*1902 1. Minutes and income-tax returns of a corporation, and insurance policies in which it is designated as beneficiary, executed over a number of years and consistently describing the corporation as "S. Hyman Co.," may not, in the absence of any evidence of relationship or identity, be regarded as documents of or relating to a corporation bringing a proceeding under the name of "L. Hyman & Co., Inc.," particularly where the latter name, with minor variations, appears in later documents, and the State law imposes upon corporations, among others, the obligation to use in its business dealings and contracts the name stated in its certificate of incorporation.
2. The petitioner corporation's claim for deductions, as ordinary and necessary business expenses, of premiums on policies of insurance on the lives of its officers and sole stockholders is rejected for failure to prove (1) actual payment of the premiums; (2) the amount of the premiums and of the other compensation paid to the sum of which the test of reasonableness may be applied; (3) that the premiums were in fact salaries rather than distributions of profits; and (4) that substitution of the wives of the officers for the corporation*1903 as beneficiaries, pursuant to the directions of corporate resolutions, was in fact made, thereby avoiding the inhibition of section 215(a)(4), Revenue Acts of 1921 and 1924.
*159 Deficiencies in income tax were determined by the respondent as follows:
| Year | Docket No. | Amount |
| 1923 | 30041 | $48.13 |
| 1924 | 41976 | 3,858.80 |
| 1925 | 41976 | 4,011.91 |
*160 The issue is whether the petitioner is entitled to deduct, in computing its net income, certain amounts alleged to have been paid during the taxable years as premiums on policies of insurance on the lives of its officers.
FINDINGS OF FACT.
The petitioner is a corporation with its principal office at 26 Washington Place, New York, N.Y. It is a jobber of woolens and linings and its sales are made principally to the cap trade.
The business was founded by Louis Hyman, and, during 1919 and at all times since, he and his sons, Abraham, Irving, Lawrence A., and Maxwell Hyman, were actively engaged in the business of petitioner and two other*1904 companies known as the Maxwell Textile Co., Inc., and the Maxwell Silk Mills, Inc., which together filed consolidated returns for 1923, 1924, and 1925.
During the taxable years there were no stockholders other than Louis Hyman and his four sons. Louis Hyman managed the financial affairs of the three corporations. Abraham Hyman was treasuer of the petitioner during the taxable years and has been actively and continuously engaged in the business of the petitioner throughout its existence. He was in charge of the woolens department and created styles.
The petitioner's sales, exclusive of those of the Maxwell Textile Co., were as follows:
| 1919 | $2,014,538.85 |
| 1923 | 1,584.464.64 |
| 1924 | 1,786,267.27 |
| 1925 | 1,856,695.63 |
The principal sales were made by Abraham and Lawrence A. Hyman, who sold all kinds of goods handled by the petitioner. The sales consummated by them amounted to about 85 per cent of the foregoing total sales made in 1919, 1923, 1924, and 1925.
Irving Hyman is an officer and director of the Maxwell Textile Co. and the Maxwell Silk Mills, Inc. The business of the former company was that of a jobber of silk, and its dealings were principally with*1905 the dress and suit trade. Irving Hyman purchased both the grey and the raw silk and had the former dyed and the latter manufactured into dress goods; he sold goods and acted as general manager. The sales of the Maxwell Textile Co. were as follows:
| 1919 | $1,124,462.08 |
| 1923 | 591,846.55 |
| 1924 | 705,555.61 |
| 1925 | 1,096,648.01 |
*161 The Maxwell Silk Mills, Inc., was organized in 1920 and was engaged in the manufacture of silk goods. Irving Hyman purchased all the raw material used by it and supervised the operation of the mill.
The commission ordinarily paid to salesmen in the silk jobbing business is 2 per cent of the amount of sales made by them, less discount and goods returned.
Lawrence A. Hyman is secretary of the petitioner and in charge of the lining department. He purchased all the grey and raw silk, had it converted and dyed, and designed patterns.
