Wagegro Corp. v. Commissioner

WAGEGRO CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Wagegro Corp. v. Commissioner Docket No. 82077. United States Board of Tax Appeals 38 B.T.A. 1225; 1938 BTA LEXIS 772; November 22, 1938, Promulgated *772 1. The income from a sale of personalty upon ten equal annual installments of the principal price and the purchaser's additional payment of an obligation of the vendor, such payment alone being made in the year of sale and being less than 40 percent of the selling price, may properly be taxed on the installment basis of the Revenue Act of 1932, section 44. 2. A deduction for salaries must be supported by evidence of the services performed sufficient to establish the reasonableness of the salaries paid, and where it appears only that some services were performed but not that the amount paid is commensurate with their value, the Board will fix the amount of a reasonable allowance. William R. Green, Jr., Esq., and Jerome R. Hellerstein, Esq., for the petitioner. Philip M. Clark, Esq., for the respondent. STERNHAGEN *1225 Respondent determined a deficiency of $94,918.68 in petitioner's income tax for the fiscal year ended May 31, 1933. Petitioner assails (1) the addition to income of the amount of deferred profit on a sale of stock alleged to have been made on the installment plan, or, in the alternative, contends that the amount of profit*773 determined was excessive, and (2) the disallowance of a deduction for officers' salaries. FINDINGS OF FACT. 1. The petitioner is a Delaware investment corporation, with its principal office in Wilmington, Delaware. During petitioner's fiscal year June 1, 1932, to May 31, 1933, Wallace Groves was president and owned 100 percent of the stock of petitioner and Compania *1226 Montana, and his brother, George Groves, was vice president of petitioner but owned no stock in Compania Montana. On December 15, 1931, petitioner purchased from Wallace Groves 292,500 common shares of the Yosemite Holding Corporation for $155,850. On June 10, 1932, it received the following letter from Wallace Groves, and accepted the offer: WALLACE GROVES 1158 Fifth Avenue New York June 10, 1932. George S. Groves and Wagegro Corporation. This is to confirm our conversation and understanding: For $10 and other considerations, I agree to cause Compania Montana, of which I am president, to purchase 292,500 shares of common stock of Yosemite Holding Corporation for the sum of $850,000 payable in ten equal installments of $85,000 each subject to the following: Delivery and sale to be*774 made in Halifax within sixty days. As part of the purchase price Compania Montana to pay attorney fees and/or other expenses up to $750. Any expense in excess of this to be paid by Wagegro Corporation. Wagegro to pay for transfer stamps. /s/ WALLACE GROVES Accepted: /s/ GEO. S. GROVES In the preparation of a formal agreement of sale, Wallace Groves, as president of petitioner, employed Baldwin, Hutchins & Todd to consult on the matter and later to prepare the contract and advise on the details of the transaction. That firm sent Wallace Groves a bill for $750 for such services, of which he paid $740 on May 19, 1933, and for which he was reimbursed by Compania Montana by check for $750 dated June 6, 1933. On June 30, 1932, the following agreement was made by petitioner and Compania Montana: AGREEMENT made at St. John, Province of New Brunswick, Dominion of Canada, dated June 30th, 1932, between The Wagegro Corporation, a Delaware corporation (hereinafter sometimes referred to as the "Seller"), and Compania Montana, a Panama corporation (hereinafter sometimes referred to as the "Purchaser"), WITNESSETH: That for and in consideration of the mutual agreements herein*775 contained, the parties hereto hereby agree as follows: 1. The Seller agrees, upon the execution and delivery of this Agreement, to sell, assign and deliver or cause to be assigned and delivered to or upon the order of the Purchaser, and the Purchaser agrees to purchase certificates representing 292,500 fully paid and non-assessable shares of the common stock of Yosemite Holding Corporation, a Delaware corporation, for the sum of $850,000., to be paid by the Purchaser to the Seller in ten equal annual installments; *1227 such purchase price to be evidenced by an installment note providing for the payment of installments of the following amounts on the following dates: Installments Due $85,000 July 1, 1933 85,000 July 1, 1934 85,000 July 1, 1935 85,000 July 1, 1936 85,000 July 1, 1937 85,000 July 1, 1938 85,000 July 1, 1939 85,000 July 1, 1940 85,000 July 1, 1941 85,000 July 1, 1942 with interest on the unpaid balance at the rate of 5% per annum, payable annually on the first day of July. 2. The closing under this Agreement shall take place in the City of St. John, Province of New Brunswick, Dominion of Canada, on the thirtieth*776 day of June, 1932, at the Hotel Admiral Beatty. IN WITNESS WHEREOF the parties have duly executed this Agreement, in duplicate, as of the day and year first above written. THE WAGEGRO CORPORATION (SEAL) By ALBERT A. SOMMERWERCK Second Vice President Witness: L. B. RILEY COMPANIA MONTANA (SEAL) By E. HILLIARD Vice President Attest: L. B. RILEY Secretary On June 30, 1932, certificates representing the 292,500 shares of Yosemite stock were delivered by Albert A. Sommerwerck to an officer of Compania Montana, and the installment note was delivered. After that the certificates were kept in Montreal. Incident to the sale of the Yosemite stock petitioner incurred expenses of not less than $677.06. Petitioner filed its return for the fiscal year June 1, 1932, to May 31, 1933, on August 11, 1933, with the collector of internal revenue for the district of Delaware. The return was on a cash receipts and disbursements basis, the basis on which its books were kept. No income from the sale of the stock was shown on the return. Petitioner did not treat the $750 legal fees paid to Baldwin, Hutchins & Todd as part of the purchase price of the 292,500*777 shares of Yosemite stock. *1228 2. For the fiscal year ended May 31, 1933, petitioner paid as salaries $7,000 to Wallace Groves, its president and on June 10, 1932, its sole shareholder, and $9,500 to George Groves, its vice president and secretary until May 19, 1933. Wallace Groves was a lawyer and had had some experience in the finance, investment banking, and small loan business. He devoted some, but "considerably" less