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    H. V. Greene Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3127.
    Decided November 11, 1926.
    1. During 1919 petitioner bad contracts whereby it was obligated to sell the entire stock issues of other companies at such an amount as would net the issuing company a stated amount per share, the difference between said stated amount and the price at which the stock was sold representing- petitioner’s commission. This commission was payable out of the first money paid by the subscriber. No stock was issued or delivered until the subscriber had fully paid therefor. Subscribers who did not desire to pay the entire purchase price in cash were permitted to pay 20 per cent in cash and give promissory notes payable monthly for the balance. In such cases the subscription contract provided (1) that should the subscriber become ill or die the installments paid would be refunded to him or his estate and the remaining installments canceled; (2) that should the subscriber become dissatisfied with his purchase before he had completed the payments he could cancel the contract and receive back the amount paid less 7½ per cent for expenses; (3) that upon application of the subscriber a reasonable extension not exceeding 90 days would be granted for the payment of installments; and (4) that if a subscriber failed to pay the installments when due, and such default continued for 30 days, the issuing company might at its option cancel the subscription contract and all rights of the purchaser thereunder. The petitioner sold many shares of stock during 1919, and on December 31 of that year commissions totaling $311,573.75 on the sale of 24,180 shares of stock were eliminated from gross income for Hie reason that subscribers for those shares were 60 days or more in arrears with one or more of their installment payments, and for the further reason that it might become necessary for petitioner to resell these shares. The petitioner kept its books upon the accrual basis. Held, that the Commissioner properly included the $311,573.75 in gross income for 1918.
    2. Petitioner, a stock-selling organization, by proper resolution fixed the compensation of its officers at a stated amount per month and authorized the payment to them of a certain commission upon the sale of stock of other corporations. Held that, in the circumstances, such compensation was reasonable and constituted a proper deduction from gross income.
    3. Petitioner and five other corporations were affiliated during the year 1919.

      W. W. Spalding, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This proceeding involves income and profits taxes for the calendar year 1919 in the amount of $270,711.60.
    The petitioner, a stock-selling organization, advances four claims as follows: (1) That it should be permitted to adjust its books at the end of the year so as to exclude from gross income commissions totaling $311,573.75 upon the sale of stock of other corporations during the year, upon the ground that under the terms of its underwriting contracts that amount of commissions was unearned. The Commissioner refuses to permit it to do this. (2) That the Commissioner erred in refusing to allow it to deduct, as a part of the compensation for its president and vice president, $241,505.78 representing the total commissions paid to its president and vice president. The Commissioner allowed the petitioner to deduct compensation of $26,000 for its president and $5,777.76 for its vice president. (3) That the Commissioner erred in declining to permit petitioner and five other corporations to file a consolidated return. (4) That petitioner’s profits tax should have been determined under the provisions of section 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    Petitioner was organized on January 5, 1918, to engage in the business of promoting and selling stock of finance corporations, with principal office at Boston, Mass. About 1917, Henry Y. Greene perfected plans for the organization of corporations and trusts to carry on a general banking business, to finance automobile sales and to deal in manufacturers’ open book accounts, and for the organization of another corporation, the petitioner herein, to sell the stock issues of these corporations. About October, 1917, he organized the Commercial Finance Corporation. On December 28, 1917, Greene, party of the first part, and this corporation, party of the second part, entered into the following agreement:
    Whereas the said party of the second part is a corporation organized and existing under the laws of the Commonwealth of Massachusetts, with an authorized capital of two million dollars, consisting of one million dollars par value of seven per centum cumulative preferred stock, participating' as to dividends and preferred as to assets on liquidation to its par value and accumulated dividends, and one million dollars par value of common stock, each of said classes of stock being divided into twenty thousand shares of the par value of fifty dollars each, and all of which said preferred stock is to be offered for public subscription.
    And whereas the said party of the first part is engaged in the business of offering for sale to investors and others the securities of corporations.
    Now, therefore, in consideration of the issuance to the said party of the first part of nineteen thousand nine hundred ninety-six shares of the said common stock of the said party of the second part, the said party of the first part agrees to underwrite said preferred stock at the price of forty-seven dollars and fifty cents per share, one-half the amount of the differnce between said underwriting price and the price at which the said stock is sold is to be paid in cash by said party of the second part to said party of the first part upon the receipt of each installment subscription to said stock, the balance to be paid weekly or monthly as paid in by subscriber.

      Where the amount of the cash payment equals or exceeds the amounts due said party of the first part under this agreement, then the entire sum so due shall at once be paid in full by said party of the second part.
    It is hereby agreed that any and all sums received by the said party of the first part for or on account of subscriptions to said preferred stock shall be promptly paid over to the said party of the second part.
    It is hereby agreed by the said Henry V. Greene that he will not engage in tho marketing or the promotion of any other proposition during the space of six months from the date of this instrument.
    In witness whereof the day first above written, the said Henry Y. Greene does hereto set his hand and seal and the said Commercial Finance Corporation, by its President duly authorized, does hereto set its hand and affix its corporate seal.
    On January 5, 1918, Greene executed the following assignment of this contract to the petitioner:
    Know all men by these presents that I, the undersigned, Henry Y. Greene, in consideration of the issuance to me of 1,200 shares of the capital stock of the H. V. Greene Company, do hereby sell, transfer, assign to H. V. Greene Company all of my title and interest in and rights under the agreement hereto attached, expressly reserving to myself, however, free from the operations of this assignment, the common stock of Commercial Finance Corporation issued to me in connection with the said agreement.
    That I hereby authorize and empower the said H. V. Greene Company upon its performance of the conditions and covenants therein mentioned to demand, enforce and receive all relief concerning the same to obtain in the same manner, to all intents and purposes, as I myself could do with these presents not executed.
    At a meeting of the petitioner’s directors on December 10,1918, the following proceedings were had:
    The president, H. V. Greene, read to the directors a contract entered into between himself and the Commercial Finance Corporation to underwrite a new issue of 40,000 shares of the preferred stock of that corporation, and, after discussion, upon motion duly made and seconded, it was voted that H. V. Greene Company assume and take over the rights and liabilities of H. V. Greene under the said underwriting agreement;
    Whereupon, Mr. Greene executed to the corporation an assignment of said contract.
    In 1918, Greene organized the Mutual Finance Corporation, and on September 26, 1918, Greene, as party of the first part, and this corporation, party of the second part, entered into the following contract:
    Whereas, the party of the second part is a corporation organized and existing under the laws of the Commonwealth of Massachusetts, with an authorized capital stock of one hundred thousand dollars ($100,000), consisting of eighty thousand dollars ($80,000) par value seven per centum (7%) cumulative preferred stock, participating as to dividends and preferred as to assets on liquidation to its par value and accumulative dividends and twenty thousand dollars ($20,000) par value of common stock, each of the said classes of stock being of the par value of $50.00 per share and all of which preferred stock is to be offered for public subscription.

      Whereas, the said party of the first part is engaged in the business of offering for sale to investors and others the securities of corporations.
    Now, therefore, in consideration of the issuance to the said party of the first part of the three hundred and ninety-seven (397) shares of the said Common Stock of the said party of the second part, said party of the first part agrees to underwrite said preferred stock at a price of fifty dollars ($50.00) per share to be paid in cash or promissory notes to the said party of the second part as and when the said preferred stock shall be sold.
    In witness whereof on the day first above written, the said Henry Y. Greene does hereto set his hand and seal and the said Mutual Finance Corporation, by its President duly authorized, does hereto set its hand and affix its corporate seal.
    At a meeting of the petitioner’s directors on October 10, 1918, the following proceedings were had:
    The president laid before the directors the contract between himself and the Mutual Finance Corporation to underwrite the preferred stock of said Mutual Finance Corporation, and outlined the desirability of having his interest in said contract taken over and assigned by the company. After discussion, and upon motion duly made and seconded, it was voted to approve the terms of said contract to take over and assign the interest, rights, and liabilities of Henry V. Greene, with the exception of any title and interest in any common stock of the Mutual Finance Corporation issued to Henry V. Greene in connection with the original execution of said contract, and to issue therefor to Henry Y. Greene 100 shares of the preferred stock of the H. V. Greene Company upon receipt of a proper assignment as herein stated on said contract, said stock to be so issued at par.
    On the same day Greene executed an assignment of this contract to the petitioner in the same form as that relating to the assignment of the Commercial Finance Corporation’s contract above quoted.
    On May 19, 1919, Greene, party of the first part, and the Mutual Finance Corporation, party of the second part, entered into the following contract relating to the sale of the second issue of preferred and common stock:
    (1) Whereas the said party of the first part is engaged in the business of offering for sale the securities of corporations and has acquired several thousand clients who are satisfied with the investments they have already made and therefore offer a field for quick distribution of large stock issues: and
    (2) Whereas the said party of the second part is a corporation organized under the laws of the Commonwealth of Massachusetts with an original capitalization of $100,000.00 all of which has been subscribed: and
    (3) Whereas the said capitalization being insufficient to do business on lines importing a great success, the said party of the second part has voted to increase its capitalization by 60,000 shares of 8% Preferred and 40,000 shares Common Stock, both of the par value of $50.00: and
    (4) Whereas the said party of the second part has no facilities for the placing of its preferred stock in such a manner as to benefit the Corporation:

