Perkins Land & Lumber Co. v. Commissioner

PERKINS LAND & LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Perkins Land & Lumber Co. v. Commissioner

Docket Nos. 11363, 17041.

United States Board of Tax Appeals

9 B.T.A. 528; 1927 BTA LEXIS 2570;

December 9, 1927, Promulgated

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">*2570 1. Petitioner's deductions for officers' salaries approved.

2. Deficiencies held not barred.

Frank E. Seidman, C.P.A., and Jacob S. Seidman, Esq., for the petitioner.

Orris Bennett, Esq., for the respondent.

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SIEFKIN

">*528 These are proceedings for the redetermination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921 in the amounts of $1,119.58, $3,962, and $653.51, respectively. The issues are as to deductions for officers' salaries and as to whether the statute of limitations bars assessment and collection. At the hearing the respondent amended his answer by alleging that certain salaries allowed by him as deductions were not properly allowable. An issue of the statute of limitations as to the year 1919 was abandoned by petitioner at the hearing, as to the amount of the deficiency asserted by the respondent in his notice of deficiency, but no more.

FINDINGS OF FACT.

Petitioner is a corporation which, during the years involved, was engaged in the purchase and sale of timber. It was incorporated in 1906 with a paid-in capital of $20,000. May 21, 1918, the capital stock was increased to $80,000, ">*2571 the increase of $60,000 par value being issued to G. W. Perkins, Sr., for his interest in an office building. On the same day the following agreement was executed:

THIS AGREEMENT, made this 21st day of May, 1918, by and between PERKINS LUMBER COMPANY (a Michigan corporation whose name has by action of the stockholders, been changed to PERKINS LAND & LUMBER COMPANY, but which action is not yet effective), first party, and CHARLES F. PERKINS and GAIUS W. PERKINS, JR., co-partners as PERKINS BROTHERS, second parties, WITNESSETH:

First party hereby, for the consideration, and upon the terms hereinafter named, gives and grants unto second parties the exclusive right to sell all lumber, timber and forest products which it now owns or may hereafter purchase in the regular course of business, hereby making and constituting second parties its sole sales agents.

In consideration of the foregoing, second parties hereby agree to market and sell all lumber, timber and forest products now belonging to first party or hereafter acquired by it in the regular course of business.

Second parties agree to pay to first party for all lumber, timber and forest products as sold by second parties, ">*2572 the entire cost to first party of such products so sold, including freight and all additional expenses (but not deducting any discounts); and in addition thereto the sum of one dollar per thousand feet; and first party agrees to accept the aforesaid price for all such products.

">*529 Settlements shall be made between the parties hereto on the first of each month, for all proceeds received during the preceding month from sales made by second parties. First party agrees to take in settlement customers' paper taken by second parties, and assignments of accounts of second parties against customers; without, however, assuming responsibility for the ultimate payment of said paper or accounts. In case any customers' paper or account taken by first party in settlement as aforesaid is not paid when due, or within a reasonable time thereafter, the same is to be charged back to second parties and settlement made therefor by second parties in accordance with this agreement of the first of the next ensuing month.

First party hereby assigns to second parties and second parties hereby assume all outstanding sales contracts of first party with any of its customers, and second parties">*2573 agree to carry out the same upon the terms and conditions of this contract.

Second parties also agree that they will, without additional compensation, give such time and services as first party may require to the purchasing for first party of lumber, timber, and forest products; and that they will in the offices furnished by first party, conduct at their own expense, the entire bookkeeping of first party, so that first party shall be at no expense for the conduct of its office beyond the rental of such office and such salaries as it may pay to its officers.

The period of this contract shall be one (1) year from and including May 1, 1918; and thereafter for further periods of one (1) year unless either of the parties hereto shall on or before sixty (60) days from the termination of any such year's period, notify the other party in writing that it or they desire this contract to be terminated at the end of such year.

IN WITNESS WHEREOF, first party has executed this instrument by its president under the authority of its stockholders and directors and second parties have executed the same, this day and year first above written.

On December 4, 1919, a special meeting of the">*2574 board of directors of petitioner was held, at which the following resolution was adopted:

RESOLVED, that the seventh paragraph of the certain agreement in writing dated May 21, 1918 between this corporation as first party and Charles F. Perkins and Gaius W. Perkins, Jr. co-partners as Perkins Brothers, second parties, be and the same is hereby amended, such amendment to take effect as of January 1, 1919, namely: Insert in place of said seventh paragraph the following:

"Second parties also agree that they will, in consideration of such reasonable compensation as may be from time to time fixed by the Board of Directors of first party, give such time and services as first party may require, to the purchasing for first party of lumber, timber and forest products; and that they will, in the offices furnished by first party, conduct at their own expense the entire bookkeeping of first party, so that first party shall be at no expense for the conduct of its office beyond the rental of such office and such salaries as it may pay to its officers."

