1924 BTA LEXIS 264 | B.T.A. | 1924
Lead Opinion
This is an appeal by the taxpayer, Beub Isaacs & Co., Inc., from a determination of the Commissioner asserting additional income and profits taxes for the fiscal years ending October 31, 1918, 1919, and 1920.
The taxpayer is a closely held New York corporation. In its returns for each of the years involved, the taxpayer deducted, among other items, as an ordinary and necessary expense of doing business, the sum of $10,000 for the year 1918, $11,500 for the year 1919, and $16,000 for the year 1920; the same being extra compensation paid to its officers and employees for services rendered during each of the three years. The Commissioner upon audit of the returns disallowed these deductions, upon the ground that the compensation was voted by the directors of the corporation after the close of the taxable year and subsequent to the close of the books for such taxable year. It is not claimed, however, by the Commissioner that the extra compensation was unreasonable, nor is it claimed that the extra compensation was not in fact paid for services rendered by the officers and employees during the fiscal years involved.
We are not called upon in this case to discuss the question of reasonable quantum of compensation, or whether the officers of this corporation were distributing profits in the guise of compensation. The question presented in this case for decision is whether the compensation for each of the taxable years was properly determined and constituted accrual items for such years. The facts surrounding the voting of the extra compensation are fully set out in the findings of fact. The testimony introduced shows that all of the directors of the corporation, except one — the president — traveled on the road selling merchandise for the company. It was their custom to meet each year in September for the purpose, among other things, of fixing the extra compensation to be paid to the officers and employees of the company for services rendered by them for the year about to close. At the conclusion of this meeting the officers departed on their several trips, not returning until some time in November. The chairman of the board of directors and the president of the corporation kept a memorandum of the names of the persons who were to receive extra compensation and the amounts thereof.
For the years 1919 and 1920 the item of extra compensation ap-Seared in the regular closing journal entries as of October 31 and •ctober 30, respectively, the same being made prior to the actual closing of the books. There is no evidence before the Board which would tend in any way to refute the facts testified to by the witnesses for the taxpayer. Since it is established that the directors of the corporation in September, before the close of the taxable year on October 31, determined the extra compensation to be paid; the same with the exception of the year 1918, which was due to an error, was accrued as an expense upon the books of account prior to the closing of the books, the only point remaining is the effect to be given to the September meetings of the directors.
Closely held corporations, as is well known, act very much like partnerships, their decisions being made in conversations, and oftentimes recorded not in the minutes, but by action. To this condition the attention of the courts has been called, and the position that a corporation can act through its directors informally without written minutes or formal resolutions, and the acts of its directors effected pursuant to oral understanding are as binding as though sanctified by the most rigid adherence to legal formality, has been sustained. In the case of Gouverneur Publishing Co., 168 Fed. 113, there was involved a claim of an officer for salary due him pursuant to an oral understanding with his coofficers and directors. The claim was contested by a creditor and stockholder on the ground that there was no formal resolution fixing the salary. The court in the course of its opinion said:
It is clear that there was a fair understanding with the creditors in the ■very beginning that Sackett should have $1,200 per year for his services outside of his official duties as director and secretary and treasurer. A binding contract for compensation for such services to one who is at the time an officer or a director in the corporation may be made without any formal resolution. Whatever may have been said in prior cases, this is now the settled law of the State of New York and the United States courts. Bagley v. Carthage W. & S. H. R. Co., 165 N. Y. 179, 182, 58 N. E. 895; Corrine Mill Canal & Stock Co. v. Toponce 152 U. S. 405, 407, 409, 14 Sup. Ct. 632, 38 L. Ed. 493; Bogart v. N. Y. & L. I. R. Co., 118 App. Div. 50, 54, 102 N. Y. Supp. 1093; Jackson v. N. Y. C. R. R. Co., 2 Thomp. & C. 653, affirmed on opinion below, 58 N. Y. 623. See also Henry v. R. & B. R. Co., 27 Vt. 435, and Bartlett v. M. R. Co., 151 Mass. 433, 24 N. E. 780.
In the case of Sheridan Electric Light Co. v. Chatham National Bank, 52 Hun, 575, the court said:
Where a corporation consists of a small number of persons like a partnership, they may transact all their business by conversation without formal votes.
In the case of Stetler v. McFarlane, 230 N. Y. 400, the court said:
Official action is not defeated either by the silence of the minutes or by the absence of their formalities if action was in truth intended.
In the case of Gerard v. Empire Square Realty Co., 195 App. Div. 244, the court said:
We must recognize the fact that to a greater and greater degree all business, great and small, is being brought under the management of corporations instead of partnerships; that they are, in perhaps the majority of instances, conducted by officers and directors little informed in the law of corporations, who often act informally, sometimes without meetings or even by-laws. To hold that in all instances technical conformity to the requirements of the law of corporations is a condition to a valid action by the directors, would be to lay down a rule of law which could be used as a trap for the unwary who deal with corporations, and to permit corporations sometimes to escape liability to which an individual in the same circumstances would be subjected.
We must in this case mve full effect to the informal meetings of the directors held in September of each of the years involved. The formal resolutions specifying the amounts of extra compensation adopted by the directors at their annual meetings held in' November of each year, immediately after the close of the taxable year involved, were merely confirmatory of the prior action of the board of directors.
The deficiencies determined by the Commissioner for the years 1918, 1919, and 1920 by reason of the disallowance of these deductions are disallowed and should not be assessed.