*45 Decision will be entered under Rule 50.
Petitioner was president and one of four equal stockholders in a corporation formed in September 1946 to build and sell houses on a tract of land. The houses were completed in March 1947, at which time each stockholder received a $ 2,200 dividend. The corporation's business activity ceased by June 1947, when its last house was sold. Prior to the closing of the corporation's fiscal year on October 31, 1947, it distributed $ 21,000 of its $ 22,115.13 surplus in four equal $ 5,250 salaries to the stockholders. A deficiency, which is uncontested, was determined by respondent in the corporation's taxes for 1947, and respondent claims that petitioner is liable therefor as transferee to the extent of the $ 2,200 dividend and one-half ($ 2,625) of his salary. Held, the dividend distribution did not render the corporation insolvent and petitioner, therefore, cannot be held liable as a transferee on that account. However, the salaries paid by the corporation rendered it insolvent, petitioner's salary was unreasonable and excessive to the extent of $ 2,625 as determined by the Commissioner, and petitioner is liable accordingly.
*70 The Commissioner has determined a deficiency of $ 3,286.74, plus negligence penalty of $ 164.34, in the income tax of Euclid Circle *71 Homes, Inc., for the taxable year ending October 31, 1947. He has determined that the petitioner is liable for that deficiency and penalty as transferee of the assets of the corporation.
The Commissioner contends that one-half ($ 2,625) of the $ 5,250 salary paid petitioner by Euclid Circle Homes, Inc., during the 1947 fiscal year was unreasonable and excessive compensation for petitioner's services as president of that corporation. The Commissioner further contends that the $ 2,625 constituted a distribution of the assets of Euclid Circle Homes, Inc., which, along with a $ 2,200 dividend (in the form of an equity in a house) paid to petitioner, rendered that corporation insolvent and unable to pay its lawful taxes for the year in question.
Petitioner does not contest the aforementioned corporation's tax liability for the 1947 fiscal year. He urges, however, that the $ 5,250 salary received by him was reasonable and proper compensation*47 for services actually rendered, and that the payment to him of that salary and the $ 2,200 dividend did not render the corporation insolvent.
FINDINGS OF FACT.
Petitioner is an individual residing in Birmingham, Alabama. He filed his tax return for the 1947 calendar year with the collector of internal revenue for the district of Alabama.
In December 1945, petitioner and J. M. Wainwright purchased a 10-acre tract of land in Mountain Brook, a suburb of Birmingham, Alabama. It was their intention to construct and sell houses thereon. The original plan was to build 21 single-family houses on the land and petitioner secured approval of that plan from the Mountain Brook City Planning Commission. However, after petitioner obtained a set of drafts from an architect and received estimates from a number of builders, the plan was abandoned because the construction costs were excessive in relation to the probable selling prices of the houses. It was then proposed to construct duplex-type houses on the tract. Petitioner obtained approval therefor from the Mountain Brook City Planning Commission in May or June 1946, following several meetings with that group.
Subsequently, while on a trip*48 to Florida, petitioner noticed some construction work being done by G. W. Klosterman who, when approached, agreed to consider building the houses on petitioner's and Wainwright's land. Petitioner returned to Florida in August, after Klosterman had completed the job he was there working on, and brought Klosterman back to Birmingham with him.
Klosterman estimated that he could build the 17 duplex houses for $ 150,000 and, when Euclid Circle Homes, Inc., hereinafter referred to as "transferor," was later formed, entered into a contract with it *72 to that effect. To finance the construction a $ 150,000 construction loan was negotiated with a local bank. However, before the bank agreed to the loan it was necessary for petitioner and Wainwright to secure a United States Fidelity and Guaranty Co. performance bond. The bonding company, following an investigation of Klosterman's record, required that petitioner and Wainwright personally endorse the bond, which they did.
Thereafter, on September 11, 1946, transferor corporation was formed under the laws of Alabama with 20 shares of $ 100 par value common stock. It does not appear that transferor ever actually received cash or property*49 for that stock. The names, interests, and positions of the shareholders were as follows:
| Shareholder | No. of shares | Positions held |
| J. Warren Leach | 9 | Director and President |
| Mrs. R. J. Silver 1 | 1 | Director and Vice-President |
| J. M. Wainwright | 10 | Director and Secretary-Treasurer |
Preferred stock of a total par value of $ 10,275 was issued in equal amounts to petitioner and Wainwright in return for their conveying to transferor the 10-acre tract of land. Transferor later redeemed this stock for cash at par value.