      (5) Now therefore, in consideration of these presents and in further consideration of the issuance to the said party of the first part of 40,000 shares of the common stock of the said party of the second part, the said party of the first part, for himself or his assigns, hereby agrees as follows:
    (a) That he will sell or cause to be sold the entire issue of the preferred stock (60,000 shares) of the said party of the second part at such price as will net the corporation a sum not less than $51.25 for each share thereof;
    (b) That he will give as a bonus to each and every purchaser of the said preferred stock, a trust certificate for one share of common for every two shares of preferred stock so purchased;
    (c) That he will give to all holders of the original issue of preferred stock, as hereinbefore set forth, a trust certificate for a full share of common stock for each two shares of preferred stock of said original issue, so held;
    (d) That whenever any of the said preferred stock shall be sold for cash, the said sum of $51.25 shall forthwith be remitted to the said party of the second part, for each and every share so sold;
    (e) That whenever any of the said preferred stock shall be sold other than for cash, where the amount of the cash payment on account exceeds the amount of the difference between the above mentioned net price and the price at which said stock shall be sold, then the said party of the second part is to remit forthwith to the party of the first part the total amount of his commission due thereunder.
    (f) That whenever any of the said preferred stock shall be sold other than for cash, where the amount of the cash payment on account is less than the total amount of commission due the said party of the first part, for said sale, then the said party of the second part shall remit forthwith to the party of the first part an amount which shall equal 5/6 of the commission due to the said party of the first part hereunder and shall remit the remaining 1/6 out of the next payment made by the client under said sale.
    (6) It is hereby understood and agreed by both the parties hereto that all the terms and conditions of this sales contract appear in the within agreement.
    This contract was duly assigned by Greene to the petitioner.
    At a directors’ meeting held June 10, 1919, the following resolution was adopted;
    Upon motion duly made and seconded, it was voted that the commissions secured from the sales of Mutual Finance Corporation’s stock under a contract of the H. Y. Greene Company with said Mutual Finance Corporation, be divided as folows:
    Salesmen 10 per cent, managers 5 per cent, superintendents 1½ per cent, general manager 1 ⅛ per cent, president, H. V. Greene, 10 per cent, H. V. Greene Company the remainder.
    All of the foregoing per cents being based on the par value of the stock.
    Mr. Greene called the attention of the Board to his desire to have the amount of his compensation spread upon the minutes of the company that they may be recorded in due form.
    On motion duly made and seconded, it was provided that the salary of H. V. Greene shall be, until otherwise voted, $500 per week, together with any bonus or commissions that may be voted him from time to time.
    At a meeting on December 26, 1919, the petitioner’s directors adopted the following resolution:
    On motion by Mr. Campbell, duly seconded, it was voted that the corporation pay to Henry V. Greene as additional bonus for his service in connection with the sale of Mutual Finance Corporation stock the sum of $1.75 for each share of preferred stock of said corporation so sold.
    The First People’s Trust was organized on October 28, 1919, and on October 30, 1919, «J. Henry Heal et al., trustees, as parties of the first part, and Henry Y. Greene, as part;/ of the second part, entered into the following contract:
    That whereas, in accordance with the plan of organization referred to in said Declaration of Trust, said Trust proposes to sell One Hundred Ninety-Thousand (190,000) first preferred shares, One Hundred Ninety Thousand (190,000) second preferred, and One Hundred Ninety Thousand (190,000) common shares of said First People’s Trust through the agency of said Greene.
    Now therefore, in consideration of the premises and the mutual promises herein contained, it is agreed by and between the parties hereto as follows:
    1. Said Trust covenants and agrees to issue or transfer, or cause to be issued or transferred, to said Greene Ten Thousand (10,000) common shares of said Trust in consideration of the undertaking on the part of said Greene hereinafter set forth.
    2. Said Greene undertakes to sell One Hundred Ninety Thousand (190,000) shares first preferred, One Hundred Ninety Thousand (190,000) shares second preferred, and One Hundred Ninety Thousand (190,000) common shares of said First People’s Trust in blocks consisting of two first preferred shares, two second preferred shares and two common shares in each block at a price to net the Trust Two Plundred Dollars ($200) for each block of shares as aforesaid.
    3. Said Greene shall have the right to fix the price in excess of Two Hundred Dollars ($200) at which each block of shares aforesaid shall be sold, and said Trust agrees to pay to said Greene as commission the excess above Two Hundred Dollars ($200) received for each block of shares sold as aforesaid, the evidence of such sale to be a subscription agreement validly executed by the purchaser thereunder. Said Greene shall receive no other commission or any compensation from said Trust for expenses or otherwise except as provided herein.
    4. Said shares are to be sold in accordance with the terms of subscription agreement, copy of which is hereto attached, and all payments under said' subscription agreement are to be made to the First People’s Trust. The commission to which the said Greene is entitled under this contract shall be paid to said Greene or his order from the first payment made by the purchaser under said subscription agreement, and shall not be payable until said first payment is made, it being understood that said first payment shall be at least sufficient to pay said commission.
    5. Dntil this contract is revoked in writing by the parties hereto, said Greene shall have the sole and exclusive agency for the sale of said shares of the First People’s Trust as hereinbefore set forth.
    Soon after the execution of the above contract it. was assigned to the petitioner by Greene, whereupon the directors voted to pay Greene a commission of $1.25 a share on the stock of this corporation.
    During 1918 and 1919 petitioner marketed the stock of the aforementioned corporations. The system of selling stock devised for the petitioner by Greene, its president, contemplated the wide distribution of the stock to the public through an extensive organization of salesmen, district managers, general sales managers, and executive officers. Branch offices were opened in the more important cities of the United States. Training schools for salesmen were established at which the more recently employed stock salesmen were instructed and the experienced salesmen enthused over the work at hand. Sixty branch offices were established and 1,800 salesmen were employed. The stock of the three corporations sold in 1918 and 1919 amounted to several millions of dollars.
    No stock was issued or delivered to any subscriber until he had fully paid for the shares for which he had subscribed. Subscribers were given the option of paying for the stock in full at the time of the signing of the contract, by which they agreed to purchase so many shares at a specified amount, or of paying 20 per cent in cash and the remainder in monthly installments. Non-interest-bearing promissory notes were given for the unpaid installments. All installment contracts between the issuing company and the purchaser of the stock provided, first, that if the purchaser should fail to make any of the installment payments when due and such default should continue for 30 days, the issuing company might at its option cancel the subscription contract; second, that upon written request of the purchaser within one week from the date of such default the issuing company would grant a reasonable extension on installments in arrears, not exceeding three months; third, in case of the death of the purchaser before the amount subscribed had been fully paid, the issuing company would pay to the purchaser’s estate the full amount paid in; fourth, should the purchaser become dissatisfied with his contract before the installments had been fully paid, all amounts paid in by him, less 7½ per cent for expenses, would be refunded.
    All cash, subscription contracts, and notes received by salesmen were transmitted direct to the company the stock of which had been sold, and daily reports were made by branch managers to the petitioner of the sales made during the preceding day. The issuing companies maintained upon their books an account in the name of each person who had signed a contract to purchase stock showing payments, etc. The petitioner did not maintain such accounts upon its books. Upon receipt by the petitioner of the daily reports of sales made, it forthwith, upon its books, charged the company the stock of which had been sold with the total commission upon the stock sold and credited the commission account. The companies whose stock was being sold made remittances to the petitioner of the commissions to which it was entitled under the contracts out of the first money received from the purchaser of the stock.
    The number of shares sold by the petitioner during the year 1919, after eliminating subscription contracts which had been definitely canceled, and the commissions of H. V. Greene thereon, were as follows:

