroys in each year. The bonuses of $4,000 each to the Pomeroys and $888.88 to Reidl were credited on the books of the corporation on December 31, 1919, instead of December 1, 1919, as provided in the resolution of the board of directors. They were not paid, however, until 1920. The bonuses of $4,000 each to the Pomeroys and $888.90 to Reidl for 1920 were credited on the books on December 31, 1920. Of this amount only $5,544.36 was actually paid. The balance of $3,344.54 was carried on the books of the corporation until December 31, 1922, when it was credited back to surplus. When this amount was credited back to surplus the accounts of the officers were charged on the basis of stockholdings as follows:
| J. P. Pomeroy, 45 per cent-stock | $1,500.04 |
| G. S. Pomeroy, 45 per cent-stock | 1,500.04 |
| W. R. Reidl, 10 per cent-stock | 344.46 |
| Total | 3,344.54 |
The following table is made up from the 1919 and 1920 income and profits tax returns filed by the taxpayer:
| 1919 | 1920 | |
| Gross sales | $251,743.92 | $226,918.16 |
| Net taxable income | 18,409.41 | 4,612.26 |
| Tax paid | 3,736.44 | 261.23 |
| Total expense for wages, commissions, and salaries, including total compensation to officers | 84,512.32 | 82,853.30 |
*2709 The taxpayer deducted on its returns $25,333.32 as compensation paid to officers for each of the years 1919 and 1920, and also took a deduction under the head of "general expenses" of $10,346.05 in *1010 1919, and $9,398.38 in 1920, on account of commissions paid to two of its officers on sales made by them.
The Commissioner allowed as deductions by the corporation, $26,790.49 in 1919, and $25,842.82 in 1920, as salaries, commissions, and bonuses paid to its officers, and disallowed for 1919, $8,888.88, and $8,888.90 for 1920, on account of bonuses or additional compensation
DECISION.
The determination of the Commissioner is approved.
Footnotes
1. Commissions. ↩