The following resolution being made and supported, was adopted by the unanimous vote of all the Directors present, namely:

WHEREAS, under">*2575 the certain written contract dated May 21, 1918, by and between this corporation as first party and Charles F. Perkins and Gaius W. Perkins, Jr., co-partners as Perkins Brothers, second parties, it was agreed that second parties should, without additional compensation, give such time and services as first party might require to the purchasing for first party of lumber, ">*530 timber and forest products, the said Charles F. Perkins being the Vice-President of this Company and the said Gaius W. Perkins, Jr. being the Secretary and Treasurer of this Company, and both of them being active in its management; and

WHEREAS, the said Charles F. Perkins and Gaius W. Perkins, Jr., have since January 1, 1919, given considerably more attention to the business of this Company and to the purchasing for first party of lumber, timber and forest products, and their services generally having been of much more value to this Company than was contemplated at the time of the making of the contract aforesaid, and it being the belief of the Board of Directors that the said Charles F. Perkins and Gaius W. Perkins, Jr. should be compensated for their services as officers of this Company in the active">*2576 management of its business since January 1, 1919; Now therefore,

BE IT RESOLVED, that the salary of the Vice-President of this Company be fixed at $7,500.00 per year, and that of the Secretary and Treasurer be fixed at $7,500.00 per year, the same to take effect on January 1, 1919, and to continue until further action of this Board; both said salaries to be payable only at such time as this Company shall have on hand cash sufficient to retire all its current liabilities.

Officers' salaries authorized, sales, net profits after taxes, and capital and surplus of petitioner for the years 1915 to 1921, inclusive, were as follows:

	Officers' salaries
Year	G. W.	G. W.	C. F.	Sales 1	Net profits	Capital and
	Perkins	Perkins, Jr.	Perkins		after taxes	surplus
1915	$2,400.00	$3,000.00	$6,000.00	$287,677.08	$5,688.72	$58,521.74
1916	2,400.00	3,000.00	6,000.00	407,242.47	5,672.20	64,210.46
1917	2,400.00	7,000.00	10,000.00	443,692.81	22,770.11	57,882.66
1918	7,466.67	2,333.33	3,333.33	263,933.99	5,732.88	132,276.71
1919	10,000.00	7,500.00	7,500.00	636,794.11	13,262.37	145,539.08
1920	10,000.00	7,500.00	7,500.00	604,625.74	22,932.50	169,853.18
1921	10,000.00	7,500.00	7,500.00	222,299.31	1,377.93	169,727.96

">*2577

Year	Yard	Direct
1918	$122,242.03	$141,691.96
1919	204,477.79	432,316.32
1920	347,902.58	256,723.16
1921	122,413.52	99,885.79

The stockholdings in petitioner during the periods in question were:

	Jan. 1, 1919, to Dec. 14, 1920	Dec. 14, 1920, to Dec. 31, 1921
	Shares	Shares
G. W. Perkins, Sr	7,000	13,125
C. F. Perkins	500	937 1/2
G. W. Perkins, Jr	500	937 1/2
Total	8,000	15,000

">*531 C. F. Perkins, the vice president of petitioner, during the years in question, started in business in 1890 as purchasing agent for the Grand Rapids Screw Furniture Co;, later merged in the American Seating Co., and remained with that company for 10 years, receiving a salary of $200 a month from that company. During the last four years of such employment he was also a partner in and the buyer for Longfellow and Perkins, doing a business of about $100,000 a year and from which he received earnings of four or five thousand dollars a year. In 1900 he formed a new partnership to buy and sell lumber at wholesale in which he had a one-fourth interest, and which became the predecessor business">*2578 of the petitioner. His duties with petitioner were the buying and selling.

G. W. Perkins, Jr., had been in the wholesale lumber business since 1903, with the petitioner since its incorporation as secretary and treasurer. His duties were to take charge of the office end of the business.

G. W. Perkins, Sr., had a long experience in the lumber business, was the president and active head of the petitioner's business, and was instrumental in obtaining much of the business of the petitioner. His services consisted largely of handling the financing of petitioner. He personally endorsed all the paper of the petitioner. He was also in charge of the operations of the office building owned by the petitioner, made the leases and had charge of the rents and repairs.

From its beginning the petitioner was undercapitalized for its volume of business, and the officers drew as small salaries as possible in order to leave money in the business+ In 1918 the two sons, G+ W+ Perkins, Jr., and C. F. Perkins, in order to increase their earning capacity above the salaries drawn from the corporation, and after conference with their father, formed the partnership of Perkins Brothers and executed">*2579 the contract with petitioner set forth above. Within two or three months the parties found that the contract proved unworkable because, at that time, much lumber was being bought by petitioner that could not be sold at once and, since it was stored and commingled, there was no equitable way of arriving at a price on which the compensation should be paid. Nevertheless, Perkins Brothers continued to sell lumber for the petitioner though, in about half the sales, without profit to the partnership. This situation was discussed at various times between the father and sons, and it was agreed to change. The resolution above was the result of such agreement.