    At the end of 1919 certain purchasers of stock were in arrears with their installment payments. The petitioner examined the books of the companies the stock of which it was selling, carefully scrutinizing each contract and the account of each purchaser of stock, and made a list of the number of shares of stock which had been sold as to which the purchasers were 60 days or more in arrears with one or more of their installment payments. This examination showed that purchasers of 11,910 shares of the stock of the Commercial Finance Corporation and of 12,270 shares of stock of the Mutual Finance Corporation were 60 days or more in arrears with one or more installment payments. The petitioner’s commissions upon these shares amounted to $311,573.75. . Whether all or any portion of the petitioner’s commissions upon these shares had been paid to it is not Neither the purchaser of any of these shares nor the issuing-company had evidenced a desire to cancel any of the contracts.
    On December 31, 1919, petitioner debited its commission account with $311,573.75 and credited the Commercial Finance Corporation with the amount of the commission upon 11,910 shares and the Mutual Finance Corporation with the commission on 12,270 shares, the two credits totaling $311,573.75. The explanation of the entry made upon the journal at the time was as follows:
    To credit tlie Commercial Finance Corporation and the Mutual Finance Corporation for tlie commissions on sales of stock. All of tlie sales, on which the above commissions were computed, were made to subscribers who were at least 60 days in arrears on tlieir payments on December 31, 1919. These contracts are known to be worthless and the stock will have to be resold.
    No adjustment was made of commissions on stocks sold as to which the purchaser was delinquent in his installment payments for less than 60 days.
    On September 30,1920, petitioner desired to show a large book net worth and, without making any further examination of the delinquent accounts, debited the Commercial Finance Corporation and the Mutual Finance Corporation with the amounts previously credited to them and credited the commission account with $311,573.75, thereby reversing the entry of December 31, 1919.
    Greene was primarily responsible for the petitioner’s activities. He formulated all of its plans of operations and supervised and directed the carrying out of those plans. Every employee worked under his supervision. He labored long hours each day and was constantly planning for the success of the company and urging others to greater efforts. He edited and published a “ House Organ,” having for its purpose the success of the company through greater effort and better salesmanship on the part of employees and salesmen. Petitioner’s entire income consisted of commissions on stock sold, and for the year 1919 was in excess of $2,000,000. After deducting all expenses, including commissions paid to salesmen of $103,655.17, to branch managers of $349,361.50, to sales directors of $113,183.50, and to district superintendents of $120,293, and after eliminating from gross income the alleged unearned commissions totaling $311,573.75, and, also, after deducting $229,691.03 commissions paid or credited to Greene and A. D. Howard, petitioner’s return for 1919 showed a net income of $84,441.31, or 138 per cent return on invested capital of $61,170.16.
    The petitioner kept its books and rendered its returns upon the accrual basis. The total compensation paid to H. Y. Greene, president and treasurer, for 1919 amounted to $249,324.04, consisting of a fixed salary of $26,000 and commissions upon stock sold of $223,524.
    A. D. Ploward was a director and vice president and devoted his entire time to petitioner’s business. With the exception of one qualifying share, he owned no stock of the petitioner. His total compensation for the year 1919 amounted to $12,144.79, consisting of a fixed salary of $5,777.76 and commissions on stock sold of $6,367.03. The Commissioner allowed the deduction of Howard’s fixed compensation but disallowed the commissions paid to him.
    Commissions were paid upon stock sold during the year 1919, as follows: Salesmen, 10 per cent; branch managers, 5 per cent; district superintendents, 2½ per cent; sales directors, 1 ½ per cent.
    The petitioner filed a consolidated return with L. W. Westcott, Inc., hereinafter designated the Westcott Company; Backus Heater & Foundry Co., hereinafter designated the Backus Company; California Carbon Co., hereinafter designated the Carbon Company; Southern Labrador Pulp <& Lumber Co., hereinafter designated the Lumber Company; and the College of the Spoken Word, hereinafter designated the College Company. The petitioner claimed that its stock and the stock of the corporations named above was owned or controlled during 1919 by the same interests, namely, H. Y. Greene, president of the petitioner. The Commissioner denied the right to affiliation. The preferred stock of the corporations had no voting rights.
    At the beginning of 1919, H. Y. Greene owned 99.98 per cent of the stock of the Westcott Company and 99.2 per cent of the stock of the Backus Company.

      In the Carbon Company he owned 7,497 shares, or more than 99 per cent of the outstanding stock. In 1919 there were issued to H. V. Greene 37,497 additional shares of stock of the Carbon Company.
    The College Company was organized June 7,1919, and throughout the remainder of that year H. V. Greene owned 99.8 per cent of its stock.
    The Lumber Company was organized September 8, 1919, and throughout the remainder of that year H. Y. Greene owned 99.8 per cent of its stock.
    H. V. Greene owned 70.5 per cent of the petitioner’s stock; the minority interest was owned as foliows: Alice Fowler, 100 shares; Mary Warren, 100 shares; Marjorie Mayo, 100 shares; bT. R. Black, 50 shares; Lillian Coleman, 85 shares; A. D. Howard, 1 share; E. C. Campbell, 101 shares; II. B. Robinson, 100 shares, and W. C. Burns, 100 shares.
    The stockholders at the end of 1919 were as follows:
    In the Westcott Company there was no change during the year.
    In the Backus Company- — II. Y. Greene, 51 per cent; F. Liston Collins, 5 per cent; F. E. Backus, 37.5 per cent; and A. L. West, 6.3 per cent. Collins and West were employees of the petitioner. The certificates of stock in the Backus Company were written up and reserved for them but the title thereto did not pass from the company. The future ownership of this stock was offered as an inducement to them to make a market for the product of the Backus Company. In this they were unsuccessful and the stock was never issued or delivered to them. The same was true in respect of the stock reserved for but not issued to Backus. All of the outstanding stock of the Backus Company during 1919 was therefore owned by H. Y. Greene.
    In the Carbon Company, the College Company, and the Lumber Company, the stock was owned at the end of the year by H. Y. Greene .in the same proportion as at the beginning of the year. The stock-holdings in the petitioner company were substantially the same at the end as at the beginning of the year. There were certain changes which will be referred to hereafter.
    Pursuant to a provision in its charter, the stock certificates of the petitioner contained the following indorsement:
    No stock of tliis corporation shall be transferred upon the books of the corporation unless it shall appear that prior to the sale thereof by the stockholder, such stock was in writing offered for sale to the corporation at par. If it shall appear that said stock was so offered for sale to the corporation, and offer was not accepted within fifteen days from the date of offer, then said stock may be otherwise sold and transferred.
    Early in 1918, H. Y. Greene, having optimistic ideas and definite plans for selling the stock of the finance corporations but no capital for this purpose, approached H. B. Robinson, an investor, with the proposal that Robinson lend him $1,000 for which he, Greene, would issue to Robinson stock of the petitioner having a par value of $1,000; that upon Robinson’s demand Greene would repay to him the amount so advanced; that Greene should have the right to repay the loan at any time and to reclaim the stock, and that Robinson’s profit on the transaction would be the dividends on the stock, which it was contemplated would be large during the period the stock stood in his name. This proposal was accepted by Robinson. He also made the same arrangement with Greene for one of his, Robinson’s employees and his nieces, Mary R. Warren, Marjorie R. Mayo, Nellie R. Black, and Alice M. Fowler.
    The same arrangement was made by Greene with E. C. Campbell and Walter Burns. It was the purpose of Greene to issue no stock of the petitioner which could not be repurchased by him at any time he might wish to do so.
    The arrangement concerning the repurchase of the stock of the individuals named was carried out in December, 1919, except as to the stock of Nellie R. Black and H. B. Robinson. At the close of 1919, Greene owned all of the stock of the petitioner, except 50 shares standing in the name of Nellie R. Black, 100 shares in the name of H. B. Robinson, 1 share in the name of A. D. Howard, and 3 shares in the name of F. Liston Collins. The total outstanding stock of the petitioner was 2,500 shares.
    At all meetings of stockholders in 1919, II. V. Greene, with the exception of qualifying shares in the names of the other directors, voted all of the stock of the petitioner pursuant to proxies given him by the minority stockholders. The voting of the stock and the entire management of the company was left in his hands by the stockholders and the board of directors. As to the other companies, all of them except the Carbon Company had their offices in the offices of petitioner, where their books of account were kept by petitioner’s employees at its own expense. The meetings of their stockholders were held in petitioner’s offices. The several companies mentioned were financed by the petitioner and H. V. Greene individually. The officers and directors of petitioner and of the other companies were interlocking. The activities of all were directed by the officers of the petitioner.
    In 1919 the following profits or losses were earned or suffered by the companies claimed to have been affiliated with the petitioner:

   OPINION.

