DocketNumber: Docket No. 2559-68
Citation Numbers: 56 T.C. 119, 1971 U.S. Tax Ct. LEXIS 146
Judges: Tietjens
Filed Date: 4/21/1971
Status: Precedential
Modified Date: 1/13/2023
Petitioner accrued officers' salaries but did not in actuality pay them within 2 1/2 months after the close of the taxable year.
*119 The Commissioner determined deficiencies in petitioner's Federal income tax for taxable years 1964 and 1965 in *120 the respective amounts of $ 40,321.48 and $ 13,704. The sole issue confronting us is whether officers' salaries of $ 55,650 and $ 27,300, accrued for 1964 and 1965 respectively, are prohibited from being deducted by
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference. HyPlains Dressed Beef, Inc., sometimes hereinafter referred to as petitioner, is a corporation organized and existing under the laws of the State of Kansas, with its principal office in Dodge City, Kans., at the time its *147 petition herein was filed. Petitioner's Federal income tax returns for the calendar years 1963, 1964, and 1965 were filed with the district director of internal revenue at Wichita, Kans. The petitioner kept its books and filed its tax returns on the accrual method of accounting.
The petitioner is engaged primarily in the slaughtering and processing of cattle, sheep, hogs, and all classes and descriptions of livestock, and rendering, refining, curing, packing, and cold storage of such livestock. During the calendar years 1963, 1964, and 1965, the petitioner's officers and board of directors were Samuel V. Davis, president; Thomas P. Shirley, vice president; Arthur J. Ebener, secretary-treasurer; H. M. Skaggs, Jr., director; and John P. Perrier, director. During the years at issue, all of the outstanding stock of the petitioner was owned one-third by Samuel V. Davis, one-third by Thomas P. Shirley, and one-third by Arthur J. Ebener. None of the officers or directors of the petitioner were related to each other during the years in question, and the three stockholders filed their individual income tax returns during these calendar years on the cash method of accounting.
During the years *148 1963, 1964, and 1965, petitioner's officers owned interests in partnerships as follows:
Partnership | Sam V. | Thomas P. | Arthur J. |
Davis | Shirley | Ebener | |
Ebener, Shirley & Davis | 1/3 | 1/3 | 1/3 |
Frontier Cattle Co. | 1/6 | 1/6 | 1/6 |
Price Hog Co. 1 | 1/6 | 1/6 | 1/6 |
Petitioner claimed the following deductions for compensation of officers during the taxable years 1963, 1964, and 1965: *121
Officer | 1963 | 1964 | 1965 |
Ebener | $ 24,400 | $ 26,466.66 | $ 26,350 |
Shirley | 10,000 | 21,266.67 | 20,550 |
Davis | 24,400 | 26,466.67 | 26,350 |
Totals claimed | 58,800 | 74,200.00 | 73,250 |
The $ 74,200 for the compensation of officers which the petitioner claimed for the taxable year 1964 consisted of the following:
Salaries paid in cash in 1964, claimed in 1964 | $ 18,200 |
Salaries paid in cash in 1964 which were accrued | |
and claimed by petitioner in 1963 | 30,000 |
Salaries accrued in 1964, but not paid in cash during | |
the year 1964 -- nor until after Mar. 15, 1965 | 55,650 |
Salaries accrued in 1964 and paid in cash between | |
Jan. 1, 1965, and Mar. 15, 1965 | 350 |
Total | 104,200 |
Less: Salaries for 1963 | 30,000 |
Compensation of officers as claimed for 1964 | 74,200 |
The salaries in the amount of $ 55,650 accrued by the petitioner for the taxable year 1964, but not paid in cash during the year *149 1964, nor during the period January 1, 1965, through March 15, 1965, were accrued as follows by journal entries on the following dates:
Nov. 28, 1964 | $ 28,350 |
Nov. 28, 1964 | 3,000 |
Dec. 31, 1964 | 24,300 |
Total accrued | 55,650 |
The $ 73,250 for compensation of officers which the petitioner claimed for the taxable year 1965 consisted of the following:
Salaries paid in cash in 1965, claimed in 1965 | $ 44,850 |
Salaries accrued in 1965, but not paid in cash during | |
