1925 BTA LEXIS 2787 | B.T.A. | 1925
Lead Opinion
Two questions of fact are presented for determination by the record in this case; namely:
1. Were the additional salaries paid by the Union Dry Goods Co. to its officers, pursuant to the action of its advisory board, taken on July 12,1918, additional compensation for personal services actually rendered by them during the fiscal year ended July 31, 1918, and
2. Were the amounts of such additional salaries reasonable?
The evidence in this case discloses that taxpayer was organized and commenced business in the year 1899 with a capital of $15,200. It was successful, and as the volume of business and the profits therefrom increased it from time to time, as conditions warranted, paid to its officers and employees bonuses or additional salaries. That was done in the year 1905 and again in the years 1913 and 1915. While business was flourishing during the years 1916 and 1917, no bonuses or additional salaries were voted or paid in those years, because the corporation was erecting a new building and needed all of its available assets for that purpose. During the fiscal year ended July 31, 1918, the volume of taxpayer’s business showed an increase of approximately 40 per cent over the business of the preceding year. During the period from July 31,1915, to July 12,1918, cost of living had increased very materially, as is well known, but taxpayer’s officers were still receiving the same regular salaries they had received in the year 1915. As a result of the increased cost of living the several officers had become indebted to taxpayer on account of merchandise
While the testimony of taxpayer’s secretary is in conflict with the recitals in the minutes of the meeting of the advisory board, which were prepared by him, we think the error in the minutes has been clearly proved, and that the additional salaries voted on July 12, 1918, were for services actually rendered in the fiscal year ended July 31, 1918, and should be allowed. The corporation liad been extremely prosperous in that year and was able after paying the additional salaries under consideration, to pay additional salaries and bonuses to its other employees and to increase its surplus by more than $54,000. Moreover, the necessity of larger salaries was recognized, in view of the greatly increased cost of living. That the additional salaries were intended to cover prior years is refuted by the fact that although the fiscal year ended July 31, 1915, is mentioned in the minutes of the meeting of the advisory board, additional salaries had already been paid for that year. The evidence further establishes that taxpayer kept its books on the cash receipts and disbursements basis and that, its books for all years prior to the year beginning July 31, 1917, had _ been _ closed at the time the additional compensation under consideration herein was voted and paid. We conclude from the evidence that the additional salaries paid to taxpayer’s officers, pursuant to the action of the advisory board, taken on July 12, 1918, were, and were intended to be, additional
An extended discussion of the second question presented is not necessary. The evidence shows that during the fiscal year ended July 31, 1918, taxpayer’s sales had increased by more than $290,000, and that', after paying the additional salaries in question, as well as bonuses to all its other employees, it carried to its surplus fund more than $54,000, or more than three times the amount of its outstanding capital stock. The officers to whom the additional salaries were paid were also employees of the corporation and devoted all their time and energy to its advancement, and its success was due almost entirely to their efforts. We think that, measured by the results accomplished, both from the standpoint of volume of business transacted and profits to the corporation arising therefrom, the salaries paid to its officers were not unreasonable or excessive for the services rendered. It therefore follows that taxpayer, in computing its net income for the fiscal year ended July 31, 1918, should be permitted to deduct as an ordinary and necessary expense, the additional salaries voted and paid to its officers in that year.