Fincher Motors, Inc. v. Commissioner

FINCHER MOTORS, INC., PETITIONER, v. COMMISSIONER OR INTERNAL REVENUE, RESPONDENT. Fincher Motors, Inc. v. Commissioner Docket No. 100212. United States Board of Tax Appeals 43 B.T.A. 673; 1941 BTA LEXIS 1464; February 19, 1941, Promulgated *1464 On February 28, 1938, petitioner's board of directors approved a bonus of $10,390.47 to H. W. Fincher as president, under a bonus agreement between them. In January 1938, $1,000 had been paid to him as an advance thereon. The unpaid portion was not actually withdrawn until after March 15, 1938. Under the method of accounting employed by Fincher the amount of the bonus involved was not reported by him in his 1937 income tax return. Fincher owned 340 shares of petitioner's class B nonvoting stock and General Motors Holding Corporation owned 160 shares of its class A voting stock, both blocks constituting all of petitioner's outstanding stock and having a par value of $100 per share. The value of the stock was not proved. held, under provisions of section 301 of the Revenue Act of 1937, deduction by petitioner of portion of bonus unpaid on March 15, 1938, not allowable. W. L. Donohue, C.P.A., for the petitioner. F. S. Gettle, Esq., for the respondent. VAN FOSSAN *673 The Commissioner determined a deficiency of $1,373.77 in the petitioner's income tax for the year 1937 and a deficiency of $682.31 in its undistributed profits tax for the*1465 same year. The petitioner alleges that the respondent erred in disallowing as a deduction that part of a bonus payable to the petitioner's president for the year 1937 but not withdrawn by him at March 15, 1938. FINDINGS OF FACT. The facts were stipulated. In so far as they are material to the issue they are as follows: The petitioner is a New York corporation, incorporated under the laws of the State of New York in January 1934, with its principal office in Rochester, New York. In April 1936 the certificate of incorporation was amended by a certificate of increase of capital stock, increase of par value, reduction of number of shares, and reclassification of shares pursuant to section 36 of the Stock Corporation Law. The certificate of incorporation provides that the capital stock of the corporation shall consist of class A stock and class B stock, and that the owners of class A stock, while any such stock is issued and outstanding, shall have the sole and exclusive right of voting on all corporate questions to the exclusion of the owners and holders of class B stock, and it further provides that the owners of class A stock shall have the exclusive right to elect the*1466 board of directors. All of the voting stock, class A, was acquired by investment on January 30, 1934, by the General Motors Holding Corporation, which *674 later became General Motors Corporation, Motors Holding Division, and is hereinafter referred to as the holding division, in accordance with their dealer investment plan. Under this plan the holding division has held the outstanding class A stock from the inception of the corporation. Under the dealer investment plan, H. W. Fincher invested $15,000 in class B stock of the corporation on January 30, 1934. Subsequent thereto, Fincher purchased some of the stock of the holding division under the terms of an option agreement entered into on February 1, 1934, and amended April 23, 1936, between Fincher and the holding division. The option further provided that Fincher was permitted to purchase the outstanding stock owned by the holding division out of dividends and bonus received from the petitioner and that the class A stock so purchased must be converted immediately into class B stock. On December 31, 1937, the holding division owned 160 shares of class A stock, with a total par value of $16,000, representing 100*1467 percent of the voting stock, or 32 percent of the total outstanding stock, and H. W. Fincher owned 340 shares of class B stock with a total par value of $34,000, representing 100 percent of the nonvoting stock, or 68 percent of the total outstanding stock. Between December 31, 1937, and March 15, 1938, the holding division owned all of the voting stock of Fincher Motors, Inc. In accordance with the dealer investment plan, on February 1, 1934, H. W. Fincher was elected the president of Fincher Motors, Inc., and he was elected a member of the board of directors on January 31, 1934. In addition to H. W. Fincher, the board of directors between December 31, 1937, and March 15, 1938, comprised R. W. Scofield and Hugh Courteol, the latter two directors representing the holding division, which owned all of the voting stock of the corporation. On April 23, 1936, H. W. Fincher entered into a bonus agreement with Fincher Motors, Inc., providing for a plan of compensating him as operator in relation to his degree of success in managing the business and affairs of the company. Paragraph 5 of that The amount of bonus due hereunder shall be determined by the Board of The amount of bonus*1468 due hereunder shall the determined by the Board of Directors of the Dealer Company and shall be paid in cash by the Dealer Company on such date as may be fixed by said Board of Directors but in no event shall such date be later than February 28th of the year next following the period for which the same is applicable. A special meeting of the board of directors of Fincher Motors, Inc., was held on January 11, 1938, and it was voted to advance H. W. Fincher, at his request, the sum of $1,000 against the bonus *675 which he had earned for 1937, pending final approval of the bonus. H. W. Fincher was paid $500 of this bonus by check on January 13, 1938, and on January 18, 1938, a