Twin City Tile & Marble Co. v. Commissioner of Internal Revenue
| Decision Date | 04 May 1927 |
| Docket Number | Docket No. 8730. |
| Parties | TWIN CITY TILE & MARBLE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
C. R. Fletcher, Esq., for the petitioner.
D. D. Shepard, Esq., for the respondent.
This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921 in the amounts of $1,238.81, $11,770.03, and $18,251.88, respectively. The portions of the deficiencies in controversy arise from the disallowance by the Commissioner in each year of certain amounts deducted by petitioner as salaries of officers and employees who were also stockholders.
FINDINGS OF FACT.
In May, 1910, Frank Armstrong, Arne Verlo, and James Taylor associated themselves as a partnership under the name of the Twin City Tile & Marble Co., with its place of business at Minneapolis, Minn. Between May, 1910, and March, 1911, F. O. Streed, E. W. Streed, and H. B. Watson became members of the partnership. The business of the partnership consisted of procuring and performing contracts for the installation of tile and marble.
From time to time after the partnership was organized the various members contributed to its capital in varying amounts. The capital contributed by each member up to and including December 31, 1910, was as follows:
James Taylor ____________________________ $1,697.86
Arne Verlo ______________________________ 1,162.49
Frank Armstrong _________________________ 816.30
F. O. Streed ____________________________ 1,114.98
H. B. Watson ____________________________ 386.48
In March, 1911 the petitioner was incorporated under the laws of Minnesota, and took over the business of the partnership. The corporation had its principal office in Minneapolis and has continued to procure and perform contracts for the installation of tile and marble work in residences and in public and other buildings where such work is required.
The original authorized capital stock of the corporation was $30,000, par value common stock and $20,000 par value 7 per cent preferred stock. In 1917 the authorized capital stock was increased from $50,000 to $100,000, divided into $70,000 par value common stock and $30,000, 7 per cent preferred stock. All of the stock was divided into shares having a par value of $100 each.
The members of the partnership became stockholders in the petitioner corporation and immediately after its organization stock was issued. The holdings of the various stockholders were increased so that the number of shares held by them was as follows on the dates indicated:
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| Taylor. | Verlo. | Armstrong. | F. O. | Watson. | E. W. | Hidding. | F. A
| | | | Streed. | | Streed. | | Streed
---------------------------------------|---------|--------|------------|---------|---------|---------|----------|--------
Common stock holdings: | | | | | | | |
| | | | | | | |
May 1, 1911 ______________________ | 22 | 18 | 17 | 25 | 12 | 11 | 0 | 0
Apr. 1, 1912 _____________________ | 42 | 40 | 34 | 55 | 27 | 24 | 0 | 0
Sept. 1, 1913 ____________________ | 50 | 50 | 50 | 55 | 45 | 50 | 0 | 0
Jan. 31, 1918 ____________________ | 100 | 100 | 100 | 105 | 95 | 100 | 0 | 0
Mar. 14, 1918 ____________________ | 100 | 100 | 100 | 100 | 100 | 100 | 54 | 0
Mar. 7, 1919 _____________________ | 100 | 100 | 100 | 100 | 100 | 100 | 59 | 0
May 1, 1919 ______________________ | 137 | 100 | 100 | 121 | 0 | 106 | 79 | 16
Jan. 1, 1920 _____________________ | 137 | 100 | 100 | 121 | 0 | 106 | 85 | 16
July 20, 1920 ____________________ | 137 | 100 | 100 | 121 | 0 | 106 | 105 | 16
Feb. 21, 1921 ____________________ | 137 | 100 | 100 | 121 | 0 | 106 | 120 | 16
| | | | | | | |
Preferred stock holdings: | | | | | | | |
| | | | | | | |
July 31, 1917 ____________________ | 0 | 0 | 0 | 0 | 0 | 0 | 50 | 0
Jan. 31, 1918 ____________________ | 16 | 16 | 16 | 16 | 16 | 16 | 50 | 0
Mar. 7, 1919 _____________________ | 25 | 25 | 25 | 25 | 25 | 25 | 0 | 0
Feb. 21, 1921 ____________________ | 39 | 35 | 35 | 37 | 25 | 36 | 4 | 2
July 5, 1921 _____________________ | 52 | 45 | 45 | 49 | 25 | 46 | 16 | 3
July 26, 1921 ____________________ | 54 | 46 | 46 | 51 | 25 | 47 | 17 | 4
Apr. 8, 1922 _____________________ | 69 | 46 | 46 | 51 | 0 | 47 | 17 | 4
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In 1917 T. G. Hidding, who formerly had been connected with the Alberene Stone Co., acquired stock in the petitioner corporation and subsequent to August 1, 1917, and throughout the years involved in this proceeding was a stockholder and an officer.