Littleton :

The position of the petitioner is that the commissions to which it was entitled under its contracts with the companies the stock of which was being sold, were not earned until all installment payments had been completed by the purchaser, and that the method adopted by it of eliminating from gross income all commissions on stock sold, as to which the purchaser was 60 days or more in arrears with one or more of his installment payments, was correct. It is argued that under the terms of the underwriting contracts petitioner was not entitled to claim as its own any commission until full and complete payment for the stock which it had sold had been made. It appears that under the underwriting contracts petitioner’s commission was payable out of the first payments made by the subscriber. It is insisted, however, that notwithstanding the fact that •when the payments made at the time of the subscription contract, or prior to the end of the year, equaled or exceeded the amount of the petitioner’s commission, and that it had the right to charge the issuing company with the commission, the petitioner was still “ under duty to see to it that the subscriber completed his payments and that the stock was actually sold, because petitioner had received compensation for making that particular sale and until the stock was paid for there was no completed sale — no stock was issued or delivered. Moreover, petitioner had by written contract agreed to underwrite the entire issue — to place the entire issue at a stipulated amount — and where a subscriber became delinquent, or he did not comply with his contract, there was only one thing for petitioner to do, and that was to resell the stock.”

By reason of this situation it is claimed that the method adopted by the petitioner of determining its income by eliminating therefrom commissions on shares sold, but as to which the purchaser was 60 days or more in arrears with his payments, should be approved.

The method adopted by the petitioner in respect of unearned commissions is not essentially different from the setting up of a reserve for future contingencies, which is unauthorized in cases of this kind by the Revenue Act of 1918. Appeal of William J. Ostheimer, 1 B. T. A. 18; Appeal of Consolidated Asphalt Co., 1 B. T. A. 79; Appeal of Uvalde Co., 1 B. T. A. 932; Thomas Cronin Co. v. Lewellyn, 9 Fed. (2d) 974; Appeal of Pan-American Hide Co., 1 B. T. A. 1249; Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008; Appeal of Thatcher Medicine Co., 3 B. T. A. 154; Appeal of Greenville Coal Co., 3 B. T. A. 1323.

It is not claimed by the petitioner that an amount equal to or in excess of its commissions had not been paid by the subscriber. Neither the company the stock of which had been sold nor the subscriber had indicated any intention of canceling the subscription contract, and the evidence does not warrant the conclusion that either was likely to do so. The petitioner excluded from income commissions on shares in respect of which the subscription contract had been canceled and which shares had not been resold, and the Commissioner does not question this.

The Board is of the opinion that the commissions, totaling $311,573.75, constituted income within the meaning of the statute, and the action of the Commissioner in increasing the income in that amount is approved.

The next question relates to the disallowance by the Commissioner of $229,691.03, claimed as a deduction as part of the compensation paid to Greene and A. D. Howard in the form of commissions on stock sold during the year. Two hundred and twenty-three thousand three hundred and twenty-four dollars of the amount represented commissions paid to Greene in addition to his fixed compensation of $26,000, and $6,367.03 represented commissions paid to Howard in addition to his fixed compensation. The amount of commissions due Greene on the total net shares sold during 1919 was $235,138.75, which brings into issue the propriety of a deduction of $241,505.78 as a part of the compensation of these two officers.

The compensation of the officers was duly and regularly fixed by resolutions of the directors and was duly paid or credited to them. Two hundred thousand dollars or more of Greene’s compensation was paid to him and he reported the same in his tax return. Howard’s total compensation was paid to him. The compensation of officers was authorized without consideration of their stock ownership. It -was predicated entirely upon the value placed by the directors upon the services rendered and to be rendered during the year. Howard was vice president and a director and owned only one qualifying share of stock. He devoted his entire time and energy to the conduct of the petitioner’s business and, as an aid to Greene, he was instrumental in the success of the company. F. Liston Collins, who owned only three shares of stock, was a sales director and was paid commissions amounting to $113,183.50. This amount was deducted by the petitioner and allowed by the Commissioner without question. Compensation in the form of commissions paid to salesmen, sales directors, branch managers, and district superintendents, only one or two of whom owned a small amount of petitioner’s stock, appears to equal, in comparison with the value of the services rendered to the petitioner, the compensation paid to Greene. No question is raised as to the deduction claimed for compensation paid to any one other than Greene and Howard.

Greene organized the three finance corporations and procured the contracts for the sale of their stock to which petitioner’s income was entirely attributable. He formulated and was largely responsible for the success and plans adopted by the petitioner. He devoted all of his energies to the business for the greater portion of time long after the usual working hours. The policies of the company represented merely the embodiment of his ideas. The responsibility of solving its problems as they arose devolved upon him.

The reason given by the Commissioner for the disallowance of the deduction of commissions paid to Greene and Howard in the notice of the deficiency mailed to the petitioner was as follows:

Commissions paid to officers are tentatively disallowed'in tlie absence of copy of agreement, or oilier evidence showing authorization, how computed, etc. However, due consideration will be given to any information you may desire to submit tending to prove the correctness of the deduction, provided same is submitted within the time limit prescribed by Section 274 of the Revenue Act of 1924.

At the hearing, and after the petitioner had proved the authorization of the salaries and the character of services rendered, the Commissioner insisted that the compensation paid to Greene and Howard was unreasonable and represented a distribution of profits. In support of this claim the Commissioner pointed to the fact that Greene’s income from other activities in years prior to 1918 was small in comparison with the amount paid him by the petitioner in 1919. We do not consider this as proof that Greene’s services to the petitioner during the taxable year were not worth what it paid him. Although the compensation paid was large, we find no sufficient evidence to justify the conclusion that the amount paid, or any portion thereof, represented a distribution of profits in the guise of compensation. In view of the evidence the Board can not, in justice, say that the value which the corporation placed upon Greene’s services was unreasonable. No reason was advanced as to why the compensation paid Howard was considered unreasonable. We think it was not.

The Board is of the opinion that the compensation of $235,138.15 paid to Greene and $6,361.03 paid to Howard should be allowed as deductions from gross income.

We are of the opinion from the evidence that H. Y. Greene owned and controlled substantially all of the stock of the petitioner and the other corporations mentioned. The minority stock in the petitioner corporation was held by persons who had received it under a contract providing that Greene might repurchase it at any time; they took no interest in the affairs of the corporation; he always voted the minority stock. The minority stock was at all times under the control of H. Y. Greene. Had there been the slightest indication of opposition by the minority stockholders, it would only have been necessary for Greene to repay the loan, which he was at all times able to do, and take over the stock. In these circumstances, we are of the opinion that he controlled the outstanding minority stock of the petitioner. Greene owned more than 99 per cent of the outstanding stock of the other corporations and they were therefore affiliated with the petitioner.

The statutory invested capital of the petitioner for 1919 was $61,170.16. It is claimed that its profits tax should be computed under the provisions of section 328 of the Revenue Act of 1918. However, in view of our decision that the net income and invested capital of the petitioner and the other corporations mentioned should be computed upon the basis of a consolidated return, it is unnecessary to pass upon this question.

Judgment will be entered on 15 days’ notice, under Rule 50.

Milliken and Steknhagen concur in the result only.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    D. L. Carmichael, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12061.
    Decided November 11, 1926.
    Taxpayers are permitted under regulations of tiie Commissioner to take inventories upon tiie basis of (a) cost, or (b) cost or market, whichever is lower. Held, that a taxpayer who took his inventory upon the basis of cost or market, which was the same as cost, at the close of the year 1920, is permitted to take his inventory upon the basis of cost or market, whichever is lower, at December 31, 1921.

      D. L. Carmichael pro se.

      W. Frank Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $425.05. Only a part of this amount is in controversy. The question in issue is whether the petitioner is entitled to reduce his book inventory at the close of 1921, in the amount of $1,906.81, to reflect a decline in the market price of merchandise on hand.
    FINDINGS OF FACT.
    The petitioner is a dealer and contractor in tile in the City of Atlanta, Ga. In the computation of net income for any year it is necessary to take into account tile on hand. Prices of tile advanced from 1918 to 1920. There was a 15 per cent advance in price in 1918 and a 20 per cent advance in 1919. Y/hen these advances occurred the petitioner appreciated his inventories accordingly. Such appreciation in inventory was reflected in the net income of the year in which the appreciation occurred.

      There was a reduction in the price of tile in 1921 of 20 per cent of the then market price. Since the petitioner had appreciated his inventories at the time when there was an increase in market price, he made a corresponding reduction in inventory when there was a decline in market price. The book value of the inventory at December 31, 1921, was $11,440.81, which the petitioner reduced by the amount of $1,906.80 to take care of the decline in price. The Commissioner disallowed the reduction of the inventory at the close of the year in the amount of $1,906.80 and increased net income accordingly.
    There was a rapid turnover of tile in the petitioner’s business. Most of the tile on hand at December 31, 1921, had been purchased in 1920 or 1921.
   oriNioK.

