Bauer Bros. Co. v. Commissioner

BAUER BROTHERS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bauer Bros. Co. v. Commissioner Docket No. 8575. United States Board of Tax Appeals 9 B.T.A. 392; 1927 BTA LEXIS 2606; November 28, 1927, Promulgated *2606 The Commissioner's determination that in 1918, the petitioner did not incur a legal obligation to pay its employees a bonus for that year will not be disturbed where it appears that the directors for the first time formally authorized the payment of the bonus in 1919 and the evidence fails to show that this action of the board of directors was merely a ratification of the acts of three of the six directors creating a legal obligation in 1918 to pay the bonus. H. A. Mihills, C.P.A., for the petitioner. George G. Witter, Esq., for the respondent. MURDOCK *392 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1918, in the amount of $27,517.98. The only error alleged is that the Commissioner failed to allow a deduction of $33,380, alleged to have been incurred as additional compensation for certain officers and employees. FINDINGS OF FACT. The petitioner is an Ohio corporation with its principal office at Springfield. Its business is the manufacture of grinding, crushing, and separating machinery. Its books were kept and its income was reported on an accrual basis. A deduction*2607 was taken and explained on its 1918 return as follows: Recipient Duties Fixed Additional Total compensa- compensa- salary tion ex- tion cluding bonus C. L. Bauer President $9,900.00 $10,100.00 $20,000.00 L. E. Bauer Vice president 8,700.00 9,300.00 18,000.00 W. A. Bauer Treasurer 6,720.00 8,280.00 15,000.00 W. E. Copenhave Secretary 5,000.00 1,000.00 6,000.00 Carl Caskey Cashier 1,985.00 1,000.00 2,985.00 T. Galley Superintendent 2,400.00 500.00 2,900.00 C. L. Lockett Assistant sales manager 3,300.00 500.00 3,800.00 L. Garbrey Department manager 1,800.00 500.00 2,300.00 W. Gogenheim Purchasing agent 2,068.30 1,000.00 3,068.30 T. R. Collette Traffic manager 1,806.20 500.00 2,306.20 I. S. Nalambre Assistant traffic manager 1,490.00 200.00 1,690.00 D. H. Adelsperger Head of experiment department 2,400.00 500.00 2,900.00 47,569.50 33,380.00 80,949.50 *393 The Commissioner disallowed the additional compensation of $33,380 as a deduction on the theory that the additional amounts were not incurred in 1918. The taxpayer is a close corporation controlled*2608 by three brothers C. L. Bauer, L. E. Bauer, and W. A. Bauer. These three men own all (735) of the outstanding shares of preferred stock in equal proportions, and 300, 228, and 192 shares respectively of the total 750 shares of common stock outstanding. The remaining 30 shares are owned by the following three employees, who, with the three Bauer brothers, make up the board of directors: Carl Caskey, T. Galley, and W. E. Copenhaver. The only reference to the question of any additional compensation for 1918 which appears in the petitioner's minutes is a resolution passed March 3, 1919, in part as follows: It was moved by Carl Caskey, seconded by W. E. Copenhaver, that a bonus salary for the year 1918 be given to such officers of the company and heads of departments as have been instrumental in procuring the successful year's results for 1918. The amount of this bonus and the division of same to be left to the discretion of the President. It was customary for the directors of the petitioner to have but one meeting each year. This was usually held in the latter part of February or the early part of March. Officers and directors were elected at this meeting after which the meeting*2609 was usually adjourned. The three brothers met frequently in informal conferences for the purpose of planning, directing, managing, and supervising the conduct of the business. In these conferences the three brothers decided during the summer of 1918 that beginning with that year bonuses, rather than salary increases, would be given to deserving employees. Before the end of the year they decided upon the men to whom bonuses would be paid and the amount to be paid each for that year. No book entry or written memorandum relating to bonuses was made during the year. *394 The policy of bonus payments was adopted after the brothers realized that other concerns were increasing the amount of compensation paid employees, that some of their own men were demanding increases and could get better salaries elsewhere, and that it would be advisable to satisfy them in this way. Thereafter if a man to whom a bonus was to be paid complained to one of the brothers he would be told that bonuses were to be paid to deserving men and that he would receive a bonus. Salaries were not usually discussed at the annual meetings of the board of directors, but it does not appear how salaries*2610 had been decided upon previously. Caskey, who kept the books of the petitioner, was not informed of the amounts of the bonuses or of the men who were to receive bonuses until several days after the meeting of March 3, 1919. As soon as he received a list from the president he made the necessary book entries to distribute the bonuses through credit accounts before closing the books for 1918. It was usual for the books to be kept open until inventories had been completed and dividends decided upon. The taking of the