A сorporate taxpayer seeks review of a decision of the Tax Court, which held that the amounts paid by it as “commission” to one of its officers — the owner of approximately 70 per cent of its capital stock — did not represent “compensation for personal services actually rendered”, but constituted in reality and fact a distribution of corporate profits in lieu of dividends, and that such payments therefore were not deductible, for income tax purposes, as “ordinary and necessary expenses” in carrying on the corporate business, under section 23(a) (1) (A) of the Internal Revenue Code, 26 U.S.C.A. § 23(a)(1)(A).
The facts which follow are taken from the findings of the Tax Court, and these facts are not assailed herе.
The corporation had been organized in 1941 by Melvin H. Heil and Carol W. Schuermann for the purpose of engaging in the business of selling beauty-parlor supplies. Mrs. Schuermann contributed $3400 in cash and Heil $1500, for which amounts stock was issued to them. The corporation thus had a paid-in capital of $4900, and this amount was never increased. Both contributors became officers of the corporation.
Heil, who had previously been a beauty-supply salesman, was made president, took charge of the selling activities and devoted his full time to the business. The corporation had a force of four to seven salesmen. Mrs. Schuermann, who was the operator of a local beauty shop, devoted no regular time to the affairs of thе corporation. “From time to time”, however, she did render “certain services”, such as “aiding and assisting customers of beauty supply equipment by explaining hair dyes, permanent waving and hair tinting, and by showing them how to handle and use certain equipment.” “On occasion she also participated in discussion * * * regarding the problem of business expansion.” All of these services “she was always available to render * * * whenever needed.”
Her position as officer carried no prescribed salary, but each year, the board of directors adopted a resolution allowing her “5% of the total net sales for the year” as “commission”, the amount of which was computed and credited to her account at the close of the year. For the years 1943, 1944 and 1945, which are the taxable years here involved, these amounts had been, respectively, $6,305.75, $7,112.53, and $10,054.56.
The Tax Court made the following appraisal of the various elements of the situation: “The record does not show that the salе of petitioner’s products was in any way increased as a result of services rendered by Mrs. Schuermann. There is no showing that the petitioner’s volume of business increased or decreased in any proportion to an increase or deсrease in Mrs. Schuermann’s activities. The so-called commissions paid by petitioner to its major stockholder apparently bear no demonstrable relation to any personal services actually rendered by the recipient. * * * The fаcts that the payments bore no relation to the amount of services rendered and were a fixed percentage of net sales, which percentage did not vary from year to year, coupled with the facts that the recipient wаs a 74 per cent [sic] stockholder and that there is no evidence that, although the business was profitable, any dividends, as such, were ever paid, leads us to conclude that these payments were, in fact and in reality, distributions of profits in lieu of dividends.”
Any рayment arrangement between a corporation and a stockholder— and particularly a major stockholder, with his normal power of control — is always subject to close scrutiny for income tax purposes, so that deduction will nоt be made, as purported salary, rental or the like, of that which is in the realities of the situation an actual distribution of profits. 4 Mertens Law of Federal Income Taxation § 25.46, pp. 399, 400. And we have previously held that whether-or to what extent paymеnts made by a corporation to a stockholder represent compensation for services or constitute a distribution of profits is
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essentially the determination of “a matter purely of fact.” Twin City Tile & Marble Co. v. Commissioner of Internal Revenue, 8 Cir.,
Such a determination is one that is entitled to be made on all the elements of the particular case. Ordinarily, where the payments are found to constitute a dostribution of profits, the evaluation will be one that has been arrived at by conclusionary inference. But where the inference has a rational basis, m the sense that there are circumstances of logical probative force to support it, m relation to and on a consideration of the evidence as a whole, there is no right on our part to touch such determination as the Tax Court may have made. All of the probative evidence-circumstances as wеll as direct testimony-necessarily is open to and should be considered by the Tax Court in resolving the factual probabilities of the situation, and it cannot be compelled to accept at face value the naked, interested testimony of the corporation or the stockholder, merely because that testimony is without direct contradiction by other witnesses-as the taxpayer here argues ought to have been done. Cf. Rand v. Helvering, 8 Cir.,
Appraising the record on this basis, as wе must do, it is not possible for us to say that the Tax Court’s finding here, that the payments made to Mrs. Schuermann were, “in fact and in reality, distributions of profits in lieu of dividends,” is without substantial evidence to support it.
