This is an appeal from the determination of deficiencies in income and profits tax for the fiscal years ending January 31, 1918, and January 31, 1919, in the amounts of $3,300.76 and $6,003.85, respectively. Only so much of the deficiencies are in controversy as arise from the reduction by the Commissioner of officers' salaries in the total amount of $12,960 in each of the years.
FINDINGS OE EAOT.
The taxpayer is a West Virginia corporation, engaged in selling general merchandise at retail, with principal office at Parkersburg.
The taxpayer is a close corporation, its entire common stock being owned by two brothers and four sisters. The business of the taxpayer was established by the father of the present owners many years ago. Subsequent to his death in 1895, the business was carried on by his widow and children until the death of the widow in 1901, and by the children since that time. The business was incorporated in 1905.
Throughout the period of several years prior to 1911 and up to the present time, officers' salaries have been regularly fixed for the ensuing year at meetings of the board of directors held in March of each year, divided into amounts designated as " Managers' salaries " and "Directors' salaries," the amounts designated as "Managers' salaries " being ordered paid to the two brothers who were president and secretary-treasurer, respectively, and the amounts designated as " Directors salaries " being ordered paid to the two brothers and four sisters. These salaries were combined as one item, paid monthly, and entered upon the books of the taxpayer as " Executive salaries." The amounts designated in the minutes as managers' and directors' salaries, and the aggregate thereof as fixed by the directors in March of each year from 1911 to 1918, inclusive, were as follows:
The amounts designated as " Directors' salaries " in the years 1917 and 1918 were the amounts paid for the fiscal years ending January 31, 1918, and January 31, 1919, and were disallowed by the Commissioner as deductions from gross income solely upon the ground that the total amounts paid in each of the years to the two brothers and four sisters were in proportion to their stockholdings.
The resolutions of the board of directors held in March, 1917, and 1918, immediately upon the adjournment of the stockholders' meetings, were as follows:
On motion, duly seconded, of Mary D. Hoblitzell, it was ordered that tbe amount of .$12,960.00 be paid tbe directors as salary for 1917, same to be distributed on a monthly basis.
Upon motion salaries to tbe amount of $3,600 were ordered paid to tbe managers, Henry H. Dils and Sam M. Dils for tbe coming year.
On motion, duly seconded, of Mary D. Hoblitzell, it was ordered that tbe amount of $12,960.00 be paid tbe directors as salary for 1918, same to be distributed on a monthly basis.
' Upon motion salaries to tbe amount of $3,600.00 were ordered paid tbe Managers, Henry H. Dils, and Sam M. Dils, for tbe ensuing year.
Henry Dils and Sam Dils, president and secretary-treasurer, respectively, were the managing officers of the corporation. They gave their entire time and attention to the business, and the four sisters gave a considerable portion of their time, actively assisting in carrying on the business. No other executives or managers were employed, and every department of the business was managed and supervised by the two brothers and four sisters. In addition to their services in the store, the sisters from time to time accompanied their •brothers on various trips for the purpose of assisting in the selection and purchase of merchandise.
The taxable net income as determined by the Commissioner, after disallowance of $12,960 of the salaries paid, was $51,350.70 for the fiscal year ending January 31, 1918, and $64,093.71, for the fiscal •year ending January 31, 1919.
DECISION.
That portion of the deficiencies resulting from the disallowance :by the Commissioner of $12,960 as compensation of officers as a deduction in each of the fiscal years ending January 31, 1918, and 1919 is disallowed. Final determination will be settled on consent or on 7 days' notice, under Rule 50,