Appeal of HOWARD SHEEP CO.

Appeal of HOWARD SHEEP CO. Docket No. 1128. Submitted July 15, 1925. Decided October 5, 1925. Edward Thompson, G. P. A., for the taxpayer. Willis D. Nance, Esq., for the Commissioner. Before Sternhagen, Green, and Love. [MAJORITY] The taxpayer appealed from the determination of a deficiency of $14,151.97 in income and profits taxes for 1918. There was an over-assessment for 1917 of $1,987.91. The amount in controversy is less than $10,000. The only question presented is the right of the taxpayer to deduct from gross income allowance for officers’ salaries for 1918. The case was submitted on depositions and a stipulation of counsel which was read into the record. This appeal was before the Board previously on the issue raised by a plea in bar filed by the Commissioner (which was treated as a motion to dismiss), in which the Commissioner claimed that the taxpayer was estopxied from questioning the Commissioner’s disallowance of these salary deductions, upon the facts hereinafter outlined. In its income-tax return for 1918 the taxpayer claimed a deduction of $15,000 for officers’ salaries. The Commissioner indicated an intention of disallowing $12,600 of this amount. The taxpayer then made application to have its tax determined under the provisions of sections 327 and 328 of the Revenue Act of 1918, claiming abnormality owing to payment of low salaries to officers and also owing to the large amount of borrowed capital used in the business. The Commissioner thereupon computed the tax under the provisions of section 328 and found the deficiency above stated. The taxpayer then took the present appeal and contends for an allowance of the salary deductions in place of the special assessment. The Commissioner’s motion to dismiss was denied. Appeal of Howard Sheep Co., 1 B. T. A. 966. At the close of the present hearing a motion was made by counsel for the Commissioner to dismiss on the ground that the taxpayer has received the benefits it now seeks to obtain from this Board. FINDINGS OP FACT. The taxpayer is an Arizona corporation and has its principal office at Flagstaff. The deficiency letter was mailed to the taxpayer October 24, 1924, and states a deficiency of $14,151.97 for the year 1918. The following tabulation gives the names of the officers, the percentage of the outstanding shares of stock held by each, and the salary deductions claimed: Howard was also the manager. These three men constituted the board of directors. The corporation was organized by the Biordans and a man named Sisson in 1893. It is in the business of raising sheep and selling mutton and wool. It is one of the larger sheep companies operating in Arizona. In 1918 it owned 31,000 acres of land, was lessee of 28,000 acres, and in addition had permits for the use of certain forest lands. It had between 18,000 and 20,000 sheep. The sheep business is hazardous financially and its success depends largely on proper judgment and experience. Prior to 1918 the Biordans did not take any salaries from the corporation. Howard received, during the year 1918, $200 per month as manager. He did not receive any salary as president. During June, 1918, the directors discussed* among themselves the question of the payment of salaries for this year but did not decide what the amounts should be. Sometime during September or the early part of October, 1918, they engaged a man named Parker, of Los Angeles, to come to Flagstaff in October and to consider the corporation’s tax questions. Parker was prevented from going to Flagstaff, first by other engagements and later by illness, until about the middle of January, 1919. There was no one available locally to advise them in tax matters. They waited for the arrival of Parker before determining the amount of salaries. The amounts were arrived at in consultation with Parker after an investigation by him and the corporation’s bookkeeper of salaries paid by other concerns for similar services. The books of the corporation for 1918 were not closed until February or March, and the salaries were entered on the books as of December 31, 1918, after the end of the year but before the books were closed. It was usual to close the books this length of time after the end of the year. Howard was in charge of the physical property; that is, the range, the sheep, and the equipment. He was in charge of all operations on the range, under the direction of the Eiordans, and he devoted substantially all of his time to this work. The Eiordans had direction of the entire business. They determined when mutton and wool were to be sold, the markets to which they would be sent, and the sale prices. They purchased lands, negotiated leases, and obtained permits; arranged for financing the business; handled legal questions; and adjusted suits. They had the longest experience of anyone in the sheep business in Arizona. The Eiordans and members of their respective families owned all of the capital stock of the Arizona Lumber & Timber Co. The Eiordans, through that company, enabled the taxpayer to get credit whenever needed, and the taxpayer was able to borrow money at 6 per cent when the other sheep outfits had to pay at least 10 per cent. All matters of policy were taken up with and determined by the Eiordans. The taxpayer was one of the most successful sheep companies in that region, and 1918 was a successful year. The salaries were never actually paid. DECISION. The determination of the Commissioner is approved. Akundell not participating.