The opinion
UNITED TAILORS & CLEANERS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
United Tailors & Cleaners Co. v. Commissioner
Docket No. 11754.
United States Board of Tax Appeals
10 B.T.A. 172 ; 1928 BTA LEXIS 4162 ;
January 25, 1928 , Promulgated
*4162 The amounts involved herein paid by the petitioner to its stockholders in the year 1920 and 1921 held to be dividends.
Leo B. Lowenthal, Esq., for the petitioner.
Alva C. Baird, Esq., for the respondent.
MARQUETTE
*172 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent for the years 1920 and 1921 in the total amount of $6,041.81. The deficiencies arise from the disallowance as deductions from gross income of the amounts of $10,704.83 and $13,357.55 alleged to have been paid by the petitioner to its stockholders in 1920 and 1921 as commissions.
*173 FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office and place of business at Chicago, Ill. It was organized in the year 1919 by a number of tailors in Chicago for the purpose of enabling them to have their cleaning and dyeing done at cost. There are approximately one hundred stockholders, each of whom owns one share of stock. The petitioner does work only for its stockholders. A flat rate was charged for work done, and at the end of each month each stockholder was allowed a 20 per *4163 cent commission upon the amount of work he had sent to the petitioner.
At the end of the year 1920 it was found that the petitioner had a surplus from earnings amounting to $10,704.83. It was proposed to distribute this surplus to the stockholders in proportion to the work which they had sent to the petitioner, but this was strongly objected to by a number of stockholders who had sent in but a small amount of work. After several meetings and discussions the stockholders agreed that the surplus should be divided equally among them. None of these meetings was an official stockholders' meeting and there was no formal declaration of a dividend by the directors of the corporation. An earned surplus of $13,357.55 in 1921 was distributed in the same manner. It its income-tax returns for the years 1920 and 1921 the petitioner deducted from gross income the said amounts of $10,704.83 and $13,357.55, respectively, as having been paid to its stockholders as commissions on work sent in by them. The respondent disallowed the deductions on the ground that the amounts paid to the stockholders were dividends and not commissions.
OPINION.
MARQUETTE: The petitioner relies upon section *4164 214(a)(1) and section 234(a)(1) of the Revenue Acts of 1918 and 1921, respectively. The wording of the two Acts is the same and provides:
That in computing the net income of a corporation * * * there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incured during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *
The petitioner claims that the distribution of surplus for the taxable years was a payment of commissions for work sent to the petitioner by its stockholders, and that such payments are deductible from gross income.
We think the facts do not substantiate this contention. It appears that monthly, throughout each of the taxable years, each stockholder *174 was paid, or credited with, a commission of 20 per cent on the work he had turned in to petitioner during that particular month. Such commission had a definite relation to the services actually rendered by the stockholder. The more work a stockholder sent to the petitioner, the greater his amount of commissions. But when, at the end of the year, the balance *4165 of surplus was divided among all stockholders equally, regardless of the amount of business each had brought to the petitioner, there was no relation between such payments and "personal services actually rendered."
The distributions in question were made from surplus earnings - profits - of the petitioner. The stockholders held the same number of shares and they participated equally in these distributions of surplus. The corporation's books are not before us but there is testimony to the effect that the board of directors did not authorize any dividend payments. We think that is not controlling. All the stockholders agreed among themselves that the surplus should be equally divided and the manager drew checks for the amounts upon the corporation's bank account. The treasurer and the president signed the checks. It is evident that the efficers and directors acquiesced in the plan of distribution, even though no formal action of approval may have been taken.
It is our opinion that the respondent rightly determined these distributions to be dividends to stockholders rather than payments for services rendered.
Judgment will be entered on 15 days' notice, under Rule 50. *4166