APPEAL OF HECHT

• Decision Date: 11 July 1925
• Docket Number: Docket No. 2096.
• Citation: 2 BTA 319
• Parties: APPEAL OF MEYER HECHT.
• Court: U.S. Board of Tax Appeals

2 B.T.A. 319 (1925)

APPEAL OF MEYER HECHT.

Docket No. 2096.

Board of Tax Appeals.

Submitted May 25, 1925.

Decided July 11, 1925.

G. H. Engelhard, Esq., for the taxpayer.

Willis D. Nance, Esq., for the Commissioner.

Before IVINS, MARQUETTE, and MORRIS.

This appeal is taken from a determination by the Commissioner of a deficiency in income taxes for 1919 of $47,761.41, arising from the disallowance as a deduction of $94,309.02 of the $114,309.02 which the taxpayer claims to have paid to his son as salary in that year. The sole question at issue is the reasonableness of the deduction allowed by the Commissioner for such salary. The appeal was presented upon depositions and exhibits filed therewith.

FINDINGS OF FACT.

The taxpayer in 1919 was in the hide business in New York City. He had been in that business for about forty-six years prior to 1919. Since 1889 he had been operating as a sole trader, in business for himself.

George J. Hecht, the only son of the taxpayer, was graduated from the College of Arts and Sciences of Cornell University in 1917, at the age of 22, with the degree of Bachelor of Arts, having taken courses in economics, business law, accounting, foreign languages, and other subjects. While he was in college he was business manager of the "Cornell Era," a college magazine. After graduation he was connected with the American Ambulance Field Service and the National Committee of Patriotic Societies for a time, thereafter going to Washington, where he served in the Bureau of Research of the War Trade Board, working on statistics of hides and skins and tanning materials, preparing certain reports, in the preparation of which he made use, among other sources, of information received from his father. After so serving for a period which is not shown by the record, he was enlisted in the United States Army as a private and served in the Statistical Division of the General Staff, working on statistics of hides and skins, computing raw material requirements for the Army.

The taxpayer, from the time of his son's birth, had planned taking him into his business and eventually making him his successor and heir. On learning, in December, 1918, that his son was about to be honorably discharged from the Army, he wrote him a letter, in part, as follows:

As you said that the B & C matter was dropped, I today ordered a desk for you at the office, and we look forward to have you with us on the turn of the year. I will not write much more than this — you know how I feel. The day of your entry into my business is what I have been looking forward to since the day you were born. I am glad to think I have an heir to succeed to the business that I have worked up since I was a boy. When I see you I will tell you more.

The son was discharged from the Army about December 18, 1918, and returned to his home. Conferences were had between the taxpayer, his wife, and his son, at which the wife suggested that the son be taken into the father's business as a partner on a 50 per cent basis, but the father refused this, agreeing to take him into the business and give him 25 per cent of the net profits. The taxpayer decided to do this partly by reason of the services he expected to receive and partly because the person with whom he was dealing was his son. The son accepted.

On the first working day of the year 1919 the son went into the taxpayer's business. The taxpayer furnished a large floral horseshoe emblazoned with the legend "Success," and the employees of the taxpayer sent a large basket of roses. The entire staff was called into the taxpayer's office and a photograph was taken of taxpayer, son, staff, and floral offerings. The taxpayer furnished information to the "Shoe and Leather Reporter" and the "Hide and Leather Review," trade periodicals, which resulted in their publishing articles to the effect that the son had entered the taxpayer's business, mentioning the son's graduation from college and his war record, including the statement that he had founded the Bureau of Cartoons of the Committee of Public Information.

During the year 1919 the son devoted his entire time to the taxpayer's business, acting as assistant to the taxpayer in the management, making business trips, inspecting hides, etc.

The son was not paid a regular salary during 1919, but drew such money as he needed—approximately $10,000 during the year. These withdrawals and the balance of his 25 per cent of the net profits were not charged to salary account on the taxpayer's books, but were entered on an account carried in the son's name. At the end of the year the balance of the 25 per cent due him was credited to him on such account.

The net profits of the taxpayer for the years 1912 to 1923, as shown by his books (before deducting the son's compensation in the years beginning with 1919), were:

                1912 ___________________________________ $107,042.86
                1913 ___________________________________   71,094.09
                1914 ___________________________________   71,660.67
                1915 ___________________________________  163,107.50
                1916 ___________________________________  193,739.67
                1917 ___________________________________  138,231.90
                1918 ___________________________________   62,597.80
                1919 ___________________________________  457,236.09
                1920 ___________________________________

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