Opinion
Docket Nos. 17404 22979.
1951-12-26
ROEHL CONSTRUCTION COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Scott P. Crampton, Esq., and Dewey R. Roark, Jr., Esq., for the petitioner. S. Earl Heilman, Esq., for the respondent.
Respondent's action in disallowing deductions of salary payments to petitioner's president in excess of $100 per month is approved in the absence of proof as to what services were in fact rendered. Further held that the salary payments so disallowed may not be allowed as additional rental for the property owned by petitioner's president and occupied by petitioner at a specific and agreed rental. Scott P. Crampton, Esq., and Dewey R. Roark, Jr., Esq., for the petitioner. S. Earl Heilman, Esq., for the respondent.
These consolidated proceedings involve income tax liability for the fiscal years ended February 28, 1943 and 1944, and excess profits tax liability for the fiscal years ended February 28, 1943 and 1945.
Petitioner, in Docket No. 17404, requests redetermination of the deficiencies asserted by respondent, as follows:
+--------------------------------------+ ¦Deficiency ¦ ¦ ¦ +------------------+-------+-----------¦ ¦Fiscal year ended—¦ ¦ ¦ +------------------+-------+-----------¦ ¦ ¦Income ¦Excess ¦ +------------------+-------+-----------¦ ¦ ¦tax ¦profits tax¦ +------------------+-------+-----------¦ ¦February 28, 1943 ¦$129.38¦$3,241.15 ¦ +------------------+-------+-----------¦ ¦February 28, 1944 ¦56.14 ¦ ¦ +------------------+-------+-----------¦ ¦February 28, 1945 ¦ ¦3,272.44 ¦ +--------------------------------------+
Petitioner, in Docket No. 22979, requests redetermination of the disallowance in part of petitioner's applications for relief from excess profits taxes paid for the fiscal years ended February 28, 1943 and 1945.
The only question for redetermination under Docket No. 17404 is the correctness of respondent's action in disallowing as unreasonable the deduction of a portion of the payments made in each year to petitioner's chief stockholder as salary as its president and, in the alternative, whether the amounts so disallowed should be considered and allowed as additional rent for the premises occupied by petitioner and belonging to its president. Several other issues were raised in the petition under this docket, but at the hearing it was stipulated that one issue involving carry-backs would be adjusted under Rule 50 computation, and the remaining issues were abandoned by petitioner at the hearing. It was also stipulated, under Docket No. 22979, that petitioner is entitled to use a constructive average base period net income in the amount of $4,309 for each of the fiscal years involved, and accordingly the only issue involved in that petition may be disposed of under a Rule 50 computation.
The stipulated facts are so found and incorporated herein.
FINDINGS OF FACT.
Petitioner is a corporation organized under the laws of Tennessee on March 25, 1942, with an authorized capital of 1,000 shares of no-par-value stock. Its principal office is located in Knoxville, Tennessee. Petitioner's Federal income and excess profits tax returns for the taxable periods involved were filed with the collector of internal revenue for the district of Tennessee.
Following its organization, petitioner issued 100 shares of its stock for $1,000 cash, and this was its outstanding capital during the years here involved. Dorothy Roehl Berry, petitioner's president, was issued 95 shares of this stock and Otto T. Roehl, petitioner's secretary-treasurer and general manager, was issued the other 5 shares. Roehl is a brother-in-law of Dorothy Roehl Berry.
The working capital of petitioner at the time it was formed consisted of the $1,000 which was paid in for stock and $5,000 loaned petitioner by Dorothy Roehl Berry, for which the petitioner issued to her its promissory note with interest at 4 per cent.
Immediately following its organization the petitioner purchased from the estate of Jay A. Roehl, deceased, the equipment and inventory of Jay Roehl Co., a sole proprietorship, for $25,000, payable $5,000 per year for 5 years. The equipment and inventory purchased had been appraised in the estate of Jay A. Roehl at a figure of $25,000, and in its acquisition petitioner gave a mortgage on the equipment in the sum of $30,000 to secure the payment of the purchase price together with the $5,000 note to Dorothy Roehl Berry. The latter was formerly the wife of Jay A. Roehl, deceased.
On March 26, 1942, immediately after the organization of the petitioner, a special meeting of its board of directors was held, which unanimously authorized the rental from Dorothy Roehl Berry of the premises known as 625 Atchley Street, Knoxville, Tennessee, at $100 per month. This property belongs individually to Dorothy Roehl Berry. At the same meeting of the board of directors Dorothy Roehl Berry was elected president of petitioner and Otto T. Roehl secretary-treasurer and general manager, the salary to be paid Dorothy Roehl Berry as president being specifically fixed at $200 per month, and to Otto T. Roehl as secretary-treasurer and general manager, at $400 per month. On July 31, 1942, a special meeting of the board of directors was held and the salary of Dorothy Roehl Berry was set at $400 per month and that of Otto T. Roehl at $800 per month.
