OPINION.
Sternhagen:
The taxpayer contends that the amounts paid to the officers were reasonable and that the Commissioner erred in disallowing the amounts in excess of $7,500 each to the four officers. The outstanding fact which gives rise to the controversy is that the salaried officers are the directors and, with their wives, all the stockholders. The business is, as they say, " a family affair." The profits could be given to them as salary or as dividends, and the only difference would have been in the effect on the corporation and individual income taxes. Under such circumstances the salaries may properly be carefully scrutinized to determine whether the deduction is a reasonable allowance for salaries or excessive and in effect a distribution of profits.
These persons met in January, 1920, as corporate directors. At that time they were in position to approximate the profits of the forthcoming year. Knowing that the sales would be greatly in excess of any preceding year, they voted to increase their own salaries by more than three times the figures of 1919, except the father, whose increase was to be not so great. The ground for this is stated in general terms to be that the officers were responsible for the business, had taken inadequate salaries in the past, wanted to participate in the fruits of a fortunate year, and had therefore demanded more money from their father. They asserted they could get more money elsewhere or by starting new businesses each for himself. We have, however, no evidence of the amounts demanded.
Looking alone to the corporation and its interests and probable conduct as an independent business organization, the directors of which were required to represent the stockholders, we can not believe that the directors would have reasonably granted such salaries to the officers and left only $4,584 as the net income of their corporation for the stockholders. That the officers were entitled to an increase is evident. We think, however, that the increase should be limited to $8,000 for each of the three sons and that the $9,000 paid to the father, T. H. McMillan, should be allowed.
Arundell not participating.