E. J. Stilwell Paper Co. v. Commissioner

OPINION.

TRAmmell:

The issue presented is whether the amount of $10,000 represents salaries or whether it represents a distribution of the profits of the corporation to the stockholders on the basis of their stock holdings.

In considering the question of whether amounts paid to officers of a corporation were salaries or a distribution of profits, we said, in the Appeal of Woodcliff Silk Mills, 1 B. T. A. 715, that:

Whether amounts paid constitute compensation for personal services actually rendered or are an attempt to distribute profits as salaries is, in the last analysis, a question of fact to be determined from all the evidence, * * * The fact that salaries paid to its officers by a corporation are in direct proportion to the stockholdings of the respective officers is strong evidence of an intent to distribute profits as salaries and must be overcome by clear evidence showing that the salaries are reasonable in amount and actually represent compensation for personal services rendered.

We think that the evidence in this case shows that the amounts allowed the officers and credited to them on the books during the taxable year were compensation for services. Considering the services rendered, the experience of the officers and other facts, we think that the amounts were reasonable. The officers had not been paid salaries in prior years and they had been insisting on being paid some amount for their services. The question had been discussed prior to the end of the year, but decision was reserved until the amount of profits for the year could be estimated with some degree of accuracy. Before the close of the year it was agreed as to the amount to be paid as evidenced by book entries.

A corporation is entitled to deduct a reasonable allowance for salaries of its officers. If the amount allowed them is reasonable for services rendered it should not be disallowed merely because the amount allowed each officer is in proportion to his stock ownership.

Judgment will be entered on 15 days’ notice, under Bule 50.