Genaiden Realty Corp. v. Commissioner , 20 B.T.A. 1204 ( 1930 )

GENAIDEN REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Genaiden Realty Corp. v. Commissioner

Docket No. 39497.

United States Board of Tax Appeals

20 B.T.A. 1204; 1930 BTA LEXIS 1953;

October 9, 1930, Promulgated

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The petitioner, a corporation, paid to certain stockholders reasonable salaries in money for their services, which amounts so paid were allowed as proper deductions in determining petitioner's taxable net income. Petitioner, in addition to salaries above mentioned, issued to said stockholders $6,000 additional stock, par value, and sought to have the same also treated as a $6,000 deductible item of salary expense. Held, the evidence is insufficient to show said stockholders entitled to any more salary than what had been allowed as a proper deduction and that, in the circumstances of the instant case, the additional issue of stock had the same effect as a stock dividend and hence was not a deductible item of expense.

Monroe P. Bloch, Esq., for the petitioner.

L. W. Creason, Esq., for the respondent.

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SEAWELL

The Commissioner determined a deficiency in income tax of $804.99 for the fiscal year ended October 31, 1926.

The sole question involved is whether the petitioner corporation is entitled to a deduction of $6,000 in excess of the amount allowed by the Commissioner as officers' salaries. The case is submitted on the pleadings, testimony of one witness, and exhibits.

FINDINGS OF FACT.

The petitioner is a New York corporation organized September 28, 1925, pursuant to an agreement of August 25, 1925, between Hyman Kornreich and Samuel Solarz. Petitioner's principal office is at 4915 Twelfth Avenue, Brooklyn, N.Y.

The petitioner had an authorized capital stock of $50,000, par value $100 per share. Kornreich and Solarz each subscribed for $10,000 of the capital stock and with the exception of qualifying shares, held by their respective wives, they were the only stockholders until June 15, 1926.

There was $10,000 par value of petitioner's capital stock issued and outstanding as at May 15, 1926, in the name of Samuel Solarz, for which he had paid cash. The same date there was issued and outstanding as at May 15, 1926, in the name of Hyman Kornreich, $5,500 par value of the capital stock of petitioner for which he had paid cash and there was a subscription by him for stock in the amount of $4,500 to be paid in the future and by September 30, 1926.

Pursuant to a written agreement dated June 15, 1926, made as at May 15, 1926, between William Glaubinger, the petitioner corporation, and Samuel Solarz and Hyman Kornreich, the first named, Glaubinger, was permitted to invest money in the corporation, paying $13,000 cash, for which capital stock of the petitioner in the amount of $13,000 par value was issued to him. Shortly after said agreement and as provided therein, $3,000 par value additional capital stock of petitioner was issued to Solarz and Kornreich each, as recited in said contract, "in consideration of services performed" for the petitioner, and in connection with the issuance thereof the following resolution appearing on the minute book of the petitioner was passed at a special meeting of the directors and stockholders thereof on June 16, 1926:

On motion duly made and seconded, it was unanimously RESOLVED, that Samuel Solarz and Hyman Kornreich, two of the officers and directors of the Corporation, each receive, in pursuance to an arrangement made at the time of the incorporation, as and for their services rendered to the Corporation, from October 1, 1925, to April 1, 1926, the sum of $3,000.00, by the issuance to each of them of thirty (30) shares of the capital stock of the Corporation.

The agreement of Solarz and Kornreich, dated August 25, 1925. preliminary to the organization of the petitioner corporation, provided that each of them should be paid a salary of $60 per week, the former to devote all his time to the interests of the corporation and the latter as much time as he could spare, but the latter was not to draw any salary until the expiration of the first six months. Up to May 15, 1926, Solarz had drawn $60 per week but Kornreich had not drawn any salary prior to that date.

The agreement of June 15, 1926, between William Glaubinger, the petitioner corporation, and Solarz and Kornreich aforesaid provided that the latter two should be employed by petitioner for a period of two years from May 15, 1926, at a salary of $60 per week for each and no further compensation to be paid them for any services they might render petitioner under any form or guise, without the unanimous consent of all the parties to the agreement. The services of Kornreich were worth more than those of Solarz, but each received the same amount. Solarz died October 27, 1926.

