Brampton Woolen Co. v. Commissioner of Internal Revenue

45 F.2d 327, 9 A.F.T.R. (P-H) 619, 1930 U.S. App. LEXIS 3626, 9 A.F.T.R. (RIA) 619

• Court: Court of Appeals for the First Circuit
• Decided: November 26, 1930
• Docket: 2476
• Status: Published

Opinions

ANDERSON, Circuit Judge.

The Board of Tax Appeals affirmed the determination by the Commissioner of Internal Revenue of a deficiency in the taxpayer’s profits for 4918, and it appealed to this court. Under section 234(a) of the Act of 1918, 40 Slat. 1077, it is provided:

“Sec. 234. (a) That in computing the net income of a corporation * * * there shall be allowed as deductions:

“(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, in eluding a reasonable allowance for salaries or other compensation for personal services actually rendered

The sole question now presented is whether additional salaries were incurred during 4918 and were improperly disallowed by the Commissioner and by the Board.

The appellant was a textile manufacturer with a plant in Newport, N. H., and another (installed during 1918) in Sunapee. The entire capital stock, $25,000 common and $50,000 preferred, was held in equal shares— $5,000 of common and $10,000 preferred— by each of five stockholders, of whom four wore directors and officers. These four were Sam D. Lewis, president, Frank P. Rowell, vice president, John MeCrillis, secretary-treasurer, Vincent J. -Brennan, Sr., general manager. The fifth director, Vincent J. Brennan, Jr., son of the general manager, was not a stockholder. The fifth stockholder was Mrs. Lizzie M. Richards. She was represented hy John MeCrillis. The Board found as follows:

“The directors of the corporation held numerous informal meetings during the year 1918 at which the matter of increasing the salaries of the officers was discussed. It was generally agreed• that the amount of the compensation then authorized and being paid to the o¡fleers was insufficient, and that there should be substantial increases commensurate with the duties performed. However, at no time during 1918 did the board of directors of the petitioner, by formal or informal action, vote, fix or agree upon the amount of additional salaries or compensation to be paid to its officers, or talce any affirmative action with respect thereto. After considerable informal discussion, it was agreed that any increase in the compensation paid to the officers should bear some reasonable relation to the gross and net earnings of the company for 1918, and it was also agreed to consult auditors for the purpose of determining what would constitute reasonable salaries in comparison with other plants. For these reasons, decision of the matter was deferred until after the close of the calendar year 1918, and no additional compensation was agreed upon or voted in 1918.”

Pursuant to this arrangement, at a formal meeting of the Board of Directors held on June 11, 1919, the Board voted additional salaries aggregating $30,000, the additions being as follows:

General manager, Brennan, Sr., $10,000; president, Sam D. Lewis, $8,500; secretary-treasurer, MeCrillis, $8,500; vice president, Rowell, $3,000. These additional salaries were promptly paid.

The Board ruled that the evidence was “not sufficient to establish that any legal liability was incurred by the petitioner corporation during 1918 to pay the additional compensation in controversy, and since the amount was not, accrued in 1918, it is not an allowable deduction from income for that year.”

The overwhelming weight of authority requires a reversal of this' ruling. The question is whether the officers rendered services “under such circumstances as to raise the fair presumption that the parties-intended and understood that they were to be paid for”—quantum meruit. Fitzgerald Co. v. Fitzgerald, 137 U. S. 98, 111, 11 S. Ct. 36, 34 L. Ed. 608; Montana Co. v. Dunlap (C. C. A.) 196 F. 612, 619; Pew v. Gloucester Bank, 130 Mass. 391, 395; National Loan & Investment Co. v. Rockland Co. (C. C. A.) 94 F. 335, 338. See, also, Fletcher’s Cye. Law of Private Corporations, see. 2738, and cases cited.

Obviously, directors cannot technically contract with themselves; but it is well settled that when, as in this ease, the directors, or a majority thereof, are also the executives and managing forces of the corporation, they may informally agree for reasonable compensation for their services rendered to their corporation. Of-course such agreement, formal or informal, must be for only reasonable compensation. They may not use their powers in fraud of rights of minority stockholders, Von Arnim v. American Tube Works, 188 Mass. 515, 74 N. E. 680; or of the government as tax collector, Botany Mills v. United States, 278 U. S. 282, 49 S. Ct. 129, 73 L. Ed. 379; Becker Bros. v. United States (C. C. A.) 7 F.(2d) 3, 6; United States v. Phila. Knitting Co. (C. C. A.) 273 F. 657.

But in this case the finding of the Board, fully supported by the evidence, indicates that the officers acted conscientiously and moderately in that regard. When, in June, 1919, they knew the gross and net earnings of the company for 1918, they then proceeded to liquidate the liability which was incurred during the year 1918, hy the informal agreement then made, for the amounts above stated. They also properly included in their vote that the treasurer should set up in his balance sheet of December 31, 1918, this amount of $30,000, as reserved for salaries. It was so set up, and tax returns were made on that basis. " The Board found that the petitioner kept its hooks by the accrual method.

It follows that the liability for additional compensation was incurred during 1918, and was deductible under section 234(a), supra.

On a motion for rehearing before the Board, the appellant asked for a finding that each of the additional salaries was a reasonable amount for the services rendered. The Board refused to make such a finding, on the ground that its ruling that no liability was incurred therefor, during the taxable year, would make such finding immaterial—merely a moot question.

We think the Board should have recognized that its rulings of law were subject to review by this court, and have made all reasonably requisite findings of fact.

While there is no contention before this court that the salaries voted and paid in June were not reasonable in amount, the only-question argued here is that the liability therefor was not incurred in 1918. But we cannot say that there is no evidence in this record warranting a finding that the additional salaries were not reasonable.

The result is that the decision of the Board of Tax Appeals must be reversed, and the case remanded, with instructions to find whether the additional salaries were reasonable and to recompute the tax for 1918 accordingly.

The decision of the Board of Tax Appeals is reversed, and the case is remanded to the Board for further proceedings not inconsistent with this opinion.