7 T.C. 729 (1946), 6666, Anthony P. Miller, Inc. v. C. I. R.

Docket Nº:6666.
Citation:7 T.C. 729
Opinion Judge:HILL, Judge:
Attorney:S. Leo Ruslander, Esq., for the petitioner. William D. Harris, Esq., for the respondent.
Judge Panel:BLACK, J., dissenting: VAN FOSSAN, LEECH, KERN, OPPER, and HARLAN, JJ., agree with this dissent.
Case Date:September 17, 1946
Court:United States Tax Court

Page 729

7 T.C. 729 (1946)




Docket No. 6666.

United States Tax Court.

September 17, 1946

1. Petitioner, on January 1, 1941, delivered demand promissory notes to its president as compensation for services rendered during 1940. Held, such compensation was not ‘ paid‘ within the meaning of section 24(a)(1) of the Internal Revenue Code and is not deductible as a business expense by petitioner for 1940.

2. Determined that stock of X Co. did not become worthless in 1940.

3. Value of the stock of certain corporations paid petitioner for construction work determined.

S. Leo Ruslander, Esq., for the petitioner.

William D. Harris, Esq., for the respondent.

Respondent determined a deficiency in petitioner's income tax liability for the calendar year 1940 in the amount of $57,322.68. Respondent also determined a deficiency in petitioner's excess profits tax liability in the amount of $39,623.98 for the same year.

The questions involved are as follows:

1. Whether section 24(c) of the Internal Revenue Code prohibits petitioner from deducting certain expenses in 1940.

2. Whether the common stock of Chelsea Housing Corporation became worthless during 1940.

3. What was the fair market value of Chelsea Housing Corporation common stock received by petitioner in 1940 as compensation for services rendered?

4. What was the fair market value of Ogontz Housing Corporation common stock received by petitioner in 1940 as compensation for services rendered?

5. What was the fair market value of Foster Park Housing Corporation common stock received by petitioner in 1940 as compensation for services rendered?

Petitioner filed its income and excess profits tax return for 1940 with the collector of internal revenue for the first district of New Jersey.

The case was submitted on a stipulation of facts, oral testimony, and exhibits. The facts stipulated are so found. Other facts are found from the evidence.



Petitioner is a corporation engaged in the building and construction business, with its principal offices located at 333 Arctic Avenue, Atlantic City, New Jersey.

Page 730

Anthony P. Miller, petitioner's president and chief executive, was 49 years old at the time of the hearing. He has worked for a living for 33 years. From 1916 to 1926 he was employed by James Ferry Co., foundation engineers. Since 1927 he has been in the construction and engineering business for himself, first, individually; later, through the Atlantic Construction Co., which he organized and controlled; and, finally, through petitioner, into which Atlantic Construction was merged. Miller organized petitioner and is the controlling owner of its stock.

Miller's knowledge of engineering and construction was derived principally from his practical experience in these fields rather than from formal or academic training. He holds 10 patents on special foundations which he designed. Several buildings in Atlantic City are supported by Miller's patented foundations.

As president of petitioner, Miller's general duties are those of obtaining construction contracts, planning, arranging financing, designing, and supervising construction projects.

Petitioner's operations in 1940 were the largest in five years. In 1936 petitioner had a $2,000,000 contract. During 1940 petitioner had six construction projects in progress totaling over $3,000,000. The increased volume of petitioner's operations in 1940 imposed an additional burden on Miller.

Miller, in 1940, obtained a $400,000 loan for the benefit of petitioner. To obtain this loan he and his wife put up about $500,000 worth of collateral and security.

Also during 1940 petitioner unsuccessfully bid on approximately $25,000,000 worth of contracts. Miller was assisted in making the estimates for these bids by a small office staff, but was required to spend considerable time himself in their preparation and submission.

About 75 per cent of petitioner's construction work in progress during 1940 was being done by subcontractors. Miller acted as general field superintendent and engineer for petitioner in supervising the work of those subcontractors. It was necessary for him to travel from project to project to fulfill his supervisory functions. Difficulties were encountered with subcontractors who required financing and it was necessary in several instances for petitioner to finish work which certain subcontractors were unable to accomplish.

