*1249 On its return for the taxable year petitioner deducted $2,340 as a reasonable allowance for personal services actually rendered by one of its officers and directors. Respondent allowed $600 thereof and disallowed $1,740. Held, the amount allowed by respondent constitutes a reasonable allowance for the personal services actually rendered; held, further, no part of the $1,740 disallowed id deductible as a pension, or as a payment in the nature of a pension.
*969 This proceeding involves an income tax deficiency for 1936 in the amount of $299.80. The issue is whether the amount paid one of petitioner's officers and directors was a reasonable allowance for personal services actually rendered. Respondent allowed a deduction of $600, and disallowed $1,740. Petitioner alleges that the amount disallowed is deductible as a pension, if not deductible as a salary.
FINDINGS OF FACT.
Petitioner is an Oregon corporation, engaged in publishing a daily newspaper at Astoria, Oregon. From 1919 to 1930 its stock*1250 was held equally by Messrs. Aldrich, Chessman, Drake, and Lamkin. In 1930 Drake's interest was acquired by the other three stockholders, the larger portion thereof being acquired by Chessman.
Lamkin, Aldrich, and Chessman had been associated in the newspaper business since 1909 and when the Astorian-Budget was purchased in 1919 Chessman went to Astoria as editor and manager. Aldrich lived at Pendleton and was the editor and president of the East Oregonian Publishing Co. From February 1932 through the taxable year Aldrich served as a member of the state highway commission and traveled extensively over the state. Lamkin assisted in the supervision and management of the business, the purchase of materials and supplies, circulation, advertising, and job printing.
Chessman, Aldrich, Drake, and Lamkin, individually, borrowed money to purchase the Astorian-Budget. For a number of years they followed the practice of putting the profits back into the business. Each of them had families to provide for and they were concerned as to what would happen if one of them passed away. To protect their dependents they agreed that in the event of the death of any one of them the salary paid*1251 each as an officer or director should be thereafter *970 paid to his widow, or next of kin, as long as such widow or next of kin continued to hold the inherited stock. Following the acquisition of Drake's interest, Chessman, Aldrich, and Lamkin renewed the agreement.
The agreement was limited to the amount received as an officer and director. It did not include salaries paid for services as an employee. Chessman as the editor and manager received a so-called "active" salary of $75 a week, and a salary as director and officer of $58 per week. Aldrich received no "active" salary, but was paid $37.50 per week as officer and director. Lamkin received no "active" salary, but a salary of $45 per week as officer and director.
In 1934 Lamkin was accidentally killed and his interest passed to his sister and sole heir, Dorothy Engle. Aldrich was appointed administrator of Lamkin's estate and during the period of administration petitioner paid the estate Lamkin's salary as officer and director of $45 per week. After administration was completed petitioner paid the $45 a week to Lamkin's heir aforesaid.
In October 1935 petitioner's board of directors adopted a resolution*1252 providing that "Dorothy Engle, as Vice-President and Director of the Astorian-Budget Publishing Company receive a salary of $20 a week for said services, and that such salary shall be paid to her from the funds of this corporation from and after the passing of this resolution and until the Board of Directors shall by resolution otherwise determine."
Pursuant to said resolution petitioner paid Dorothy $20Engle a week for her services during the taxable year. Pursuant to the agreement of Chessman and Aldrich with Lamkin the petitioner made a weekly payment of $25 to Dorothy Engle during the taxable year, which payment was carried on petitioner's regular pay roll.
Each payment was made by a separate check of the petitioner.
Dorothy Engle performed no clerical or supervisory duties for the petitioner as she resided in Portland and was physically incapacitated by a broken hip. Her personal services consisted of consulting and advising with the other directors. Conferences were held at her place of residence two or three times a month with Chessman or with Aldrich, or with both, at which major business policies were discussed and decided. The detailed operation of the business*1253 was handled by Chessman. Comprehensive weekly reports were prepared by petitioner and received by Dorothy Engle covering petitioner's business operations. These weekly reports were summarized monthly and yearly. Matters shown thereon were the subject of oral discussion and written communications between Dorothy Engle and the other directors. Dorothy Engle had never worked in a newspaper office. Her business experience consisted of unsuccessfully operating *971 two small drug stores inherited from her husband, and thereafter operating a leased apartment house in San Francisco, California. While operating the apartment house she fell and fractured her hip, and from that time on was more or less dependent upon Lamkin.
During the taxable year petitioner's officers, directors, and stockholders were as follows:
| Shares | |
| Merle Chessman, president and director | 189 |
| Dorothy Engle, vice president and director | 148 |
| L. B. Aldrich, secretary-treasurer and director | 123 |
| Mrs. J. S. Dellinger | 25 |
| Hetty Brown | 25 |
| Total outstanding | 510 |
On its income tax return for the taxable year petitioner deducted the entire amount of $2,340 paid to Dorothy Engle, of which*1254 $1,740 was disallowed by the respondent.