than a major part, of his time to the affairs of petitioner - all the time he thought they needed. He "watched the company", helped to improve its assets and earnings, and worked on the Yosemite Holding Co. stock transaction. George Groves was Wallace Groves' brother. He had had "considerable" experience in the type of business in which petitioner was engaged and had contacts in this field of business. He was otherwise employed, and a portion of his time was devoted to petitioner's affairs in an effort to make its business profitable. He did more for petitioner than Wallace did. A reasonable allowance for salaries and other compensation paid by petitioner for services actually rendered to it by Wallace Groves and George Groves in the taxable*778 year is $3,000. OPINION. STERNHAGEN: 1. The petitioner, in accounting on its return for the gain from the sale of the Yosemite shares, used the installment basis recognized in the Revenue Act of 1932, section 44(b). The Commissioner refused the use of the installment basis and included in petitioner's income for the fiscal year ended May 31, 1933, the difference between the "proceeds of sale of stock $850,000" and the "cost and other expenses of sale" $156,627.06, as "profit from sale $693,472.94." In our opinion, the petitioner is clearly entitled to use the installment basis. This was a "casual sale of personal property for a price exceeding $1,000", in which "the initial payments did not exceed 40 percentum of the selling price." The $750 fee paid by the purchaser in discharge of the vendor's obligation to the law firm must be regarded as part of the purchase price. ; . The fact is that, as provided in the original offer and acceptance, the purchaser paid the fee in discharge not of its own obligation, but in discharge of petitioner's obligation to the law*779 firm. This was tantamount to a payment from the purchaser to the seller, and must be so treated. See Law of Federal Income Taxation, Paul and Mertens, vol. 1, § 912. Its use to discharge what might be called a "selling expense" of the seller does not alter the fact that it was a *1229 prescribed part of the consideration of the sale and that it was in effect received by the seller in the year of sale, thus fulfilling the statutory definition of an "initial payment." In Regulations 77, article 352, the rule is laid down that: * * * Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken into account in determining the amount of the "initial payments," the "total contract price," or the "selling price." This applies in its terms to the treatment of amounts paid by the vendor and has no relation to amounts received, actually or constructively, by the vendor from the purchaser. We are here considering not the treatment to be applied to the $750 as paid by the vendor to the lawyers, but as received by the vendor from the purchaser. The dual conception of the direct payment by the purchaser to the vendor's obligee which the law*780 recognizes for other income tax purposes must be preserved here as well. The rule of article 352 appears to have been applied without contest to the $677.06, and perhaps it should be applied also to the $750 payment constructively made by petitioner to the law firm. But as a part of the consideration constructively received by petitioner for the sale, it must be regarded as an initial payment of the installment sale. Since there was what the statute recognizes as an initial payment, it is not necessary to decide the question, elaborately argued, whether the "installment basis" may be used if no payment whatever is received in the year of sale. 2. The Commissioner disallowed the deduction taken by the petitioner on its return of $16,500 as compensation paid to its officers. The petitioner assails the disallowance and has undertaken to support the deduction by proving that the payment was made and that the amount was no more than reasonable compensation for the services which were performed. To this end it offered the oral testimony of Wallace Groves and Grorge Groves. It can not be said, however, that the evidence establishes that the amounts paid were no more than reasonable, *781 the defect of evidence being in an inadequate description of the services performed. The Commissioner, presumably after an investigation of the facts, held that there was no evidence before him to show that the amounts were paid for services rendered. There is, however, in the present record uncontradicted evidence that the payments were made and also some evidence that some services were performed. The disallowance of the entire deduction may not, therefore, be sustained. It does not follow, however, that because the evidence shows that some services were performed it must be held that the entire amount paid was properly deducted. To establish the deductibility of salaries over the Commissioner's adverse determination the taxpayer *1230 must prove not only that the salaries were paid, but also that they were reasonable compensation for the services performed. ; ; affd., ; *782 . This is especially true where the alleged salary is paid by a corporation to one who owns all of its shares, and also, although perhaps to a slightly less degree, as to a salary paid by such a corporation to the brother of the principal shareholder. Under such circumstances the mere statement by the two brothers that they believed the amounts to be commensurate with the value of their services, even though not contradicted, is not per se determinative of its deductibility. Neither of the brothers testified with any accuracy as to the specific services which he rendered to the value of their services, even though not contradicted, is not per se determinative of its deductibility. Neither of the brothers testified with any accuracy as to the specific services which he rendered to this corporation during the year in question, and the general language in which their activities for the corporation were described establishes finding, however, is required in recognition of the evidence that some services were performed, "bearing heavily * * * upon the taxpayer whose inexactitude is of his own making." *783 . The finding has been made, therefore, that $3,000 is "a reasonable allowance for salaries or other compensation for personal services actually rendered" to the petitioner. So much may be deducted, and the Commissioner's disallowance as to the rest is sustained. Decision will be entered under Rule 50.