Acer Realty Company v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 14 October 1941 |
| Docket Number | Docket No. 102119. |
| Citation | 45 BTA 333 |
| Parties | ACER REALTY COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
R. Shad Bennett, for the petitioner.
Carroll Walker, Esq., for the respondent.
This proceeding is for the redetermination of deficiencies in income and excess profits taxes and for penalties thereon for the taxable years ended January 31, 1936, 1937, and 1938, as follows:
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| Income tax || Exces profits tax
|----------------------||---------------------
Year | | 5% || |
| Deficiency | penalty || Deficiency | Penalty
--------------------------------|------------|---------||------------|--------
1936 __________________________ | $1,350.94 | $67.55 || $474.78 | $23.74
1937 __________________________ | 2,763.08 | 138.15 || 915.66 | 45.78
1938 __________________________ | 3,652.94 | 182.65 || 257.91 | 12.90
| __________ | _______ || __________ | _______
Total ___________________ | 7,766.96 | 388.35 || 1,648.35 | 82.42
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The issues are (1) whether or not salaries of petitioner's president and secretary-treasurer, in the amount disallowed by respondent, constituted "ordinary and necessary" expenses paid or incurred in carrying on the petitioner's business; (2) whether or not the petitioner was in constructive receipt of an unpaid portion of rent which was due it from its principal tenant; and (3) whether or not a 5 percent penalty should be imposed on petitioner on the ground of negligence or intentional disregard of rules and regulations. One other adjustment made by the respondent with respect to the profit realized on the sale of a bond was assigned as error but apparently was abandoned by petitioner, since no evidence relative thereto was submitted.
FINDINGS OF FACT.
Petitioner is a corporation organized in 1908, with its principal place of business at Big Bend and Grant Roads, St. Louis County, Missouri. It filed its income tax returns for each of the years here in question with the collector of internal revenue for the first collection district at St. Louis, Missouri.
Prior to 1933, practically the entire activity of petitioner was the holding of title to certain improved real estate in St. Louis County occupied under lease by the Glenwood Sanatorium Co., hereinafter referred to as the sanatorium, and the collection of rentals from that tenant. In 1933, plans were made for the remodeling and enlarging of the facilities leased to the sanatorium. Following this, petitioner's activities, in addition to collection of rentals, was the construction of certain new buildings, the remodeling of some of the old buildings, and the improvement and landscaping of a considerable additional area of the surrounding grounds.
Prior to his death in 1932, Henry North had been president of petitioner and also operated the sanatorium. After his death and during the taxable years here in question, petitioner's president was Anna M. Bennett and its secretary-treasurer was Bertha M. North. These individuals are, respectively, the widow and sister of Henry North. During this period, 279 of the 330 issued shares of stock of petitioner were owned by Anna M. Bennett and the others, with the exception of one share, were owned by or held in trust for Bertha M. North. All of the stock of the sanatorium was owned by these two individuals and the estate of Henry North.
Upon determining to remodel and expand the facilities of petitioner leased to the sanatorium, Mrs. Bennett and Mrs. North traveled through various states inspecting the facilities of different sanatoriums engaged in the same character of work as that carried on by petitioner's tenant, with a view to securing plans for the most modern and efficient type of facilities required. The program of construction was begun in July 1933. At that time it was difficult to borrow the necessary funds to finance the work. However, largely through the efforts of Mrs. Bennett, a loan of $20,000 was secured on a note signed by petitioner and the sanatorium as comakers, secured by a $25,000 deed of trust on the property owned by petitioner and also by certain securities belonging to petitioner and the sanatorium. Mrs. Bennett personally advanced, from time to time, funds of her own for the building program. No interest was charged by her on these advances. At times during the period of construction the amount owing Mrs. Bennett by petitioner was between ten and fifteen thousand dollars.
Petitioner's program of construction and improvement was carried on throughout the taxable years in question. Two buildings known as the North and South Buildings were modernized, a new barn was built, and a new building known as the Administration Building, representing 350,000 cubic feet of construction, was completed in 1935. Another new building of 210,000 cubic feet, known as the West Building, was begun in 1936 and completed in 1938. There was also constructed a modern occupational therapy building, two garages, two store buildings, and other improvements.
This program of construction and improvement was managed and directed by Mrs. Bennett and Mrs. North. In her planning and supervision of construction Mrs. Bennett was assisted and advised by her husband, who had considerable experience in such matters and was himself engaged in the construction business. The work was done through the purchase of materials and the hiring of labor and the letting of subcontracts for different parts of the construction. In this way the expense of a general contractor and a supervising architect was eliminated, resulting in a considerable saving to petitioner. Bids had been asked on the Administration Building without garage and a completed third floor and the lowest received was $106,000, whereas this building with garage and third floor was erected under the supervisions of petitioner's president and secretary-treasurer for less than $70,000. The construction of the other buildings and facilities was effected with a very considerable saving by reason of the method used by petitioner and through the supervision of the work by its president and secretary-treasurer.
Petitioner's president and secretary-treasurer drew no salaries until June 1, 1934, on which date the president was voted a salary of $325 per month and the secretary-treasurer $50 per month. These salaries continued until February 1, 1935, when they were increased to $650 and $100 per month, respectively. On August 1, 1935, the president's salary was again increased, to $975 per month, and the secretary-treasurer's salary was increased to $150 per month. These salaries remained at these amounts until February 1, 1938, at which time the expansion program was completed.
The amounts of the salaries claimed by petitioner on its returns for the years in question as ordinary and necessary expenses in carrying on its business and the amounts thereof allowed by respondent are as follows:
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| Salary of president || Salary of secretary-treasurer
|----------------------||------------------------------
| Claimed on | Allowed || Claimed on | Allowed
| return | || return |
-----------------------------|------------|---------||--------------|---------------
1936 _______________________ | $10,075 | $1,200 || $1,550 | $600
1937 _______________________ | 9,750 | 1,200 || 1,650 | 600
1938 _______________________ | 11,700 | 1,200 || 1,800 | 600
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Petitioner's president, Anna M. Bennett, performed all the services necessary to the management of the construction of the buildings, the landscaping, the location of the buildings, and building water lines. Bertha M. North, petitioner's secretary-treasurer, did not have the business ability of the president, but she helped in the management of petitioner's expansion program. She attended business and directors' meetings and passed on construction bids and obtained and furnished lien waivers.
Petitioner...
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