1926 BTA LEXIS 2263 | B.T.A. | 1926
Lead Opinion
The taxpayer contends that in December, 1918, the necessities of its business were such that it was justified in entering into a contract with its stockholders to pay'them 6 xier cent of its “ net annual business ” in consideration of their guaranteeing its loans and credits; that by the words “ net annual business ” the parties to the contract meant gross sales less dealers’ commission, and that 6 per cent of the gross sales for the ten-month period ended October 31,1919, rexiresented a reasonable compensation to the stockholders for the services rendered by them and constituted an ordinary and necessary business expense of the taxpayer, which should be deducted in computing its net income. The taxpayer concedes, however, that 6 per cent of its gross sales for the period mentioned amounted to only $20,778.85 and that it was in error in paying to its stockholders the amount of $21,292.85 for their services and in deducting that amount from its gross income for the period involved.
Upon consideration of the evidence presented, we are of the opinion that the determination of the Commissioner should be approved. Conceding, for the purpose of argument, that the taxpayer is correct in construing the words “net annual business” in the contract as meaning gross sales less dealers’ commission, and that its stockholders rendered services under that contract, we think that the compensation is out of all proportion to the value of the services. So far as the record shows, the taxpayer did not borrow any considerable amount of money under the line of credit guaranteed by its stockholders, and they were not called upon to pay anything on account of their guarantee. Payment of approximately $21,000 to them for guaranteeing loans which actually amounted to less than $100,000 is, it seems to us, entirely unreasonable. Furthermore, it appears that, with the exception of R. J. and W. W. Stevens, the stockholders owned little or nothing except their stock in the company, and that when they guaranteed the company’s credit, they in fact risked nothing, since the assets of the company, which gave whatever value the stock had, would first be subject to the payment of the company’s debts. In addition, it may be pointed out that the stockholders, during the entire period under consideration, were indebted to the taxpayer in the amount of more than $28,000, which, so far as the record shows, was more than the amount the taxpayer borrowed under the credit guaranteed. In view of these facts, and of the further fact that the payments in question were made to the stockholders in proportion to their stock holdings, we are of the opinion that they in fact constituted a distribution of profits and not reasonable compensation to the stockholders for services rendered by'them.
The deficiency is $10,lfl.07. Order will be entered accordingly.
