Majestic Mfg. Co. v. Commissioner

MAJESTIC MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Majestic Mfg. Co. v. Commissioner

Docket No. 9760.

United States Board of Tax Appeals

11 B.T.A. 37; 1928 BTA LEXIS 3881;

March 16, 1928, Promulgated

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1. Sum paid as proportionate share of cost of maintaining baseball team held not to be deductible as an ordinary or a necessary expense, or otherwise.

2. Adjustment of invested capital on account of taxes for prior years held to be correct under section 1207 of Revenue Act of 1926.

3. Earnings available for the payment of dividends should not be reduced by the amount of a tentative tax. L. S. Ayers & Co.,1 B.T.A. 1135">1 B.T.A. 1135, followed.

Jesse I. Miller, Esq., and J. L. Elliot, C.P.A., for the petitioner.

Harold Allen, Esq., for the respondent.

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ARUNDELL

This is a proceeding for the redetermination of income and profits taxes for the years 1919 and 1920 in the amounts of $584.31 and $1,576.68, respectively. As error for the year 1919 petitioner alleges the reduction of invested capital by $11,593.20, on account of the net amount of additional tax for the years 1916, 1917 and 1918, and as errors for the year 1920, (a) the disallowance of the sum of $2,187.09 contributed towards the support of a village baseball team, (b) the reduction of invested capital on account of prior year's taxes, and (c) the adjustment of invested capital by the computation of a tentative tax.

The issue with respect to the disallowance of the sum of $2,187.09 claimed as a deductible expense for the year 1920 was submitted upon the testimony of record in the case of , with the additional stipulation that no similar expenditure was made by the petitioner before or after the year 1920.

FINDINGS OF FACT.

During the year 1920 the petitioner was one of five corporations engaged in the operation of cotton mills in the Village of Belmont, North Carolina. Belmont then had a population of about 3,000, between 800 and 900 of which were employees of the five cotton mills. By agreement among the directors and managers of these five mills, it was arranged that the five mills should, acting together, finance a village baseball team during the season of 1920, each mill paying its proportion of the expenses of maintaining such a team. A manager was hired for the team and he employed the players. Some of the players may have been employees of the cotton mills and other players were hired from outside the village. The ball team operated during the season of 1920 and the petitioner's share of the expenses of financing the team was $2,187.09, which the petitioner paid and claimed as an expense deduction in its income-tax return for 1920. The Commissioner disallowed this deduction.

The petitioner did not make a similar expenditure prior or subsequent to the year 1920.

The year 1920 was the most prosperous ever experienced by the cotton mills of North Carolina. Every mill was devising ways to keep its employees contented in order that the maximum production might be maintained.

Many of the other mill towns within the county had ball teams and there was much enthusiasm for the town having a good team. It was determined by the directors, managers and superintendents of the five mills of Belmont that it would be a good thing for the mills to have a ball team in their village, as it was expected that the maintenance of such a team would have a beneficial effect on employees of the mills and result in a diminution of labor turnover.

In computing the invested capital of the petitioner for the year 1919 the respondent reduced the amount thereof by $2,436.38 for 1917 taxes and the further sum of $9,504.65 for 1918 taxes, prorated over the year. For the year 1920 the invested capital was adjusted by reducing it $2,436.38 on account of tax due for 1917 and $35,458.15 for 1919 tax, prorated.

In determining the amount of current earnings available for the payment of dividends in the year 1920, respondent reduced its earnings by the amount of a so-called tentative tax. The effect of this action was to reduce petitioner's invested capital for 1920 by the amount of the excess of the dividend over current earnings as so computed.

OPINION.

ARUNDELL: Following the decision in the case of , and , the issue respecting the deductibility of the amount paid by the petitioner for the support of the village baseball team is decided in favor of the respondent.

The adjustments in petitioner's invested capital on account of taxes due for prior years appear to have been made in accordance with the applicable regulations of the Treasury Department. The respondent is therefore affirmed. Section 1207 of the Revenue Act of 1926, and .

The decision of the last allegation of error is controlled by . The respondent is reversed.

Judgment will be entered on 10 days' notice, under Rule 50.