*729 1. Where income tax returns for 1927 are stamped as having been filed in the deputy collector's office on April 14, 1928, and the evidence before the Board indubitably shows that the returns were filed on April 13, 1928, the presumption of correctness as to the date of filing which attaches to the records of the collector's office is overcome. In the case of nine of the petitioners herein the returns were filed in the deputy collector's office on April 13, 1928. The petitioners have filed no waivers of the statute of limitations. The returns were not false or fraudulent with intent to evade tax. The deficiency notices were mailed by the respondent on April 14, 1931. Held, that the deficiencies were are barred by the statute of limitations.
2. Corporations A and B, about to sell for cash gas and oil properties, organized a new corporation C, to which A and B transferred the assets to be sold subject to an option agreement in exchange for all the shares of stock of C. A and B then distributed the shares of stock of C to their two corporate stockholders, the G. H. M. Co. and Davis Brothers Co. After a series of transfers the shares of stock of C found their way into the*730 hands of the stockholders of the G. H. M. Co. and Davis Brothers Co., by whom they were transferred to a trustee, who deeded the assets of C (the gas and oil properties to be sold) to the purchaser and received $2,750,000 cash, which he turned over to the G. H. M. Co. and to Davis Brothers Co. as the agents of their stockholders, a part of the cash to be distributed to the stockholders and a part to be retained in accordance with the provisions of the trust instrument. Held, that there was no reorganization of corporation A and B and that the reorganization provisions of the statute are not applicable to these petitioners.
3. The G. H. M. Co. kept its books of account and made its income tax returns on the accrual basis. In its return for 1927 it deducted from gross income $94,313.99 as additional compensation paid to its treasurer and general manager for services rendered under a contract which the company had with him. The contract was a reasonable contract and the amounts paid thereunder to the treasurer and general manager were not in excess of reasonable compensation for service rendered. In the determination of the deficiency the respondent has disallowed the deduction*731 from gross income of $80,134.24 paid in pursuance of the terms of the contract to its treasurer and general manager. Held, that the amount is a legal deduction from gross income.
*607 These proceedings, consolidated for hearing, involve income tax deficiencies for 1927 as follows:
| Petitioner | Docket No. | Deficiency |
| Thomas N. Perkins | 57848 | $3,143.44 |
| Edmund J. Shattuck | 58305 | 2,069.83 |
| G.H.M. Co | 58306 | 17,630.13 |
| Perkins & Buttrick Trust | 58443 | 15,145.95 |
| Trust u/w George H. Morrill | 58475 | 41,457.23 |
| Thompson Oil Co | 58770 | 38,199.65 |
| Eastern Carbon Black Co | 58772 | 260,928.42 |
| W. H. Davis | 58904 | 12,494.56 |
| Lillian A. Davis | 58905 | $4,999.14 |
| Matilda M. Davis | 58906 | 21,846.24 |
| Alton N. Davis | 58907 | 7,885.26 |
| Emma Luette Davis, Executrix, u/w O. L. Davis | 58917 | 22,288.29 |
| Lue Davis | 58918 | 7,399.75 |
| Davis Brothers Co | 58925 | 19,717.85 |
The deficiencies arose in large part out of certain transactions which took place during 1927 in connection with the sale of*732 certain gas and oil properties owned by Eastern Carbon Black Co. and Thompson Oil Co. Many of the issues are interrelated and in some instances are mutually dependent. It is impossible to draw an exact line of demarcation between them.
FINDINGS OF FACT.
1. Income tax returns for 1927 of the nine last named petitioners in the above list were filed in the office of the deputy collector of internal revenue at Charleston, West Virginia, on April 13, 1928, and his receipt takenj therefor. None of the nine petitioners filed waivers of the statute of limitations. The returns were not false or fraudulent with intent to evade tax. Deficiency notices were mailed to the petitioners on April 14, 1931.
The Thompson Oil Co. (hereinafter sometimes called Thompson), Docket No. 58770, and Eastern Carbon Black Co. (hereinafter sometimes called Eastern), Docket No. 58772, filed petitions with this Board on May 28, 1931, for the redetermination of deficiencies for 1927 in the respective amounts of $38,199.65 and $260,928.42. In July 1931 the respondent made a jeopardy assessment against Eastern of $260,928.42. Payment of this jeopardy assessment, together with interest thereon from March 15, 1928, in*733 the amount of $56,281.30, making a total tax plus interest of $317,209.72 was demanded on August 19, 1931, by the collector of internal revenue for the district of West Virginia, and payment of the above mentioned amounts was made to the collector under protest on September 14, 1931. In August 1931 the respondent also made a jeopardy assessment against Thompson for the amount of the alleged deficiency in tax for 1927, namely, $38,199.65. Payment of this jeopardy assessment, together with interest thereon from March 15, 1928, in the amount of $8,827.03, making a total tax plus interest of $47,027.68, was demanded of Thompson by the collector of internal revenue for the district of West *608 Virginia, and payment of same was made by Thompson to the collector under protest on October 28, 1931.
2. The petitioners Eastern and Thompson are West Virginia corporations. The former was engaged in the manufacture of carbon black and the production and sale of gas and oil. The latter was engaged exclusively in the production and sale of gas and oil in West Virginia. The stock of each was owned one half by the G. H. M. Co., a corporation (at that time known as the George H. Morrill*734 Co. but hereinafter called G. H. M. Co.), and one half by the petitioner Davis Brothers Co., a corporation. On July 15, 1927, Eastern and Thompson granted to the Hamilton Oil & Gas Co. (hereinafter called Hamilton), a West Virginia corporation, an option running for a period of four months from its date for the purchase of their gas and oil properties at a price of $2,750,000 cash. This option covered substantially all the properties of Thompson, but only a part of those of Eastern. This option was in effect extended by the contract of November 14, 1927, as shown hereinafter.