inventory usually required about six weeks and was begun immediately after the close of the year. OPINION. MURDOCK: The respondent apparently concedes that these bonuses were reasonable compensation for personal services actually rendered, but denies that all or any portion of the amount eventually paid was paid or incurred during the taxable year within the meaning of section 234(a)(1) and section 200 of the Revenue Act of 1918. The Commissioner determined, in effect, that the amount of $33,380 additional compensation was neither paid nor incurred in the taxable year and our only problem is to decide whether or not the petitioner has overcome the presumption*2611 in favor of the Commissioner by the production of evidence tending to show that in 1918 a legally enforcible obligation to the employees had been incurred. Appeal of . In our opinion the petitioner has not overcome this presumption. A great deal of the testimony of the three Bauer brothers was indefinite, conflicting, and ambiguous. This was especially true of their testimony in regard to the exact time when they decided to pay bonuses to certain men in fixed amounts and in regard to their reason for so deciding. It also appeared on cross-examination that although they had filed affidavits with the Bureau of Internal Revenue in connection with this case they had never sworn previously either that they had decided upon names and amounts or that any employee had been told of the amount he was to receive. In 1918 there was no writing relating to the payment of any bonus. Nevertheless we have *395 found as a fact from the uncontradicted testimony of these three witnesses that at some time during the summer or fall of 1918 they decided among themselves upon the men to whom bonuses would be paid and upon the*2612 amounts to be paid to each man. But this finding does not determine the issue. The petitioner sought to prove further that some employees were told in 1918 of the amount of additional compensation they were to receive. C. L. Bauer, the president, on direct examination, stated that no discussion was had with the employees as to the specific amounts of additional compensation to be paid to each, but that the brothers themselves thought the amount was definitely settled and that he had definite conclusions as to what his discretion, as it was termed in the resolution, should be. On cross-examination he qualified his direct testimony with the statement that he would not say that no employee had been told of the amount he would receive. W. A. Bauer, the treasurer, said that he had never mentioned to any employee an amount which such employee would receive. L. E. Bauer, however, testified that he had told three men, Gogenheim Garbrey, and Collette, the amount of their respective bonuses. The three Bauers and Caskey were the only witnesses. The latter knew that he would receive a bonus but did not know the amount of it. The three brothers made up only one-half of the board of*2613 directors. We have grave doubt as to whether they ever had or even thought they had authority, independently of the board of directors, to make such a substantial increase in salaries, particularly as the three of them were to receive about 83 per cent of it themselves. Apparently they thought that some action of the board was necessary. The board of directors met before any book entry was made in regard to the bonuses and authorized such increase as the discretion of the president might dictate. The form of the minutes of this meeting is indicative of original action rather than of ratification of something already done. It implies that no list of names and amounts had yet been made. If then L. E. Bauer announced to each of three men the respective amount which he would receive, it does not appear that he did so by virtue of any proper authority from the corporation or from his brothers, and it does not appear that the corporation would be bound to pay the amounts he promised. Furthermore, the record contains an inference only that the bonuses as finally paid tallied with those decided upon by the brothers. The thread connecting the final discretion of the president with*2614 the earlier unwritten decision of the three brothers is weak indeed. This case is distinguishable from , for in that case it clearly appeared that the resolution *396 after the close of the taxable year was only a formal confirmation or ratification of what had been legally done in behalf of the corporation within the year. Likewise this case is not controlled by , for in that case it appeared that as to the year 1918, everything necessary to create a liability was done within the taxable year and the making of the book entries was delayed only on account of a mistake. As to the year 1919 the case is some authority for our present decision. , and , are not in point. The facts found in the , and , are quite similar to the facts before us. The difference, if any, would be that the present facts are less favorable*2615 to the allowance of a deduction. Yet in each of those cases we denied a similar deduction. We therefore hold in this case that the facts proven do not overcome the presumption that the determination of the Commissioner was correct. Judgment will be entered for the respondent. Considered by MORRIS and SIEFKIN.