*2023 1. A corporation of which the decedent was president and the principal stockholder voted the decedent a nominal monthly salary at the beginning of each of the years 1923 and 1924, and an additional large amount of salary based upon the financial condition of the company at the close of each year. The additional amount of salary voted in each year was paid to the decedent when the corporation was in funds to make such payment. The decedent made his income tax returns upon the cash receipts and disbursements basis. Held, that the decedent is taxable upon only the amounts of salary actually received by him during each of the years.
2. The corporation in 1923 issued to the decedent certain shares of its 6 per cent cumulative preferred stock at par value in payment of accumulated salary. At the hearing counsel for the respondent moved to increase the deficiency for 1923 by including in the decedent's taxable income for 1923 the par value of the shares of preferred stock paid to him as compensation. Held, that the par value of the preferred stock received in 1923 is taxable to the decedent as salary received in 1923.
*1062 These proceedings, consolidated for hearing and opinion, are for the redetermination of deficiencies in income tax for 1923 and 1924 of $4,324.76 and $8,078.54, respectively. The proceedings involved originally only a single issue, namely, the amount of salary upon which the decedent is taxable in each of the years 1923 and 1924. At the hearing counsel for the respondent moved to increase the deficiency for 1923 by including in the decedent's taxable income for 1923 the par value of certain shares of preferred stock received by the decedent as compensation for services.
FINDINGS OF FACT.
The decedent, during the years 1923 and 1924, was president, a director, and the principal stockholder of the Crown Shade & Screen Company, a Massachusetts corporation engaged in business at Boston. The business of the corporation was the manufacture and sale of window shades and the sale of screens.
*1063 In 1923 and 1924 the company had outstanding 97 shares of common stock of a par value of $100 each owned as follows:
| Shares | |
| Charles J. Shugrue, president | 75 |
| Charles K. Thurston, treasurer | 12 |
| William T. Dacey, vice president | 5 |
| G. Albert Spargo, director | 5 |
*2025 The monthly salaries of the decedent and other officers of the company for 1923 were fixed by the following resolution adopted at a directors' meeting held January 29, 1923:
On motion duly made and seconded, it was voted that the salaries be as follows: for the President, Charles J. Shugrue, $222 per month, Treasurer William T. Dacey, $148 per month, Vice President, G. Albert Spargo, $174 per month, and to be increased later in the year as business conditions warrant.
On December 18, 1923, additional salaries for that year were voted to the officers as follows:
| Charles J. Shugrue, president | $44,525 |
| Charles K. Thurston, treasurer | 10,500 |
| William T. Dacey, vice president | 4,375 |
| G. Albert Spargo, director | 3,500 |
Officers' salaries for 1924 were voted February 4, 1924, as follows:
For the present, President, Charles J. Shugrue, $222 per month, Treasurer, Charles K. Thurston, $215 per month, Vice President, William T. Dacey, $200, Director, G. Albert Spargo, $200 per month, to be increased later if business conditions warrant.
On December 8, 1924, the following additional salaries for that year were voted:
| Charles J. Shugrue, president | $50,750 |
| Charles K. Thurston, treasurer | 12,000 |
| William T Dacey, vice president | 5,000 |
| G. Albert Spargo, director | 5,000 |
*2026 The company's balance sheets at January 1, 1923, January 1, 1924, and January 1, 1925, showed the following assets and liabilities:
| January 1, 1923 | |||
| Assets | Liabilities | ||
| Furniture | $573.51 | Capital stock | $9,700.00 |
| Office fixtures | 837.08 | C. J. Shugrue | 49,704.58 |
| Automobiles | 2,500.00 | C. K. Thurston | 7,500.00 |
| Merchandise | 27,885.64 | W. T. Dacey | 1,946.82 |
| Accounts receivable | 52,638.99 | G. A. Spargo | 330.00 |
| Cash | 5.354.45 | Accounts payable | 17,735.55 |
| Notes receivable | 1,396.82 | Profit and loss | 4,269.54 |
| 91,186.49 | 91,186.49 |
| January 1, 1924 | |||
| Assets | Liabilities | ||
| Merchandise | $54,733.63 | Capital stock | $59,700.00 |
| Factory fixtures and machinery | 1,950.64 | C. J. Shugrue | 34,914.92 |
| Office fixtures | 995.93 | C. K. Thurston | 10,000.00 |
| Automobiles | 1,000.00 | W. T. Dacey | 2,548.58 |
| Notes receivable | 1,000.00 | G. A. Spargo | 2,009.10 |
| Accounts receivable | 46,818.77 | Accounts payable | 151.55 |
| Cash | 8,722.84 | Profit and loss | 5,818.66 |
| 115,221.81 | 115,142.81 |
| January 1, 1925 | |||
| Assets | Liabilities | ||
| Cash | $63,872.26 | Capital stock | $59.700.00 |
| Notes receivable | 312.25 | Accrued salaries | 69,750.00 |
| Accounts receivable, trade | 41,948.61 | Accounts payable | 133.37 |
| Accounts receivable, officers | 551.10 | Surplus | 7,978.51 |
| Store fixtures and machinery | 1,799.58 | ||
| Office fixtures | 899.94 | ||
| Automobiles | 2,131.25 | ||
| Merchandise | 26,046.89 | ||
| 137,561.88 | 137,561.88 |
*2027 *1064 The decedent at times loaned money to the company and at other times borrowed money from it. His cash withdrawals from the company for 1923 and 1924 attributable to salary amounted to $38,287.28 and $17,127.82, respectively. In his income tax returns for 1923 and 1924, made upon a cash receipts and disbursements basis, the decedent reported a salary from the Crown Shade & Screen Company of $33,582.70 and $16,281.30, respectively. The Commissioner has determined that the amounts of salary taxable to the decedent are $52,167 for 1923 and $53,447 for 1924, and has determined deficiencies accordingly.
