Oconto Falls Motor Car Co. v. Commissioner , 18 B.T.A. 840 ( 1930 )

OCONTO FALLS MOTOR CAR CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Oconto Falls Motor Car Co. v. Commissioner

Docket No. 12471.

United States Board of Tax Appeals

18 B.T.A. 840; 1930 BTA LEXIS 2580;

January 16, 1930, Promulgated

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DEDUCTIBLE EXPENSES - ADDITIONAL SALARIES. - Amounts for additional compensation to employees, admittedly reasonable and for services actually rendered within the taxable year, are held to be deductible from income by the petitioner on the accrual basis, since they were definitely, although informally, incurred within the taxable year and constituted outstanding liabilities of the petitioner at the end of the taxable year; unforeseen losses, suffered subsequently, preventing a discharge of the liabilities and ultimately resulting in the voluntary cancellation of the liabilities, are immaterial, since there is no doubt of the intention of the parties or of the purity of the liabilities when incurred.

Walter W. Hammond, Esq., for the petitioner.

F. R. Shearer, Esq., for the respondent.

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TRUSSELL

This is an appeal for a redetermination of a deficiency in income and profits tax for 1920 amounting to $1,415.75. Petitioner alleges error in a failure to allow as a deduction from income of an aggregate of $4,000 credited to employees upon the books as a bonus for services rendered in the taxable year.

FINDINGS OF FACT.

The petitioner is a Wisconsin corporation with its principal office at Oconto Falls, and is engaged in the business of automobile sales and service, handling Ford cars, trucks and tractors, and conducting a garage. During the taxable year the following were directors of the petitioner: W. J. Munsert, M. L. Munsert, D. J. Meyer, Joseph Plain, and Nora Munsert. M. L. Munsert was the financial backer of the enterprise.

At a directors' meeting held on January 29, 1920, the following officers were elected for the taxable year, and salaries to them were authorized as follows: W. J. Munsert, president, treasurer and manager, $2,400; D. J. Meyer, vice president, $1,800; Joseph Plain, secretary, $1,800.

The salary of Fred Johnson, another employee for the taxable year, amounted to $1,800.

In the spring of the taxable year conditions in this line of business were very flourishing, with the result that there was a demand for the services of experienced men, and it appeared to the officers of the petitioner that the salaries authorized at the beginning of the year were insufficient. Joseph Plain, the secretary, received offers of $250 per month from other concerns in the same line of business. The matter of additional salaries was informally and frequently the subject of discussion between the interested parties, and the officers were assured by W. J. Munsert that if they would remain in the employ of the petitioner the matter of adequate salaries would be satisfactorily taken care of. Affirmative action, however, was deferred mainly for the reason that it was desired to observe the course of the business. However, by September of the taxable year it was well understood between the parties that additional compensation would be provided for in some way. In the latter part of December, 1920, the matter came up for action when all the interested parties, including a majority of the directors of the petitioner, met at the office of the petitioner. At this meeting it was definitely decided that bonuses of $1,000 to each of the four employees, W. J. Munsert, D. J. Meyer, Joseph Plain and Fred Johnson, would be authorized and paid. At this time the stockholdings of these employees were as follows: W. J. Munsert, 256 shares; D. J. Meyer, 96 shares; Joseph Plain, 80 shares; Fred Johnson, 2 shares. The sales for 1920 amounted to approximately $250,000. However, there were a great many deferred payments included in this business. The petitioner was short of cash at this time, and as a consequence it was determined at this same meeting that the bonuses would be entered upon the books as liabilities to the four recipients, but they would not be discharged in cash until spring or later in the following year when collections from the customers were to be expected. The action taken at this meeting was never entered upon the minutes.