Smith :

Section 203 of the Revenue Act of 1921, provides:

That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

The Commissioner has provided that inventories shall be taken on the basis of (a) cost, or (b) cost or market, whichever is lower. Article 1582, Regulations 62. For a number of years prior to 1918 the petitioner had taken -his inventories upon the basis of cost. When there was an advance in the price of tile during the years 1918 and 1919, the petitioner took his inventories upon the basis of market, which was above cost. By doing so he showed a larger net income than he would have shown if the inventories had continued to be taken upon the basis of cost. The inventory at December 31, 1920, included goods which had generally been purchased at the increased prices. Although the petitioner did not attempt to take his inventory at December 31, 1920, strictly upon the basis of cost or market, whichever is lower, the inventory was actually taken upon that basis, since there was no difference between the cost and the market price. At December 31, 1921, the petitioner took his inventory on the basis of cost or market, whichever is lower, and thereby brought himself within the requirements of the regulations that his inventory must be taken upon the basis of either (a) cost, or (b) cost or market, whichever is lower.

Judgment vñll be entered on 15 days’ notice, under Rule 50.


author: Murdock:

text:
    New Orleans Shipwright Co., Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 228, 876, 5111.
    Decided November 11, 1926.
    Tlie petitioner during the years in question was not a personal service corporation as defined by section 200 of the Revenue Acts of 1918 and 1921.

      Isom, J. Guillory, Esq., and E. Barrett Prettymcm, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies for the following years in the following amounts:
    1918_$41, 512.60
    1920_Over $10, 000. 00
    1921_ 8, 250. 67
    For the hearing and decision the proceedings were consolidated bj? agreement of counsel. The single question is whether or not the petitioner was a personal service corporation during the years in question.
    FINDINGS OF FACT.
    The petitioner was incorporated in 1902 under the laws of the State of Louisiana and has since conducted its business in the City of New Orleans. Its capital stock consists of 51 shares, each of the par value of $100, a total of $5,100. This was $100 more than the minimum required under the Louisiana laws and was fixed at this amount so that it would be divisible by three. The shares have always been owned as follows:
    Owner. Number of shares.
    Alfred LeBlane_ _17
    Robert A. Warriner — 8½
    Matthew Warriner _ — 8½
    M. J. Sanders_ _ 9
    Edward Nathan_ _ 8
    LeBlane was the agent in New Orleans of the Harrison Lines, the Warriners were agents there for the Elder-Dempster Lines, and Sanders was agent for the Leylancl Lines. All of the stockholders resided in New Orleans at all times material hereto, except Matthew Warriner, brother and partner of Robert, who resided in England.
    In 1902, these New Orleans agents of the three English steamship lines above named, with the approval of their principals, incorporated the petitioner to do the shipwright work on the vessels of their respective lines loading at New Orleans, thus to avoid having the work done by the man who had previously contracted for it at what the agents considered were exorbitant rates. The petitioner performed the work on the basis of cost plus 10 per cent. Cost included the amount paid for materials, labor, superintendence, and all overhead expenses. Later the 10 per cent was increased to 15 per cent.
    The shipwright work consisted of the construction of stalls, shifting boards, platforms and the like to protect the ship and cargo. It differed for each ship and for each cargo, but in every instance it had to conform with detailed, printed rules of the New York Board of Underwriters and had to be approved by an inspector of that board before the cargo would be insured.
    Prior to 1902, the agent for the owner of any ship which loaded at the port of New Orleans booked and made all necessary arrangements for the cargo, decided in what compartments of the ship the principal cargo should be loaded — though leaving the rest of the loading plan to the captain of the vessel — and ordered the shipwright contractor to fit up the ship in accordance with the rules and the loading plan. In that part of his duties connected with the shipwright work the agent had the aid of his assistants, his marine superintendent, the captain of the vessel, and the wharf officials.
    After the petitioner was incorporated the duties of each of the three men, now both agents and stockholders, were the same as before except that now, upon completion of the work, the agent can inspect the books of the shipwright company and check the bill.
    Edward Nathan supervised the petitioner’s clerical work and lboked after the details of its business. He had under him a chief clerk and a bookkeeper.
    The petitioner secured a “ very good ” superintendent, formerly the foreman for the contractor above mentioned. This man had his son as an assistant and, after they had been informed as to the plan for loading a particular vessel, they hired all labor and ordered all necessary material for the work at a fixed price, prearranged between the seller and the petitioner. By doing all of the shipwright work for the three lines the petitioner was able to purchase lumber and supplies at low prices.
    Materials needed in connection with the shipwright work on a particular steamer were delivered by the seller at the wharf where the steamer was docked. They were charged to the account of the petitioner and bills therefor were rendered at the end of each month. The petitioner’s foreman or the captain of the vessel signed a receipt for the seller on delivery of the materials at the wharf. The work on a steamer was usually completed within two days. In 1918, the petitioner’s biggest year, over 300 vessels were fitted. Much of the work was done at night. When the work for a particular steamer was completed, the agent of the steamship company owning the vessel was presented with a bill setting forth the cost of the materials and labor, charge for the superintendent’s services, workmen’s compensation insurance, miscellaneous expenses, and a charge to include the petitioner’s overhead expenses, plus 10 or 15 per cent of the total. A typical bill included charges as follows:
    Material_$2,166.18
    Labor_„_ 1, 699.24
    Superintendent_ 15. 00
    Miscellaneous_ 5.00
    Workmen’s compensation insurance_ 110. 55
    Fifteen per cent of the above_ 599. 40
    Total_ 4, 595. 37
    After the bill had been approved by the captain, the agent for the steamship company, within from three to five days of the completion of the work, paid the petitioner the amount of the bill.
    When more materials were ordered for a vessel than were necessary, the excess remained on the wharf of that particular steamship company and was used in the next steamship of the same line loading at that wharf. The petitioner never sold any materials which it purchased for shipwright work and it seldom did any shipwright work upon any steamships except those owned by the Harrison Lines, the Leyland Lines and the Elder-Dempster Lines.
    The petitioner sometimes had as many as 100 carpenters and laborers in its employ. These men were hired by the job and were paid by the hour or quarter day during actual employment. Payrolls sometimes averaged $40,000 a month. If in any case the petitioner did not have cash on hand to meet a payroll, the agents of the steamship companies were requested to and did advance their proportionate shares.
    None of the stockholders ever received any salary for services, but Edward Nathan, as secretary, treasurer and manager, was paid bonuses over the proportionate amount of earnings to which his shares entitled him, for direct supervision of all services performed, as follows:
    In 1918_ $765. 00
    In 1919_4,103. 78
    In 1920_ 300. 00
    In 1921_l 789. 56
    The respective balance sheets of the petitioner for December 31 in each of the years 1917, 1918, 1919, 1920, and 1921, show:

    The accounts payable represent supplies received, bills for which were not due. The principal amount under accounts receivable was for work in process of completion on the day on which the balance was taken, the bill for which had not been rendered to the agent for the steamship company. The petitioner’s overhead expenses consisted of salaries of office clerks, employers’ liability insurance, automobile expenses, office rent, advertising for help, audit fees, telephone and telegraph, and other miscellaneous items. These overhead expenses amounted to-$4,599.60 in 1918, $12,275.39 in 1919, $6,939.02 in 1920, and $6,708.56 in 1921. The gross value of materials, supplies and labor amounted to $445,308.24 in 1918, $127,326.47 in 1920, and $89,063.38 in 1921. The net profits were for 1918, $37,939.30, for 1919, $4.44, for 1920, $31,440.93, and for 1921, $26,936.24. Dividends were usually paid every six months. The corporation paid dividends amounting to $25,500 in 1918 and $58,353.60 in 1919.
    In addition to his activities in the conduct of the affairs of the petitioner for the years 1918 to 1921, inclusive, Alfred LeBlanc received a salary of $5,000 and a commission of 2½ per cent on the steamer freight list for acting as the blew Orleans agent of the Harrison Lines, a commission of 2½ per cent on light freight and 1 ¾ per cent on coffee, for acting as the New Orleans agent of the Lam-port and Holt Lines, and also commissions for acting as the New Orleans agent of Chubb & Sons. He also received a salary from LeBlanc & Bailey, Ltd., a fire and marine insurance company, in which he owned a one-half interest and to which he devoted some of his time.
    M. J. Sanders received a salary of $12,000 or $15,000 a year during the years 1918 to 1921, inclusive, for acting as the New Orleans agent of the Leyland Lines. About 1918, he organized the Mississippi Shipping Company Corporation and devoted some time to this company until about the year 1921. He also devoted some time to Mobile Liners, Inc., of which he was the president.
    Edward Nathan was an expert freight broker and a partner in Nathan & Fettis.
    No part of the petitioner’s gross or net income consisted of gains, profits, or income derived from trading as a principal, nor of gains, profits, commissions or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
   OPINION.

Murdock:

A personal service corporation is one “whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor,” and which meets certain other requirements of the statute. The obvious intent of Congress was to exempt those corporations from taxation as corporations whose profits were due primarily to personal service rendered by the principal owners or stockholders, provided they meet all of the other requirements of the definition in section 200 of the Revenue Acts. Do the facts in this case qualify the petitioner for personal service classification ?

