Geiger & Peters, Inc. v. Comm'r of Internal Revenue, Docket No. 53746.

• Decision Date: 12 March 1957
• Docket Number: Docket No. 53746.
• Citation: 27 T.C. 911
• Parties: GEIGER & PETERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

27 T.C. 911

GEIGER & PETERS, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 53746.

Tax Court of the United States.

Filed March 12, 1957.

[27 T.C. 911]

Lester M. Ponder, Esq., and Raymond W. Gray, Jr., Esq., for the petitioner.

[27 T.C. 912]

Elmer E. Lyon, Esq., for the respondent.

The petitioner deducted as an expense on its Federal income tax returns certain amounts for salary, rent, and interest expense. Such amounts were credited on the books of the petitioner but not actually paid to the payees within 2 1/2 months after the close of the taxable year for which such amounts were claimed as deductions. Held, such amounts were includible in the gross income of the payees by application of the doctrine of constructive receipt and the claimed deductions are not barred by section 24(c), I.R.C. 1939, as amended by the Technical Changes Act of 1953. Held, further, the amounts claimed as deductions for officers' salaries were reasonable.

BRUCE, Judge:

The respondent determined deficiencies in the income taxes of petitioner for the years and in the amounts as follows:

+--------------------+
                ¦Year ¦Deficiency ¦
                +------+-------------¦
                ¦1948 ¦$16,840.63 ¦
                +------+-------------¦
                ¦1949 ¦18,259.90 ¦
                +------+-------------¦
                ¦1950 ¦17,737.48 ¦
                +--------------------+
                

Two questions are presented: (1) Whether the amounts of interest and rent and a portion of the officers' compensation claimed by petitioner as deductions on its returns for 1948, 1949, and 1950 are prohibited as deductions by the provisions of section 24(c), as amended, of the Internal Revenue Code of 1939; and (2), if not so prohibited, whether the portions of the officers' salaries which have been disallowed by respondent unreasonable and excessive salaries within the meaning of section 23(a), Internal Revenue Code of 1939.

FINDINGS OF FACT.

Some of the facts have been stipulated and are incorporated herein by this reference.

Petitioner is a corporation organized on July 12, 1929, under the laws of the State of Indiana, with its office and principal place of business at Indianapolis, Indiana. Petitioner's Federal income tax returns for the years in issue were prepared and filed on an accrual basis of accounting and on the basis of a fiscal year ending June 30. Petitioner filed its Federal income tax returns for the taxable years in issue with the collector of internal revenue for the district of Indiana.

Two brothers, Oscar and Harold Peters, and their mother, Lena Peters, each owned one-third of the petitioner's capital stock during the years in issue. During this period the officers and directors of the petitioner consisted of Harold I. Peters, president and treasurer; Oscar C. Peters, secretary; and Lena B. Peters, vice president, each of whom filed his or her individual Federal income tax returns for the years 1948, 1949, and 1950 on a calendar year basis and cash receipts and disbursements method of accounting.

Prior to and during the years in issue, petitioner was engaged in the business of fabrication and erection of structural and ornamental steel. Fabrication of steel is a process whereby lengths of raw steel obtained either from warehouses or from the steel mills are drilled and shaped preparatory to their use for construction purposes. To carry out the fabrication process the blueprints of the proposed construction must be examined, and from them detailed drawings of the fabricated steel requirements must be prepared showing the precise shapes necessary, as well as the points where drilling is required. Subsequently a ‘layout man’ transfers the data from the drawings to

[27 T.C. 913]

the raw steel itself and the metal shop of the petitioner shapes and drills the steel accordingly. Maximum tolerances allowed in this fabrication process do not exceed one-fourth inch.

The petitioner employs about 35 men. Its operation is divided into two main departments, the office force and the metal shop.

Harold I. Peters has been employed by the petitioner continuously since 1934. During the years in issue Harold was in charge of the office management of the petitioner. In this capacity he performed the following duties: Supervising the bookkeeping; estimating the costs of prospective fabricating jobs and submitting bids; buying the raw steel used by the petitioners; and hiring the engineers and office personnel. During the years in issue Harold spent 50 to 60 hours per week on company business.

Oscar C. Peters has been employed by the petitioner since 1929 and has worked almost exclusively in the metal shop. In the early 1930's Oscar became shop manager of the petitioner corporation and occupied that position during the taxable period in issue. In that capacity he supervised the entire fabrication process in the plant and was responsible for its production. When necessary Oscar hired and trained new personnel for jobs in the plant and as shop manager he was responsible for the steady flow of the fabricated steel to the erection site in the field. He also assisted Harold in the procurement of raw steel and other necessary material.

Oscar and Harold were the only active executives of the corporation during the years in issue.

During the year 1941 Harold, Oscar, and Lena loaned petitioner the amount of $18,900 and petitioner executed demand notes for that amount bearing interest at the rate of 5 per cent per annum. The amount of $10,500 remained unpaid during the entire period in issue. This amount was represented by demand notes payable in the following respective amounts:

+------------------------+
                ¦Harold I. Peters ¦$4,000¦
                +-----------------+------¦
                ¦Oscar C. Peters ¦4,000 ¦
                +-----------------+------¦
                ¦Lena B. Peters ¦2,500 ¦
                +------------------------+
                

On its books of account petitioner debited an expense account, designated ‘Interest and Discount,‘ under date of June 30, 1948, 1949, and 1950, in the amount of $525, and credited the ‘Personal’ accounts of Harold and Oscar in the amount of $200 each and the ‘Personal’ account of Lena in the amount of $125. These amounts were for interest on petitioner's demand notes payable to these individuals for each taxable year. Such amounts were included as gross income for the years 1948, 1949, and 1950 in the income tax returns of each individual and taxes were paid thereon. The respondent disallowed the entire amount of this claimed interest expense.

[27 T.C. 914]

During the taxable years in issue petitioner occupied a building owned by Harold, Oscar, and Lena as tenants in common.

On its books of account petitioner accrued in an expense account designated ‘Rent’ (for its use and occupancy of the business property leased from the Peters) the amount of $4,800 for the taxable year 1949 and $7,200 for...