Memphis Linotype Printing Co. v. Commissioner

MEMPHIS LINOTYPE PRINTING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Memphis Linotype Printing Co. v. Commissioner

Docket No. 7072.

United States Board of Tax Appeals

9 B.T.A. 666; 1927 BTA LEXIS 2539;

December 19, 1927, Promulgated

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">*2539 Upon the evidence submitted, additional salaries claimed as a deduction for 1918 disallowed.

O. R. Ewing, Esq., for the petitioner.

W. T. Wattles, Esq., for the respondent.

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VAN FOSSAN

">*666 In this proceeding the petitioner appeals from the determination of a deficiency in income tax for the year 1918 in the amount of $3,154.43. It is alleged that the respondent erred in refusing to permit the petitioner to take as a deduction from income in 1918 reasonable salaries for its three officers in that year in the aggregate amount of $9,960. The evidence consists of the depositions of four witnesses.

FINDINGS OF FACT.

The petitioner is a Tennessee corporation engaged in the business of printing, engraving, etc., with principal office in the City of Memphis, Tenn. The principal stockholders and dominating directors in the management of the affairs of the petitioner corporat on during the year 1918 were Dan Wolf, F. W. Borsch, and P. L. Brent. Wolf was president and acted as a salesman; Borsch was vice president and in charge of the printing and lithographing department; Brent was secretary and treasurer and had general supervision of the">*2540 business.

The three officers during the year 1918 devoted their entire time and energy in the management of the business and received in that year total fixed salaries aggregating $8,040 or $2,680 each.

The petitioner kept its books and made its returns on the basis of a calendar year.

">*667 At a meeting of petitioner's directors on May 10, 1918, the following record was entered in the minute book:

Meeting of Board of Directors held this day at the office of the Company at 7:30 p.m. for the purpose of considering plans for payment of our entire account at the Commercial Trust and Savings Bank when due on the 15th of June next. Messrs. Brent, Borsch and Wolf were present, representing clear majority of stock. It was explained by Mr. Wolf that he had uncovered a source where it was thought the Company could dispose of new issues of Bonds in sufficient amount to cover our indebtedness at the Commercial Trust and Savings Bank, and leave us a reasonable balance for other needed plans at this time. After thorough discussion it was decided, if it could be so arranged, to sell $20,000 in 10-year Bonds at 8%, and Mr. Wolf and Mr. Brent were instructed by Mr. Borsch to make">*2541 the arrangement if possible.

Mr. Borsch complained of his inability to get by on his present salary on account of past indebtedness of his, personally, and suggested we raise salaries of officers. Mr. Brent explained the conditions of the Company's affairs would not justify increase of any salaries or wages at this time; that while the Company was making some headway in its financial affairs, it was still badly involved and could not stand additional outlay at present. It was agreed if conditions later in the year would permit that some plan may be worked out to enable each of the officers to be paid suitable increase in compensation for their services.

Mr. Borsch, in connection with his position as superintendent, stated that it was almost imperative we have additional equipment in our Cylinder Press room, but aside from general discussion of same no definite conclusion was arrived at.

At a subsequent meeting of petitioner's directors on January 6, 1919, the following record was entered in the minute book:

At a meeting of the Board of Directors held this day, attended by Mr. Dan Wolf, President (84 shares); Mr. F. W. Borsch, Vice-President (84 shares), and Mr. P. L. Brent, ">*2542 Secretary-Treasurer (83 shares), aggregating 251 of the 377 shares issued, and a majority thereof, it was moved by Mr. Borsch and seconded by Mr. Brent, that the salary accounts of each of the above named officers for the year 1918 be credited with $3,320.00 each, making the salary of each for the year 1918 $6,000. It was explained and concurred in by each that on account of the unprecedented increase in the cost of living during the year it was impossible for the three to avoid going behind and in debt in their respective household expenses during the year and that they could not properly maintain their families in keeping with their needs. When finally put to vote the motion was carried by the total vote of the above 251 shares.

It was also voted, under motion by Mr. Brent, and seconded by Mr. Borsch, that the salaries of each of the three above mentioned officers of the company, for the year 1919, and thereafter until changed by a majority of the outstanding stock of the corporation, beginning January 1st, 1919, be placed at $6,000 per year so long as each of them are actively connected with and devote exclusively all of their time and energies to the conduct of the business, ">*2543 the excessive cost of all necessaries for their families making it essential that they receive greater remuneration for their efforts, and in keeping with the efforts they devote to the interests of the business. The motion provided that each of the three above officers are to receive $100 per week, the difference to be credited to their respective ledger accounts, to be drawn when the finances of the corporation justifies.

">*668 After the directors' meeting of January 6, 1919, petitioner's bookkeeper, pursuant to instructions and in accordance with the directors' resolution of January 6, 1919, made book entries reflecting the aggregate salary increase of $9,960 to the officers for the year 1918. These entries were made after the regular closing of petitioner's books, but were antedated as of December 31, 1918.

OPINION.

VAN FOSSAN: The petitioner in this case sets out as its sole ground of error that the respondent "refused to permit the taxpayer to take reasonable salaries as a deduction" in the year 1918. An examination of the evidence, however, reveals little or no substantiation of the reasonableness of the amounts alleged to have been paid. The fact that salaries">*2544 formerly paid were inadequate to meet living demands, as recited in the resolutions, does not demonstrate that the increased amounts are reasonable. Where issue is joined on the question of reasonableness, it must be proven. On this ground, therefore, it is necessary to sustain the Commissioner.

The evidence presents a further ground on which it would probably be necessary to rule against petitioner. The testimony is almost entirely directed to an attempt to establish the fact of corporate authorization in 1918 of the salary increases and of a corporate obligation to pay them. From a consideration of the resolutions appearing in the record and the testimony of the witnesses, we are convinced that there was no corporate authorization of the salary increases within the taxable year or any other action creating such an obligation as would authorize the deduction of the additional amounts. See ; ; ; ">*2545 .

Judgment will be entered for the respondent.

Considered by MARQUETTE and PHILLIPS.