It was appreciated by the parties interested that if the sale was made directly by Eastern and Thompson both would be subject to large income taxes upon the profits made; that the G. H. M. Co. and Davis Brothers Co. would likewise be subject to taxes on liquidating dividends received from Thompson; and that the stockholders of those companies would likewise be subject to income taxes upon the distributions made to them by the G. H. M. Co. and Davis Brothers Co. The attorneys for the companies believed that the reorganization provisions of the Revenue Act of 1926 could be invoked to minimize the total of*735 the income taxes to be paid by the interested parties. With this end in view an elaborate scheme was devised, called a "plan of reorganization", which contemplated the organization of a new corporation to which the properties to be sold should be transferred, subject to the option agreement, the shares of stock of that corporation to be distributed as dividends to the two corporate stockholders of Eastern and Thompson, each of which would then form a new corporation to which the dividend shares received by each would be transferred in exchange for the shares of stock of the new corporation, which shares would then be distributed as dividends to the stockholders, who would then bring about the dissolution of the last two corporations and then turn the shares of the corporation which then held legal title to the gas and oil properties over to a trustee, who would convey the legal title to the properties to the purchaser in return for the cash consideration therefor and then distribute the proceeds to the beneficiaries of the trust pursuant to the terms thereof. The various steps contemplated by the plan were carried out in great detail.
*609 Pursuant to the plan a new corporation, *736 the Interstate Gas Co. (hereinafter called Interstate), was organized on November 10 and 11, 1927. To this corporation Eastern, on November 12, 1927, deeded its gas and oil properties to be sold, subject to the option, to Interstate in exchange for 83 percent of its shares of stock and on November 14, 1927, Thompson deeded its entire assets, subject to the option, for 17 percent of the shares of stock of Interstate.
On November 14, 1927, a contract was executed between Eastern and Thompson as parties of the first part, and Hamilton as party of the second part, whereby Eastern and Thompson agreed to sell and deliver or cause to be sold and delivered to Hamilton, and Hamilton agreed to buy, the gas and oil properties covered by the option agreement of July 15, 1927. The contract provided in part as follows:
That the parties of the first part, for and in consideration of the sum of One Dollar ($1.00), cash in hand paid, and other valuable considerations, the receipt of all of which is hereby acknowledged, hereby severally agree to sell and deliver, or to cause to be sold and delivered, unto the party of the second part, and the party of the second part hereby agrees to buy, at*737 the time, at the price, and upon the terms hereinafter specified, all of the oil and gas properties, * * * owned by the parties of the first part, * * * it being understood that this agreement for sale embraces all of the oil and gas properties, including leaseholds, wells, equipment and appurtenances, of the parties of the first part, * * *
The purchase price for the property hereby agreed to be sold is Two Million Seven Hundred and Fifty Thousand Dollars ($2,750,000), which shall be paid in cash to the parties of the first part upon the delivery or tender by the parties of the first part, or their respective successors or assigns, of proper deeds of conveyance and assignment for the property agreed to be sold, free of liens.
* * *
It is further understood and agreed that during the continuance of this agreement for sale the parties of the first part shall control, operate and manage the property hereby agreed to be sold in their usual and customary manner, and shall use and sell the gas and oil produced therefrom, but shall not substantially diminish or deplete said property by selling or otherwise disposing of any leases, leaseholds, wells, pipe lines or equipment.
* * *738 *
It is understood and agreed that if the parties of the first part so desire conveyance may be made by a trustee or trustees to whom the properties to be conveyed shall be liquidated and who shall have powers for the purpose satisfactory to the party of the second part. In the event the conveyance is made by such trustee or trustees Eastern Carbon Black Company shall deliver to the party of the second part at the time of the conveyance its guarantee to the effect that the conveyance by such trustee or trustees carries the same rights and titles as if the properties were conveyed by Eastern Carbon Black Company and Thompson Oil Company, respectively. Said properties shall be conveyed by the delivery at the office of the Chatham-Phoenix National Bank and Trust Company of New York City, at 12 o'clock noon, on the 15th day of December, 1927, of proper deed or deeds of conveyance and assignment rrnning to the party of the second part, or its nominee, which said deed or deeds shall be in substantially the form hereto annexed, with proper insertion of *610 names of parties and of descriptions of the property hereby agreed to be sold. Upon the delivery or tender of such deed or*739 deeds the party of the second part shall pay to the parties of the first part the sum of Two Million Seven Hundred and Fifty Thousand Dollars ($2,750,000) in cash.
There was annexed to the contract, with reference to the Eastern properties, a form of deed, which form of deed ran from a trustee as party of the first part, and stated that the properties conveyed -
* * * are the same that were granted and assigned unto the party of the first part [namely, the trustee] by deed of Interstate Gas Company, dated the day of December, 1927, and the same that were granted and assigned unto the said Interstate Gas Company by deed of Eastern Carbon Black Company, bearing date of November , 1927.
There was also annexed to the contract a form of deed with reference to the Thompson properties corresponding to the form of deed covering the Eastern Properties. On the same date that this contract between Eastern and Thompson, as first parties, and Hamilton, as second party, was executed, Interstate, through appropriate action of its board of directors, approved and assented to the contract with Hamilton and approved, ratified, and confirmed the action of its president in consenting on behalf*740 of Interstate to the execution of the contract.
