Brooklyn Radio Service Corp. v. Commissioner

31 B.T.A. 269, 1934 BTA LEXIS 1123

• Court: United States Board of Tax Appeals
• Decided: October 9, 1934
• Docket: Docket No. 61229.
• Status: Published

Opinions

OPINION.

Muedock:

The petitioner in this proceeding contends that a deficiency of $3,664.55 for the calendar year 1929 was improperly determined. The Commissioner admits that he erred in disallowing a deduction of $3,300 representing accounting fees. The only issue submitted to the Board is whether or not the petitioner incurred a liability in 1929 to pay its president as part of his salary 2 percent of its net sales so that the amount was an ordinary and necessary expense incurred in that year. No question of the reasonableness of compensation is raised. The material facts were stipulated.

The petitioner kept its books on an accrual basis. Its board of directors passed the following resolution on December 28, 1928:

Resolved: that Mr. Benjamin Ginsberg, the President of this Corporation receive a salary for the year 1929 the sum of Twelve Thousand Dollars ($12,000), payable $1,000 per month, plus 2% of the net sales for the year 1929, with the understanding however,- that such 2% of the net sales be not paid to him as long as the corporation is indebted to Finance Companies on account of its own insufficiency of working capital or to any banks, and in no event until after January 1, 1930, and with the further understanding that said 2% of the net sales to be due to Benjamin Ginsberg be subordinated by him to the indebtedness to all other creditors of this corporation.

Two percent of net sales for 1929 amounted to $33,757.61. The record is silent as to any accrual of this amount. Eight thousand three hundred and twenty dollars was drawn in cash by the president in 1929 and on the accounts .receivable ledger he was charged in that year with $3,736.77 representing merchandise and payments for his account. The $3,736.77 was charged in 1930 against the balance due the president for 1929 salary. The balance sheet of the petitioner for the close of the year 1929 shows, inter alia:

Notes payable_$40, 780.97

Accounts payable_ 260,916. 77

Due finance companies_ 261,145.28

Notes receivable discounted_ 7,261. 67

Capital_ 122,800.00

Surplus-:_ 30, 694.16

The petitioner, on its return for 1929, claimed a deduction for salaries including $37,854.28 as salary of its president. The Commissioner allowed $12,000 of that amount and in disallowing the balance of $25,854.28 explained that under the resolution of December 28,1928, the 2 percent of net sales was only a contingent liability which was not to be paid in 1929 and might never be paid because the corporation might always be indebted to finance companies and banks on account of its own lack of working capital. The Commissioner filed no brief.

A deduction in a case like this is proper for the year in which events occur which fix the amount and determine the liability of the taxpayer to pay that amount. United States v. Anderson, 269 U.S. 422. Clearly the amount was definitely fixed in 1929, being 2 percent of net sales for that year, or $33,757.61. Why that amount -was not claimed on the return is not shown. But the Commissioner has made no point of the absence of evidence of how the $33,757.61 was treated on the taxpayer’s books. Cf. Savinar Co., 9 B.T.A. 465. His whole point is that in 1929 this amount represented only a contingent liability. Sunburst Oil & Refining Co., 23 B.T.A. 829. Contingent liabilities are not deductible. Lucas v. American Code Co., 280 U.S. 445. The amount here in question, however, was not a contingent liability in 1929. The time of payment was uncertain, but that fact does not delay an accrual for income tax purposes. Perkins Land & Lumber Co., 9 B.T.A. 528; Oliver H. Van Horn Co., 9 B.T.A. 76; Automobile Insurance Co. of Hartford, 72 Fed. (2d) 265. The liability to pay $33,757.61 at some future time was definitely determined in 1929. Other indebtedness of the corporation were to have priority over this one as to j>ayment, but it was still a definite obligation of the corporation which would have to be paid before the assets of the corporation could be distributed to the stockholders. Payments of salaries in capital stock have been held to be deductible when made, Haskell & Barker Car Co., 9 B.T.A. 1087; Commercial Investment Trust Corp., 28 B.T.A. 143; Package Machinery Co., 28 B.T.A. 980; W. M. Ritter Lumber Co., 30 B.T.A. 231, 274, yet the creditor in this case would receive payment before any stockholder would receive a distribution of capital. Subsequent insolvency of the debtor alone could prevent the creditor from demanding payment eventually. The year 1929 was the proper year for accrual of this liability, which was an expense incurred in and properly attributable to the earning of income for that year. United States v. Anderson, supra; American National Co. v. United States, 274 U.S. 99.

Reviewed by the Board.

Decision will be entered under Rule 50.