The annual payments of over $6,000, $7,000 and $10,000, successively made to her, were claimed to represent compensation for explaining or demonstrating “hair dyes, permanent waving and hair tinting” and the use of “certain equipment.” What had been the frequency of these explanations or demonstrations, or hоw much time they had consumed, was not shown, Whether they were engaged in formally at the corporation’s place of business or occurred as mere incidents of permitted observation of routine operations at her beauty shop was similarly not revealed. All that the Tax Court was told was simply that, while Mrs. Schuermann gave no regular time to the corporation’s business, she had been called upon “from time to time” to make explanations or demonstra- and that «she was always available to r£nder such scrvices whenever needed.” Tbe record further .g without specific Hght Qn whether what she did was a normal factor ^ ^ operation of such a business Qr had any commercial value as contributing tQ tfae effecting or increasing of sаles, so ^ tbe situation would not be subject t0 ^ inference that it had been engaged in by ^ corporation only as a stockholder actiyity becaus,e she chanced tQ be a beauty_ , ODerator
ASain> no Part of the s°-called commlssion” was Pald or supposed to be paid to her throu^h the co”se of th" year’ 1 c clal“ed serJlces mfht be rendered, such as would be tbe s*™*™ no^ally m the case of servlces rendered and “t“ded í0 be compensated for as one of the ordinary and ^cessary incidents of regular commer,clal °Peratlon- Instead she was to be Pald a sum annually ^ tbe corporation, whose amount was to await computation and ^location at the end of the year m relationship to total net sales , m the fasblоn of a determination and distribution of earnings. And the making of payments to her in the manner and to the extent done always had the practical significance and result of leaving the corporation without need or occasion to conсern itself about profits or dividends as such for. the two stockholders.
Viewing ^ Qf these dements aga¡nst the background and setting of Mrs. Schuermann’s dominant capital contribution in getting the business started, of Heil’s intended role as developer and operator of the business, of the growth which the business came to make, of the discussion shown by the record to have been had from time to time about expanding the business and its capital needs, and of Heil’s testimony as to Mrs. Schuermann’s readiness at all times *196 “to put morе money into the business,” we think it must be held that there existed an ample evidentiary basis of circumstances of logical probative force to warrant, a reasonable mind in concluding that what Mrs. Schuermann’s contribution to the business was intended to be and what she was being compensated for was financial and not service relationship; that her concern was about obtaining, and her position was used to command, return upon her mvestment; that the fixed, unvarying percentage of total net sales for the year allowed her, from the time the corporation began, was, from its inception and throughout, related to the money which she had furnished and not to the vaguely described, incidental demonstrations of hair dyes, etc., which she sporаdically may have been called upon to make; and that the amount paid her in a lump sum, after each year’s business had been closed, represented m fact a distribution to her of net earnings or profits, which, except for her stockholder position, would not have been made the subject of the arrangement for purported compensation or of payment to her by the corporation , otherwise than m dividends.
Mrs. Schuermann did ¡however perform “certain services” for the corporation, as the Tax Court recognized. Services actually rendered, which are ordinary and necessary in the conduct of a business, and for which compensation has been paid, are of course properly a subject for deduction or credit, under section 23(a)(1) (A) of the Internal Revenue Code, to the extent of their reasonable value, having due regard for such margin of prudent judgment as may within natural managerial prerogative be legitimately exercisеd. And deduction or credit on such a basis should be allowed, if the evidentiary situation is appropriate for the purpose, even though the corporation, in the payments which it has made, has gone beyond these bounds and has been guilty, in part at least, of attempting to distribute profits as purported compensation.
But the taxpayer is not in a positíon t0 complain of the Tax Court’s failure to bave m,ade suob an allowance, in any case wiiere the evidence does not with suffident definiteness show the nature and the amount of the serviceSj to remove any stockholder sinecural tinge, to establish tbe;r ordinary and necessary relationship tQ & carrying on of the businesS) and to enable their fair v£dlle t0, be reasonably determined. In such a situation it may properly be ,held that the taxpayer has failed to sustajn tbe burden resting upon him of demonstrating that the Commissioner’s action, in mak¡ng no sucb allowance, was wrong, See National Weeklies, Inc., v. Commissioner of Internal Revenue, 8 Cir.,
TT .. . Here, as has been pointed out, it was not ... ’ . ., ’ . ^ . possible to say from the evidence that such services as Mrs. Schuermann rendered had been of any substantial nature, either in time expended, or in necessary incidence to the business, or in results contributed. On ad these as well as any other evaluative aspects of the services rendered, the record is wholly vague and unilluminating. And, as a matter of fact, the taxpayer’s present brief does not attempt to argue that, if all tbe amount which. Mrs. Schuermann received was not entitled to be paid as compensation, -the Tax Court should have made a determination and allowance of what the services which she rendered were reasonably worth. What has been said is intended merely to make it impossible to attempt to inject any such contention by a petition for rehearing,
The decision of the Tax Court is affirmed.