DocketNumber： Docket No. 14376.
Citation Numbers： 10 B.T.A. 103, 1928 BTA LEXIS 4200
Judges： Arundell
Filed Date： 1/21/1928
Status： Precedential
Modified Date： 10/19/2024
1928 BTA LEXIS 4200">*4200 Additional compensation
10 B.T.A. 103">*103 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1920 and 1921 in the respective amounts 10 B.T.A. 103">*104 of $2,332.47 and $429.31. Only so much of the deficiencies are in controversy as result from disallowances of amounts claimed as additional compensation paid to the president and general manager of the petitioner in 1920 and 1921.
FINDINGS OF FACT.
The petitioner is an Indiana corporation, with its principal office in Portland, Oreg., and doing a wholesale business in pipe, plumbing, and mill supplies.
The president of the petitioner, W. S. Babson, was in active management of the business, and in 1917, when Babson's duties were becoming heavier and his responsibility larger, he requested a commensurate increase in salary. At a meeting of the board of directors held in Evansville, Ind., on May 7, 1917, the subject was brought up for discussion. Babson stated at that time that he felt it necessary to take out1928 BTA LEXIS 4200">*4201 insurance in view of the obligations he was incurring in purchasing the interests of some of the then stockholders, and it was voted at that meeting to increase his salary to $6,000 and to grant him additional compensation in an amount equal to the premiums on such insurance. The secretary, who was present at the meeting, was inexperienced in the duties of that office. He took no notes of the proceedings, and, in writing up the minutes thereafter from memory, omitted the resolution pertaining to Babson's salary. At the meeting held the following year Babson mentioned the omission to the other directors, and they orally confirmed his understanding of the resolution that had been passed.
On May 7, 1917, W. S. Babson took out a $25,000 life insurance policy expiring in five years. Another policy was taken out and surrendered February 10, 1921. These were the only policies held by Babson prior to December 8, 1919, when he took out a 23-year endowment policy for $25,000. Two 10-year-term policies for $25,000 each were taken out on March 13, 1921. The petitioner was not named as beneficiary under any of the policies. In 1920 and 1921 the premiums on these policies, amounting to1928 BTA LEXIS 4200">*4202 $3,343.23 and $2,548.83, respectively, were paid by the taxpayer and charged to Babson's personal account. These amounts were reported by Babson as income in his income-tax returns.
By resolution of January 31, 1919, Babson's salary was increased to $8,500.
At a special meeting in the board of directors on October 12, 1925, at which all of the directors were present either in person or were represented by proxy, the following resolution was adopted:
WHEREAS, it appears from the records that at a certain meeting of the Board of Directors of the Peerless Pacific Company held on May 7th, 1917, in writing 10 B.T.A. 103">*105 up the minutes for this meeting the Secretary overlooked and failed to record one part of the second resolution which now reads as follows:
"SECOND RESOLUTION: On motion duly made and seconded it was unanimously resolved that the salary of W. S. Babson, President, is to be Six Thousand and No/100 Dollars, ($6,000.00) a year. Said salary is to date back to January 1st of the present year."
AND WHEREAS, during the discussion of this resolution there was included a proviso whereby the President was also to receive as compensation an amount which would be necessary1928 BTA LEXIS 4200">*4203 to carry suitable life insurance policies to protect all parties to the contract for the purchase of the stock of the Peerless Pacific Company by W. S. Babson. Therefore, the Secretary should have fully recorded this second resolution which was as follows:
"SECOND RESOLUTION: On motion duly made and seconded it was unanimously resolved that the salary of W. S. Babson, President, is to be Six Thousand and No/100 Dollars, ($6,000.00) a year. Said salary is to date back to January 1st of the present year, and further compensation is granted him based upon and to pay the premiums on policies of life insurance on his own life for the protection of all parties to the contract covering the purchase of stock by said W. S. Babson."
Be it further resolved that the minutes of this meeting showing the correctness of minutes of meeting of May 7th, 1917, be sent to all of the Directors of the Peerless Pacific Company who were holding office during the time of the meeting of May 7, 1917, and their signature be affixed to the bottom of the resolution as signifying their understanding that this extra compensation was agreed upon at the time of said meeting.
This resolution was signed by W. 1928 BTA LEXIS 4200">*4204 S. Babson and Olive R. Babson as directors for the year 1925, and by W. S. Babson, Olive R. Babson, M. D. Helfrich and H. F. Weaver, as directors for the year 1917. The meeting was called for the express purpose of correcting the minutes of the meeting of May 7, 1917, and the resolution adopted represents the only business transacted.
During 1917, 1920, and 1921, and in October, 1925, W. S. Babson held approximately 75 per cent of the outstanding stock of the Peerless Pacific Co. In 1920 and 1921 he had charge of sales, supervised the buying, had complete jurisdiction over credit matters and was generally responsible for the conduct of the corporation's business. For the year 1920 he was paid a salary of $10,000 and given a bonus of $5,453; for the year 1921 he was paid of salary of $9,646.72 and a bonus of $2,800.
The taxpayer's net sales, net profits, after deducting Babson's salary and extraordinary losses, and approximate percentage of net profit to capital during the taxable periods, were:
| 1920 | 1921 | |
| Net sales | $1,048,880.46 | $839,005.21 |
| Net profit | 66,067.87 | 25,096.20 |
| Profit on capital | 10% | 8% |
10 B.T.A. 103">*106 The petitioner kept its books on the1928 BTA LEXIS 4200">*4205 accrual basis and made its returns on the calendar year basis.
On an audit of the taxpayer's returns for those years the Commissioner disallowed the deductions taken for such payments on the theory that the expenditures authorized by the corporation's directors at a meeting held on May 7, 1917, were for the payment of life insurance premiums and not compensation for services rendered.
OPINION.
ARUNDELL: The amounts sought to be deducted were authorized by petitioner's board of directors as additional compensation to Babson to be measured by the amounts of premiums on life insurance policies taken out by him on his own life. These sums were paid by petitioner and were reported by Babson in his income-tax returns as additional compensation to him. No question is raised that the total amount paid to and on behalf of Babson does not constitute reasonable compensation and we are satisfied that the amounts paid do in fact constitute reasonable compensation. It follows that the deduction sought by petitioner should be permitted.