Later, on November 14, 1927, the directors of Eastern voted to distribute as a dividend to its stockholders the 830 shares of Interstate stock issued to it in consideration of its conveyance to Interstate of its gas and oil properties as aforesaid, and pursuant to this vote the shares were distributed to Eastern's stockholders, 415 shares to the G. H. M. Co., and 415 shares to Davis Brothers Co. Likewise, on November 14, 1927, subsequent to the procedure hereinbefore described, the directors of Thompson voted to distribute as a dividend in liquidation to its stockholders the 170 shares of Interstate stock issued to it in consideration of its conveyance to Interstate of substantially all of its properties as aforesaid, and pursuant to this vote the shares were distributed to Thompson's stockholders, 85 shares to the G. H. M. Co. and 85 shares to Davis Brothers Co. The fair market value of Interstate stock at the date of distribution was $2,750 per share.
The G. H. M. Co. and Davis Brothers Co. then each formed a corporation, that formed by the G. H. M. Co. being called the Morrill Securities Co., and that formed by Davis Brothers*741 Co. being called the Union Holding & Investment Co. The G. H. M. Co. and Davis Brothers Co. then turned over to the Morrill Securities Co. and Union Holding & Investment Co. the shares of Interstate stock which had been received by them, receiving in exchange therefor all the shares of Morrill Securities Co. and Union Holding & Investment Co., respectively. The G. H. M. Co. and Davis Brothers Co. then *611 distributed as dividends to their stockholders the shares of stock of the Morrill Securities Co. and the Union Holding & Investment Co., who immediately caused the dissolution of both corporations receiving in place thereof the Interestate shares. The stockholders of the G. H. M. Co. and of Davis Brothers Co. then, pursuant to the plan, turned over their Interstate shares to Hodges, trustee, who, pursuant to a declaration of trust of December 8, 1927, was to transfer legal title to the gas and oil properties to be sold, bring about the dissolution of Interstate, and turn the $2,750,000 received from Hamilton to the G. H. M. Co. and Davis Brothers Co., which were to act as agents for the stockholders, retain a part of the cash, and distribute the balance to the individual*742 stockholders entitled to receive the same. The declaration of trust of December 8, 1927, by Arthur B. Hodges, trustee, provided in part as follows:
2. The Trustee shall cause to be held a meeting of the stockholders of said Interstate Gas Company for the purpose of authorizing the liquidation and dissolution of said corporation, and at said meeting shall vote said shares of common stock in favor of liquidating the said Interstate Gas Company by conveying to the Trustee all the property of said corporation, and dissolving said corporation, and shall receive, and may in his discretion give receipt for, conveyance of said property as a dividend in final liquidation of said shares.
3. The Trustee shall thereafter convey the property so received by him by proper Trustee's deed or deeds to Hamilton Oil & Gas Company, a West Virginia corporation, or its nominee or nominees, upon receipt in payment therefor of a certified check or checks for the aggregate sum of $2,750,000.
4. The Trustee shall thereupon distribute the Trust Property as follows: one-half (1/2) to George H. Morrill Company for the account of the beneficiaries named in Paragraph I of the Schedule of Beneficiaries*743 attached hereto, and one-half (1/2) to Davis Brothers Company for the account of the beneficiaries named in Paragraph II of the Schedule of Beneficiaries attached hereto, in each case subject to such adjustments as the Trustee may deem proper, and the trust shall thereupon terminate. Such distribution shall ipso facto discharge the Trustee from all liability as Trustee or otherwise hereunder.
The plan was carried out as contemplated.
In its income tax return for 1927, the G. H. M. Co. did not report any taxable income from the receipt by it of the Interstate shares from Eastern. The stockholders of the G. H. M. Co. in their individual tax returns did not report any income from the receipt by them of the shares of stock of the Morrill Securities Co. but they did report as taxable income the amount of cash received by them from Hodges, trustee, through the G. H. M. Co.
The respondent in the determination of the deficiencies has held that the reorganization provisions of the statute are not applicable to the petitioners, the G. H. M. Co. and its stockholders; that the G. H. M. Co. is liable to income tax upon a portion of the liquidating dividends received from Thompson, and*744 that the stockholders of the G. H. M. Co. are liable to income tax upon the dividend paid to them *612 by the G. H. M. Co. consisting of shares of stock of the Morrill Securities Co.
3. As a result of dividend declarations by Eastern and Thompson on November 14, 1927, the G. H. M. Co. received shares of stock of Interestate, the fair market value of which at the date of receipt was $2,750 per share. The shares received from Thompson constituted a liquidating dividend. Those received from Eastern were from the profits of that company accumulated after February 28, 1913, or from increase in value of property accrued after that date.
During the year 1927 Frederick P. Bagley was the treasurer and general manager of the G. H. M. Co. He had held that position for many years. In 1918 an agreement had been made between Bagley and the G. H. M. Co. (at that time called George H. Morrill Co.) regarding the compensation which he should receive for his services to that corporation. The terms of this contract were set forth in a letter dated March 12, 1918, from Bagley to one Stedman Buttrick, at that time a director of the G. H. M. Co. This letter was made a part of the records*745 of the directors of the G. H. M. Co. at their meeting held January 5, 1920. The letter read as follows:
1. That my indebtedness to the Company as of December 31, 1917, is cancelled, the cancellation being a bonus for services rendered the Company during the year 1916.
2. That my services to the Company are to be remunerated in the following manner, to be effective as of January 1, 1917:
(a) A salary of $15,000.00 per year.
