Banta Refrigerator Co. v. Commissioner , 15 B.T.A. 1038 ( 1929 )

BANTA REFRIGERATOR CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Banta Refrigerator Co. v. Commissioner

Docket No. 17164.

United States Board of Tax Appeals

15 B.T.A. 1038; 1929 BTA LEXIS 2746;

March 22, 1929, Promulgated

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1. Deduction from gross income in the fiscal year ended July 31, 1920, on account of additional salary paid in such year is allowed as reasonable compensation for services rendered in such year.

2. The amount received in the taxable year ended July 31, 1922, in settlement of an action for damages was properly added to petitioner's gross income by the Commissioner.

3. Evidence fails to overcome the presumption that petitioner's invested capital was properly computed by the Commissioner for each year here involved.

Frederick B. Kerr for the petitioner.

C. H. Curl, Esq., and I. W. Carpenter, Esq., for the respondent.

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LANSOON

The respondent asserts deficiencies in income and profits taxes for the fiscal years ended July 31, 1920, 1921, and 1922, in the respective amounts of $8,296.22, $3,105.01, and $4,305.17. For its causes of action the petitioner alleges that the respondent erred as follows:

(a) An item of $8,100, paid in the fiscal year 1920 in treasury stock to L. A. Banta as additional salary was not allowed as a deduction from income in such year.

(b) An item of $5,381.60, received in settlement of a suit for damages against the Howe Scale Company of Rutland, Vermont, for working drawings, patterns and wood cuts stolen from petitioner's factory, was treated as taxable income in the fiscal year 1922.

(c) That certain assets acquired during the course of the business, but not recorded or shown on the books, should be added to invested capital, making a total thereof of $190,663.83.

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation, organized June 17, 1912. Its principal office is at Clearfield, where it is engaged in the manufacture of refrigerators.

Prior to incorporation of the petitioner the James Kerr Estate, under the management of Frederick B. Kerr, had been engaged in the manufacture of light wagons and sleds. The returns from such business having become unsatisfactory, the manager decided to use the plant for the production of articles for which there was a better market and a more assured promise of profitable return. For this purpose he entered into negotiations with one L. A. Banta, then engaged in the manufacture of refrigerators at Ligonier, Ind. Banta visited and inspected the plant at Clearfield and decided to associate himself with the Kerr Estate in the production and sale of refrigerators. As a result of such negotiations and decision the petitioner was incorporated, Banta became production manager, and the business of producing refrigerators was initiated.

At the date of incorporation the authorized capital of petitioner was $5,000, and stock of that par value was issued to the Kerr interests in exchange for all the plant and property which it had theretofore used in the production of wagons and sleds and such property was taken into the assets account of the petitioner at a value of $68,000.

The agreements between Banta and the petitioner at or about the date of incorporation were (1) that Banta should devote his time to the business and receive an annual salary of $2,000 per year; (2) that the Kerr interests, which then held all the stock, should receive an annual return of 6 per cent on $60,000; and (3) that after the payment of such salary and return the remaining net income, if any, should be shared equally by Banta and the owners of the stock. Neither Banta nor the Kerr interests drew the full amounts assigned to them under the agreement, but the business grew and became profitable and in the year 1920 the obligations to Banta and the Kerr interests were settled. This was done by increasing the capital stock and by the issue of 81 shares of new preferred stock of the par value of $100 each to Banta and of 600 shares of such preferred stock to the Kerr interests as a full discharge of the petitioner's obligations to Banta for services rendered and to the Kerr interests for capital assets then and so acquired by the petitioner. From the same date all the outstanding common stock of the petitioner was held in equal amounts by Banta and Frederick B. Kerr.

Some time prior to 1922 a superintendent of the shop of the petitioner left its employment and took with him a number of drawings and designs used in the manufacture of refrigerators. He allied himself with another company, and placed the purloined materials at its disposal. Thereupon such company began to manufacture and sell refrigerators identical in design with those produced by the petitioner. The result was a considerable loss of business by the petitioner and it brought suit for damages against the competitor, which was using the stolen designs and drawings. In the fiscal year 1922 the suit was terminated and the petitioner received $7,500 from the competing concern. Attorneys' fees and other costs reduced this amount to $5,381.60, which the petitioner did not include in its gross income for the fiscal year ended July 31, 1922.

In its income and profits-tax returns for the fiscal year ended July 31, 1920, the petitioner deducted from its gross income the amount of $8,100 as additional salary paid to its president in that year; it did not include in its gross income for the year 1922 the amount of $5,381.60, the net amount received in such year in settlement of litigation, and in the computation of its invested capital for each of the taxable years it included amounts in excess of value shown by its books for the property paid in for stock at date of incorporation. Upon audit of such returns the Commissioner disallowed the deduction taken for additional salary in 1921; added the amount of $5,381.60 to the petitioner's gross income for 1922, and reduced the invested capital claimed by the petitioner in each year to the approximate amount of $68,000.

OPINION.

LANSDON: The issues here are fully set forth in our preliminary statement. The evidence indicates that Banta is a man of long and successful experience in the business of manufacturing refrigerators. That he received only nominal payment for his services in years prior to 1920 is not proof that $8,100 was an unreasonable salary for that year. He was the income-creating officer of the corporation and as a result of his work the business became profitable. The obligation to pay was a corporate liability determined in the year in which payment was made. In the light of the evidence we are convinced that $8,100 was a reasonable salary for his services in the fiscal year ended July 31, 1920. Such amount should be deducted from the gross income of the petitioner in that year. ; .

The petitioner admits that it received the amount of $5,381.60 in the year 1922 in settlement of an action for damages terminated in that year and such amount was not reported as income. The only reason offered for this omission is that the officers of the petitioner believed losses had been sustained greatly in excess of the amount received. This may be true, but the law requires that income from whatever source derived shall be reported.

In the matter of invested capital the petitioner claims that property of the value of at least $190,000 was paid in for stock when it was incorporated in 1912, or that the amount then paid plus subsequent capital additions and earned surplus aggregated that amount in the taxable year. These are allegations of fact that must be established by proof. The petitioner offered no books and the oral testimony based on recollection and information, and doubtless perfectly honest, fails to sustain its contention on this point. Much of the testimony dealt with amounts paid in to a prior business and is obviously without value, since we are concerned only with the actual cash value of the property paid in for stock and the earned surplus subsequently accumulated and undistributed in the taxable years. On the issues relating to gross income in 1922 and to invested capital for all the years here involved, the evidence is not sufficient to overcome the presumption that the determination of the Commissioner is correct.

Decision will be entered under Rule 50.