Appeal of New York Theatre Program Corp. ( 1926 )

OPINION.

Littleton

: The taxpayer contends that the amount of $65,410.15 paid to its stockholders during the fiscal year ending May 31, 1921, should be allowed as a deduction as an ordinary and necessary expense, as additional compensation for services rendered during that year. The Commissioner allowed the taxpayer to deduct $15,000, $8,000 and $12,363.63, representing regular compensation of the president, vice president, and secretary, respectively, but disallowed the deduction of the first-mentioned amount upon the ground that the same represented a distribution by the taxpayer of profits to its stockholders.

The taxpayer further claims that, while the payments made were computed upon the number of shares of stock held by each stockholder, the stock holdings were used as a convenient basis for arriving at the amount which each stockholder should receive upon the basis of 20 per cent and that the amounts so paid, together with the regular compensation fixed by the directors, were no more than reasonable compensation for the services rendered.

The statute, section 234 of the Revenue Act of 1921, provides that a corporate taxpayer shall be allowed a deduction of reasonable compensation for personal services actually rendered. It is not the policy of the law to allow a corporate taxpayer to deduct amounts paid in the form of compensation when, in reality, such payments amount to a distribution of profits or are made in lieu of the payment of dividends. When, as in this case, profits are distributed to the owners of all of the stock in proportion to the number of shares held by each, and claimed as deductions in addition to the regular compensation fixed by the directors, the evidence offered that such payments were in fact reasonable compensation for personal services actually rendered must be convincing, especially where the sole stockholders constitute the board of directors.

Frank Y. Storrs, the majority stockholder, was interested in other corporations and held no executive position with the taxpayer. He devoted only a portion of his time to securing advertising contracts. So far as the evidence shows, he had never been paid a salary or fixed compensation. Only one witness testified. His testimony does not very clearly show just what was agreed Tip on by the three stockholders early in 1920, and his statements as to the extent to which other salesmen employed by the taxpayer rendered services in connection with contracts credited to the three stockholders are equivocal. Although the year ending May 31, 1921, was the most prosperous in the taxpayer’s history, no payments by way of dividends were made to the stockholders after they had received the amounts claimed to have been paid as compensation.

From all the evidence the Board is of the opinion that the amounts paid to the stockholders between July 19, 1920, and May 31, 1921, did not constitute reasonable compensation but were distributions of profits to the stockholders, and as such are not deductible from gross income.

Judgment for the Commissioner.