(b) A bonus each year of ten percent of the profits (after depreciations have been deducted) of the George H. Morrill Co. and its subsidiaries that are over and above eight percent on the invested capital of the Geo. H. Morrill Co. and its subsidiaries. The invested capital to be as shown by the books of these companies January First of the year for which the bonus is paid. Federal taxes are not to be considered as an operating expense in figuring the profits.
(c) The upkeep and running expenses of my automobile to be paid for by the Company.
On the Thirty-first of this month I will have had charge of the Company for ten years. While I want to thank you and the Directors for what you have done in the above matter, I want to tell you that the*746 consistent support which you, Perkins and George have given me at all times during the past ten years has meant more to the success of the Company than any salary or bonus the Directors could possibly give me.
This bonus contract was in force during 1927.
For the year 1927, Bagley was paid a bonus under this contract of $14,402.38 based upon 10 percent of the operating income of the G. H. M. Co. for that year in excess of 8 percent of its invested capital at the beginning of the year. At that time Thomas N. Perkins and John M. Richardson were trustees for a large amount of the stock of the G. H. M. Co. and Richardson was a director of the company. Several conferences were held between them and *613 with several officers and directors of the G. H. M. Co. to determine whether Bagley was entitled to receive an additional bonus under his service contract as a result of the receipt by the G. H. M. Co. in 1927 of 500 shares (one half of the total) of Interstate stock from Eastern and Thompson. On the books of the G. H. M. Co. the receipt of this stock was treated as giving rise to no gain or loss. This was in accordance with the view of the company's attorneys and accountants*747 that the amount was received in a reorganization proceeding. It was concluded as a result of the conferences above referred to that Bagley was entitled to be paid an additional bonus for 1927 which was computed at 10 percent of the excess in value of the 500 shares of Interstate stock received by G. H. M. Co., namely, $1,375,000, over the aggregate investment of the G. H. M. Co. in the stock of Eastern and Thompson. The bonus thus computed amounted to $94,313.99; it was accrued upon the petitioner's books of account for the year 1927 and paid to Bagley in February 1928.
In its income tax return for 1927 the G. H. M. Co. deducted from gross income the $94,313.99 accrued upon its books of account to Bagley. On audit of the return the respondent determined that the G. H. M. Co. was entitled to deduct only $14,179.75 of the $94,313.99 claimed as a deduction. The amount allowed represented 10 percent of the taxable income which the respondent then determined that the G. H. M. Co. had realized in the year 1927 in the liquidation of Thompson. The deduction of the balance, $80,134.24, was disallowed.
The G. H. M. Co. kept its books of account and made its tax returns upon he accrual*748 basis.
The contract which Bagley had with G. H. M. Co. was a reasonable contract and the total amounts paid to him during the term of the contract constituted reasonable compensation for services rendered.
4. The Perkins & Buttrick Trust (Docket No. 58443) was established under an indenture of trust dated May 6, 1919. Under the provisions of this trust instrument 125 shares of the capital stock of the G. H. M. Co. were transferred to the trustees by Frederick P. Bagley in trust to hold and manage the property as a trust fund and "to pay the net income thereof to Grace H. Bagley, wife of said Frederick P. Bagley, so long as she shall live." Upon the death of Grace H. Bagley the trust principal was to go to her husband and issue as she should by will appoint, or in default of such appointment, in trust for her two daughters. In December 1927 this trust was the owner of voting trust certificates representing 1,500 shares of the common stock of the G. H. M. Co. As such owner the trust *614 became the beneficiary of the trust of William Nelson dated December 7, 1927, and as such beneficiary received from William Nelson, trustee, on December 7, 1927, 80.36862 shares of Interstate*749 as a result of the liquidation by said William Nelson, trustee of the Morrill Securities Co. The receipt by the Perkins & Buttrick Trust of this stock of Interstate was treated as giving rise to a capital gain to the trust of $165,734.13, as indicated in the fiduciary information return (form 1041) of William Nelson, trustee, and this capital gain was included in schedule D of the fiduciary return (form 1041) and in schedule D of the return of the trust (form 1040) for the year 1927 filed by the Perkins & Buttrick Trust. The fiduciary information return of the trust for the year 1927 on form 1041 showed that the current dividends received by the trust during that year were included in the income distributable to Grace H. Bagley, the life beneficiary, and, accordingly, taxable to her. The capital net gain of $165,734.13, however, arising from the receipt through William Nelson, trustee, of the 80.36862 shares of Interstate stock upon the liquidation of the Morrill Securities Co. was shown as retained by the trust and, accordingly, taxable to it. In the return of the trust (form 1040) for the year 1927, this capital gain of $165,734.13 was included in schedule D as a part of the*750 capital net gain of $173,396.69 therein reported.