During the fiscal years 1943, 1944, and 1945 the petitioner paid its president, Dorothy Roehl Berry, the sum of $100 per month as rental for the property occupied by it and $3,600, $4,800, respectively, as salary for her services as president. These payments of $100 a month for rental were duly entered upon the petitioner's books as rental for the property, and reported and deducted as such upon its returns filed for each of the years involved. No formal lease was executed covering the premises rented at $100 per month, petitioner having occupied them on a month-to-month basis. The aforementioned payments of salary to Dorothy Roehl Berry in the three taxable years were duly recorded on the corporate books as salary and deducted as such on the corporate returns for each of those years. In determining the pending deficiencies, respondent disallowed as a deduction by petitioner all but $100 per month of the amounts paid as salary by it to its president, Dorothy Roehl Berry.
In the three fiscal years here involved, properties in Knoxville, Tennessee, of the same general character as the premises rented by petitioner from its president, were renting at an average price in 1943 of $250 per month, in 1944 of $275 per month, and in 1945 of $325 per month.
OPINION.
LEECH, Judge:
Although a number of issues were raised by the petitioners in these proceedings, all have been disposed of either through stipulation or abandonment by the petitioner, with the exception of one which questions the correctness of respondent's action in his disallowance of the excess above $100 per month of the salary paid by petitioner to its president, Dorothy Roehl Berry.
Petitioner's primary contention in its petition is that the payments made its president as salary in each of the fiscal years here involved were reasonable for services rendered and as such properly subject to deduction in arriving at net income. A secondary contention is that if such payments are in excess of reasonable compensation, such excess be considered as payments of additional rental for the premises leased from its president and occupied by petitioner at a rental of $100 per month.
Petitioner appears to have abandoned its primary contention, since no evidence was offered at the hearing with respect to the services rendered by Dorothy Roehl Berry as president of the petitioner. As far as we are advised, the individual in question may have performed no services whatever, or services not even justifying the deduction of $100 a month allowed by respondent in his adjustment of the deductions.
Petitioner now urges only its contention that we should consider salary payments made to Dorothy Roehl Berry, as in fact, payments of additional rent for the premises it occupied. It is argued that the situation calls for the application of the rule that in matters of income taxation we must look through form to substance and give effect to reality, disregarding the manner in which the particular expenditure may have been recorded on the corporate records. In support of this contention the petitioner presents proof only upon one question, this being the fair rental value on the market of the premises occupied. There is absolutely no evidence that even tends to indicate an intention upon the part of petitioner, through its directors, to pay any amount in excess of $100 per month as rental for the premises. Nor is there evidence that the figures set out in the resolutions by the directors authorizing the payments of rent and salaries in specific amounts were erroneously entered, or that a mistake had been made in the treatment of these items on the books of petitioner. The only testimony presented, in addition to that of two real estate appraisers setting a fair rental value upon the premises, was given by Otto T. Roehl, the petitioner's secretary-treasurer and general manager, who testified that rentals and salaries were paid in the amounts as set out in the resolutions by the board of directors, but that in his opinion the rental agreed upon and paid was too low.
These facts do not, in our opinion, call for an application of the rule invoked by the petitioner. We are not called upon to correct a mistake in the characterizing of an expenditure upon corporate records. We do not dispute the soundness of the rule for which petitioner argues. The courts have, in many cases, found that an expenditure has been given an incorrect label and is in fact an allowable expense, and have disregarded the corporate book entry recording it. Helvering v. Tex-Penn Oil Co., 300 U.S. 481; Whitehead v. Commissioner, 64 F.2d 118, certiorari denied 290 U.S. 690; John A. Nelson Co., 28 B.T.A. 529; Doyle v. Mitchell Bros. Co., 247 U.S. 179. Petitioner here, however, asks us to disregard the fact and to change the intended character of the expenditure. The payments made as salary to petitioner's president were intended to be salary, were received as such and, under the facts disclosed, the petitioner was under no legal obligation to pay more than $100 a month to its president for rental of the property leased from her. The substance of petitioner's argument appears to be that we should disregard the fact in this case and treat the payments as for something for which they were not at the time intended because such change would benefit the petitioner taxwise, and would still not result in the allowance of an excessive and unreasonable rental deduction.
Respondent's action in disallowing the payments of salary to petitioner's president in excess of $100 per month is approved. We do not agree with petitioner's contention that the amounts so disallowed should be allowed as deductions of payments for additional rental of the property leased by petitioner.
Decisions will be entered under Rule 50.