the year 1965 -- nor until after Mar. 15, 1966 | 27,300 |
Salaries accrued in 1965 and paid in cash between | |
Jan. 1, 1966, and Mar. 15, 1966 | 1,600 |
Error in return preparation | (150) |
Total | 73,600 |
Less: Adjusting entry for 1964 salaries paid between | |
Jan. 1, 1965, and Mar. 15, 1965 | (350) |
Compensation of officers as claimed for 1965 | 73,250 |
The salaries in the amount of $ 27,300 accrued by the petitioner for the taxable year 1965, but not paid in cash during the year 1965, nor during the period January 1, 1966, through March 15, 1966, as shown *122 above, were accrued by journal entries on the following dates, in the amounts shown, and were credited to petitioner's salaries and wages payable account:
Jan. 30, 1965 | $ 4,200 |
Feb. 27, 1965 | 4,200 |
Apr. 3, 1965 | 5,250 |
May 1, 1965 | 4,200 |
May 29, 1965 | 4,200 |
July 3, 1965 | 5,250 |
Total officers' compensation accrued for 1965, as shown | |
above | 27,300 |
Under *150 petitioner's method of accounting, all wages -- including those of clerical and production staffs, officers, etc. -- were accrued as an expense and set aside in a salaries and wages payable account, and as payment was made in cash, the amount was removed from the salaries and wages payable account. The salaries and wages payable account on petitioner's books showed accrued amounts in total without identifying the actual individual officer or other employee involved. No separate account(s) was maintained for officers' salaries.
On December 5, 1963, a special meeting of the officers and directors of the petitioner was held in Dodge City, Kans. The minutes of that meeting state, among other things, the following:
The next matter on the agenda concerned the paying of bonuses to the Company executives. During the discussion that followed, it was pointed out that the business had been operated in a profitable and successful manner during the past twelve months, and that the executives' fixed salaries had been small in relation to the duties performed. It was thereupon moved by Vice President Shirley, and seconded by President Davis, that the following bonuses be declared: to President *151 Sam V. Davis $ 10,000.00, to Vice President Thomas P. Shirley $ 10,000.00, to Secretary Treasurer Arthur J. Ebener $ 10,000.00; thereby providing compensation commensurate with the services performed. It was further agreed that the bonuses would be accrued on the books of the Company and that payment thereof would be made at a time when the withdrawal of the cash would not impair the Companys' [sic] working capital. Motion passed unanimously.
The above-stated amounts were accrued on petitioner's books, which included their being credited to the salaries and wages payable account on petitioner's books and their being deducted on petitioner's 1963 Federal income tax return as compensation for officers' salaries.
A special meeting of the officers and directors of petitioner was held on August 28, 1964. The minutes of that meeting, in connection with the salaries of petitioner's officers, state:
On motion of Director Skaggs, seconded by Director Perrier the Officers salaries are to be raised as directed, President Sam V. Davis $ 500.00 per week; Vice President Thomas P. Shirley $ 400.00 per week; Secretary Treasurer Arthur J. Ebener $ 500.00 per week. Motion carried unanimously.
*123 In subsequent *152 discussion, the Board believes that due to the financial condition of HYPLAINS DRESSED BEEF, INC., a portion of this salary should be accrued as determined by accountants Hogue, Beebe, and Treindle [sic].
On motion of Director Perrier, seconded by Director Skaggs, it was directed that salary be accrued for the first twenty seven weeks of 1964 in the amount of $ 9450.00 for each of the Officers of HYPLAINS DRESSED BEEF INC. These officers being Sam V. Davis, President, Thomas P. Shirley, Vice President, and Arthur J. Ebener, Secretary Treasurer. Motion carried unanimously.