Construction of the houses was begun on September 16, 1946, and was completed about the end of the following March. Transferor's books of account were negligently and poorly kept during the construction period, with little regard for accepted accounting procedures. Moreover, after March 1947, the only entries made in those books were journal entries.
In November 1946, five of J. M. Wainwright's ten shares of common stock were transferred to W. K. Dean's designee (his wife). At the same time Dean purchased*50 one-third of the preferred stock from petitioner and Wainwright which, as aforementioned, was later redeemed by transferor at par. Dean, who was Wainwright's partner in other ventures, was taken into transferor corporation because it was expected that he could obtain building materials which were then scarce. As it turned out, however, he was not notably successful in that respect.
During the construction period petitioner kept a check on the progress of the project, spending the better part of many mornings there. In an office maintained by him in Birmingham, and employing a secretary and bookkeeper, the records of transferor were kept, payrolls for the job were prepared, and he personally prepared periodic progress reports necessary to submit to the bank in order to obtain progress payments on the construction loan. He also negotiated for F. H. A. approval and underwriting of mortgages on the completed *73 units, made arrangements with a mortgage company, and processed applications for mortgage loans to veterans purchasing the units. Furthermore, petitioner did most of the buying for the construction project and signed contracts with subcontractors engaged to work thereon*51 under Klosterman, the general contractor. Petitioner's office expenses incurred in connection with transferor's business were paid for by transferor.
Klosterman, as general contractor, was in charge of the actual construction work and received a salary from transferor for his labor. The amount of that salary is not apparent from the evidence. Wainwright and Dean, on the other hand, were primarily engaged in handling other of their interests and spent no significant amount of time or effort on transferor's affairs.
Following completion of the 17 houses, one each was transferred as a dividend distribution to petitioner, Wainwright, and Dean in April 1947. Based on the difference between the then fair market value of the houses and the amount of the mortgages thereon assumed by those shareholders, the amount of each one's dividend was $ 2,200. Klosterman, who then and subsequently was treated as an officer and shareholder with 25 per cent interest in transferor, elected to take $ 2,200 in cash rather than one of the houses.
Both before and immediately after the dividend distribution the fair market value of the assets owned by transferor (principally the 14 remaining completed houses*52 and unused building materials) substantially exceeded transferor's liabilities. We, therefore, find as a fact that transferor was solvent at the time of the distribution and, moreover, was not rendered insolvent by that distribution.
The remaining 14 houses were put on the market at two prices, $ 13,200 and $ 13,600, the higher price placed on units which included stoves and refrigerators. Petitioner arranged for the renting of those units until sales could be completed and was personally responsible for sales of 13 of them. For that service transferor paid him $ 3,785.73 in sales commissions at commission rates agreed upon between petitioner and transferor. The agreed rates averaged approximately one-half of the 5 per cent commission rate then prevalent in the area for sales of such dwellings.
By June 1947, all the houses were sold and the purpose for which transferor was formed accomplished. Meanwhile, since the time transferor's houses were nearing completion in March, petitioner had been devoting an increasing portion of his time to the Woodland real estate development project in which he, Wainwright, Dean, and Klosterman were engaged. That development principally, along*53 with other matters, occupied him for the remainder of transferor's 1947 fiscal year. Petitioner frequently spent time at the site of the *74 Woodland project checking on the progress of the construction, which was under Klosterman's direction. Furthermore, he maintained the books, ran the office and performed the same administrative and financial functions for the Woodland project as he had done for transferor. For this work Woodland paid him a salary of $ 2,482 in 1947. Petitioner also earned $ 3,493.52 in commissions for sales of houses in the Woodland development.
