*4127 1. The value of real property transferred to a corporation at the time of its organization and the amount of paid-in surplus which resulted determined.
2. Disallowance of a deduction of alleged salaries in proportion to stock ownership approved.
*368 This is a proceeding for the redetermination of deficiencies in income taxes in the amounts of $1,175.31 for the calendar year 1920 and $4,070.20 for the calendar year 1921.
Three allegations of error were set forth in the petition, but one allegation was later waived, and we have to consider whether the Commissioner allowed sufficient invested capital for each year, and whether he was in error in refusing to allow the deduction of officers' salaries in the amount of $3,600 for two of the four officers for each of the years concerned.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal office in New York City. It owns a piece of real estate fronting about 100*369 feet on Riverside Drive and about 123 feet on 97th Street, New York City. On this piece*4128 of real estate there is an apartment house known as the "Victoria." It was built in 1903, is nine stories high, constructed of steel and concrete with a brick exterior, is fireproof, and contains 54 apartments.
In 1903, just after the building was completed, Lilly J. Earle acquired the property in a trade. Considering the cost of the property which she traded, the one which she received cost her $500,000. On January 20, 1916, she sold the property to the petitioner, receiving therefor the entire capital stock of the petitioner, to wit, 50 shares of the total par value of $5,000.
In opening its books, the petitioner entered its investment in this land and building at $353,837.33, which amount represented the total of the mortgages against the property, the petitioner's capital stock of $5,000, estimated taxes, accrued interest and estimated water tax of January 20, 1916. This figure did not represent the true value of the property, but has never been changed upon the books except that depreciation has been deducted in the amount of $8,000 each year. In 1916, the receipts from the "Victoris" amounted to $34,182.53, from which taxes, interest on the mortgage, and other charges*4129 not paid for maintenance by the agent had to be paid.
On January 20, 1916, the fair market value of this property was $650,000, the value of the land being $300,000 and the value of the building being $350,000. At that time there was a mortgage of $325,000 on the property. In addition there were taxes, water rents, and other similar charges which had accrued against the property in the sum of $23,837.33.
For each of the years 1920 and 1921, the Commissioner determined the petitioner's invested capital based on a total valuation for the land and building as of January 20, 1916, of $410,000, made up of a land value of $140,000 and a building value of $270,000.
In 1920 and 1921, the officers of the petitioner, all sons of Lilly J. Earle, deceased, were as follows:
Victor M. Earle, president
William P. S. Earle, vice president
Guyon S. C. Earle, secretary
Ferdinand P. Earle, treasurer
Each owned 12 1/2 shares, or one-fourth of the stock. On the return for each of the years 1920 and 1921, a deduction was taken in the amount of $14,400 for officers' compensation, being $3,600 a year for each officer, and on the return it was stated that each officer devoted part time*4130 to the affairs of the corporation. For each of the years 1920 and 1921, the Commissioner disallowed the deduction of $14,400 for officers' salaries.
*370 For the year 1920, the return showed a loss of over $5,000 and for 1921 it showed a gain of over $6,000. Attached to the return for each of the years were balance sheets purporting to show the assets and liabilities as of the beginning and end of each of the years. In each of the statements real estate appears in the amount of $353,837.33 and in each of deficit is shown.
During 1920 and 1921, the apartment was managed by a firm known as Earle & Calhoun. This firm performed for the owners the usual services rendered by real estate and rental agents. They employed help, bought coal and supplies, looked after repairs, rented the apartments and collected the rents. For their services they charged 3 per cent, which was the usual charge for such services. Victor M. Earle was president of this firm. He and Guyon Earle devoted some of their time to the corporate affairs of the petitioner. They decided on the rent schedules, arranged for all financing, paid all taxes and did what they could to keep down assessments, determined*4131 upon the improvements, and arranged for the making of any improvements, visited the property and directed the agents in all except routine matters. They made interest payments and saw that the books were kept.
OPINION.
MURDOCK: The petitioner alleged that the Commissioner erred in failing "to allow a large paid-in surplus as part of the taxpayer's invested capital for each of the years involved." The deficiency letter shows that for the year 1920, the Commissioner determined that at the beginning of the year the petitioner's invested capital consisted of $5,000 paid for capital stock, and a surplus of $39,798.92, and that during the year a certain amount as dividends was paid from surplus, which, when properly prorated, reduced the invested capital to be allowed for the year to the amount of $39,133.75. The balance sheets at the time showed deficits and perhaps the dividends were liquidating dividends. For the year 1921, the deficiency notice states that inasmuch as the excess-profits tax is greater under section 301 than that under section 302, the benefit of the latter section has been given.
The answer denies any error in the computation of invested capital and as a*4132 proposition of law states that "the taxpayer's invested capital has been properly computed under sections 326 of the Revenue Acts of 1918 and 1921, by taking into consideration the market value of the property paid in for stock at date of organization as near as may be determined." Before any evidence was taken, counsel for the respondent stated that there was an issue in regard to the value of real estate at 315 West 97th Street, New York City, and that there had been allowed a value of $410,000 on the property, of which*371 amount $270,000 was attributed to the building and $140,000 was attributed to the land.
Under these circumstances we assume that the issue in regard to invested capital is limited to the question of the value of the property at the time it was transferred to the corporation and that once that value is determined the tax for 1921 will not be less under section 302 than under section 301 and the parties can have no further difficulty in arriving at the invested capital for the taxable years; in short, that if the value of the property was not more than $410,000 at the time it was transferred to the corporation, then the determination of the Commissioner*4133 must be approved, because otherwise his computation of invested capital is not questioned, and, on the other hand, if the value of the property at the time it was transferred to the corporation was more than $410,000, the determination of that value by this Board will enable the parties to compute the true tax liability of the petitioner for the taxable years without further controversy, inasmuch as the Commissioner's method of computing invested capital is not questioned, provided he uses as a starting point the proper value for the property at the time of the transfer.
The petitioner offered proof that at the time the corporation was formed tangible property was paid in for stock, which tangible property at the time paid in had an actual cash value clearly and substantially in excess of the par value of the stock issued for it, that such excess amounted to $296,162.67 and should be treated as paid-in surplus in accordance with section 326 of the Revenue Acts of 1918 and 1921. From this evidence we hold that the petitioner at the tme of incorporation had a paid-in surplus of $296,162.67 and the deficiencies for the years in question must be redetermined taking into consideration*4134 our finding of fact that the property at the time transferred to the corporation had a value of $650,000, which gave rise to a paid-in surplus in the above amount.
Although on the income-tax return a deduction was claimed which included compensation for each of four officers, the petitioner now contends for the deduction of alleged salaries of only two of these officers. The corporation in paying money to these two men might have been doing one of two things, it might have been compensating them for their services as officers, or it might have been making a distribution to them as stockholders. The Commissioner determined that it was making a distribution and the petitioner would have this Board reverse the Commissioner and hold that $3,600 was paid or incurred by the corporation for personal services rendered by these two officers, and that it was a reasonable compensation for personal services actually rendered by them. When payments are made for services the amounts usually depend upon*372 the services rendered. Here we see that two officers who rendered no services received just as much as those who performed services. Each one of the four officers owned one-fourth*4135 of the stock and the corporation apparently paid each the same amount. The effect of the payments was the same as that which would have resulted from a distribution. From the facts before us, all of which we have set out in our findings of fact, we can not say that the Commissioner was in error.
Judgment will be entered in accordance with the foregoing opinion on notice of 15 days, under Rule 50.