Bailey Dental Co. v. Commissioner

BAILEY DENTAL CO. OF IOWA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bailey Dental Co. v. Commissioner Docket No. 3950. United States Board of Tax Appeals 11 B.T.A. 860; 1928 BTA LEXIS 3706; April 27, 1928, Promulgated *3706 1. Salaries not authorized by corporate action not deductible as ordinary and necessary expense. 2. Proof insufficient to establish right to relief under sections 327 and 328 of the Revenue Act of 1918. G. D. Shepherd for the petitioner. Philip M. Clark, Esq., for the respondent. LANSDON *860 The respondent asserts a deficiency in income and profits tax for the year 1919 in the amount of $1,044.41. The petitioner contends that certain amounts distributed to its officers as dividends should be regarded as salaries incurred and paid within the taxable year, and that, if this contention is disallowed, it is entitled to have its tax liability for such year computed under the provisions of section 328 of the Revenue Act of 1918. *861 FINDINGS OF FACT. The petitioner is an Iowa corporation with its principal office at Omaha, Nebr. During the taxable year it was engaged in the practice of dentistry at Council Bluffs and Sioux City, Iowa, and at Omaha, Nebr. In the taxable year R. W. Bailey and D. J. Shepherd each owned 50 per cent of the stock of the petitioner, and both were officers of the corporation. Each of the officers*3707 devoted about one-fourth of his time to the affairs of the petitioner. They visited the several offices regularly, planned policy and work, had general supervision and direction of all operations, hired by trained dentists and laboratory workers, and assumed personal responsibility for all expenses. Neither was paid any salary for services rendered. Within the time prescribed by law, the petitioner filed an income-tax return for the year 1919 as a personal service corporation, and set forth therein, that the amount of $1,500 had been paid to each of the two officers as their respective shares of the earnings of the corporation for such year. Upon audit the respondent disallowed personal service classification, held that the amounts paid the officers were dividends, determined net income for the year in the amount of $6,372.89, and asserted the deficiency in income and profits tax here in controversy. OPINION. LANSDON: The petitioner herein does not now seek personal service classification, but contends that the amounts distributed to its two officers in the taxable year as dividends should be regarded as salaries and deducted from its gross income for such year as ordinary*3708 and necessary business expenses, or that, if this contention is disallowed, its tax liability should be computed under the provisions of section 328 of the Revenue Act of 1918. The record supports the petitioner's contention that two of its officers rendered some services to it during the year in question, and that it paid no salaries to them. Each of the two officers received $1,500 in dividends. There is no evidence that the salaries claimed were authorized prior to or in the taxable year either by formal or informal corporate action. There was no accrual of such salaries on the books of the petitioner. We are of the opinion, therefore, that no liability for the payment thereof was incurred. When ; ; affirmed by the Court of ; . *862 In support of its alternative contention for special assessment, the petitioner relies on section 327 of the Revenue Act of 1918. The language of such section pertinent to this controversy is as follows: *3709 (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section, would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. The only abnormality alleged by the petitioner is that disallowance of the deduction herein claimed as ordinary and necessary expenses incurred in earning this income which the respondent seeks to tax increases its net taxable income in the amounts disallowed and so increases its excess profits tax, and that it is, therefore, subject to an exceptional hardship as compared to other similar corporations which have been allowed to deduct all expenses incurred in producing income. The evidence is clear that the officers rendered some service to the petitioner in the taxable year, but, in the absence of any proof as to the reasonable value of such services, we can not say that the disallowance of the amounts in*3710 controversy as expenses resulted in an abnormality in income, or that the computation of the profits tax under section 301 works upon petitioner an exceptional hardship. Judgment will be entered for the respondent.