On October 16, 1947, petitioner, Wainwright, Dean, and Klosterman held a meeting. At that time transferor's surplus was $ 22,115.13. It was proposed to give each of the four shareholders a salary of $ 5,250 for the year, $ 21,000 in all. No outstanding salaries were due to petitioner or the other shareholders on that date, nor had transferor agreed to pay petitioner for services rendered prior to its incorporation. Petitioner objected to the salary distribution on the grounds that it was an improper reduction of transferor's profits, particularly since Wainwright and Dean had not earned such salaries. In*54 addition, he did not believe transferor could legally get away with distributing profits in such a manner. When the other shareholders persisted, petitioner accepted his share but announced that he was severing all connections with transferor corporation and wanted nothing more to do with it or with the Woodland development. By that time transferor's activities had been completed.
Following the aforementioned distribution of $ 21,000 in salaries, transferor's surplus was $ 1,115.13 and remained at that figure until the close of the 1947 fiscal year. Since this was not enough to meet its uncontested tax liability, we find as a fact that the payment of those salaries rendered it insolvent and unable to pay its debts, including the deficiency of $ 3,286.74 and penalty of $ 164.34 which the Commissioner has determined.
In addition to the $ 5,250 in salary received by petitioner and the aforementioned $ 3,785.73 in sales commissions, transferor also paid petitioner $ 775 in 1947, which was labeled a "service fee." Petitioner, moreover, received during 1947, $ 4,563.35 from the Cedar Hotel, a property he owned and leased to another, and earned a total of $ 492.32 from a small amount *55 of insurance work he did in connection with transferor's development and from the sale of a few heaters.
Following investigation of transferor's income tax return for its 1947 fiscal year, the Commissioner determined in 1951 that one-half ($ 2,625) of the $ 5,250 salary paid to each of transferor's four shareholders, or a total of $ 10,500, was excessive and that transferor showed a deficiency in income tax for 1947 of $ 3,286.74. The Commissioner further determined that the 5 per cent penalty for negligence resulting in the tax deficiency, as provided in the Internal Revenue Code, section 293 (a), should be imposed on transferor. Wainwright, acting for *75 transferor, acquiesced in this determination and petitioner (though not a party to the acquiescence) does not here contest transferor's liability.
Transferor has been inactive since October 31, 1947, and has no assets. Consequently, any attempt to collect from it any portion of the deficiency and penalty would be fruitless. Wainwright, Dean, and Klosterman have already paid in equal portions, as transferees, $ 3,187.41 of the deficiency, penalty, and interest. According to the statement of the Director of Internal Revenue*56 which was introduced in evidence, $ 945.01 remained outstanding and unpaid at the time of the statement which was January 29, 1953.
OPINION.
The provision of the Internal Revenue Code providing the basis for a transferee's liability for unpaid taxes of his transferor is printed in the margin. 1To hold a party liable as transferee in equity for a transferor's delinquent taxes it must be proved (1) that the alleged transferee received assets of the transferor, and (2) that the transferor was insolvent at the time of, or was rendered insolvent by, that transfer of assets. We have stated the elements of that liability in R. E. Wyche, 36 B. T. A. 414 at 418, as follows:
the mere fact of a transfer of part of its assets by a corporation to its stockholders does not establish transferee liability. A necessary item of proof in any transferee proceeding is that the taxpayer transferor was insolvent at the time of the transfer or that the transfer itself made the transferor insolvent, or that the transfer was one of a series of distributions in pursuance of complete liquidation, which left the corporation insolvent. * * *
See also Ungerleider v. Commissioner, 167 F. 2d 865 (1948).*57 The transferee is retroactively liable for transferor's taxes in the year of transfer and prior years, and penalties and interest in connection therewith, to the extent of the assets received by him even though transferor's tax liability was unknown at the time of the transfer. Scott v. Commissioner, 117 F. 2d 36; R. E. Wyche, supra;Coca-Cola *76 ., 22 B. T. A. 686; Buzard v. Helvering, 77 F.2d 391">77 F. 2d 391; Rubel v. Commissioner, 74 F. 2d 27.