During the taxable years the petitioner paid its salesmen the following commission of 2 per cent:
| Year | 2 per cent | On sales of - | Out of total |
| commission | sales of- | ||
| 1923 | $4,271.10 | $213,555.00 | $1,584.464.64 |
| 1924 | 7,229.05 | 361,425.50 | 1,786,267.72 |
| 1925 | 9,373.80 | 468,690.00 | 1,856,695.63 |
*1906 Maxwell Hyman was credit manager of petitioner and devoted his time to the business of petitioner and the Maxwell Textile Co. He is a lawyer, and also performed legal service for both companies.
The net income of the petitioner and Maxwell Textile Co. for 1919, as shown on the returns for 1919, was $254.038.48. No cash dividends were paid by the petitioner during 1923, 1924, and 1925.
The invested capital of S. Hyman Co. for 1919, as shown by its return, was $441,290.29, and that of the Maxwell Textile Co. for the same year, as shown by its return, was $82,633.40. In 1919 the petitioner used in its business $300,000 of borrowed money.
Prior to December 1, 1919, Louis Hyman and his four sons had conferences or meetings at which the salaries paid the sons were discussed. The sons said they were entitled to increases. Louis Hyman said he also was entitled to an increase in salary. It was decided that insurance should be procured on the lives of the sons in which their wives should be named as beneficiaries, and also on the life of Louis Hyman.
On December 1, 1919, the board of directors of S. Hyman Co., consisting of Louis Hyman and his four sons, passed a resolution*1907 reading as follows:
WHEREAS, preliminary reports submitted by the Certified Public Accountants of the corporation indicate that the earnings for the year 1919 will be the largest realized during the career of this Company, and it is desired to furnish the officers of the corporation with some inducement for keeping the earnings at the same rate in succeeding years, and to even stimulate them to greater efforts, upon motion duly made, seconded and carried the following resolution was unanimously adopted.
*162 RESOLVED, that the Secretary of the corporation, be and hereby is authorized and directed to make applications in the name of S. Hyman Company for life insurance on the lives of the following officers in the following amounts:
| Louis Hyman | $20,000.00 |
| Abraham Hyman | 25,000.00 |
| Lawrence A. Hyman | 25,000.00 |
| Irving Hyman | 25,000.00 |
| Maxwell Hyman | 25,000.00 |
and he is further directed to make the respective wives of the aforementioned persons the beneficiaries of the said policies to receive the net sum due upon the death of the insured, without the right reserved to this corporation to change such designation of beneficiaries, and he is further authorized*1908 and directed to use the funds of the corporation to pay the premiums for the aforementioned policies of insurance as same become due from time to time, and to charge such premiums as expenses of the corporation.
The policies were applied for and issued by the Union Central Life Insurance Co. a short time before the resolution of December 1, 1919, with the exception of policy No. 629140, which was issued under date of December 16, 1919. They were as follows:
| Policy No. | Date | Insured | Amount | Annual |
| premium | ||||
| 623542 1 | Oct. 31, 1919 | Louis Hyman | $10,000 | $1,126.80 |
| 629140 2 | Dec. 16, 1919 | Louis Hyman | 10,000 | 2,158.40 |
| 625081 | Nov. 13, 1919 | Abraham Hyman | 20,000 | 1,968.40 |
| 625082 | Nov. 13, 1919 | Abraham Hyman | 5,000 | 1,025.55 |
| 624466 | Nov. 8, 1919 | Irving Hyman | 20,000 | 1,959.40 |
| 624467 | Nov. 8, 1919 | Irving Hyman | 5,000 | 1,023.60 |
| 624312 | Nov. 7, 1919 | Lawrence A. Hyman | 20,000 | 1,952.00 |
| 624313 | Nov. 7, 1919 | Lawrence A. Hyman | 5,000 | 1,022.15 |
| 624470 | Nov. 8, 1919 | Maxwell Hyman | 20,000 | 1,955.40 |
| 624472 | Nov. 8, 1919 | Maxwell Hyman | 5,000 | 1,022.85 |
Under the*1909 terms of the foregoing policies the amount of insurance is payable to the wife of the insured if living at the death of the insured, otherwise to the administrators, executors, or assigns of the insured, upon proof of death of the insured during the continuance of the policy; or to the insured if living on the date of maturity. In all of them except those on the life of Louis Hyman there was no reservation of the right to change the beneficiary. In November, 1928, policies Nos. 625081, 624312, and 624470 were surrendered by the insured for their cash value, and policy No. 624466 was surrendered to the company at a date not disclosed by the record. Louis Hyman filed a certificate of change of beneficiary under policy No. 623542 in January, 1928, designating as beneficiaries the trustees under a certain trust agreement of December 13, 1927. In the case of policies Nos. 624470 and 624472, on the life of Maxwell Hyman, there are endorsements on the policies showing them to have been issued on October 10, 1923, in lieu of original policies of the same *163 number, and, attached to policy No. 624470 is an assignment, dated June 2, 1923, by Henrietta Hyman, the wife of Louis Hyman, *1910 to Maxwell Hyman, of all her rights under the policy, and a certificate by Maxwell Hyman, also dated June 2, 1923, designating his wife, Beatrice Hyman, as beneficiary in the event of his death.