On January 1, 1923, the company was indebted to the decedent on account of salary in the amount of $49,704.58. At that time the par value of the capital stock outstanding was $9,700. In order that the company's financial statement might present a better appearance to the banks and credit agencies the company issued to the decedent on April 16, 1923, 500 shares of 6 per cent cumulative preferred stock in payment of salary obligations to the decedent. The preferred stock was issued with a provision that the company should have the right to redeem it at par upon any dividend*2028 date. Dividends were regularly paid on the preferred stock. The stock was redeemed at par, one-half in 1925 and one-half in 1927.
The Crown Shade & Screen Company kept its books of account and made its income tax returns upon the accrual basis.
*1065 OPINION.
SMITH: In these proceedings issue is raised as to the amount received by and taxable to the decedent in each of the years 1923 and 1924 as salary from the Crown Shade & Screen Company. The petitioners contend that the decedent is taxable in each year only upon the amounts of salary actually received without regard to the amounts voted to him by the company. The respondent takes the position that the total amounts of salary voted to the decedent in each of the years 1923 and 1924 were constructively received by him and are taxable to him in those years.
The test, as we understand it, in applying the rule of constructive receipt for the purpose of determining taxable income is whether the amount sought to be included in income was unconditionally at the disposal of and subject to the use of the taxpayer at some time within the taxable period. In *2029 , we said:
Before it should be held that a taxpayer constructively received income in any taxable year when he did not, in fact, come into possession of the money or property, it should appear beyond question that the taxpayer, although at liberty, considering the financial requirements and needs of the corporation, to withdraw the amount due him, deliberately chose not to draw or receive the amount owing by the corporation. * * *
The facts show that this was not the situation in the instant proceedings. At the close of 1923 the company was not in funds with which to pay the decedent the accrued salary due him. At the close of 1924 the company was apparently in funds with which to pay the decedent the full amount of salary due him, but not in funds with which to pay the full amount of accrued salaries, and the evidence shows that the company's inventory at the close of the year was small and that the cash on hand was needed with which to purchase merchandise for the business of the ensuing year. The situation was similar to that which obtained in *2030 , where we said:
* * * These petitioners were not in a position where they could demand and cause to be paid the full percentage amounts at their pleasure, or before the end of the year, and there is, therefore, no basis for saying that, although not actually, the amounts were constructively received.
The decedent reported his income on the cash basis. We think that he was required under the circumstances of these proceedings to include in his income only the amounts of salary actually received in each of the taxable years from the corporation.
*1066 The remaining issue was raised at the hearing on motion of counsel for the respondent for such increase in the deficiency for 1923 as would result from including in decedent's income for that year the amount of $50,000, representing the par value of the shares of preferred stock of the Crown Shade & Screen Company issued to him on April 16, 1923.
Section 213 of the Revenue Act of 1921 provides in part:
That for the purposes of this title * * * the term "gross income" -
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal*2031 service * * *, of whatever kind and in whatever form paid, or * * * gains or profits and income derived from any source whatever. * * *
Article 33 of Regulations 62, promulgated under the provisions of the Revenue Act of 1921, provides in part:
* * * Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. * * *
At the hearing of these proceedings Charles K. Thurston, treasurer of the Crown Shade & Screen Company, was asked:
Then in point of fact the issue of that preferred stock was in payment to Mr. Shugrue of this salary?
A. Yes, sir. It would have been the same as if we had given him a check for $50,000, and he had given us back the check.
The evidence of record shows that the Crown Shade & Screen Company was a remarkably prosperous concern. It earned a very large income upon a very nominal amount of capital stock. Practically all of the earnings were paid to the stockholder officers as salary. We have no question in the light of the evidence that the preferred stock was issued to the decedent in payment of $50,000 salary and received by him as such. *2032 The identical question before us in these proceedings was discussed at length in , where we held, with reference to section 213(a) of the Revenue Act of 1921, the same provisions applicable in these proceedings, that shares of stock of a corporation received by a taxpayer as additional compensation for services rendered to the corporation constitute taxable income to the recipient to the extent of their fair market value at the time of receipt. See also ; ; ; and . In the light of all the evidence before us we can not doubt that the preferred stock had a fair market value equal to $50,000 in 1923.
The motion of counsel for the respondent to increase the deficiency for 1923 is granted.
Judgment will be entered under Rule 50.