JH Martinus & Sons v. Commissioner of Internal Revenue

• Decision Date: 31 December 1940
• Docket Number: No. 9578.,9578.
• Citation: 116 F.2d 732
• Parties: J. H. MARTINUS & SONS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

116 F.2d 732 (1940)

J. H. MARTINUS & SONS v. COMMISSIONER OF INTERNAL REVENUE.

No. 9578.

Circuit Court of Appeals, Ninth Circuit.

December 31, 1940.

Philip G. Sheehy, of San Jose, Cal., and W. H. Morrissey, of Redwood City, Cal., for petitioner.

Samuel O. Clark Jr., Asst. U. S. Atty. Gen., and Norman D. Keller, Morton K. Rothschild, and Michael H. Cardozo, IV, Sp. Assts. to Atty. Gen., for respondent.

Before MATHEWS, HANEY, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

Petition to review a decision of the Board of Tax Appeals sustaining the assessment of a deficiency in income taxes paid for the year 1935. The question presented is whether the taxpayer may deduct as a business expense salaries authorized but not paid during the tax year, where the return was prepared on the cash basis.

The taxpayer is a small family corporation engaged in farming. The officers and principal stockholders, members of the Martinus family, give their full time to the business. At a meeting of the directors and stockholders held during 1935 salaries of $3,400 were authorized for each of three officers. Each officer had the privilege of drawing on the corporate bank account without consulting any of the others, and it was their custom to draw salaries as needed. The salaries authorized were drawn to a partial extent only, that is, the officers actually drew during 1935 the total sum of $1,131.07 on salary account. In computing the net corporate income for the year the whole authorized amount of $10,200 was deducted. The Commissioner allowed salary deductions in the amounts actually paid but disallowed the excess.

The corporate accounts were kept and income tax returns ostensibly made on the cash basis. The sums in excess of the amounts actually withdrawn by the officers were not entered or credited in the books, which were informal and maintained irregularly. Notes were not given for the unpaid amounts and no entries appear showing that the money was set aside for the officers. However, each of the three reported in his individual return for 1935 the full $3,400 as taxable income.

The controlling provisions of the Revenue Act of 1934 are copied on the margin.¹ In a case like the present, where a corporation maintains its accounts on the basis of cash receipts and disbursements, reasonable salaries actually paid to officers are entitled to be deducted in the year in which the payment is made. Conversely, taxpayers keeping their accounts and making their returns on an accrual basis may deduct salaries accruing although not paid during the tax year. Petitioner confessedly belongs in the first category and was entitled to deduct salaries to the extent it actually paid them, but no more. As said in Massachusetts Mutual Life Ins. Co. v. United States, 288 U.S. 269, 53 S.Ct. 337, 339, 77 L.Ed. 739, "it is settled beyond cavil that taxpayers * * * may not accrue receipts and treat expenditures on a cash basis or vice versa. Nor may they accrue a portion of income and deal with the remainder on a cash basis, nor take deductions partly on one and...