Bauer Bros. Co. v. Commissioner of Internal Revenue, 5270.

• Decision Date: 09 February 1931
• Docket Number: No. 5270.,5270.
• Citation: 46 F.2d 874
• Parties: BAUER BROS. CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

46 F.2d 874 (1931)

BAUER BROS. CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 5270.

Circuit Court of Appeals, Sixth Circuit.

February 9, 1931.

H. C. Corry, of Springfield, Ohio (Martin & Corry, of Springfield, Ohio, on the brief), for petitioner.

J. G. Remey, of Washington, D. C. (Mabel Walker Willebrandt, John Vaughan Groner, Dorothy A. Moncure, C. M. Charest, and D. V. Hunter, all of Washington, D. C., on the brief), for respondent.

Before MOORMAN and HICKS, Circuit Judges, and SIMONS, District Judge.

SIMONS, District Judge.

The petition is filed to review a decision of the United States Board of Tax Appeals redetermining a deficiency in income and excess profits taxes for the year 1918 against the petitioner. The petitioner kept its books, and its income was reported upon an accrual basis. In its return for 1918 it deducted as an expense for that year bonuses allowed to certain officers and employees which were paid in 1919, pursuant to a resolution passed at a meeting of its board of directors in the latter year. This deduction was disallowed by the Commissioner of Internal Revenue as an expense for 1918, and, upon appeal to the United States Board of Tax Appeals, the Commissioner's finding was upheld. Since the errors complained of in the decision of the Board of Tax Appeals are with a single exception, which is not deemed material, errors of law and not erroneous findings of fact, we accept the facts as found by the Board of Tax Appeals.

The petitioner is a close corporation controlled by three Bauer brothers, who own all of the preferred stock, and all but thirty shares of the common stock, the thirty shares of common stock being owned by three employees, who, with the Bauer brothers, make up the board of directors. The only reference to additional compensation for 1918 which appears in the petitioner's minutes is a resolution passed March 3, 1919, in part as follows:

"It was moved by Carl Caskey and seconded by W. E. Copenhaver that a bonus salary for the year 1918 be given to such officers of the Company and heads of Departments as have been instrumental in procuring the successful year's result for 1918, the amount of this bonus and the division of the same to be left to the discretion of the President."

It was customary for the directors of the petitioner to have but one meeting each year. This was usually held in the latter part of February or the early part of March. Officers and directors were elected at this meeting, after which the meeting was usually adjourned. The three brothers met frequently in informal conferences for the purpose of planning, directing, managing, and supervising the conduct of the business. In these conferences the three brothers decided during the summer of 1918 that, beginning with that year, bonuses, rather than salary increases, would be given to deserving employees. Before the end of the year, they decided upon the men to whom bonuses would be paid and the amount to be paid each for that year. No book entry or written memorandum relating to bonuses was made during the year. The policy of bonus payments was adopted after the brothers realized that other concerns were increasing the amount of compensation paid employees, that some of their own men were demanding increases, and could get better salaries elsewhere, and that it would be advisable to satisfy them in this way. Thereafter, if a man to whom a bonus was to be paid complained to one of the brothers, he would be told that bonuses were to be paid to deserving men, and that he would receive a bonus. Salaries were not usually discussed at the annual meeting of the board of directors, but it does not appear how salaries had been decided upon previously. Caskey, who kept the books of the petitioner, was not informed of the amounts of the bonuses or of the men who were to receive bonuses until several days after the meeting of March 3, 1919. As soon as he received a list from the president, he made the necessary book entries to distribute the bonuses through credit accounts before closing the books for 1918. It was usual for the books to be kept open until inventories had been completed and dividends decided upon. The taking of the inventory usually required about six weeks, and was begun immediately after the close of the year.

The issue before the Board of Tax Appeals, and now before the court, is whether the additional compensation paid to officers and employees of the petitioner for services rendered during 1918 was an allowable deduction incurred during the year 1918 under the provisions of section 234(a)(1), and section 200 of the Revenue Act of 1918 (40 Stat. 1058, 1077). The applicable language of section 234 is as follows:

"Sec. 234(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually...