1946 Tax Ct. Memo LEXIS 251 | Tax Ct. | 1946
Memorandum Findings of Fact and Opinion
LEECH, Judge: This controversy originally involved income, declared value excess-profits and excess-profits taxes as follows:
Fiscal | |||
Year | Declared | ||
Ending | Value Ex- | Excess | |
April 30 | Income | cess-Profits | Profits |
1941 | $ 51.55 | $ 47.53 | |
1942 | 1,128.51 | 774.85 | $ 2,327.25 |
1943 | 528.29 | 19,980.13 |
Findings of Fact
Petitioner is a corporation organized in 1916, engaged in the manufacture of a diving hood. Its Federal tax returns for the periods involved were filed with the collector of internal revenue for the district of Florida on the basis of a fiscal year ending April 30. Petitioner originally had outstanding 120 shares of stock. As a result of a stockholders' meeting of July 13, 1941, the outstanding shares were reduced to 90, by the cancellation of 30 shares. The stockholders at that time were:
Minnie E. Mason | 55 shares |
W. S. Dunn | 30 shares |
C. Roy Miller | 3 shares |
W. F. Miller | 1 share |
B. B. Carlton | 1 share |
On January 9, 1942, the Rellim Corporation, of which W. F. Miller was the sole stockholder, acquired the 30 shares formerly held by SW S. Dunn. C. Roy Miller is the son of W. F. Miller and the nephew of Minnie E. Mason.
The diving hood manufactured by petitioner was the invention of its president, W. F. Miller, upon which he was issued a patent. The date of the expiration of the patent does not definitely appear, but it was shortly after the war started. The diving hood consisted of a pump1946 Tax Ct. Memo LEXIS 251">*253 and hood, and could be used by anyone without experience. It was used mostly in shallow waters of 30 or 40 feet depth in connection with repair work on ships and to clean out harbors. Over the years, W. F. Miller made improvements to the unit and the machinery used in its construction. In the early years, the Navy used about 50 per cent of petitioner's output, but in the tax periods involved, the Navy took practically the entire output. Prior to 1940, the petitioner's average receipts from sales were between $3,000 and $5,000 per year. For the fiscal year ended April 30, 1941, these receipts increased to $34,335; for the year ended April 30, 1942, to $104,644.79; and in the fiscal year ended April 30, 1943, reached a total of $234,673.57. The total salaries paid to petitioner's officers, exclusive of the amounts paid to W. F. Miller, in the fiscal years ended April 30, 1942 and 1943 were $4,730 and $10,635, respectively. Until 1935 or 1936, W. F. Miller, petitioner's president, drew no salary, and thereafter until the fiscal year beginning in 1941 drew a salary of only $800 per year. On March 30, 1941, W. F. Miller suffered a stroke and was confined to his bed until his death in August1946 Tax Ct. Memo LEXIS 251">*254 1943. In about 1932 or 1933, W. F. Miller became blind. Despite this affliction he was able to carry on his work on the unit by touch, and give instructions as to the changes he wanted made. On March 31, 1941, C. Roy Miller came to Miami from Daytona Beach and took over the office of president of petitioner although he had not previously been connected therewith. Sometime prior to April 28, 1942, C. Roy Miller, as president of petitioner, felt that the corporation should reward W. F. Miller for the services he had rendered petitioner over the prior years in which he drew no salary or only a small salary. He determined a fair amount would be a so-called "royalty" $10of per diving unit manufactured. He discussed the matter with B. B. Carlton, secretary-treasurer and a director, and with Minnie E. Mason, a director and largest stockholder, who gave their approval to such plan. W. S. Dunn, another director, who had previously sold his interest, did not thereafter take any active part. No formal resolution accepting the plan was adopted. No minutes at all appear in petitioner's minute book during the period April 8, 1933 to May 1941. On April 28, 1942, there was placed on the petitioner's1946 Tax Ct. Memo LEXIS 251">*255 books, for the first time, a charge for "royalties" and a credit to the account of W. F. Miller of $10 per unit for each unit manufactured during the fiscal year ended April 30, 1942. In the next fiscal year, the charge was computed monthly. Against the personal account of W. F. Miller were charged bills for his illness as they arose. In petitioner's tax return for the fiscal year ended April 30, 1942, a deduction of the amount of $5,690, and in the fiscal year ended April 30, 1943, a deduction of $8,370, were claimed as "royalties" paid. The respondent disallowed both amounts. The disallowance was explained as follows:
It has been determined that no deduction is allowable for any royalties to W. F. Miller.
The amounts of $5,690 and $8,370 were paid by petitioner to W. F. Miller in the respective fiscal years ended April 30, 1942 and 1943 as compensation for services actually rendered by him to petitioner in prior years, and were reasonable in relation to such services.
Opinion
The only question is whether the amounts paid by petitioner to its former president, W. F. Miller, in the taxable fiscal years ending April 30, 1942 and 1943, constituted compensation paid to him for1946 Tax Ct. Memo LEXIS 251">*256 services actually rendered to petitioner. If so, such amounts are deductible as ordinary and necessary expenses of its business.
Decision will be entered under Rule 50.