*58 Petitioner contends that he is not liable as a transferee in regard to the distribution to him in April 1947 of the $ 2,200 dividend (equity in one of transferor's houses) because transferor was neither insolvent at the time of, nor did insolvency result from, that distribution. We have found as a fact that transferor was solvent both before and immediately after that distribution. Furthermore, (1) the lapse of time between that dividend distribution and the payment of the $ 21,000 in salaries to petitioner and the other three stockholders on October 16, 1947, (2) the fact that transferor was solvent throughout that period of time, and (3) the fact that the decision to pay those salaries was not preconceived but was reached on October 16, 1947, belies any claim that the dividend was distributed as one of "a series of distributions in pursuance of complete liquidation." R. E. Wyche, supra.We, therefore, sustain petitioner in this contention.
Petitioner next urges (1) that the entire $ 5,250 salary paid him by transferor in 1947 was reasonable and proper compensation for services actually rendered and not, as respondent claims, a distribution of assets*59 to the extent of $ 2,625 (one-half of that salary); and (2) that the payment of the salary to him did not render transferor insolvent.
As regards the issue of insolvency, we have found as a fact that prior to the payment of the $ 21,000 in salaries on October 16, 1947, transferor had a surplus of $ 22,115.13. The salary payments (one-half of which the respondent claims was excessive and unreasonable) reduced that surplus to $ 1,115.13, which rendered the transferor insolvent and unable to pay its debts. As a result, transferor was rendered unable to pay its $ 3,286.74 tax deficiency, plus $ 164.34 negligence penalty. That this deficiency and penalty were not determined by respondent until 1951 is immaterial because, in determining a question of insolvency, liability for taxes, though unknown at the time, must be considered. Scott v. Commissioner, supra;R. E. Wyche, supra.
Petitioner argues in his brief that transferor's insolvency resulted not from the salary payments to him and Klosterman, which were entirely reasonable and proper, but rather from the unreasonable and excessive salary payments made to Wainwright and*60 Dean (the remaining two stockholders). This, of course, is merely another way of alleging that the entire salary paid him was reasonable compensation for services rendered, which allegation is dealt with below.
The one remaining issue, therefore, is whether the $ 5,250 salary payment to petitioner was reasonable and not excessive compensation for services rendered as president of transferor. This is a question of fact. Moreover, the burden of proof rests upon the respondent *77 to prove his contention that half of the salary was in reality a distribution of assets. 2
In Mayson Mfg. Co. v. Commissioner, 178 F. 2d 115, 119, the court, though recognizing*61 that each case must stand on its own facts, enumerated basic factors to be taken into account in determining reasonableness of salary, to wit:
Although every case of this kind must stand upon its own facts and circumstances, it is well settled that several basic factors should be considered by the Court in reaching its decision in any particular case. Such factors include the employee's qualifications; the nature, extent and scope of the employee's work; the size and complexities of the business; a comparison of salaries paid with the gross income and the net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; the salary policy of the taxpayer as to all employees; and in the case of small corporations with a limited number of officers the amount of compensation paid to the particular employee in previous years. The action of the Board of Directors of a corporation in voting salaries for any given period is entitled to the presumption that such salaries are reasonable and proper. * * *
The presumption that salaries voted by the board of*62 directors are reasonable and proper is of negligible weight, however, where, as here, the directors are both the sole stockholders and the employees for whom the salaries were voted. Glenshaw Glass Co. v. Commissioner, 175 F. 2d 776, certiorari denied 333 U.S. 842">333 U.S. 842, affirming per curiam Memorandum Opinion of this Court; L. Schepp Co., 25 B. T. A. 419, 429.
Facts were adduced at the hearing regarding petitioner's services to transferor prior to its incorporation and the beginning of its 1947 fiscal year. Petitioner's position is that those services, for which he was not paid, should be taken into consideration in determining the reasonableness of the salary received by him on October 16, 1947, shortly before the end of transferor's fiscal year on October 31, 1947. Under the facts and circumstances which we have here we cannot agree to this contention of petitioner. Transferor at no time undertook to reimburse petitioner for his preincorporation services nor was the salary distribution decided on at the October 16, 1947, meeting made with the intent to compensate petitioner for any services*63 rendered prior to the 1947 fiscal year. Had there been such an intent W. K. Dean surely would not have received a salary equal to petitioner's since Dean did not become affiliated with transferor until November 1946, and rendered far less services after that date than did petitioner.
