1930 BTA LEXIS 2051">*2051 Amounts withdrawn by two stockholders from a corporation whose stock was owned jointly by them held not to be deductible as salaries for the years 1922 and 1923.
20 B.T.A. 711">*711 This proceeding was brought to redetermine the deficiencies in the income tax of the petitioner for the years 1922 and 1923 in the sums of $3,912.51 and $3,750, respectively.
The petitioner alleges that the respondent erred in (1) disallowing salaries of $20,000 and $10,000 to Harold C. Mathews and John J. Hearn, respectively, for each of the years under consideration and (2) disallowing a deduction of $1,300 deposited by the petitioner during the year 1922 to cover taxes due the State of New York. At the hearing the petitioner abandoned its second allegation of error.
FINDINGS OF FACT.
The petitioner is a corporation organized in 1916 under the laws of the State of New York and having its principal offices at 22 West 49th Street, new York City. During the years 1922 and 1923 the amount of capital stock was $120,000, $80,000 of which was owned by Mathews and $40,000 by Hearn. 1930 BTA LEXIS 2051">*2052 Mathews was president of the corporation during those years, but Hearn was not an officer of the corporation. Mathews had been engaged in the real estate business in New York City and had extensive experience in real estate operations. Hearn had less knowledge of the real estate business, but was considered an expert in the construction and erection of apartment houses and other such buildings. The corporation was primarily organized to acquire and erect buildings and dispose of them.
In 1916 the petitioner purchased lots on West 55th Street and erected a building thereon. In 1917 this building was sold and other 20 B.T.A. 711">*712 properties received in exchange. They in turn were immediately resold. In 1916 the petitioner acquired property at Central Park South and shortly thereafter began the erection of a fourteen-story apartment hotel building thereon containing two, three, and four-room apartments, and a restaurant and stores on the first floor. That building was completed in 1918 and the property was sold in 1924 at an approximate profit of $700,000. During the years in question the gross rentals therefrom amounted to about $180,000 per year.
Mathews, acting for the1930 BTA LEXIS 2051">*2053 petitioner, employed O. D. and H. B. Dike, a real estate firm, to collect the rents, superintend minor repairs, and rent apartments subject to Mathews' supervision. Mathews had desk room in Dike's office in the apartment building and transacted his individual business as well as business for the petitioner from that office. During 1922 and 1923 the apartment house was offered for sale and Mathews held many conferences with brokers looking toward that end. He considered thirty or forty applications for trades. His work in that connection involved getting appraisals, examining property and ascertaining its history, and other such duties. Mathews exercised general supervision over the operation and management of the apartment house and Hearn acted as his assistant. Neither he nor Hearn received a commission or other compensation for their services as such. Mathews devoted approximately 50 per cent of his time to activities in connection with the apartment house, but the record does not disclose what portion of Hearn's time was so applied.
For each of the years 1922 and 1923 Mathews withdrew $20,000 and Hearn $10,000 from the petitioner corporation and designated such withdrawals1930 BTA LEXIS 2051">*2054 as salaries. Mathews included his so-called salary in his income-tax returns for those years. The said sums of $20,000 and $10,000 were not received by Mathews and Hearn, respectively, in monthly installments, but at the end of the year or during the year. The petitioner submitted no evidence to show the authorization of such salaries by the corporation nor did the president testify that the salaries actually had been authorized. The petitioner presented no books or records to show that the alleged salaries had been entered thereon or had been actually paid.
The income-tax returns of the petitioner for the years in question show that on December 31, 1922, the petitioner listed among its assets $237,000 as "stockholders loans," while on December 31, 1923, that item was increased to $295,979.04. The returns also show that on December 31, 1922, the surplus and undivided profits were $101,695.64, while on December 31, 1923, they were $138,685.42. No dividends were ever paid by the petitioner.
20 B.T.A. 711">*713 OPINION.
VAN FOSSAN: The only question at issue in this proceeding is whether or not the respondent erred in disallowing as a deduction from the petitioner's income the1930 BTA LEXIS 2051">*2055 salaries alleged to have been paid to Harold C. Mathews and John J. Hearn in the amounts of $20,000 and $10,000, respectively for the years 1922 and 1923. The petitioner claims that the services of Mathews and Hearn were reasonably worth amounts received by them and that they were properly termed salaries in its tax returns.
In considering the evidence in this case certain facts stand out. Petitioner was a close corporation, two-thirds of the stock being owned by Mathews and one-third by Hearn. The payments denominated "salaries to officers" in the tax return were in exact proportion to the stock holdings. Mathews was the president of the corporation. Hearn was not an officer. There is no evidence of any corporate authorization of the payments either as salaries or otherwise, nor is there any evidence of how the payments were entered on the corporate books, if any record was made. The amounts were not withdrawn periodically but in a lump sum. Mathews devoted approximately one-half of his time to petitioner's business but we are unadvised what part of Hearn's time was devoted thereto. There was a suggestion by counsel for petitioner that Hearn received a "small salary of1930 BTA LEXIS 2051">*2056 $5,000" during the taxable years, presumably in addition. The corporation never paid any dividends.
On this record we are asked to find that the payments of $20,000 and $10,000 to Mathews and Hearn, respectively, were fair and reasonable salaries for services actually rendered in the taxable years.
The fact that the payments were listed in the tax returns as "salaries" is not conclusive of their true character. The record indicates to us that they were more probably payments in lieu of dividends. Moreover, we are unable on the evidence to find that they were fair and reasonable in amount. Petitioner has not overcome the presumption of correctness that attaches to the finding of the respondent.
Judgment will be entered for the respondent.