On December 8, 1919, the board of directors of S. Hyman Co. met and passed the following resolutions:
WHEREAS this corporation is carrying the following described policies of life insurance:
| Policy No. | Name of company | Name of insured | Amount |
| 553250 | Union Central | Louis Hyman | $25,000 |
| 4517092 | New York Life | Louis Hyman | 25,000 |
| 553006 | Union Central | Abraham Hyman | 25,000 |
| 4516926 | New York Life | Abraham Hyman | 25,000 |
| 553002 | Union Central | Irving Hyman | 25,000 |
| 4516925 | New York Life | Irving Hyman | 25,000 |
| 553352 | Union Central | Lawrence A. Hyman | 25,000 |
| 394839 | Travelers | Lawrence A. Hyman | 10,000 |
and
WHEREAS this corporation is desirous of recognizing the valuable services to the Company of the above named employees and of indemnifying the wife of each of said employees for the loss to said wife of her husband's salary in the event of his death while in the employ of the Company;
RESOLVED that this Board hereby authorizes and directs that proper instruments*1911 of absolute assignment be fully executed and filed transferring all the right, title and interest of the Company as a beneficiary under said policies, as follows:
Policy #553250 to Henrietta, wife of Louis Hyman.
Policy #4517092 to Henrietta, wife of Louis Hyman.
Policy #553006 to Maude, wife of Abraham Hyman.
Policy #4516926 to Maude, wife of Abraham Hyman.
Policy #553002 to Fannie, wife of Irving Hyman.
Policy #4516925 to Fannie, wife of Irving Hyman.
Policy #553352 to Peggy, wife of Lawrence Hyman.
Policy #394839 to Peggy, wife of Lawrence Hyman.
RESOLVED FURTHER that this corporation continue to pay the premium cost of carrying the above described policies and to charge said cost to the operating expenses of the business until further action of this Board.
On motion, duly made, seconded and carried, the following resolutions were unanimously adopted:
WHEREAS this corporation is carrying a policy of life insurance #553381 on the life of Maxwell Hyman, for the amount of $25,000, in the Union Central Life Insurance Company; and
WHEREAS this corporation is desirous of recognizing the valuable services to the Company of the said Maxwell Hyman, and of*1912 indemnifying his dependents for the loss of his salary in the event of his death while in the employ of this Company;
RESOLVED that this Board hereby authorizes and directs that a proper instrument of absolute assignment be duly executed and filed transferring all the right, *164 title and interest of the Company as beneficiary under said policy #553381 to the mother of the said Maxwell Hyman; viz. Henrietta Hyman.
RESOLVED FURTHER that this corporation continue to pay the premium cost of carrying the said policy, and to charge said cost to the operating expenses of the business until further action of this Board.
On the same day Louis Hyman and his four sons, as owners of all of the issued and outstanding capital stock of the S. Hyman Co., approved the foregoing resolution and consented to the assignment of the life insurance policies referred to therein.