check was issued for the balance, $379.77, after the deduction of $120.23 due from him as an account receivable. An examination of the records of the petitioner was made in accordance with the bonus agreement by John W. Stokes, certified public accountant, for the period ended December 31, 1937, and his report dated February 9, 1938, adjusted the amount of the bonus due to Fincher for the year 1937 to $10,390.47, instead of $10,263.37 as estimated by the company and deducted on the income tax return*1469 for the calendar year 1937. The petitioner's books were adjusted to reflect the bonus of $10,390.47. On February 28, 1938, the board of directors voted approval of payment to H. W. Fincher of a bonus for 1937 amounting to $10,390.47, as ascertained by the certified public accountant's report, and such bonus was determined by the board to be due and payable to him and was ordered to be forthwith paid to the said Fincher. All of the bonus was actually withdrawn by the said Fincher in the year 1938, as follows: Date Explanation Amount [1938] January 13 Check No. 937 $500.00 January 18 Check No. 1039 379.77 January 18 Transfer of accounts receivable from H. W. Fincher 120.23 March 31 Check No. 1861 1,390.47 March 24 Check No. 1879 5,000.00 April 22 Check No. 2254 500.00 April 30 Check No. 2340 1,500.00 May 27 Check No. 2664 400.00 July 18 Check No. 3302 600.00 Total 10,390.47 There was sufficient cash available to the company to pay the bonus between February 28, and March 15, 1938, as indicated below: Date Balance per bank statement Balance per records February 28 $14,240.72 Figures March 2 10,315.14 n0t March 3 14,297.42 available March 4 13,970.98 $13,192 March 7 $14,834.90 $11,180 March 12 13,382.20 10,674 March 14 17,247.56 12,325 March 15 14,893.01 12,541 *1470 The check signatories during the period December 31, 1937, to March 15, 1938, were H. W. Fincher, president, Harold H. Henry, treasurer, William Cooke, vice president, and Veronica Frayling, secretary. It was required by the minutes of the petitioner Corporation that checks be signed by two of the signatories and one of the signatories must be the president or vice president. *676 The petitioner keeps its books and reports its income for income tax purposes on the accrual basis. Under the method of accounting employed by H. W. Fincher the amount of the bonus involved in this proceeding was not reported by him in his 1937 income tax return. OPINION. VAN FOSSAN: The Commissioner disallowed the bonus to Fincher in so far as unpaid on March 15, 1938, "as a deduction under the provisions of section 24(c) of the Revenue Act of 1936, as amended by the Revenue Act of 1937." 1 It is clear that all three conditions stated in the statute must coexist, i.e., as to payment, difference of accounting methods, and limitation by section 24(b). 2 Under the rules of the Board petitioner undertook the burden of proving that respondent erred in applying the cited statute. *1471 Admittedly there was no cash payment. Petitioner contends, however, there was constructive payment. We are unable to agree. Constructive payment is a fiction applied only under unusual circumstances not existing here. ; certiorari denied, , affirming ; ; . We believe respondent was correct in holding that the bonus was not paid within the taxable year or within two and one-half months after the close thereof. It is stipulated that Fincher did not report the disallowed, unpaid bonus in his income for the taxable year and petitioner does not challenge the correctness of respondent's action as to the second requisite of the statute. Addressing itself to the third condition found by respondent to exist, petitioner argues that, by reason of the difference between the *677 rights and privileges enjoyed by holders of class A stock and those limited by the provisions of the class B certificates, class A stock*1472 was more valuable than class B stock, although both had the same par value. However, it has made no attempt to ascertain or prove the relative or actual values of the stock. Submission of such proof was part of its burden in the case. The Board can not assume values or speculate with respect thereto. Since the record shows that Fincher owned 68 percent of the total outstanding stock and the petitioner has failed to prove that its value did not exceed the value of the class A stock held by the holding division, we can not say that respondent erred in holding that the situation falls under subsection (3) of section (c). It is axiomatic that the allowance of deductions is a matter of legislative grace. Congress has seen fit to limit that allowance by the enactment of section 301. Respondent determined that petitioner came under the ban raised by this section. The petitioner undertook to prove that this was erroneous. It has failed to do so. We sustain the Commissioner. Decision will be entered for the respondent. Footnotes 1. SEC. 301. DISALLOWED DEDUCTIONS. (a) Section 24(a) of the Revenue Act of 1936 is amended to read as follows: * * * "(c) UNPAID EXPENSES AND INTEREST. - In computing net income no deduction shall be allowed in respect of expenses incurred under section 23(a) or interest accrued under section 23(b) - "(1) If not paid within the taxable year or within two and one-half months after the close thereof; and "(2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and "(3) If, at the close of the taxable year of the taxpayer or at any time within two and one-half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24(b)." ↩ 2. The pertinent part of section 24(b) reads as follows: "(b) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; * * *" [Sec. 24(b)(1)(B).] ↩