*78 We consider only, therefore, whether petitioner's salary was unreasonable and excessive for services rendered during the 1947 fiscal year. In our consideration we have kept in mind the touchstones provided by the court in Mayson Mfg. Co. v. Commissioner, supra.
Transferor was organized solely for the purpose of building and selling 17 duplex-type houses on a 10-acre tract of land. The building operations were completed by the end of March 1947, and the last house was sold by June 1947. Transferor was inactive for the remainder of the 1947 fiscal year and thereafter.
During the construction period petitioner spent many mornings at the construction site checking on the progress of the work. G. W. Klosterman, however, was in direct charge of the work. Petitioner was responsible for the administrative matters connected with the development. He maintained *64 the books and records, handled the paper work in connection with the financing of the development, purchased supplies, and signed certain contracts with subcontractors employed by Klosterman (who was the general contractor).
After construction was completed in March 1947, his major activity in regard to transferor was seeing to the sales of the houses. For this he was paid separately, receiving $ 3,785.73 in sales commissions at commission rates mutually agreed upon between himself and transferor. His work in that respect, therefore, is not to be considered in determining the reasonableness of the salary payment in issue. In effect, we have before us a question as to the value of petitioner's services from November 1, 1946 (the beginning of transferor's fiscal year), to about March 30, 1947, when construction was completed, a period of 5 months.
At the end of the 1947 fiscal year transferor had a surplus of $ 22,115.13. Of that surplus, $ 21,000 was divided into four equal shares of $ 5,250 and was distributed to petitioner and the other three stockholders in the form of a "salary" payment. No consideration appears to have been given to what the proper salaries of the stockholders*65 should be in view of actual services rendered. On its face the payment of such salaries appears to have been but a method of distributing earnings. See Commissioner v. Renyx, 66 F. 2d 260. Petitioner admitted that he objected to this procedure, recognizing that it was improper, but maintains that the services rendered actually justified a salary of that size.
The record reveals that at least from the end of March (when construction was completed) until October 16, 1947, petitioner was working on another real estate development (Woodland) in which he, Wainwright, Dean, and Klosterman were interested. He devoted a great deal of time to Woodland and rendered the same services in respect thereto as he rendered for transferor. For those 6 1/2 months *79 of services he received a salary of $ 2,482 and, as with transferor, commissions for sales negotiated.
We are faced here with a comparison of salaries paid petitioner for almost identical services performed during the year in question. For the 5 months of work performed for transferor petitioner received a $ 775 "service fee" plus the $ 5,250 salary in question, a total of $ 6,025. But for the*66 6 1/2 months of work for Woodland he was paid $ 2,482, a considerably lesser amount. Other factors of significance are that petitioner found time to successfully administer an interest in the Cedar Hotel property (on which he earned $ 4,562.35 during 1947), and to engage, to some extent at least, in insurance sales and sales of heaters.
A consideration of the aforementioned facts establishes, we think, that respondent has successfully sustained his burden of proving that petitioner's salary was unreasonable and excessive in the amount of $ 2,625, that this amount was in effect a distribution of assets to petitioner, and that consequently petitioner is liable for transferor's unpaid taxes to that extent. Since the other three stockholders have already paid a portion of transferor's tax deficiency and penalty, thereby reducing the amount payable by petitioner, computation of petitioner's precise liability must be made. J. P. Quirk, 15 T. C. 709, affirmed per curiam 196 F. 2d 1022; A. D. Saenger, 38 B. T. A. 1295; G. C. M. 9252, X-1 C. B. 261.
Decision will be entered*67 under Rule 50.
Footnotes
1. Mrs. R. J. Silver was petitioner's secretary. Petitioner possessed the beneficial interest in her share of stock, which later was turned over to him.↩
1. SEC. 311. TRANSFERRED ASSETS.
(a) Method of Collection. -- The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):
(1) Transferees. -- The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this chapter.
* * * *
Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.
* * * *
(f) Definition of "Transferee." -- As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee.↩
2. Internal Revenue Code.
SEC. 1119. PROVISIONS OF SPECIAL APPLICATION TO TRANSFEREES.
(a) Burden of Proof. -- In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.↩