The respondent in his deficiency notice to the Perkins & Buttrick Trust has treated the trust as having received a taxable dividend of $221,013.60 and as not having realized any capital gain. The $221,013.60 represents the fair market value of the trust's pro rata share of the Morrill Securities Co. stock received by the voting trustees on 1,500 shares of the common stock of the G. H. M. Co. Paragraph 5 of the indenture of trust dated May 16, 1919, vests in the trustees unreviewable authority to determine what is income. The paragraph reads in part:
* * * at their discretion to treat as income the whole or any part of the lividends or interest derived therefrom, and generally to determine what of the receipts of the trust is principal and what is income; * * * to pay out as income, if they see fit, the whole or any part of the dividends of said mining or land stocks or other wasting securities, and no person claiming under this instrument shall have any right to object to such holding of mining or land stocks or other wasting investment or of any other investment on the ground that such holding is hazardous or speculative or*751 favors income at the risk or expense of principal, or principal at the risk or expense of income, * * * to retain or invest in the shares or other evidences of interest in and the securities or other evidences of indebtedness of any unincorporated trusts or associations, and, when they have occasion to distribute the principal of the fund or any part thereof, to effect the distribution in whole or in part by allotting to some or all of the distributees securities or other property or shares in securities or other property of the trust at such valuation as to the trustees in their uncontrolled discretion shall seem proper; * * *
5. *615 Thomas N. Perkins, Edmund J. Shattuck, and the trust u/w George H. Morrill were all stockholders of the G. H. M. Co. In 1927 each received as a dividend from the G. H. M. Co. shares of stock of the Morrill Securities Co., the value of which is not in dispute in these proceedings. In their income tax returns for 1927 these petitioners did not include in their income the value of the Morrill Securities Co. stock received, but did incloude the cash received by them from Hodges, trustee, through the G. H. M. Co. The respondent in the audit of*752 the returns has included in the gross income of each petitioner the value of the dividend received by each and has determined deficiencies accordingly.
OPINION.
SMITH: 1. The petitioners in the nine highest docket numbers in these proceedings contend that the deficiencies are barred by the statute of limitations. They contend that the returns were filed on April 13, 1928. The deficiency notices were mailed under date of April 14, 1931. If the returns were filed on April 13, 1928, as claimed by the petitioners, then the period within which the respondent could mail notices of deficiency expired on April 13, 1931, or one day prior to the date they were actually mailed. The applicable statute is section 277 of the Revenue Act of 1926, which provides, so far as pertinent, as follows:
SEC. 277. (a) Except as provided in section 278 -
(1) The amount of income taxes imposed by this Act shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
The returns in question were prepared in Boston, Massachusetts, and sent to the offices of the*753 Davis Brothers Co. in Charleston, West Virgina. They were signed and verified on April 10, 1928. One H. H. Corrie, a public accountant of Charleston and the accountant for Davis Brothers Co. and most of the stockholders of that company, was to attend to the filing of the returns. April 13, 1928, fell on Friday. W. H. Davis was anxious that the returns be filed on that day. All of the nine petitioners above referred to had obtained an extension of time for the filing of the returns which expired on April 15, which was Sunday. When on April 13 Davis got back to his office after lunch he telephoned Corrie's office to have him come over and attend to the filing of the returns that afternoon. He was informed that Corrie was already on his way to the Davis Brothers Co. office. He soon arrived, looked over the returns, and dictated to a stenographer, who had custody of the returns, a form of receipt for the returns to be signed by the deputy collector with whom they were *616 to be filed. Corrie then took the returns, went across the street to the Federal Building where he purchased a money order, went upstairs and filed the returns with Emory Kirby, the deputy collector, *754 and took his receipt therefor. The signature of Kirby upon the receipt is admitted. This was between 2 and 2:30 o'clock that afternoon. The receipt reads in part as follows:
Charleston, W. Va.,
April 13th, 1928.
Received this day of H. H. Corrie the following tax returns with checks as noted:
Then follows a list of tax returns, including those of the last nine named petitioners. Corrie immediately returned to the office of Davis Brothers Co. and delivered the receipt to the stenographer, who filed it away with the duplicates of the returns. Corrie then busied himself with accounting matters in the office of Davis Brothers Co. for the balance of the afternoon. Corrie's diary for April 13, 1928, has a notation that he filed the returns on that day and that he was engaged at the office of Davis Brothers Co. all of that afternoon. The next day he was engaged on other matters.
The returns are stamped as having been received in the deputy collector's office on April 14, 1928. Kirby's daily report for April 13 does not show the receipt of the returns by him on that date whereas his daily report for April 14 shows the receipt of the returns on that day. His daily reports*755 for April 13 and April 14 were made out and mailed to the collector on April 14. Kirby testified that he was always careful to place his stamp upon tax returns on the day filed, and, although he had no personal recollection as to the time of the filing of the returns, he was of the opinion that they must have been filed in his office on April 14, and that in signing the receipt for the returns he inadvertently failed to notice the date borne by the receipt.
The evidence that the petitioners filed their returns on April 13 is convincing. There were several witnesses who distinctly remember that Corrie came into the office of Davis Brothers Co. on the afternoon of April 13 and left his office with the returns under his arm and that he was back in the office within a period of less than half an hour. Some of these witnesses were not in the office of Davis Brothers Co. on Saturday, April 14. It is also to be noted that Corrie was engaged in work for other clients than Davis Brothers Co. on the fourteenth and did not go near the Federal Building on that day. In view of all the evidence upon this point, the presumption of correctness as to the date of filing which attaches to the*756 records of the collector's office is overcome. We find as a fact that the returns were filed on April 13, 1928.
*617 Section 241(b) of the Revenue Act of 1926 requires that "Returns shall be made to the collector of the district in which is located the principal place of business or principal office or agency of the corporation." The question arises as to whether the returns filed with the deputy collector on April 13, 1928, were properly filed. Kirby testified that one of his duties, although a minor one, was that of receiving income tax returns. Under section 3148 of the Revised Statutes, as amended, each deputy collector -
* * * shall have the like authority in every respect to collect the taxes levied or assessed within the portion of the district assigned to him which is by law vested in the collector himself, but each collector shall, in every respect, be responsible, both to the United States and to individuals, as the case may be, for all moneys collected, and for every act done or neglected to be done, by any of his deputies while acting as such.