At a special meeting of officers and directors, held September 30, 1964, the minutes disclose the following action:
The next order of business was a discussion centering on the accruing of salaries in HYPLAINS DRESSED BEEF, INC. It was decided that the $ 9,450.00 dollars to be accrued as salary for the Officers of HYPLAINS DRESSED BEEF, INC., as set forth in the minutes of the Special Meeting held August 28, 1964, be accrued during the month of September, 1964. It was also agreed that the amount of weekly salary over $ 150.00 ($ 350.00) be accrued in the case of President Davis, and Secretary Treasurer Ebener. *153 It was further agreed that in the case of Vice President Shirley, the amount of weekly salary in excess of $ 50.00 ($ 350.00) be accrued.
On January 11, 1965, petitioner's stockholders and board of directors authorized officers' salaries as follows:
On motion of Vice President Shirley, seconded by President Davis, it was moved that the weekly salaries be as follows: President Davis, $ 500.00 per week, Vice President Shirley, $ 400.00 per week, Secretary Treasurer Ebener, $ 500.00 per week. Of these salaries, $ 350.00 per week is to be accrued. All salaries to be reviewed each quarter. Motion carried unanimously.
All salaries as accrued were credited to petitioner's salaries and wages payable account.
Petitioner's officers reported in their individual 1964 and 1965 income tax returns the following amounts which they received from petitioner:
1964 | 1965 | |
Sam V. Davis | $ 7,800 | $ 16,750 |
Thomas P. Shirley | 2,600 | 16,750 |
Arthur J. Ebener | 7,800 | 11,350 |
18,200 | 44,850 | |
Payments on 1963 accrued salaries | 1 30,000 | |
Total reported by officers | 48,200 | 44,850 |
The record of minutes of a board meeting of petitioner's stockholders on April 12, 1965, shows the following concerning *154 officers' accrued salary:
*124 The first order of business was a discussion of Officers accrued salary. President Davis stated that he felt that there were three conditions to be met when taking accrued salary from the business. These conditions being, first, when the business can afford it, secondly whenever the most tax advantage can be obtained and third, to be used to start a new business. There followed some discussion of the three conditions, however none were in total disagreement with the three conditions set forth by President Davis.
The officers' salaries and bonuses which petitioner accrued for the years 1963, 1964, and 1965, were paid to the officers in equal amounts on December 31, 1964, and again on April 16, 1966.
The salaries and bonuses reported by petitioner's three officers in their individual income tax returns for the years 1964 and 1965 did not include the amounts accrued of $ 55,650 for the year 1964 or $ 27,300 for the year 1965. Petitioner's three officers reported their individual incomes for the years 1964 and 1965 on the cash basis, reporting only the salaries and bonuses that were actually received in cash during each of those years.
During the years 1963, *155 1964, 1965, and 1966, the petitioner had the capacity of borrowing from the First National Bank in Dodge City, Kans., the amount which had been accrued as officers' salaries but which salaries were not paid in cash during those years. During this period, Ebener, Shirley, and Davis received loans in substantial amounts from the First National Bank in Dodge City.
All checks of the petitioner are written in the office and they come out of a common checkbook. Ebener, who was the secretary of the corporation, had not had any previous experience in writing minutes for corporations but he testified that he recorded the actions taken to the best of his recollection.
In its tax returns for taxable years 1964 and 1965, petitioner deducted the respective amounts of $ 74,200 and $ 73,250 as officers' salaries. The Commissioner determined that of those amounts $ 55,650 and $ 28,550 were disallowed as deductions for the respective years because they were not paid within 2 1/2 months after the close of the taxable year and were not included in the gross incomes of the officers under the provisions of
OPINION
We must decide if petitioner is prohibited, by
* * * * (2) Unpaid expenses and interest. -- In respect of expenses, otherwise deductible under *125 (A) If within the period consisting of the taxable year of the taxpayer and 2 1/2 months after the close thereof (i) such expenses or interest are not paid, and (ii) the amount thereof is not includible in the gross income of the person to whom the payment is to be made; and (B) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and (C) If, at the close of the taxable year of the taxpayer or at any time within 2 1/2 months thereafter, both the taxpayer and the person to whom the payment is to be made are persons specified within any one of the paragraphs of subsection (b).
