Young Iron Works v. COMMISSIONER OF INTERNAL REVENUE

• Citation: 21 BTA 1238
• Decision Date: 19 January 1931
• Docket Number: Docket No. 33329.
• Parties: YOUNG IRON WORKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

21 B.T.A. 1238 (1931)

YOUNG IRON WORKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 33329.

Board of Tax Appeals.

Promulgated January 19, 1931.

Raymond G. Wright, Esq., and S. F. Racine, C. P. A., for the petitioner.

Arthur H. Murray, Esq., for the respondent.

The respondent has asserted a deficiency in income tax for the year 1923, in the amount of $1,895.18. The only issue is whether the Commissioner erroneously disallowed certain losses alleged to have been sustained in 1921 and 1922 as net losses applicable for the reduction of petitioner's taxable income in 1923. This issue in its turn depends upon the deductibility of certain amounts from income in the years 1921 and 1922, as salaries of officers received in such respective years.

FINDINGS OF FACT.

Petitioner is a Washington corporation with its principal office in Seattle. It was organized in 1920, with authorized capital stock of the par value of $20,000, subscribed for and issued to G. T. Young, O. A. Young, and John Isaacson, in the respective amounts of $4,000, $4,000, and $12,000. In 1923 the authorized capital was increased to $100,000 and additional stock was issued, so that all outstanding shares were held in the year 1923 by G. T. Young, O. A. Young, John Isaacson, Paul Isaacson, and A. E. Hanson, in the respective amounts of $14,000, $14,000, $50,500, $7,500, and $14,000. Considerations for the issue of the additional stock were certain unpaid salaries due to the Youngs and Isaacsons, and a patent which was paid in by Hanson.

At or about the date of beginning business, salaries of officers of the petitioner were authorized by proper corporate action as follows: John Isaacson, G. T. Young, and O. A. Young, $500, $350, and $350 per month, respectively. There was no change in such authorized salaries in 1921 or 1922, which were reasonable compensation for the services rendered.

In the years 1921 and 1922 the petitioner paid on account of salaries the amounts of $6,779.34 and $10,471.60, and deducted such amounts from its income-tax returns for such respective years. The amounts so paid and deducted were allowed. Such amounts were described in the income tax returns for the years involved as officers' salaries, $2,325, $3,140 and salaries $4,454.34 and $7,471.66, respectively. At December 31, 1922, the undrawn authorized salaries of officers had not been credited to the personal accounts of the officers, charged to expenses, or deducted from income in either 1921 or 1922.

In the year 1921, without the deduction of the undrawn salaries in controversy, the petitioner sustained a net operating loss in the amount of $130.08; in 1922, without the deductions now claimed, it realized a net gain in the amount of $1,193.73; in 1923, deducting only the salaries actually paid, it realized a net gain in the amount of $15,777.94, and on its income-tax return deducted the amount of $13,808.49 as a net loss brought forward from the two preceding years. Upon audit the Commissioner disallowed the net loss deduction, made other minor adjustments, and asserted the deficiency here in controversy.

The petitioner kept its accounts and rendered its income tax return on the accrual basis.

Some time in January, 1923, the capitalization of the petitioner was increased to enable it to acquire a patent deemed vital to its business that was owned by Hanson. As one of the conditions of the recapitalization the officers of the petitioner accepted additional stock for unpaid salaries then due, and agreed that thereafter their compensation should be the amounts actually paid them in cash in each year.

Isaacson was president and general manager and treasurer of the petitioner in 1920, 1921, 1922, and 1923. Although engaged in other important undertakings, he devoted an average of 50 per cent of his time to the affairs of petitioner. Gustave Young was shop superintendent in the same years and was in charge of efficiency, shop management, and production. There were from 30 to 50 men under his direction. Oscar Young was in charge of furnaces and forgings. Both of the Youngs devoted all their time to the business. The gross sales of the petitioner in 1921, 1922, and 1923 were in the amounts of $69,622.65, $81,893.74, and $142,440.29, respectively.

OPINION.

LANSDON:

The primary question here involved is whether, in the circumstances set out above, the full amounts of authorized officers' salaries may be deducted from the petitioner's income in the years 1921 and 1922. Such years are not before us in this proceeding, but the facts in relation thereto are essential to the redetermination of the deficiency here in controversy...