Since the collector had authorized his deputy at Charleston to receive income tax returns at his office, we think*757 there can be no question but that the filing of the returns with the deputy collector was a filing within the contemplation of section 241(b) of the Revenue Act of 1926. Cf. , on powers and duties of deputy collectors.
The Federal income tax return for 1927 of Eastern and Thompson was a consolidated return together with the Owl Oil Co., the wholly owned subsidiary corporation of Eastern. These corporations had filed a consolidated income tax return for a part of the year 1925 and for the year 1926 and at the time that the consolidated return for 1927 was filed it was assumed that that return also should be a consolidated return. It was not until 1929, more than a year after the 1927 consolidated return was filed, that the respondent ruled these corporations not entitled to file consolidated returns for the years 1925 and 1926. The consolidated return filed for 1927 was filed in good faith.
The respondent contends that the consolidated return did not enable him to determine the separate income of Thompson and that therefore the filing of the consolidated return did not start the running of the statute of limitations*758 with respect to Thompson.
An inspection of the schedules attached to the consolidated return shows that the separate gross incomes and deductions of each of the three corporations whose financial operations were included in the consolidated return are set forth in separate columns. Thus the consolidated return furnished the respondent with the information necessary to determine the net income of each corporation separately to the same extent as if they had each filed a separate return. It has been held in numerous decisions that the filing of such a consolidated return starts the statute of limitations running in favor of each of *618 the corporations included therein. ; ; affd., ; ; . We hold therefore that the filing of the consolidated return set in operation the statute of limitations with respect to Thompson the same as for the other petitioners named.
The respondent makes the further contention that the income tax returns of Eastern, Thompson, *759 the G. H. M. Co., and Davis Brothers Co. were false or fraudulent with intent to evade tax and that therefore the statute of limitations has not run with respect to these companies. At the conclusion of the hearing the respondent moved for the imposition of the 50 percent addition to the deficiency in the case of each of these companies provided for by section 275(b) of the Revenue Act of 1926, which in material part provides as follows:
If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency * * * shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.
The respondent alleges that an inspection of the returns filed by the four corporations named shows that "it would be utterly impossible from an examination thereof to unravel the many transactions involving transfer of assets and stock, for statements and references thereto were either omitted, studiously concealed or absolutely falsified." We have carefully examined the record in these proceedings for the purpose of determining the correctness of the grave*760 charges made by the respondent. On such examination we reach the conclusion that the evidence discloses no intent on the part of the four corporations involved to evade tax, and further that there is no ground for the suspicion that the returns were false or fraudulent with an intent to evade tax. The evidence all goes to show that at most the petitioners sought to minimize their tax liabilities by meticulously following what they believed to be the proper interpretation of the provisions of the statute relating to the reorganization of corporations. Taxpayers are not required so to conduct their business as will best pay the Treasury. . The fact that in following the letter of the law they have not escaped tax liability is no ground for assuming that they had been fraudulently trying to do so.
We reach the conclusion that the statute of limitations has operated to bar the collection of the deficiency due from the nine petitioners referred to above; also, that the return of the G. H. M. Co., the only one of the corporate petitioners before us in these proceedings whose deficiency is not barred by the statute of limitations, *761 was not false or fraudulent with intent to evade tax, and that therefore the 50 *619 percent addition to the deficiency determined for the G. H. M. Co. was not incurred.
2. In these proceedings the petitioners contend that when Eastern and Thompson transferred their gas and oil properties to Interstate in exchange for all of their shares which they immediately distributed as dividends to their two corporate stockholders, the G. H. M. Co. and Davis Brothers Co., a reorganization was effected under the provisions of section 203(h) of the Revenue Act of 1926; that when the G. H. M. Co. and Davis Brothers Co. received the shares of stock of Interstate they realized no taxable income because those shares of stock were distributed to them pursuant to a plan of reorganization; and that when the shareholders of the G. H. M. Co. and of Davis Brothers Co. received as dividends shares of stock, on the one hand, of the Morrill Securities Co., and, on the other hand, of the Union Holding & Investment Co., they likewise received no taxable income since they represented distributions pursuant to a plan of reorganization. They admit, however, that the stockholders of the G. H. M. Co. are*762 taxable upon the cash actually received by them from Hodges, trustee, through the G. H. M. Co.
Section 203(h) of the Revenue Act of 1926 provides in part:
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
Section 203(b) of the same act provides in part:
(3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
(4) No gain or loss shall be recognized if property is transferred to a corporation*763 by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
The petitioners admit that the steps taken involving the transfer of the gas and oil properties to be sold by Thompson and Eastern to Interstate, the creation by the G. H. M. Co. and Davis Brothers Co. of the Morrill Securities Co. and Union Holding & Investment Co., respectively, and the creation of the Hodges trust, etc., were for the purpose of availing themselves of the reorganization provisions *620 of the Revenue Act of 1926 and limiting tax liability. There was never any intention on the part of Eastern to reorganize its corporate business. Thompson was to be dissolved because it was to sell all of its assets to Hamilton. It was never contemplated that Interstate, the Morrill Securities Co., and the Union Holding & Investment Co. should be operating corporations. *764 They were simply to hold the shares of stock turned over to them for a short period and then be dissolved. This was done. Likewise, Hodges, trustee, was simply to hold the title to the properties to be sold for a period of a few days, convey the legal title to the properties to Hamilton, receive the cash from the purchaser, and turn it back to the beneficiaries of the trust. As soon as these objects were accomplished the trust was terminated.