H. B. Watson severed his connection with the company in 1919, selling his common stock to the other stockholders and retaining his preferred stock until July 26, 1921.
Until 1915 the greater part of the business of the corporation was buying and installing tile. In 1915 petitioner purchased two marble-milling machines and began to do some of its own cutting and polishing of marble. In 1920 additional marble-milling machinery was installed.
The following statement shows for the years 1911 to 1921 the petitioner's net sales, amounts claimed by petitioner as salary paid officers and stockholding employees and profits, salaries of officers and employees having been considered in determining the profits:
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| | Total salaries |
Year | Net sales. | officer-stockholders. | Profits
--------------------------|-------------|-----------------------|----------
| | |
1911 ____________________ | $112,137.45 | $12,420.00 | $9,941.10
1912 ____________________ | 170,817.55 | 12,600.00 | 13,520.10
1913 ____________________ | 239,235.22 | 12,600.00 | 8,336.07
1914 ____________________ | 221,443.38 | 12,720.00 | 13,657.34
1915 ____________________ | 220,145.69 | 12,477.95 | 9,799.78
1916 ____________________ | 218,522.60 | 12,708.50 | 13,506.40
1917 ____________________ | 197,293.94 | 13,635.17 | 6,678.03
1918 ____________________ | 260,498.47 | 20,644.72 | 6,374.08
1919 ____________________ | 212,318.00 | 19,110.63 | 11,245.88
1920 ____________________ | 346,368.60 | 44,156.94 | 21,342.26
1921 ____________________ | 585,071.50 | 53,256.24 | 52,499.41
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The following is a statement of the amounts paid by the petitioner corporation during the years 1911 through 1921 to its officers and such employees who were stockholders which it claimed to be compensation for services rendered:
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Year. | F. O. | | | | | E. W. | | F. A.
| Streed. | Taylor. | Hidding. | Armstrong. | Verlo. | Streed | Watson. | Streed.
------------|-----------|------------|----------|------------|-----------|-----------|-----------|----------
1911 ______ | $2,400.00 | $1,800.00 | ________ | $1,800.00 | $1,800.00 | $1,800.00 | $1,800.00 | $1,020.00
1912 ______ | 2,400.00 | 1,800.00 | ________ | 1,800.00 | 1,800.00 | 1,800.00 | 1,800.00 | 1,200.00
1913 ______ | 2,400.00 | 1,800.00 | ________ | 1,800.00 | 1,800.00 | 1,800.00 | 1,800.00 | 1,200.00
1914 ______ | 2,400.00 | 1,800.00 | ________ | 1,800.00 | 1,800.00 | 1,800.00 | 1,800.00 | 1,320.00
1915 ______ | 2,400.00 | 1,800.00 | ________ | 1,667.55 | 1,618.45 | 1,781.95 | 1,800.00 | 1,410.00
1916 ______ | 2,400.00 | 1,800.00 | ________ | 1,832.40 | 1,653.05 | 1,723.05 | 1,800.00 | 1,500.00
1917 ______ | 2,400.00 | 2,100.00 | $750.00 | 1,602.95 | 1,751.04 | 1,731.18 | 1,800.00 | 1,500.00
1918 ______ | 3,300.00 | 3,000.00 | 2,286.00 | 2,560.00 | 2,666.66 | 2,631.18 | 2,700.00 | 1,500.00
1919 ______ | 3,546.00 | 3,402.00 | 2,611.00 | 2,505.60 | 2,707.21 | 2,492.82 | ________ | 1,846.00
1920 ______ | 7,823.96 | 8,313.04 | 6,070.04 | 6,298.08 | 6,480.08 | 6,168.66 | ________ | 3,003.08
1921 ______ | 9,759.96 | 10,505.04 | 9,127.50 | 7,746.58 | 8,150.58 | 7,966.58 | ________ |
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