Chicago Warehouse Lumber Co. v. Commissioner , 16 B.T.A. 1416 ( 1929 )

CHICAGO WAREHOUSE LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Chicago Warehouse Lumber Co. v. Commissioner

Docket No. 21427.

United States Board of Tax Appeals

16 B.T.A. 1416; 1929 BTA LEXIS 2386;

July 24, 1929, Promulgated

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A cancellation of stockholders' and officers' indebtedness tentatively agreed to in 1922 but as to which formal action was not taken until 1923, held not to justify a deduction for compensation of officers in 1922.

Eugene Bernstein, Esq., and Albert E. Gordon, Esq., for the petitioner.

Edward C. Lake, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 asserted by the respondent in the sum of $656.25. One error alleged in the petition was withdrawn by the petitioner at the hearing and the only remaining question is with respect to the disallowance of a deduction of $4,800 for compensation of officers.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its principal office at Chicago. It was incorporated in January, 1922, to take over the business formerly conducted by S. R. Taxey as an individual. On incorporation Taxey held 171 shares of the capital stock, Julian Lentin held 25 shares, and James H. Kelly held 25 shares. Taxey paid for his stock with assets of his business and with a note for $1,000, and Kelly and Lentin paid for theirs with cash and notes. At the end of 1922 the amount of such notes totaled $4,800, consisting of one of Lentin for $2,500, one of Kelly for $1,300, and one of Taxey for $1,000. These notes were all in part payment for stock, and were unpaid at the end of 1922.

Kelly and Lentin had been employed by Taxey in his business before the petitioner was formed. Lentin's duties with the petitioner were those of general manager. He bought and sold lumber and lumber products and performed duties incidental to his buying and selling. He also kept the books. He devoted all of his time to the petitioner's business. Kelly was yard superintendent and devoted all his time to the petitioner's business. Taxey worked with both Lentin and Kelly and devoted all of his time to the petitioner's business.

At the time of the organization of the petitioner, Taxey, Kelly, and Lentin agreed to draw only nominal amounts in salaries until the success of the company was certain with the understanding that the compensation of all would be adjusted at the end of the fiscal year when it was known how much the company could afford to pay. They thought that it might be two or three years before the company would make a profit but were surprised to find that the company made a little money the first year. In October or November, 1922, Taxey, Kelly and Lentin discussed the question of salaries and agreed to charge off the accounts as they then stood on the books and cancel the notes of each. The amounts drawn by each during the year were as follows:

S. R. Taxey	$2,775.80
J. Lentin	3,154.00
J. H. Kelly	2,702.38

On January 5, 1923, a directors' meeting was held. The minutes of that meeting read:

Special meeting called in session by the President of the Board of Directors of the Chicago Warehouse Lumber Company, at its general offices, convened January 5, 1923; and on motion duly made and seconded, it was unanimously voted that a stock bonus of 10 shares be voted to S. R. Taxey, amount $1,000; 25 shares to Julius Lentin, amount $2,500; 13 shares to James H. Kelly, amount $1,300; and it is agreed and understood that the above stock bonuses represents the original issue of stock subscribed for by the above parties, which the corporation holds notes in part payment thereof, and these notes are hereby paid by virtue of this bonus. There being no further business, the meeting, upon motion duly made, seconded and carried, adjourned.

No new stock was issued as the result of such action, but instead the notes of each officer were canceled and returned to them. This was done in 1923.

The directors' action above stated was taken at the suggestion of the company's lawyer, who advised them that such action was necessary to make the action legal. The action was decided on in October or November, 1922, but formal action was not taken until January 5, 1923.

The item of $4,800 on account of notes canceled was charged to the surplus account on the books of the petitioner in 1923 after the books had been closed for 1922.

In its income-tax return for 1922 the petitioner deducted $4,800 as a stock bonus to officers. The respondent disallowed the deduction and determined the deficiency in question in this proceeding.

The petitioner's books were kept during the year 1922 upon an accrual basis.

OPINION.

SIEFKIN: The petitioner, in order to justify the deduction of $4,800 in 1922, relies upon an oral agreement or understanding in 1922 that such action would be taken. It is clear, however, that corporate action was not taken until 1923 and, consequently, no liability to pay accrued to the petitioner until that year. See . It follows that the action of the respondent in disallowing the deduction in 1922 must be approved.

Judgment will be entered for the respondent.