[425]*425OPINION.
Love:
The sole issue in this proceeding is whether the additional compensation in the amount of $48,000 voted and accrued in the year 1920, pursuant to the action taken by the board of directors on May 6, 1920, to the petitioner’s president and treasurer may be deducted from gross income for that year.
It is necessary, first, for us to determine the status of the additional compensation in question. Was it voted as and for salaries for 1920, although measured by services rendered prior to that year, or, was it voted and accrued in 1920 as and for salaries for services performed in prior years? If the additional compensation comes within the latter classification, then, in our opinion, it may not be deducted in the year 1920. Vaughan & Barnes, Inc., v. Commissioner, 6 B. T. A. 1279.
The resolution of May 6,1920, is ambiguous and might be susceptible to either interpretation. The resolution, in part, says:
This meeting having been called for the purpose of considering and acting upon the proposal for a grant of additional compensation to Mr. J. K. Robinson, Jr., and Mr. Alfred McEwen, for their past services to the Company * * *.
At the hearing, the history of the petitioner was opened up and evidence was introduced with respect to the action taken by the board of directors and of their intention in connection therewith. We have held in the Appeal of Union Dry Goods Co., 1 B. T. A. 833, that the minute as written is not conclusive as to the year for which additional compensation was authorized. From all of the evidence adduced, we are of the opinion that the additional compensation voted and accrued in May, 1920, was intended to be as and for, and was as and for, salaries for the year 1920. The motivating or impelling influence, however, in determining the amount to be paid as additional compensation for the year 1920 was the service rendered by the officers in question prior to that year. In other words, the additional compensation for 1920 was based upon efficiency and ability of the officers as demonstrated by past performances and results achieved over the preceding period of years.
[426]*426Section 234(a)(1), which provides for the deduction of salaries reads, in part, as follows:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.
It follows, therefore, that if the regular annual salaries of the petitioner’s president and treasurer plus the additional salaries of $48,000 constituted reasonable compensation for services actually rendered by those officers in 1920, the deduction on account thereof is properly allowable. The petitioner urges that the total compensation for 1920 was reasonable in amount for services actually rendered in that year by the officers in question and the respondent insists that it was unreasonable.
In support of its contention that such amount was reasonable compensation for 1920, the petitioner takes the position that the action of the board of directors of a corporation in authorizing salaries for a given year raises a presumption that the amount voted is reasonable and complies with the statute until the contrary be proven. In other words, the petitioner insists that the burden of proof is on the respondent to show that the salaries for 1920 were unreasonable. We are unable to agree with the petitioner in this respect.
Our attention is called to the case of United States v. Philadelphia Knitting Mills Co., 273 Fed. 657, as supporting the petitioner’s position that the compensation in dispute is presumed to be reasonable until the presumption, is overcome. In that case the court was construing the Corporation Excise Tax Act of 1909, which provided for a tax at a named rate upon the net income of a corporation, to be ascertained by deducting from its gross income “ all ordinary and necessary expenses.” The statute did not specifically make salary an allowable deduction, though it was so construed by the Bureau of Internal Revenue when the salary is a “reasonable and fair compensation for services rendered regardless of the amount of stock such officer may hold.” The court in holding that, under the statute, the Government may not determine whether salary paid corporation officers is a reasonable and fair compensation, but may determine whether it is salary that is paid, or whether it constitutes profits diverted to a stockholding officer under the guise of salary, stated :
Confining our inquiry to tbe statute, it appears that the basis on which a salary may be allowed as a valid deduction is that it was in fact an “ ordinary and necessary expense (of the corporation) actually paid * * * in the maintenance and operation of its business.” To be a necessary expense it must have been paid for services actually rendered. Jacobs & Davies, Inc., Anderson 288 Fed. 505, 506, 143 C. C. A. 87. Whether services were rendered and whether also they were commensurate with the salary paid are matters of judgment [427]*427and discretion reposed by general law in the board of directors of the corporation. As the board of directors is charged with the duty and clothed with the discretion of fixing salaries of the corporation’s officers, the Government has no right (until expressly granted by statute) to inquire into and determine whether the amounts thereof are proper, that is whether they are too much or too little. But, while the amount of salary fixed by a board of directors is presumptively valid, it is not conclusively so, because the Government may inquire whether the amount paid is salary or something else. Admittedly the Government has a right to collect taxes on net income of a corporation based on profits after all ordinary and necessary expenses, including salaries, are paid. It has a right, therefore, to attack the action of a board of directors and show by evidence, not th.at a given salary is too much, but that, in the circumstances, the whole or some j rt of it it not salary at all but is profits diverted to a stock-holding officer under the guise of salary and as such is subject to taxation * * *. The question of fact here was whether the money paid was all salary or part profits. The presumption arising -from the action of the hoard of directors was that it was all salary. In order to overcome the presumption the burden was on the Government to produce evidence, not necessarily conclusive, but sufficient to raise a valid inference that some definite part of the compensation was not salary but profits. (Italics ours.)