The agreement of August 25, 1925, between Kornreich and Solarz provided that the parties who subscribed for stock of petitioner would be entitled to any and all profits or benefits accruing from the said stock, even though the same had not been fully paid for or issued to the said parties at the time said profits may have accrued.

The financial condition of the petitioner, as of May 15, 1926, and as represented and shown by the aforesaid agreement and statement of June 15, 1926, indicated a surplus of $6,312.23.

The gross income reported in the return of the petitioner corporation for the fiscal year ended October 31, 1926, was $20,439.70 and the net income reported thereon was $2,277.66. The deductions claimed therein for officers' salaries were $7,120, $7,120, and $1,000 for Solarz, Kornreich, and Glaubinger, respectively, of which the Commissioner in determining the deficiency disallowed $6,000 representing the amount of $3,000, each, par value additional capital stock issued to Solarz and Kornreich as heretofore stated.

OPINION.

SEAWELL: The law applicable in the instant case if found in the Revenue Act of 1926, and, as regards deductions, is as follows:

SEC. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, * * *

The petitioner corporation in its income-tax return for the fiscal year ended October 31, 1926, took a deduction of $6,000 claimed as additional salaries or compensation paid to Hyman Kornreich and Samuel Solarz for personal services actually rendered it from October 1, 1925, to April 1, 1926. From the date of petitioner's incorporation to May 15, 1926, Kornreich and Solarz, for all practical purposes, were the only stockholders of petitioner. Kornreich and Solarz in their agreement preliminary to incorporation of petitioner specified that the salary of each should be $60 per week. On May 15, 1926, Solarz owned $10,000 par value of the stock of petitioner and Kornreich owned $5,500 par value of the stock and had subscribed for $4,500 more, par value.

On May 15, 1926, or as of that date, Solarz and Kornreich permitted one William Glaubinger to invest $13,000 in the corporation, he receiving therefor $13,000 par value of its capital stock. At the time Glaubinger acquired his said stock it was agreed between said three stockholders and the petitioner that additional stock in the amount of $3,000 par value should be issued to Solarz and Kornreich, each, which was done. The written agreement of June 15, 1926, between the parties also provided that Kornreich and Solarz should agree to serve petitioner for $60 per week for a period of two years from May 15, 1926, and receive no more compensation except by unanimous consent. Kornreich, when asked on cross-examination what the profits of the corporation were up to and including the 15th of May, 1926, stated that they were probably between five and seven thousand dollars, "something like that," that he did not know exactly. He subsequently stated he thought his answer was "wrong," that he believed the profits were "between two and three thousand dollars."

We are of the opinion, however, that on May 15, 1926, the corporation did have profits or earnings of approximately $6,312.23, as indicated in our findings of fact. There was issued additional stock in approximately the same amount ($6,000) to Kornreich and Solarz, $3,000 par value to each.

It is contended in behalf of petitioner that the stock so issued to Kornreich and Solarz was pursuant to contract and "in consideration of services performed" for the petitioner. A resolution appearing on its minute book is to the same effect. The agreement of Solarz and Kornreich, dated August 25, 1925, preliminary to the organization of the petitioner corporation, however, provided that each of them should be paid salary of $60 per week.

We are of the opinion that the evidence does not show that the services of Solarz and Kornreich were really worth any more than the $60 per week as provided for in the original contract made preliminary to the organization of petitioner. Such was the value which they then placed upon their services. Such was also the value placed upon them in the agreement of June 15, 1926, between William Glaubinger, Solarz, Kornreich, and the petitioner corporation, in which contract Solarz and Kornreich agreed to serve petitioner at a salary of $60 per week for each, for a period of two years from May 15, 1926.

The petitioner did not pay $6,000 to Solarz and Kornreich, $3,000 to each. It paid no money to either of them as salaries for services rendered in excess of what the Commissioner allowed as such. Petitioner paid nothing by reason of the increase in issued stock to the amount of $6,000 par value. There was, in fact, no distribution of earnings or profits to Solarz and Kornreich but rather a capitalization of $6,000 of earnings. The corporation, having paid nothing in excess of what the Commissioner allowed as a deduction, has nothing further to deduct.

We are of the opinion, therefore, that when all the facts and circumstances in the instant case are carefully considered and given due weight, the Commissioner committed no error, but allowed all deductions to which the evidence shows petitioner was entitled.

Judgment will be entered for the respondent.