*1325 Where a building was erected by a corporation on its own property and at its own cost for the purpose of supplying a residence to its president and sole stockholder, held, that the reasonable value of the use of the residence was taxable income to the president as additional compensation, but was not income to the corporation as rental. There being no evidence as to whether such additional compensation was reasonable, it is held that the corporation is not entitled to deduct such amount from its gross income.
*451 These proceedings were consolidated for hearing. The respondent determined deficiencies in income tax against the petitioner, Reynard Corporation, for its fiscal years ended March 31, 1930 and 1931, in the respective amounts of $628.75 and $888, and against the petitioner, Fontaine Fox, for the calendar year 1930 in the amount of $632.82.
The Reynard Corporation asserts that the respondent erred as to the year ended March 31, 1930, in adding to its income the sum of $3,000 representing rent of premises occupied by its president*1326 and *452 also in adding to its income the sum of $2,588.85 resulting from the disallowance of a deduction for depreciation, and as to the year ended March 31, 1931, in adding to its net income the sum of $7,400 representing the rent for the same premises occupied by its president. The petitioner, Fox, alleges error in that the respondent has determined that for the calendar year 1930 he received a dividend of $7,400 from the Reynard Corporation representing the rental value of the premises occupied by him.
FINDINGS OF FACT.
The petitioner, Fox, an artist, is the sole stockholder of the Reynard Corporation, and is its president. He produces six daily cartoons and one Sunday cartoon, which he disposes of through the corporation. He attends to other business of the corporation such as making investments. Prior to 1927 the corporation erected on land owned by it near Roslyn, Long Island, at its own expense, a house, and a studio and garage. Both buildings were erected for the use of Fox, the one for his use as a residence, and the other as a studio in which to do his work and a garage. The total cost of land and house was about $74,000. The residence was constructed*1327 of brick veneer and is of a Norman type. It contains four bedrooms, three baths, one or two maids' rooms, a living room, a dining room, kitchen and butler's pantry. Near, but not adjoining, is the studio and garage, which have a heating plant separate from the residence. Both are situated in the woods and are about two miles from the nearest bathing beach. The residence was built to suit the individual taste of Fox and cost more than the usual house of its size and construction. It had a rental value of $3,000 a year. Fox usually spent five months of each year in Florida. The house had a normal life of about 25 years. During the years before us, Fox was paid a salary of $30,000 a year and had the free use of the residence.
For the year ended March 31, 1930, the corporation returned a net income of $54,777.36. To this respondent added rent in the amount of $3,000 and depreciation in the sum of $2,588.85. The deficiency notice, after reciting that Fox occupied the property free of charge, stated that in accordance with an agreement reached in prior years covering the property, rent of $3,000 had been included in the corporation's income. For the year ended March 31, 1931, respondent*1328 added to the corporation's reported net income of $28,641.12 the sum of $7,400 representing rent on premises occupied by its president free of charge and treated this sum as a dividend to the corporation's sole stockholder. For the calendar year 1930 respondent added to the income of the petitioner, Fox, dividends in the amount of $7,400 representing the rental value of the premises occupied free by him. *453 In neither case did the respondent allow the corporation any deduction on account of additional compensation to its president arising from the occupation of the premises.
OPINION.
MARQUETTE: At the hearing counsel for petitioners conceded that the premises occupied by Fox had a fair rental value of $3,000 a year, but no more, and asserted that this amount should be included in Fox's gross income as additional compensation and not as a dividend. We have found the value to be as claimed. In reaching this conclusion we have disregarded the fact that Fox spends about five months of each year in Florida, for the reason that the premises were his to occupy whenever he chose. On the other hand, the evidence shows that the residence was not built for rental purposes, *1329 but for the use of Fox according to his individual artistic tastes and at a cost in excess of that of an ordinary house of its size and construction. Taking into consideration these facts, the location of the property, and the further fact that the studio was the workshop of the corporation, and the occupancy thereof by its officer and the producer of its income was occupancy by it and not be Fox, the individual, we have arrived at a fair rental value of $3,000 a year. This is also the value placed on the use of the premises by a real estate agent who was thoroughly familiar with the property and whose testimony is uncontradicted.
While the occupancy of the studio by Fox was that of the corporation, the residence was occupied by him as an individual, and the fair rental value of its use was taxable income to him. . See section 213(b)(11) of the Revenue Acts of 1921, 1924, and 1926, and section 22(b)(8) of the Revenue Act of 1928.
The respondent has treated this income as additional compensation in one year and as a dividend in the next. We think he was right in his first determination. The residence was built not for the temporary*1330 use of Fox, but for his use at all times, and this irrespective of whether the corporation had a surplus or made earnings and profits. It would be anomalous to hold that when there was sufficient surplus the value of the right of occupancy constituted a dividend, and when there was no such surplus the value of the right was additional compensation. The value of this occupancy was clearly additional compensation and should be so taxed to Fox, and it matters not whether the corporation is or is not entitled to a further deduction on account of the increased compensation arising from this occupancy. ; ; .
*454 The respondent has also included the rental value of the premises in the gross income of the petitioner corporation, apparently upon the theory of constructive receipt. In this we think he was in error, and such rental value should be excluded in recomputing the tax of the corporation.
The corporation is not entitled to a further deduction on account of this additional compensation*1331 unless it has shown that the total salary of $33,000 constituted a reasonable compensation for its president. Sec. 23(a) of the Revenue Act of 1928. . While the respondent is raising no question as to the reasonableness of the $30,000 salary, he has denied to the corporation the right to deduct an additional $3,000 as compensation, resulting from the occupancy of the premises in the first year by its president, and has evidently reached the same conclusion as to the second year, as there he has determined the rental value to be a dividend. As opposed to respondent's determinations we have no evidence that the salary thus increased is still reasonable. It is true, as was stated at the hearing by counsel for the petitioners, that in a previous year, not well identified, such a deduction was taken by the corporation and allowed. But the respondent had the right and it was his duty to change his determination if the facts, in his judgment, so required. ;*1332 . Here the respondent has altered his determination, but the burden of proof remained on the petitioner. . In our opinion the petitioner has not met this burden and the corporation should not be permitted to take as a deduction the additional $3,000 compensation to its president.
The corporation is entitled to take as a deduction depreciation on the buildings, both of which were used in its business, the one to furnish a residence to its president, and the other as a shop or office. SEC. 23(k), Revenue Act of 1928. We have found the normal life of the residence to be 25 years. Counsel for the respondent stated at the hearing that there was no dispute as to the basis for the computation of depreciation. This will be settled under Rule 50.
Reviewed by the Board.
Judgment will be entered under Rule 50.
LEECH, dissenting: The majority opinion, although it approves the charging of the petitioner, Fox, with additional compensation for the rental value of the corporation's residence which he used during the taxable years, reverses the*1333 action of the respondent in including this identical rental value in the corporation's income for the same *455 years. I think the decision upon this latter action inconsistent with the former and erroneous. This amount, recognized as compensation to Fox from the corporation, must be treated as having been constructively paid to the corporation as rental, and therefore taxable income, to it, before it can be held to have been paid by the to Fox. Cf. Burnet v. Wells,289 U.S. 670">289 U.S. 670.
SEAWELL agrees with this dissent.