This corporation had a very small amount of capital and, so far as the record discloses, it never borrowed any money on its paper. But it retained a considerable surplus in the business; materials and supplies were purchased on credit, and the steamship lines occasionally advanced money for payrolls. We must consider these things when we are called upon to decide whether capital, invested or borrowed, was a material income-producing factor.

R. A. Warriner, who owned one-sixth of the stock, gave none of his time to the conduct of the corporation’s affairs. The other stockholders were somewhat active in the business. They chose an able superintendent and they may have had a part in obtaining good workmen and favorable prices for supplies and in seeing that the books were properly kept, but aside from these things, which are not determinative, there was no satisfactory evidence to show, and we are unable to see, just what LeBlanc, Sanders, and Matthew Warriner did as stockholders, from which we might decide that they were regularly engaged in the active conduct of the affairs of the corporation.

LeBlanc testified that he directed the shipwright work on the Harrison Line steamers, that Sanders did the same for the Leyland Line vessels and that Matthew Warriner performed a like service for the Elder-Dempster Line boats. But he did not tell us in what way he directed this work and he failed to mention any new duties which he took on as a stockholder which he did not already have as agent. He said that the shipwright work which he did as stockholder he would have done in any event as agent — that he could not separate the one from the other. He also said that after the plan for loading a vessel had been adopted it was only necessary to tell the foreman to fit up the boat in conformity with the rules. We fail to see any personal element in this service.

Sanders’ testimony was to the same effect. It indicated that a large part of his work was done by assistants and that he personally might not go to the wharf once in a month. He said that his duties before and after the petitioner was incorporated differed very little.

A corporation, to qualify for personal service classification, must prove that its income is to be ascribed primarily to the activities of its principal stockholders. In the present case the ability and judgment of four of the stockholders undoubtedly played a part in the production of the petitioner’s income, but in respect to the activities of three of these men the evidence leaves us in doubt, as we have already indicated.

Demand for the petitioner’s services arose because the agents for three important steamship lines were numbered among its stockholders. The same situation was favorable to the success of the petitioner in other ways. For instance, because of it, bills were promptly paid and bad debts were avoided. As a result of the large volume of business which came to the petitioner from these three steamship lines, it could obtain favorable prices for lumber and supplies and could maintain a permanent force both for superintendence and for clerical work. See Appeal of Medbury-Wilson Co., 1 B. T. A. 963; and Appeal of Citizens Underwriters Agency, 2 B. T. A. 1116.

The petitioner received income because if was able to furnish completed shipwright work, satisfactory in workmanship and price. Before selling this finished product it took some of the risks of a manufacturer. Fire, accident, or negligence might have caused a loss to the petitioner. It was paid for taking this chance and some of the income must be ascribed to its acceptance of these risks.

We have carefully considered not only the facts above discussed, but also all other facts in this case; we have had in mind that failure to meet any one of the tests of the definition is fatal to the contention of the petitioner, and we are of the opinion that the petitioner, during tire years in question, was not a personal service corporation as defined by section 200 of the Revenue Acts of 1918 and 1921.

Judgment will be entered for the Commissioner.


author: Murdock :

text:
    Hibbard, Spencer, Bartlett & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7431.
    Decided November 12, 1926.
    Amounts paid into a fund during each year for pensioning its employees are deductible from gross income for tbe year as ordinary and necessary expenses of carrying on the petitioner’s business, where the facts and circumstances connected with the creation and operation of the fund show that it is a trust and a separate taxable entity.

      David Bluford, Esq. and Raymond H. Schultz, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
    The Commissioner has determined deficiencies in income and profits taxes and an overassessment for the following years in the following amounts:

    The controversy arises over the alleged error of the Commissioner in refusing to allow, as deductions from' gross income in the respective years, the amounts paid by the petitioner in each year to the Hibbard, Spencer, Bartlett & Co. pension fund; in holding that the total of the annual contributions made to the fund by the employees, and of the accrued interest on the entire fund, was income to the petitioner in each year; and, if no trust existed, in disregarding for invested capital purposes the contributions of the employees for years prior to 1918. The facts were stipulated.
    FINDINGS OF FACT.
    1. In 1904 the taxpayer submitted to its employees a proposition for the establishment of a pension fund, which was accepted by both the employees and the taxpayer, and, pursuant thereto the Hibbard, Spencer, Bartlett & Co. Pension Fund, hereinafter called the Pension Fund, was established and has since continued in operation.
    2. The following rules and regulations govern the operation and conduct of the Pension Fund and were in effect during the years covered by the deficiency letter referred to in the taxpayer’s petition:
    RULES AND REGULATIONS GOVERNING HIBBARD, SPENCER, BARTLETT & CO.
    State Street Bridge, Chicago
    PENSION FUND
    1. The word Employer, wherever it shall appear herein, shall be taken to mean Hibbard, Spencer, Bartlett & Co. The personal pronouns he, his and him, wherever appearing herein, unless a contrary intention is clearly expressed, shall he taken to refer to employes of either sox. The word salary, as used herein, means the agreed periodical compensation of the employe and does not include commissions, bonuses, overtime earnings, profit sharing distributions or service dividends.
    2. This fund shall be known as “ The hibbard, spencer, bartlett a co. pension fund.”
    3. The by-laws of Hibbard, Spencer, Bartlett & Co. shall control the maintenance and distribution of said fund in so far as they are applicable and not modified by anything herein contained.
    4. Said fund shall be controlled by a Pension Committee of seven, consisting of the President and First Vice-President of Hibbard, Spencer, Bartlett & Co., three Directors to be chosen at the annual meeting of the Board of Directors of said company and two employes, not directors, to be elected annually by the employes. Each member shall serve until his successor is elected. Said committee shall have full power and authority to do all acts necessary to carry out the objects of this pension fund as provided herein. One member of said Committee shall be chosen and act as its secretary. Meetings of said Committee may be called on notice by any member. Vacancies occurring in the Pension Committee may be filled by the Board of Directors of Hibbard, Spencer, Bartlett & Co. Three members of the Committee, including the Chairman of the Board of Directors, or President or First Vice-President, shall constitute a quorum for the transaction of business.
    6. With the exception mentioned in Paragraph 7, all employes (including officers) of the Employer, who are eighteen years of age or over (other than persons more than forty years old when last entering the service of the Employer, and country traveling salesmen) shall contribute to this fund and be eligible to receive benefits therefrom as herein provided. By country traveling salesmen is meant all salesmen whose routes are mainly outside of the limits of the city of Chicago.
    6. Each employe specified in the preceding section shall contribute to this fund a sum equal to two per cent of his annual salary, not exceeding sixty dollars per annum, to be deducted quarterly from the payment of such salary.
    7. Subject to the approval of the Employer, employes of advanced age electing so to do may participate in this fund. By employes of advanced age is meant those who, when last entering the service of the Employer, are more than forty, but not more than fifty-five years old. Notice of such election must be given in writing to the treasurer of the Employer within ten days after the employe of advanced age enters the service of the Employer. Such notice must state the date of the employe’s birth, — day, month and year. If the employe’s application is approved by the Employer, its treasurer will give him written notice thereof.
    8.The percentage of his annual salary to be contributed to this fund by each male employe of advanced age participating therein shall be determined by subtracting his age at his nearest birthday when last entering the service of the Employer from sixty-five and dividing one hundred by the remainder. In the case of female employes of advanced age participating in the fund, the percentage to be contributed shall be determined by subtracting the age at the nearest birthday when entering the service from sixty and dividing one hundred by the remainder. In each of these calculations fractions under one-half of one per cent shall be disregarded in the result. Fractions of one-half of one per cent or more shall be treated as a whole number. The percentage thus determined shall be the fixed contribution of the employe throughout the period of his service. The contributions of employes of advanced age will be deducted by the Employer from their salaries.
    ILLUSTRATION

      Age at Nearest Birthday

    9. The Employer will contribute each quarter a sum equal to the aggregate payments by the employes during the same period.
    10. The pension fund shall remain in the custody of the Employer and all payments provided for in these Rules and Regulations are to be made out of said fund.
    11. In case of the voluntary resignation of an employe or his dismissal by the Employer, or such employe becoming a country traveling salesman, or in case suit shall be filed by any such employe against the Employer, or in case the Employer shall become liable to pay compensation to such employe for disability, as provided in any Workmen’s Compensation Law, all payments made by him to this fund shall be returned to him, with simple interest at the rate of three per cent per annum, less any amount he may have received from the fund, and his interest in the fund shall thereupon terminate. Interest shall be computed from the first of the year on the contributions for the year next preceding.
    Provided that the question of cause for dismissal of any employe by the Employer is to rest wholly in the discretion of said Employer by its proper officer or officers.