The officers were actively engaged at the end of the year in serving the usual holiday rush of business, and after that when the midwinter snows had come in the middle of January they were occupied in taking the annual inventory. At the end of January, 1921, the secretary noticed for the first time that the bookkeeper had carried to surplus account the book profits for the prior year without accruing the liabilities for the bonuses. It was the custom of the petitioner to determine roughly the profits every month in a profit and loss account called "loss and gain this year" subject, however, to correction at the end of the year when the actual physical inventory was compared with the book inventory. When this was accomplished the net profits reflected in the account were customarily transferred to a surplus account called "loss and gain previous years." Accordingly, the secretary directed the bookkeeper to accrue the liability of $4,000 upon the books, charging the expense to the account "loss and gain previous years" and crediting new liability accounts to be opened for each of the recipients. This journal entry was made under date of February 28, 1921. The petitioner kept its accounts and filed its return on the accrual basis. In the personal returns filed by the four employees for 1920 they reported the bonuses of $1,000 each as income received.

The bonuses were never paid to the employees in cash. Early in the spring of 1921 the Ford Co. instituted a succession of price reductions, the cumulative effect of which was to so cheapen the security behind the deferred payments due to the petitioner as to render difficult or impossible the collection of further payments from the customers. This rendered continuous a condition wherein the petitioner was constantly short of ready cash. Many of the accounts which ultimately failed of collection were for sales made in 1920. It was found impossible by the petitioner without borrowing the money to make payments of cash to the employees for the liability on account of the bonus, and the interested parties all agreed that it would be undesirable to borrow the money. In 1924 and 1925 the employees agreed to a procedure wherein certain bad debts in part attributable to sales made in 1920 were charged off against the liability accounts to the employees for the bonuses.

In determining the deficiencies the respondent has disallowed the deduction of the bonuses of $4,000 claimed by the petitioner.

OPINION.

TRUSSELL: The sole issue in this appeal is the propriety of allowing as a deduction from income certain bonuses accrued upon the petitioner's books to the credit of four employees by way of additional compensation for personal services. The salaries paid appear to be modest, and it is conceded by the respondent that the aggregates of the salaries paid and the bonuses entered upon the books will amount to no more than reasonable allowances for the personal services actually rendered. The question for decision is whether as a matter of fact the expense was actually incurred during the taxable year as it must have been by this petitioner on the accrual basis in order to be deductible under the statute. See section 234(a)(1) of the Revenue Act of 1918.

A series of unfortunate occurrences conspired to lend some color to a presumption by the respondent that the expenses were not incurred during the taxable year, but we are not inclined to attach weight and materiality to them. Thus it appears that the failure of the bookkeeper to accrue the expenses upon the books until February 28 of the following year was nothing more than a matter of forgetfulness or misunderstanding on her part. Again, the failure to enter upon the minutes a formal record of the decisive action taken by the directors in the latter part of the taxable year with relation to the bonuses was due simply to the fact that the petitioner was a close corporation in which the principal stockholders were also the directors and the administrative officers, who were frequently in personal contact with relation to business affairs, and more formal procedure did not appear to them necessary under the circumstances. The fact that the liabilities for the bonuses recorded upon the books were never discharged in cash, and, after four or five years, were actually written off against certain bad debts is shown to have been due to disastrous developments which were totally unforeseen at the end of the taxable year, and being wholly subsequent are, therefore, not material to the issue here before us. We are satisfied that the cancellations bear no significance to the present issue.

On the other hand, it appears from the record that the low salaries authorized at the beginning of the year were the subject of continual debate during the year, and as early as September of the taxable year the employees had been definitely assured that some form of procedure would be adopted to increase their compensation. In the latter part of December affirmative action was taken when all of the interested parties met and amounts of additional compensation of $1,000 to each of four employees were agreed upon and were authorized by the directors, with the understanding, however, that the liabilities would be merely accrued upon the books and they would not be discharged in cash until some time in the following year when the necessary cash was expected to be realized from the deferred payments outstanding and due from customers. We think the parties intended and they actually did definitely set up a liability to the employees during the taxable year; consequently, the deduction of $4,000 claimed should be allowed. This conclusion is in line with a great many of our prior decisions, including such cases as ; ; ; ; ; and .

Judgment will be entered pursuant to Rule 50.