Of the policies referred to in the resolution, the five issued by the Union Central Life Insurance Co. were 10-year endowment policies. The dates of issue, amount of insurance, and prescribed annual premiums are as follows:
| Policy No. | Date | Insured | Amount | Annual |
| premium | ||||
| 553250 | July 19, 1917 | Louis Hyman | $25,000 | $2,746.00 |
| 553006 | July 16, 1917 | Abraham Hyman | 25,000 | 2,454.25 |
| 553002 | July 16, 1917 | Irving Hyman | 25,000 | 2,442.25 |
| 553352 | July 20, 1917 | Lawrence A. Hyman | 25,000 | 2,436.75 |
| 553381 | July 20, 1917 | Maxwell Hyman | 25,000 | 2,438.50 |
*1913 Under the terms of these policies, except No. 553381, the insurance is payable to S. Hyman Co., its successors or assigns, upon the death of the insured during the continuance of the policy, or to the insured if living at maturity of the policy, and in all of them no reservation is made of the right to change the beneficiary. In the case of policy No. 553381, another policy was issued October 10, 1923, in lieu of the original policy of the same number, and by its terms the insurance is payable to the wife of Maxwell Hyman, the insured, if living at his death, otherwise to the administrators, executors or assigns of the insured, upon the death of the insured during the continuance of the policy, or to the insured if living at maturity.
The policies referred to in the resolution of December 8, 1919, and issued by the New York Life Insurance Co., are as follows:
| Policy No. | Date | Insured | Amount | Annual |
| premium | ||||
| 4517092 | Nov. 3, 1913 | Louis Hyman | $25,000 | $1,360.25 |
| 4516926 | Oct. 20, 1913 | Abraham Hyman | 25,000 | 833.50 |
| 4516925 | Oct. 29, 1913 | Irving Hyman | 25,000 | 766.50 |
Policy No. 4517092 was an ordinary life policy and policies Nos. 4516926*1914 and 4516925 were "twenty-payment-life" policies. All three were payable to S. Hyman Co. or its legal representatives, with the right reserved to the insured to change the beneficiary. On January 23, 1928, Louis Hyman designated the trustees under a certain deed *165 of trust dated December 13, 1927, as beneficiaries of his policy. Loans were made on the policies of Abraham and Irving Hyman in March, 1925.
There is no evidence concerning the nature or terms of policy No. 394839, issued by the Travelers Insurance Co., which was referred to in the resolution of December 8, 1919, as being carried on the life of Lawrence A. Hyman, in the amount of $ 0,000.
The total amount of insurance carried on the lives of Louis Hyman and his sons in 1923, 1924, and 1925, and the total amount of the annual premiums fixed in the policies were as follows:
| Insured | Amount of | Annual |
| Insurance | premium | |
| Louis Hyman | $70,000 | $7,391.45 |
| Abraham Hyman | 75,000 | 6,281.70 |
| Irving Hyman | 75,000 | 6,191.75 |
| Lawrence A. Hyman | 50,000 | 5,410.90 |
| Maxwell Hyman | 50,000 | 5,416.75 |
| Total | 320,000 | 30,692.55 |
The respondent disallowed claimed deductions of premiums in the amounts*1915 of $30,870.40 for 1924 and $30,860.85 for 1925. He also disallowed a claimed deduction for premiums for 1923.
OPINION.
STERNHAGEN: The petitioner seeks to deduct from its gross income for 1923, 1924, and 1925, as ordinary and necessary business expenses, premiums which it claims to have paid as additional compensation to its officers, on policies of insurance taken out on their lives. The respondent denies that such disbursements constitute ordinary and necessary business expenses, and, conceding for argument that they do represent additions to officers' salaries, denies that the salaries so augmented are reasonable in amount. He also denies that petitioner was not directly or indirectly a beneficiary under the policies, which would render the amounts of the premiums paid nondeductible under section 215(a)(4), Revenue Acts of 1921 and 1924.