OPINION.
ARNOLD: The respondent dontends that Dorothy Engle performed no substantial services for the petitioner which would entitle her to compensation of $2,340 for 1936. It is his contention that the $600 allowed is more than adequate for the services rendered. Petitioner contends that $1,040 represents compensation fixed by the directors for her services, and that the $1,300 paid her is in the nature of a pension pursuant to the agreement between Chessman, Aldrich, and Lamkin.
The testimony and our findings of fact show that Dorothy Engle rendered no clerical or supervisory services to the petitioner. Her services were limited by her physical condition to advising and consulting with the other directors two or three times a month. Aldrich was an experienced newspaper man and his advice and opinions were undoubtedly valuable, but this is not so as to Dorothy Engle. Unlike Aldrich, she had no substantial business experience upon which to formulate opinions. According to the testimony she took over and operated two small drug stores after her husband's death, and lost a large part of her inheritance. Thereafter, she attempted*1255 to operate an apartment house and while so engaged she suffered the broken hip which has since incapacitated her. We do not feel that such business experience qualified her to advise and consult on the major policies of a daily newspaper. She had had no previous experience in the newspaper business, and, despite the resolution of the board of directors, which allocated $20 a week to her as a salary, and despite the testimony of Chessman and Aldrich that they believed the salary voted her was reasonable, we are not convinced that respondent erred *972 in his determination. In our opinion a tax deduction of $600 per year constituted a reasonable allowance as compensation for the personal services actually rendered by Dorothy Engle. Home Industry Iron Works,8 B.T.A. 1267">8 B.T.A. 1267; Monte Glove Co.,44 B.T.A. 539">44 B.T.A. 539.
This allowance amounts to $25 per directors' meeting, based on an average of two meetings a month, and we can not say that the services rendered by a person of Dorothy Engle's limited experience entitled her to a larger compensation.
Petitioner contends that, if it is not allowed to deduct the entire $1,040 as salary or compensation, the*1256 difference, $440, should be treated the same as the $1,300 paid pursuant to the agreement with Lamkin. Under the agreement Chessman and Aldrich were obligated to see that Lamkin's next of kin received $45 per week so long as such next of kin continued to hold petitioner's stock. The agreement did not contemplate or provide for contingencies that might arise, such as disposition by the heir of part of the stock inherited, inability of the heir to serve as a director or officer, or other possible contingency. The agreement was between petitioner's stockholders as individuals, and not between Lamkin and the petitioner as a corporate entity. Formally, therefore, petitioner was not obligated to make these payments, but since its stock was so closely held and the three principal stockholders had been associated together in business for years, petitioner was operated more like a partnership than a separate legal entity. This fact, no doubt, influenced Chessman and Aldrich to consider their agreement with Lamkin as a corporate obligation.
Petitioner relies upon our decision in *1257 Seavey & Flarsheim Brokerage Co,41 B.T.A. 198">41 B.T.A. 198, 202, 203; art. 23(a)(9), Regulations 94; and I.T. 3329, C.B. 1939-2, p. 153, to justify the $1,740 deduction. In the cited case there was a written contract between the employee and the taxpayer therein, whereby the latter obligated itself to pay the employee's widow $12,000 per annum if he would continue with the firm and not establish a competing business. Subsequent to the employee's death $12,000 per annum was paid to his widow, and the Board held that this was additional compensation for the employee's services, and therefore deductible. No comparable situation exists here, as there was no agreement between petitioner and Lamkin that the former would pay the latter's heir a salary or a pension of $45 a week. Factually, the two cases are distinguishable.
Article 23(a)(9), supra, permits amounts paid "by a taxpayer for pensions to retired employees or to their families or others dependent upon them", to be deducted "as ordinary and necessary expenses", where taxpayer is not compensated by insurance or otherwise. It also provides that, where the salary of an officer is paid for a limited period after his*1258 death to his widow or heirs, in recognition *973 of services rendered, such payments may be deducted. Strictly speaking, no part of the $45 paid Dorothy Engle was a pension, nor does petitioner so contend. Its contention is that the payment is in the nature of a pension. The payment more nearly complies with the second provision above, because it is the amount of salary that Lamkin received, it was paid to his heir, and the agreement clearly indicates that it was in recognition of services rendered by Lamkin. However, the only limitation of time on the payment is the period that Dorothy Engle continues to hold the stock. Such a provision bears more earmarks of a special provision for the distribution of profits to an officer-stockholder than it does of a pension payment. Laudable as we deem the disbursements made, we can not subscribe to petitioner's contention that the payments were pensions or sufficiently in the nature of pensions to be deductible as ordinary and necessary expenses.
In I.T. 3329, supra, it is obvious from the facts set forth that the period of time was limited to designated amounts for the calendar years by action of the board of directors, and*1259 the amounts paid were not conditioned upon continued stock ownership.
In view of the foregoing we must affirm respondent's determination.
Decision will be entered for the respondent.