It is apparent from the foregoing statement that the court was not considering the reasonableness of the compensation sought to be deducted. The only question before it was whether the amount sought to be deducted was in fact salary, and with respect to the amount fixed as salaries the court stated that there was a presumption that it was in fact all salary. That is simply another way of saying that the acts of the board of directors of a corporation are presumed to be regular and valid.
The Revenue Act of 1918 differs from the Corporation Excise Tax Act of 1909 with respect to the deduction of salaries, in that section 234(a)(1), supra,
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[425]*425OPINION.
Love:
The sole issue in this proceeding is whether the additional compensation in the amount of $48,000 voted and accrued in the year 1920, pursuant to the action taken by the board of directors on May 6, 1920, to the petitioner’s president and treasurer may be deducted from gross income for that year.
It is necessary, first, for us to determine the status of the additional compensation in question. Was it voted as and for salaries for 1920, although measured by services rendered prior to that year, or, was it voted and accrued in 1920 as and for salaries for services performed in prior years? If the additional compensation comes within the latter classification, then, in our opinion, it may not be deducted in the year 1920. Vaughan & Barnes, Inc., v. Commissioner, 6 B. T. A. 1279.
The resolution of May 6,1920, is ambiguous and might be susceptible to either interpretation. The resolution, in part, says:
This meeting having been called for the purpose of considering and acting upon the proposal for a grant of additional compensation to Mr. J. K. Robinson, Jr., and Mr. Alfred McEwen, for their past services to the Company * * *.
At the hearing, the history of the petitioner was opened up and evidence was introduced with respect to the action taken by the board of directors and of their intention in connection therewith. We have held in the Appeal of Union Dry Goods Co., 1 B. T. A. 833, that the minute as written is not conclusive as to the year for which additional compensation was authorized. From all of the evidence adduced, we are of the opinion that the additional compensation voted and accrued in May, 1920, was intended to be as and for, and was as and for, salaries for the year 1920. The motivating or impelling influence, however, in determining the amount to be paid as additional compensation for the year 1920 was the service rendered by the officers in question prior to that year. In other words, the additional compensation for 1920 was based upon efficiency and ability of the officers as demonstrated by past performances and results achieved over the preceding period of years.
[426]*426Section 234(a)(1), which provides for the deduction of salaries reads, in part, as follows:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.
It follows, therefore, that if the regular annual salaries of the petitioner’s president and treasurer plus the additional salaries of $48,000 constituted reasonable compensation for services actually rendered by those officers in 1920, the deduction on account thereof is properly allowable. The petitioner urges that the total compensation for 1920 was reasonable in amount for services actually rendered in that year by the officers in question and the respondent insists that it was unreasonable.
In support of its contention that such amount was reasonable compensation for 1920, the petitioner takes the position that the action of the board of directors of a corporation in authorizing salaries for a given year raises a presumption that the amount voted is reasonable and complies with the statute until the contrary be proven. In other words, the petitioner insists that the burden of proof is on the respondent to show that the salaries for 1920 were unreasonable. We are unable to agree with the petitioner in this respect.
Our attention is called to the case of United States v. Philadelphia Knitting Mills Co., 273 Fed. 657, as supporting the petitioner’s position that the compensation in dispute is presumed to be reasonable until the presumption, is overcome. In that case the court was construing the Corporation Excise Tax Act of 1909, which provided for a tax at a named rate upon the net income of a corporation, to be ascertained by deducting from its gross income “ all ordinary and necessary expenses.” The statute did not specifically make salary an allowable deduction, though it was so construed by the Bureau of Internal Revenue when the salary is a “reasonable and fair compensation for services rendered regardless of the amount of stock such officer may hold.” The court in holding that, under the statute, the Government may not determine whether salary paid corporation officers is a reasonable and fair compensation, but may determine whether it is salary that is paid, or whether it constitutes profits diverted to a stockholding officer under the guise of salary, stated :
Confining our inquiry to tbe statute, it appears that the basis on which a salary may be allowed as a valid deduction is that it was in fact an “ ordinary and necessary expense (of the corporation) actually paid * * * in the maintenance and operation of its business.” To be a necessary expense it must have been paid for services actually rendered. Jacobs & Davies, Inc., Anderson 288 Fed. 505, 506, 143 C. C. A. 87. Whether services were rendered and whether also they were commensurate with the salary paid are matters of judgment [427]*427and discretion reposed by general law in the board of directors of the corporation. As the board of directors is charged with the duty and clothed with the discretion of fixing salaries of the corporation’s officers, the Government has no right (until expressly granted by statute) to inquire into and determine whether the amounts thereof are proper, that is whether they are too much or too little. But, while the amount of salary fixed by a board of directors is presumptively valid, it is not conclusively so, because the Government may inquire whether the amount paid is salary or something else. Admittedly the Government has a right to collect taxes on net income of a corporation based on profits after all ordinary and necessary expenses, including salaries, are paid. It has a right, therefore, to attack the action of a board of directors and show by evidence, not th.at a given salary is too much, but that, in the circumstances, the whole or some j rt of it it not salary at all but is profits diverted to a stock-holding officer under the guise of salary and as such is subject to taxation * * *. The question of fact here was whether the money paid was all salary or part profits. The presumption arising -from the action of the hoard of directors was that it was all salary. In order to overcome the presumption the burden was on the Government to produce evidence, not necessarily conclusive, but sufficient to raise a valid inference that some definite part of the compensation was not salary but profits. (Italics ours.)