Petitioner has failed to offer any evidence regarding some of the elemental facts necessary to establish the deductibility of these premiums; unexplained contradictions and confusions, moreover, occur in the evidence introduced. Of the insurance policies involved it appears that ten were authorized by a resolution of the board of directors*1916 of one S. Hyman Co. on December 1, 1919, to be taken out in the name of said company for the benefit of the wives of its officers, who are identical in name with the officers of L. Hyman & Co., Inc., the petitioner. By another resolution of December 8, 1919, *166 said board of directors further authorized that in nine other policies which S. Hyman Co. was carrying, the wives of its officers be substituted for the company as beneficiaries. In both instances future premiums were to be paid by the company. Petitioner has failed to show any connection between it and S. Hyman Co., and identity is not to be presumed or lightly inferred. The name of "S. Hyman Company" appears on a tax return for 1919, and on several policies bearing date prior to 1920, authorized by the aforesaid resolutions; petitioner's name with minor variations appears only on later documents.
S. Hyman Co., as shown by the 1919 tax return, is a New York corporation. In the organization of business corporations under the law of New York, the name of the proposed corporation must be stated in the certificate of incorporation, Stock, Corporation Law, sec. 5; and "persons seeking to form a corporation under*1917 any general law * * * must insert therein all the matter particularly required by the law." ; . "The name, therefore, is essential to its existence. * * * And, while by its use advantages are gained, corresponding obligations must be recognized, and one of these is that in its business dealings and contracts it must use the name given to it by the law of its existence. It can not change its name, either directly or by user; nor can the public give it a name other than that of its creation, by which it can be recognized in judicial proceedings." ; . The minutes, returns, and policies which purport to be of S. Hyman Co. must be regarded as relating to a corporate entity distinct from petitioner, and with respect to such necessary facts as petitioner has sought to establish by these documents alone there is a failure of proof.
Petitioner has failed further to show that it actually paid any of the premiums which it claims as deductions, or even the amounts which became due during the taxable*1918 years in question. Allegations in the petitions, which the answers deny, that premiums aggregating $28,099.25, $30,870.40, and $30,860.85 were paid in 1923, 1924, and 1925, respectively, are not established by proof of the amounts payable as premiums appearing on the policies; and there is no evidence concerning the treatment of any dividends received from the insurance companies, although the policies contemplate an annual declaration of dividends.
Considerable testimony was offered by petitioner designed to establish what constituted reasonable compensation to its officers, it being respondent's contention that the sum of the insurance premiums plus other salary paid resulted in unreasonable salaries. The findings *167 contain such facts as the testimony in this respect seems to warrant, but neither the amount of the premiums nor of the other compensation paid is in evidence, and the Board is hence without evidence of the comparative sufficiency of the salaries claimed or paid. ; *1919 ; ; affd., .
But there is another serious defect in petitioner's presentation. It has frequently been held by the courts and applied by the Board that where a corporation claims a deduction of salaries alleged to have been paid to persons who are not only employees or officers, but also substantial stockholders, it must be recognized that the corporation is in a position to distribute its profits in the guise of salaries and that to the extent this is done the deduction fails. When the corporation petitioner as proponent before the Board makes such a claim, the burden is upon it not only to prove that the amounts paid are reasonable as salaries, , but also that they are in fact entirely salaries and not partly or wholly profit distributions. , affirming . The petitioner has ignored this aspect of the alleged payments and has failed entirely to establish that no part of the amounts claimed*1920 (assuming payment) could be fairly regarded as distributions of profits.
With reference to the policies affected by the resolution of December 8, 1929, of which the S. Hyman Co. was then beneficiary, there is no evidence whatever tending to show that the beneficiary was in fact changed as contemplated by the resolution. Such a change of beneficiary is not established by incidental papers of later date, attached to some but not all of these policies, which the officers' wives signed as beneficiaries. Even if the S. Hyman Co. be held identical with petitioner, the proof is insufficient to show that it is not within the provisions of section 215(a)(4) barring deduction. ; .
Judgment will be entered for the respondent.