      12. If any employe contributing to said fund shall die while in the service of the Employer, or while on the pension roll hereby created, all payments made by such employe to said fund shall be paid to his estate with interest as provided in the preceding section. Provided, if any employe shall die intestate his deposit with interest as aforesaid may, in the discretion of the Pension Committee, be paid to his widow, or if he shall be unmarried at the time of his death, to his next of kin, unless said employe shall have filed a notice in writing with the secretary of the Pension Committee directing payment to be made otherwise.
    13. Except in eases where there are special reasons to the contrary, it is the policy of the Employer to retire from its service all employes who have reached the age of sixty-five years in casé of males, and sixty years in case of females.
    14. Male employes who have been continuously in the service of the Employer at its Chicago office for fifteen years or more will be permitted to retire from such service on attaining the age of sixty-five years. After attaining the age of sixty years such employes may be retired by the Pension Committee, at its discretion.
    Female employes who have been continuously in the service of the Employer for fifteen or more years, at its Chicago office, will, on attaining the age of sixty years, be permitted to retire from such service.
    15. Each employe upon so retiring, or being retired, shall receive from said pension fund, at intervals of two weeks thereafter, a sum equal to two-thirds of his average salary for that period during the previous five years.
    Provided that no pensioner shall be paid at the rate of more than fifteen hundred dollars per annum and provided such payments shall not extend beyond a period equal to the time during which such employe has made payments to said fund, except that the pension shall be paid during life to any employe who has contributed continuously to the fund for twenty years or more.
    16. An employe who, before attaining the age of sixty-five years in the case of males, and sixty years in the case of females shall seem permanently incapacitated by ill health or affliction for service with the Employer, shall be retired, and may take the benefits provided herein as though such employe had reached the above specified age, such benefits to cease should he again become capacitated for service or engage in any gainful employment without the approval of said Pension Committee.
    Provided:
    (a) The question of the capacity or incapacity of any such employe is to rest wholly with the Pension Committee.
    (b) If the pensioner is or shall become mentally incapacitated, said Pension Committee may, in its discretion, pay the pension of such pensioner to any member of his family; or, if such pensioner has no immediate family, to his guardian or next friend.
    (c) When incapacity for work is the result of intemperance or any other cause within the control of the employe no pension shall be paid.
    (d) When incapacity or disability results from any cause for which the Employer shall pay compensation, the amount thus paid, whether covered by liability insurance or not, shall be deducted from any payment provided by this pension system.
    (e) In no event shall any pension provided in this section be paid during a period longer than the time during which such employe has made payments to this fund.
    17. For the period of five years following the death of a male pensioner, an allowance equal to one-half of his pension shall be paid to his widow. This allowance shall cease on her re-marriage. At her death, if she leaves children, her allowance is to be paid to them or to their guardian until the youngest shall attain the age of eighteen years. The interest of each child in the pension fund shall cease when he or she reaches that age, or on marriage prior thereto. No allowance shall be paid to the widow of a pensioner who married him after he became a pensioner, nor to her children. Neither shall an allowance be paid to a widow who was living apart from her husband at the time of his death, but in such a case it may, in the discretion of the Pension Committee, be paid to his children.
    (a) Orphan children of a pensioner shall, subject to the conditions as to payments to children above set forth, receive a like allowance. By orphan children is meant those who have lost both father and mother.
    (b) In case the survivors include orphan children and their step-mother, both being entitled hereunder to share in the above allowance, it shall be divided between them, half to the orphan children and half to their stepmother.
    (c) The children of a female pensioner shall be pensioned in the same amount, for the same time, and under the same rules and conditions as the children of a male pensioner, but the widower of such female pensioner shall be entitled to no pension.
    (d) Payments for minor children having no guardian may be made to a trustee to be named by the Pension Committee.
    (e) The Pension Committee may, at its discretion, and to such extent and during such a period as it may determine, permit an indigent father, mother, sister, or brother of a deceased pensioner to share in the benefits provided herein for widows and children.
    (f) Provided, that upon the death of any pensioner whose pension has been extended over a period longer than that covered by his contributions to the fund, it shall rest in the discretion of the Pension Committee, to determine whether the above allowance, or any portion of it shall be continued to his surviving relatives, and provided further, that in no event shall the allowance or allowances, created in this paragraph amount to more than half of the stipend paid to the deceased pensioner or to be continued beyond a period of five years from his death.
    18. The Directors of the Employer shall have authority, in extraordinary cases, to continue pensions beyond the duration limits herein established.
    19. The obligation of the Employer under this pension plan to any person who, in applying for employment in its service, has misrepresented his age, may be satisfied at any time by the return of his deposits in the fund together with three per cent simple interest computed on the deposits of each year from the end of the year; and, thereupon, his interest in the fund shall cease
    20. No assignment of a pension will be permitted or recognized by the Employer or the Pension Committee.
    21. These Bules and Regulations may be changed at any meeting by the vote of a majority of the Directors of the Employer, provided that such a change shall not cancel the obligation of the Employer to return eventually to each employe, all the money he may have paid into this fund, with simple interest at the rate of three per cent per annum, less any amount such employe may have received from this fund, with the same interest computed thereon.,
    22. This fund may be liquidated at any time by the vote of a majority of the Directors of said Employer and, in case of such liquidation, each employe who has contributed to this fund shall be repaid the amount he has contributed with simple interest at the rate of three per cent per annum, less any sums (with the same interest computed thereon) which he has received from this fund; the residue of this fund then remaining to revert to the general treasury of the Employer.
    3. A Pension Fund Committee has been in existence continuously since the establishment of the Pension Fund.
    4. The taxpayer and the employees have made the payments in said years provided for by said rules and regulations.
    5. The Pension Fund Committee established and has continuously maintained a deposit account with the Northern Trust Co. in the name of the Hibbard, Spencer, Bartlett & Co. Pension Fund, and all moneys paid .into the Pension Fund have been deposited in said account.
    6. No account involving the name of Hibbard, Spencer, Bartlett & Co. other than the Hibbard, Spencer, Bartlett & Co. Pension Fund has been carried with the Northern Trust Co.
    7. The moneys deposited in the Hibbard, Spencer, Bartlett & Co. Pension Fund account have at all times been and now are subject to withdrawal only upon checks signed with the name of the Hibbard, Spencer, Bartlett & Co. Pension Fund.
    8. The funds or securities belonging to the Pension Fund have been used only for the purposes of the fund in accordance with the rules and regulations.
    9. All income of the Pension Fund has been and is now being deposited in the account of the Hibbard, Spencer, Bartlett & Co. Pension Fund account, above described.
    10. Since the establishment of the Pension Fund the Pension Fund Committee has continuously maintained a safe deposit box under lease in the vaults of the Northern Trust Co. in which all of the securities of the Pension Fund have been placed for safekeeping, and only the Pension Fund Committee has had access to said box.
    11. The Pension Fund Committee alone has from time to time invested the moneys of the Pension Fund in securities and such securities have been placed in the safe deposit box referred to above.
    12. Continuously since the establishment of the Pension Fund books of account have been kept for the Pension Fund which are separate and distinct from the general books of account of the taxpayer, and the general books of the latter in no manner reflect any interest in the Pension Fund.
    13. Each employee eligible to participate in the Pension Fund signed as part of his contract of employment an agreement to be bound "by the rules and regulations of the Pension Fund in the following form;

      CONTRACT
    No._
    Name _
    Age_ Married_ Single-
    formerly employed by_
    Chicago_19_
    I enter the employ of Hibbard, Spencer, Bartlett & Company with the understanding that I will conform to their rules and give my best and most loyal service. It is agreed I will give a week’s notice, in advance if I decide to cancel this contract, and my employers may discharge me upon giving a like notice or by paying me for a week’s time. Should I violate any of their rules or if my services do not satisfy my employers at any time, or if I have made any misstatements in my application or omitted information, I waive the week’s notice or payment of a week’s salary.
    Present salary $_per week.
    I agree to abide by the Rules and Regulations governing the Pension Fund.
    Signed -
    No. -St.
    Telephone No._
    Department _
    14. The Pension Fund Committee has paid out of the Pension Fund all of the amounts due to those employees who have become entitled to the benefits provided for under the rules and regulations.
    15. The Pension Fund Committee has at all times been composed of the president and first vice president of Hibbard, Spencer, Bartlett & Co., three directors of Hibbard, Spencer, Bartlett & Co. chosen by the board of directors of Hibbard, Spencer, Bartlett & Co., and two employees, as provided in the rules and regulations of the Pension Fund, and in all other respects also the Pension Fund has been operated and managed in accordance with the rules and regulations.
    16. The provision for pensions did not render the total compensation of each employee unreasonable.
    17. No fiduciary returns on account of the Pension Fund were ever filed, either in the name of Hibbard, Spencer, Bartlett & Co. or of Hibbard, Spencer, Bartlett & Co. Pension Fund Committee.
    18. The employees’ contributions to the Pension Fund, less withdrawals for the years prior to 1918, amounted to $74,652.52.
    19. The interest in the Pension Fund as of December 31, 1917, of $174,996.35, as stated in the deficiency letter, is based on a computation of the amount of the payments to the Pension Fund made by the taxpayer prior to December 31, 1917, plus the earnings of the fund to that date.
   OPINION.