The salaries authorized for 1919, 1920, and 1921 to C. F. Perkins and G. W. Perkins, Jr., were charged on the books of petitioner during each of the years in question but were not paid until 1922. Petitioner's books were kept, and its tax returns made, on an accrual basis.

">*532 Petitioner filed the following instruments with the Bureau of Internal Revenue. At some time after filing the Commissioner of Internal Revenue or someone acting for him signed such instruments.

INCOME AND PROFITS TAX WAIVER FOR TAXABLE YEARS">*2580 ENDED PRIOR TO JANUARY, 1, 1922

JANUARY 18, 1926.

In pursuance of the provisions of existing Internal Revenue Laws Perkins Land and Lumber Company a taxpayer of Grand Rapids, Michigan, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1920 under existing revenue acts, or under prior revenue acts.

This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.

PERKINS LAND & LUMBER CO.

Taxpayer.

By G. W. PERKINS, Jr.

Treas.

D. H. BLAIR

Commissioner. WB

INCOME AND PROFITS">*2581 TAX WAIVER FOR TAXABLE YEARS ENDED PRIOR TO JANUARY 1, 1922

JANUARY 18, 1926.

In pursuance of the provisions of existing Internal Revenue Laws Perkins Land and Lumber Co., a taxpayer of Grand Rapids, Michigan, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1921 under existing revenue acts, or under prior revenue acts.

This waiver of the time for making assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency, in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.

PERKINS LAND & LUMBER COMPANY

Taxpayer.

By G. W. PERKINS, Jr.

Treas.

D. H. BLAIR

Commissioner.">*2582 WB

">*533 OPINION.

SIEFKIN: In his deficiency notice for the year 1919, respondent allowed $5,000 salary to each C. F. Perkins and G. W. Perkins. Jr., although $7,500 was duly authorized and paid to each. By amendment of his answer at the hearing, respondent alleged no amount should be allowed as salary to either. In his deficiency letter for the years 1920 and 1921, respondent allowed only $1,000 of a $10,000 salary authorized and paid G. W. Perkins, Sr., but allowed $7,500 each authorized and paid to C. F. Perkins and G. W. Perkins, Jr. By amendment of his answer at the hearing, respondent alleged that the allowance of $7,500 each to C. F. Perkins and G. W. Perkins, Jr., was erroneous.

As to the salaries of C. F. Perkins and G. W. Perkins, Jr., it is the contention of the respondent that, under the above resolution, notwithstanding the action authorizing the salaries and the resulting credits on the books of petitioner, a liability for salary did not exist and that any such liability was contingent upon future events, since the resolution stated that -

said salaries to be payable only at such time as the company shall have on hand cash sufficient to retire all">*2583 its current liabilities.

As to the salary of G. W. Perkins, Sr., respondent contends that $1,000 a year is a reasonable allowance for the years 1920 and 1921, basing such contention upon his age, his failure to spend more than a part of his time at petitioner's place of business and the competence of his two sons to properly handle the business. No such issue is raised by the respondent for the year 1919.

It is in evidence and uncontroverted that the three officers were men of long experience and of demonstrated abilities. The services were actually rendered, the salaries were duly authorized by appropriate action of the board of directors, and the salaries incurred were accrued upon the books of account of petitioner. After a careful consideration of all the evidence we are of opinion that the salaries were reasonable and they were ordinary and necessary expenses of the business. We are unable to agree with the contention of respondent that the provision for deferment of the payment in cash of the liabilities of petitioner for these salaries until such time as the petitioner was possessed of sufficient cash to retire all its current liabilities operated to relieve petitioner">*2584 of the liabilities. Petitioner was on the accrual basis and in our opinion, whether it quickly discharged in cash its liabilities for salaries is immaterial. We therefore conclude that the salaries of the three officers accrued upon the books and claimed as deductions from income should be allowed.

">*534 On the question of the statute of limitations petitioner makes two contentions. So far as the year 1919 is concerned petitioner abandons the issue of the statute of limitations, except so far as the deficiency asserted by the respondent may be increased because of the amendment of respondent's answer. In view of our decision above, therefore, we need not pass upon 1919. As to the years 1920 and 1921, the petitioner contends that the "income and profits tax waivers" set out in our findings of fact, not being signed personally by the Commissioner and it not appearing by whom and when they were signed on behalf of the Commissioner, were inadmissible in evidence and ineffective to extend the statutory period of limitations. A witness on behalf of respondent, however, identified the instruments as part of the official files in the Bureau of Internal Revenue. ">*2585 Both contain a signature purporting to be that of "D. H. Blair, Commissioner," and the witness testified to a practice in the Bureau to sign such "waivers" as soon as received. In view of all the facts, and also taking into consideration our belief that it is not necessary that the Commissioner personally sign all "waivers" in order to have a valid consent in writing, it is our opinion that the time was extended and that assessment and collection are not barred. See .

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.

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Footnotes

• 1. Classification of sales. ↩