(b) Relationships. -- The persons referred to in subsection (a) are: * *157 * * * (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; * * * *
(c) Constructive Ownership of Stock. -- For purposes of determining, in applying subsection (b), the ownership of stock -- * * * * (3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;
It is well established that for a deduction to be barred under
We deal first with the least troublesome of the three requirements of
The facts reveal that no two of petitioner's officers or directors were related to each other during the years *159 in question and that they equally owned all the outstanding stock of petitioner. However, each of petitioner's officers owned: (a) A one-third interest in Ebener, Shirley & Davis, a partnership; (b) a one-sixth interest in Frontier Cattle Co., a partnership; and (c) a one-sixth interest in Price Hog Co., a partnership.
Thus, the requirements of
Petitioner's argument that
This brings us to a consideration of the last remaining requirement, that of
The Commissioner's main argument is that when the petitioner, under authority from its directors, accrued the officers' salaries, it did so with a restriction placed on payment and that this restriction operated to negate any constructive receipt. *161 The claimed restriction referred to is supposed to be included in the various minutes of directors' meetings which were held during the years in question.
The Commissioner cites the following statements in the minutes as evidence of the restriction: (1) December 5, 1963 -- accrued salaries *127 would be paid "at a time when the withdrawal of the cash would not impair the Companys' [sic] working capital;" (2) August 28, 1964 -- "due to the financial condition of Hyplains Dressed Beef, Inc., a portion of this salary should be accrued as determined by accountants;" and (3) April 12, 1965 -- "President Davis stated that he felt that there were three conditions to be met when taking accrued salary * * * first, when the business can afford it, secondly whenever the most tax advantage can be obtained and third, to be used to start a new business. * * * none were in total disagreement with the * * * conditions."
As to the alleged restriction of December 5, 1963, relating to the impairment of working capital, it is stipulated that petitioner had sufficient credit at the First National Bank in Dodge City to borrow the accrued amounts. In light of this stipulation, the alleged restriction cannot *162 stand. "[Where] a corproration * * * could have borrowed an amount that would enable it * * * [to pay accrued salaries], the doctrine of constructive receipt * * * [is] applicable and the payor * * * [is] accordingly entitled to a deduction.
As to the alleged limitation of August 28, 1964, concerning the financial condition of petitioner, upon analysis, all this alleged restriction states is that the salaries will be accrued according to the accountants' recommendation. We fail to see how this statement can act as a restriction on the payment of salaries. The more correct interpretation would appear to be that the accountants would determine the amount to be accrued and not whether such amount would or would not be paid when desired by the payee.
The third alleged restriction contained in the minutes of the April 12, 1965, meeting relates to the three conditions voiced by Davis, petitioner's president. Again we have difficulty in finding the statement of Davis to be a restriction. The minutes show that there was some discussion about the three *163 conditions but that none of the officers were in
The Commissioner also argues that since the accrued salaries were not credited to the accounts of the officers but rather were lumped in with all salaries and wages payable, the doctrine of constructive receipt was rendered inapplicable. We cannot agree. Decided cases, as reviewed in
The Commissioner's final contention is that petitioner's failure to withhold taxes on the *164 accrued salaries indicates that the accrued amounts were not constructively received by the officers, i.e., "Paid," for withholding tax purposes since the duty to withhold on all wages whether actually or constructively paid, is presumed to be known by all taxpayers.
Although we do not condone the failure to withhold as required by law, we do not feel that this action is fatal to petitioner's claimed deduction. The record adequately reveals that the officers and directors were not well versed in the technical terms of accounting and that the officers were new to the business world in the management sphere. In addition, petitioner admits that such failure was an error on its part. And finally, we are not involved herein with a withholding tax case, but rather with an income tax case, and we do not consider this failure by petitioner to be of ultimate significance. Accordingly,
1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.↩
1. Partnership interest acquired in 1964.↩
1. Each officer received a cash payment of $ 10,000.↩
2. Sec. 1.267(a)-1(b).
* * * *
(ii) If the payee is on the cash receipts and disbursements method of accounting with respect to such items of gross income for his taxable year in which or with which the taxable year of accrual by the debtor-taxpayer ends; and↩