Murdock :

The petitioner contends and the respondent contravenes that under the stipulated facts in this case a valid trust was created, that it was thereafter a separate taxable entity and payments made to it were deductible from gross income of the petitioner as ordinary and necessary expenses of carrying on a trade or business. In arriving at a decision of this question the rules of law governing the creation of a trust must be examined and applied to these facts.

Perry on Trusts, 6th ed., section 82, states the law as follows:

Any agreement or contract in writing, made by a person having the power of disposal over property, whereby such person agrees or directs that a particular parcel of property or a certain fund shall be held or dealt with in a particular manner for the benefit of another, in a court of equity raises a trust in favor of such other person against the person making such agreement, * * * and the statute of frauds will be satisfied if the trust can be manifested or proved * * * by any writing in which the fiduciary relation between the parties and its terms can be clearly read.

There is abundant authority to support this statement. The Supreme Court of the United States used almost the identical language in Colton v. Colton, 127 U. S. 300. Mr. Justice Sharswood of the Supreme Court of Pennsylvania expressed the rule succinctly as follows in Helfenstein’s Estate, 77 Pa. St. 328:

There is no prescribed form for the declaration of a trust. Whatever evinces the intention of the party that the property, of which he is the legal owner, shall beneficially be another’s, is sufficient.

See also Holden v. Circleville Light & Power Co., 216 Fed. 490; Heartley v. Nicholson, L. R. 19 Eq. 233; Fox v. Fox, 250 Ill. 384; 95 N. E. 498; Orr v. Yates, 209 Ill. 222; 70 K E. 731.

In the case we are considering the money paid or contributed by the employer, together with the other money paid into the fund and all accretions, was to be and was held and dealt with for the benefit of the employees under the terms of the agreement. Immediately there was a separation of the legal and equitable estates in the money. So long, at least, as the fund was not liquidated, the employer ceased to be the beneficial owner of the part it had contributed. The respondent argues that “ the employer had the same power with reference to this fund, in so far as its own contributions were concerned, as it had with reference to its other funds.” But this is not so. For the reasons just stated, as soon as it made a payment to the fund it ceased to have any rights in that payment except a possibility of reversion upon liquidation of the fund. The money could be used for certain purposes prescribed in the regulations and for no other purpose. A court of equity could restrain any attempt to use the fund otherwise than for the purposes of the trust.

Mr. Justice Pitney, in Chicago, Milwaukee & St. Paul Ry. Co. v. Des Moines Union Ry. Co., 254 U. S. 196, citing Colton v. Colton, supra, said:

It needs no particular form of words to create a trust, so there be reasonable certainty as to the property, the objects, and the beneficiaries.

See In re Smith's Estate, 144 Pa. St. 428; 22 Atl. 916, where the whole subject is exhaustively treated.

Counsel for respondent attacked the alleged trust on the ground that a trust was not intended and that sufficient words to create a trust were not used, but he cited no authorities in support of his contention. Looking at the agreement of the parties in its entirety and applying the above stated rules of law to the facts, we are led to a different conclusion — that all the elements of a valid trust are present. Our conviction is strengthened by the subsequent acts of the parties.

The employer offered a pension-fund plan to its employees which they accepted. The contract between them went into detail as to the manner of creating the fund, the use of it, and the beneficiaries; it carefully defined the subject of the proposed trust, made certain the object, and contained a sufficient declaration of the terms of the trust. In accordance with the terms of this contract a specific fund arose for the benefit of the specific beneficiaries. The trust has functioned for eighteen years to the apparent satisfaction of all concerned. It is vain to say that no trust existed.

Having decided that the essential elements of a trust are present, let us see if there is anything so repugnant to the contention that a trust was created as to refute it.

No express words of trust were used, but it has been decided many times that none are necessary. Perry on Trusts, 6th ed., section 122: Colton v. Colton, supra; In re Smith's Estate, supra; Richards v. Delbridge, L. R. 18 Eq. 11-13. The employees might change, but this fact is immaterial. Coe v. Washington Mills, 149 Mass. 543; 21 N. E. 966; Walters v. Pittsburgh & Lake Angeline Iron Co., 201 Mich. 379; 167 N. W. 834. Whether the Pension Fund was to “ remain in the custody of the employer ” or was to be “ controlled by a pension committee" is immaterial also, as in either case a trust might or might not exist, depending upon the presence or absence of other essential features. As a matter of fact the Pension Fund Committee accepted and had both the custody and the control of the fund, a situation most favorable to the trust theory.

It is argued that the employer’s right under rule 21 to change the rules and regulations is inconsistent with the existence of a trust. In In re Dolan's Estate, 279 Pa. St. 582; 124 Atl. 176, the settlor had similar rights and yet it was held that a trust existed. It must also be remembered that a court of equity could restrain any attempt to change the rules and regulations of the Pension Fund which would not be for the best interests of the beneficiaries, and therefore any change in the rules, under the power reserved, would have to be consistent with the general plan of the trust fund already created.

The employer had the right to revoke the trust and to liquidate the fund in the way indicated in rule 22, but it is not essential to the validity of a trust of personal property that it should be irrevocable.

A power of revocation is perfectly consistent with the creation of a valid trust. It does not in any degree affect the legal title to the property. That passes to the donee and remains vested for the purposes of the trust, notwithstanding the existence of a right to revoke it. If this right is never exercised according to the terms in which it is reserved, as in the case at bar, until after the death of the donor, it can have no effect on the validity of the trusts or the right of the trustee to hold the property. Stone v. Hackett, 12 Gray, 227.

See also In re Dolan’s Estate, supra, where the court fully discussed the subject of revocation, cited numerous authorities, and said, in part:

It is urged that under the deed of trust the settlor had complete dominion and control of the property; she could alter or amend the trust at any time; no investment or reinvestment could be made without the consent of the husband, and the trustee could be removed at her will; property might be added, and, finally, that the power of revocation effectually retained the title and control completely in her until death, when the trust, qua trust, would effectually operate.
# # ⅜ * * * *
* * * But the right to revoke, unexercised, is a dead thing. Its presence in a deed does not alter the character of the instrument or estate granted; to all intents and purposes, title and possession pass just as effectively as any deed or grant could make it, continuing in that state so long as the power of revocation lies dormant.

To the same effect, see In re Smith’s Estate, supra; Dickerson’s Appeal, 115 Pa. St. 198; 8 Atl. 64; Lines v. Lines, 142 Pa. St. 149; 21 Atl. 809; People v. Northern Trust Co., 289 Ill. 475; 124 N. E. 662; In re Carnegie’s Estate, 203 App. Div. 91; 196 N. Y. S. 502 (affirmed on appeal without opinion in 236 N. Y. 517; 142 N. E. 266).

We are not impressed with the argument that the composite effect of all of the provisions governing the fund is inconsistent with the idea of a trust.

This Board has already held in the Appeal of Frank H. Sullivan, 1 B. T. A. 93, that the question whether expenses are paid for business purposes is always determined from the facts of the particular case. We have also said in the Appeal of Thomas Shoe Co., 1 B. T. A. 124, that contributions must have a reasonable relation to the petitioner’s business to be deductible as business expenses.

It is stipulated that the payments were paid or incurred during the taxable years in which they were deducted, and that they did not make the total compensation of each employee unreasonable in amount. We think they were reasonably connected with the petitioner’s business, since under the agreement they were to be and. were used to benefit and pension employees of the petitioner, thus making employment more attractive and satisfactory to th¿ employee and inducing him to' give and compensating him for faithful service. Employment with the taxpayer entitled the employee, to participate in the benefits of the fund, and all employees took advantage of the opportunity. How can it be said that the employer was not benefited by its contributions to the fund % Appeal of Poinsett Mills, 1 B. T. A. 6; Elm City Cotton Mills v. Commissioner, 5 B. T. A. 309. Under all of the facts in the case, we are convinced that the payments made by the petitioner to the Pension Fund were ordinary and necessary expenses of carrying on its trade or business and, as such, were deductible from gross income.

Judgment will be entered for the fetitioner.

Littleton dissents.

Geeen did not participate.