In , it was stated:
When subdivision (B) [section 203(h)(1)] speaks of a transfer of assets by one corporation to another, it means a transfer made "in pursuance of a plan of reorganization" (section 112(g)) of the corporate business; * * *
There was no reorganization of the corporate businesses of Eastern, of Thompson, or of the other corporations involved in these proceedings. The following language of the Supreme Court in the above quoted case is apposite to the proceedings at bar:
* * * The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and*765 nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.
See also Ballwood Co. v. Commissioner (C.C.A., 3d Cir.), Fed.(2d) (July 16, 1935), affirming .
No contention is made by the petitioners that the shares of stock of Interstate, the Morrill Securities Co., and the Union Holding & Investment Co. did not have the fair market value attributed to them by the respondent in the determination of the deficiencies. The substance of the contention of the petitioners is that the recipients of those shares are not liable to income tax in respect to them as of the date of receipt, because they were received pursuant to a plan of reorganization under the statute. In accordance with the principle of law enunciated in the above cited cases the claim of the petitioners that the reorganization provisions of the Revenue Act of 1926 are applicable to these proceedings can not be*766 sustained.
3. The petition of the G. H. M. Co. alleges:
(a) The respondent has improperly treated the petitioner as realizing a taxable profit of $141,797.45 upon the liquidation in the year 1927 of Thompson Oil Company, whereas the petitioner realized no taxable income as a result of such liquidation.
*621 (b) The respondent has allowed the petitioner a deduction of only $14,179.75 on account of "adjustment to salary of officer" whereas the petitioner is entitled to a deduction on this account of $94,313.99 and is thereby entitled to a refund of taxes for the year 1927 of $12,732.38 with interest thereon.
The issue set forth in the foregoing paragraph (a) is as to whether, as the petitioner claims, the stock of Interstate received by it in the course of liquidation of Thompson, was received pursuant to a reorganization exchange and therefore not subject to tax, or whether, as the respondent claims, it was received as a dividend in liquidation without protection from tax by the reorganization provisions of the statute. The petitioner argues that the transfer by Thompson of all of its assets to Interstate in exchange for stock of Interstate followed by the distribution*767 of Interstate stock thus received by Thompson to its stockholders and the dissolution of Thompson, was a reorganization under section 203(h)(1)(A) of the statute; accordingly, that the exchange by the G. H. M. Co. of its 900 shares of stock in Thompson for stock in Interstate falls within the provisions of section 203(b)(2) of the statute as follows:
No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
It is submitted that both Thompson and Interstate were parties to the reorganization hereinabove described and that the exchange was made in pursuance of the plan of reorganization.
We have held above that there was no reorganization within the contemplation of the statute of Eastern and Thompson. Accordingly, the reorganization provisions of the statute may not be invoked by the G. H. M. Co. for the purpose of minimizing its tax liability. The G. H. M. Co. is liable to income tax upon the profit realized by it from the exchange of its shares of stock in Thompson*768 for the shares of stock of Interstate, as determined by the respondent.
The G. H. M. Co. further argues that, if Thompson is liable to income tax in respect to the transaction by which it sold its assets to Hamilton, then the profit computed by the respondent in the amount of $141,797.45 is in excess of the actual profit realized by it from the receipt of the shares of stock of Interstate. We have found, however, that the collection of any deficiency from Thompson is barred by the statute of limitations. Since this is so, the taxable profit found by the respondent to be $141,797.45 is not in excess of the actual profit received by the G. H. M. Co. as a result of the liquidation in 1927 of Thompson.
In these proceedings the respondent moved to increase the deficiency due from the G. H. M. Co. on the ground that the shares of Interstate stock received by the G. H. M. Co. as a dividend from *622 Eastern constituted in part a liquidating dividend. In the determination of the deficiency the respondent treated the value of these shares as an ordinary dividend. The evidence of record is that Eastern was not liquidated in whole or in part. None of its outstanding shares were*769 canceled or redeemed and the distributions made by Eastern to its stockholders were either out of earnings accumulated since February 28, 1913, or out of increase in value of assets accrued after that date. After the payment of the dividend the books of Eastern still showed a large surplus. In the determination of the deficiency due from the G. H. M. Co. the respondent treated the dividend from Eastern as giving rise to no taxable income. He has not sustained the burden of showing the liquidation of Eastern in whole or in part. Therefore, the claim of the respondent for an increased deficiency due to the receipt of the Interstate shares from Eastern can not be allowed.
In the determination of the deficiency the respondent has disallowed the deduction from the gross income of the G. H. M. Co. of $80,134.24 representing a portion of the bonus paid to Frederick P. Bagley as treasurer and general manager. Bagley had been the chief executive of the G. H. M. Co. for a period of nearly twenty years. In 1918 or 1920 his salary had been fixed at $15,000 per year plus 10 percent of the profits of the company. He had received a bonus of 10 percent of the profits of the company for a*770 period of several years prior to 1927. He received the same bonus in 1927. The G. H. M. Co. realized that it had sustained a large profit in 1927 as a result of the dividends which it had received from Eastern and Thompson in the form of shares of Interstate stock. Under his contract with the company Bagley was entitled to receive 10 percent of the profits from this source. The Interstate shares received by it had a fair market value at the date of receipt of $1,375,000. It was determined that the amount received less its investment in the shares of the stock of Eastern and Thompson constituted a profit of $943,139.90 and that Bagley was entitled under his contract to 10 percent of that amount, or $94,313.99. This amount was accrued to the credit of Bagley on the books of the G. H. M. Co. as of December 31, 1927, and paid to him in February 1928.