It is apparent from the foregoing statement that the court was not considering the reasonableness of the compensation sought to be deducted. The only question before it was whether the amount sought to be deducted was in fact salary, and with respect to the amount fixed as salaries the court stated that there was a presumption that it was in fact all salary. That is simply another way of saying that the acts of the board of directors of a corporation are presumed to be regular and valid.
The Revenue Act of 1918 differs from the Corporation Excise Tax Act of 1909 with respect to the deduction of salaries, in that section 234(a)(1), supra, specifically provides for a deduction for “a reasonable allowance for salaries or other compensation for personal services actually rendered.” Pursuant to this provision, as stated in the case of William S. Gray & Co. v. United States, decided by the Court of Claims, June 6, 1927, “ it is undoubtedly the right, as well as the duty, of the Commissioner of Internal Revenue under the provisions of the 1918 Revenue Act to determine the reasonableness of the salaries of which a deduction is asked by the taxpayer, as well as to decide whether or not the salaries are ordinary and necessary expenses in the maintenance and operation of the business.”
In the Appeal of Gustafson Manufacturing Co., 1 B. T. A. 508, we stated:
Counsel for taxpayer contends that the directors of the corporation are the sole judges as to what constitutes reasonable compensation and that since they determined upon §20,000 as a salary to be paid the president and general manager for 1918 the Commissioner has no authority to reduce the amount notwithstanding the fact that the salary was based upon earnings or was a [428]*428.istrlbution of profits of the corporation in the form of compensation. This contention, of course, cannot be sustained.
* * * sjt * * *
Under the provision of this section (234(a) (1) supra) the Commissioner not only has the authority but it is his duty to determine under all of the facts obtainable the reasonableness or unreasonableness of deductions by a corporate taxpayer of compensation paid. The Commissioner, upon the evidence before him, determined that a deduction of $16,000 for compensation for the services rendered taxpayer by its president and general manager during the year 1918 was reasonable. The evidence before us does not justify a deduction for compensation of an amount in excess of that determined by the Commissioner.
In W. K. Henderson Iron Works & Supply Co. v. Commissioner, 6 B. T. A. 92, we stated in part:
It may be that such additional salaries paid in 1919, when added to the regular salaries paid in 1919, constitute a reasonable compensation for personal services actually rendered in that year, but we have no evidence before us concerning the salaries paid, service performed, or the volume or character of business done during the year 1919, and we are, accordingly, without the necessary facts to determine the issue for that year. •
We conclude, therefore, that the action taken by the board of directors in voting the total compensation to the officers in question for 1920, does not raise a presumption that the amount voted was in fact reasonable for services actually rendered, thereby complying with the terms of the statute. The Commissioner having determined that the additional compensation voted in May, 1920, was unreasonable for services actually rendered in that year, it becomes necessary for the petitioner, if the deduction is to be allowed, to show that he erred in his determination. We, therefore, must be guided in our determination as to the reasonableness of the compensation in dispute by the evidence adduced in this proceeding.
It will be noted from the table set out in the findings of fact that the petitioner was prosperous in years prior to 1920. It will also be noted that the compensation for 1920 to the officers in question was more than two times the amount received in any other year. There is nothing in the record to indicate that additional salaries might be expected or would be granted in the future, and there is nothing to indicate that the duties performed were materially different from those performed in preceding or succeeding years. It is not intimated that the compensation received prior to and subsequent to 1920 was inadequate. Under these circumstances, we are of the opinion that the salaries paid by the petitioner to its officers in years prior to and subsequent to 1920 are the best evidence of their reasonableness and their value to the petitioner in that year. The deliberate, bona -fide action of the board of directors over a period of years is persuasive in such matters.
[429]*429It may be conceded that the officers in question were efficient, and brought prosperity to the petitioner and that the additional compensation was a merited recognition on the part of the board of directors of the valuable services rendered prior to 1920, but all of the evidence tends to the conclusion that the extra compensation for 1920 was in excess of reasonable compensation for services performed in that year.
We approve, therefore, the respondent’s determination in disallowing as a deduction for the year 1920 the additional salaries in the amount of $48,000.
Judgment will he entered for the respondent.
Considered by Smith and Littleton.