Miller's supervisory activities kept him away from Atlantic City almost five days a week. He kept in touch with his office by telephone and was required to do most of his office work at night and on week ends. Petitioner's office staff consisted of a bookkeeper, an office engineer, a secretary, and two clerks. The salaries of this staff ranged from $30 to $75 a week. Miller did not hire additional help for petitioner as his experience in the past with field superintendents and engineers had been unsatisfactory.

Page 731

In each of the years 1936 and 1937 Miller received as compensation $20,000, of which one-half was paid by the Atlantic Construction Co. and one-half was paid by petitioner. In 1938, 1939, and 1941 he was paid a basic salary of $12,000 a year without any bonus. For his services during 1940 he received as compensation a basic salary of $12,000 plus a bonus of $30,000, or a total compensation of $42,000. As controlling stockholder, Miller determined the amount of salary and bonus he was to receive.

Miller's total compensation of $42,000 for 1940 was accrued on petitioner's books in that year. On January 1, 1941, petitioner delivered to him two promissory notes payable to him on demand. On such note, dated December 30, 1940, was in the amount of $30,000, representing his bonus for 1940. The other note, dated January 1, 1941, was in the amount of $20,940, which included, among other items not here pertinent, his basic salary of $12,000 for 1940. Petitioner was financially able to pay these notes at all times material herein. According to petitioner's bookkeeper, current assets exceeded current liabilities as of December 31,1940, by some $88,000. According to respondent's reconstruction of petitioner's balance sheet as of December 31, 1940, total assets exceeded total liabilities by over $130,000. Petitioner had sufficient credit at the end of 1940 to have borrowed $42,000, if necessary. Miller did not present these notes for payment until December 31, 1942, at which time they were paid in full. Petitioner deducted for Federal tax purposes the amount of $42,000 representing Miller's compensation for 1940 as a business expense in that year. He included this amount for Federal tax purposes as part of his 1940 income.

Respondent determined that petitioner was not entitled to deduct the sum of $42,000 representing compensation for Miller's services during 1940. In the statement attached to the notice of deficiency, respondent stated in part as follows:

You contend that in the determination of your net income for 1940 you should be allowed a deduction for compensation of Anthony P. Miller based upon the sums of * * * $42,000 in 1940. It has been determined that a reasonable basis for compensation of Anthony P. Miller is * * * $25,000 for 1940. * * * It has also been determined that no amount is allowable in respect to the 1940 compensation since no payment was made within two and one-half months after the close of the taxable year as provided by section 24(c) of the Internal Revenue Code.

The amount of $25,000 constitutes a reasonable allowance for compensation to Miller for his services to petitioner during 1940.


In 1938 a group of labor union representatives, acting under the name of Providence Housing Corporation, were unsuccessfully attempting to persuade the Federal Housing Administration (hereinafter

Page 732

referred to as FHA) to insure a mortgage on a housing project in Atlantic City, New Jersey. Providence Housing Corporation appealed to petitioner for help. After preliminary discussions, petitioner agreed to lend its assistance in sponsoring the project. After negotiations, an arrangement was agreed to by FHA, the Irving Trust Co. of New York, and petitioner. Under this arrangement the Irving Trust Co. agreed to place the mortgage on the project and FHA agreed to insure such mortgage, provided, however, that petitioner raised the necessary junior capital.

This arrangement was carried into effect. The mortgage obtained from the Irving Trust Co. was in the principal amount of $875,000. The mortgage ran for 28 years, commencing May 1, 1939. Interest was at the rate of 4 1/2 per cent per accum. Interest alone was payable on the first day of August 1939, and quarter-annually thereafter up to and including the first day of November 1940. Thereafter, commencing on the first day of February 1941, quarter-annual installments of interest and principal were to be paid in the sum of $14,218p.75 each, such payments to continue quarter-annually thereafter on the first day of May, August, November, and February until the entire debt was paid. The whole balance of principal, if any, remaining unpaid, plus interest accrued, was due and payable on the first day of May 1967.

Pursuant to this arrangement, petitioner caused to be organized the Chelsea Housing Corporation (hereinafter referred to as Chelsea), which was to own and operate the proposed project. Petitioner's president, Miller, was made president of Chelsea. Petitioner, in fulfillment of its agreement with FHA and the...

To continue reading