In the audit of the return the respondent determined that under the contract with Bagley the G. H. M. Co. owed him only 10 percent upon the profit made by the G. H. M. Co. from the liquidation of Thompson. The respondent therefore allowed the deduction of $14,179.75 of the $94,313.99 claimed, and disallowed the balance, $80,134.24.
*771 The taxing statute permits the deduction from gross income of "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a *623 reasonable allowance for salaries or other compensation for personal services actually rendered." (Sec. 234(a)(1), Revenue Act of 1926.) It is not necessary under the statute that services must be rendered within the year for which the payment is made. . What constitutes reasonable compensation for services deductible from gross income must be determined in the light of facts and circumstances in each individual case. In Regulations 69, promulgated under the provisions of the Revenue Act of 1926, it is provided:
* * * Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract*772 it may prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance for the compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned.
In , it was held that the fact that "in the actual working out of the contract contingent compensation may prove to be greater than the amount which ordinarily would be paid" was no ground for the denial of part of the deduction.
The evidence of record in these proceedings shows that the additional compensation paid to Bagley by the G. H. M. Co. in 1927 was pursuant to the contract made between the G. H. M. Co. and Bagley many years prior thereto. There is no reason to question the reasonableness of the contract, or the reasonableness of the compensation paid to him*773 pursuant to its terms. There is no ground for a suspicion that the amount paid to Bagley was in any wise a distribution of a part of the profits to a stockholder in lieu of the payment of the same in the form of a dividend. Neither is there any element of a gift in the payment of the $94,313.99.
The fact that the amount was not actually paid to Bagley within the year 1927 is of no consequence. The G. H. M. Co. kept its books of account and made its income tax returns upon the accrual basis. All the facts necessary for the determination of the liability were known by the G. H. M. Co. within the year 1927. The accrual of the same as an expense of 1927 to the G. H. M. Co. was proper. See ; .
*624 The action of the respondent in disallowing the deduction of $80,134.24 of the bonus paid is reversed.
The motion of the respondent made at the conclusion of the hearing of these proceedings for the addition to the deficiency of the G. H. M. Co. of the fraud penalty provided for by section 275(b) of the Revenue Act*774 of 1926 is denied for reasons set forth above.
4. In view of our conclusion that the reorganization provisions of the statute are not effective to limit the liability of the stockholders of the G. H. M. Co., the appeal of the Perkins and Buttrick Trust, Docket No. 58543, presents only one allegation of error to be considered. This allegation of error is stated in the petition as follows:
(d) If the petitioners' trust received any taxable dividend from the George H. Morrill Company (which the petitioners deny) then the respondent has erred in taxing such dividend to the petitioners' trust since under the terms of the petitioner's trust any such dividend would be distributable to the life beneficiary and accordingly taxable to her and not to the trust as an entity. Moreover, in such event, the respondent has erred in failing to refund to the petitioners' trust a substantial part of the Federal income tax already paid for the calendar year 1927.
The facts applicable to this issue are contained in finding number 4. From that finding it is seen that the trustees were given the "uncontrolled discretion" to determine what constituted net income and in the case of securities backed*775 by wasting assets, or associations and trusts, were given the "uncontrolled discretion" to determine what was principal and what was income, and, further, could in their discretion distribute to any and all of the beneficiaries any amount they decided on. On form 1041 filed for 1927, the trustees showed as distributed to beneficiary $6,587.55; then, under capital net gain or loss, "Trustee as an equity for which a return on form 1040 has been filed, $173,396.69." Thus it is seen the trustees treated the income as an accretion to capital, as to which, according to the instrument from which they derived their power and the beneficiary her income, their decision was absolutely final except for fraud. The trustees further filed a return on form 1040 for the trust and paid a tax thereon.
From a careful reading of the trust instrument (Exhibit 66), we are of the opinion that the respondent did not err in taxing the trust on the undistributed income. In , it was held that where the income from a trust had not been distributed or paid by the trustee to the beneficiaries and was not held by the trustee to*776 be currently and regularly distributed to the beneficiaries, the trustee was liable under section 219 of the Revenue Act of 1926 for the tax on the income of the trust. We are of the opinion that the respondent has correctly held the trust liable to income tax on the property dividend, which was not distributed to the beneficiary.
*625 5. It does not follow that because the reorganization provisions of the Revenue Act of 1926 are not effective in the determination of the liability of the petitioners involved in these proceedings that the transactions taken thereunder were nullities. The G. H. M. Co. distributed as a dividend to its stockholders shares of stock of the Morrill Securities Co. These shares of stock had a fair market value. The recipients of the dividend, Thomas N. Perkins, Edmund J. Shattuck, and the trust u/w George H. Morrill, are liable to income tax in respect to the value of the shares received. . The respondent did not err in taxing each of the G. H. M. Co. stockholders upon the value of the dividend received by each. The fact that the stockholders had an understanding that a particular use*777 would be made of the property dividend received by them in no wise serves to exempt them from tax upon the value of the property dividend received. See , and .
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Edmund J. Shattuck; G. H. M. Company; Fiduciary Trust Co., Elizabeth Bagley Reed and Almeda Bagley Meyers, Trustees; Perkins & Buttrick Trust; Thomas N. Perkins, John Richardson and George H. Morrill, Trustees u/w George H. Morrill; Thompson Oil Company; Eastern Carbon Black Company; W. H. Davis; Lillian A. Davis; Matilda M. Davis; Alton N. Davis; Emma Luette Davis, Executrix u/w O. L. Davis; Lue Davis; and Davis Brothers Company. ↩