Appeal of CHARLES HENRY MATTLAGE

Appeal of CHARLES HENRY MATTLAGE. Docket No. 2116. Submitted May 19, 1925. Decided December 23, 1925. O. J. McGuire and J. Marvin Haynes, Esqs., for the taxpayer. Willis D. Nance, Esq., for the Commissioner. Before Ivins, Marquette, and MoRris. This appeal is from the determination of a deficiency in income tax for the year 1919 in the amount of $5,115.12. Three questions are presented: (1) The amount of salary received by the taxpayer in 1919: (2) the deductibility of an alleged bad debt; and (3) the deductibility of the amount paid to an accountant for services in connection with the rendering of the Federal tax return. FINDINGS OF FACT. The taxpayer is a resident of New York City. He reported his income for taxation on the cash receipts and disbursements basis for the calendar year 1919. During the years 1913 to 1920, both inclusive, the taxpayer was president and a member of the board of directors of Charles F. Mattlage & Sons, a corporation organized under the laws of the State of New York, the other directors being the taxpayer’s son-in-law and one Henry A. Gaede, who, together with the taxpayer, was an executor of the estate of the taxpayer’s father. Throughout the years 1918 and 1919, the taxpayer owned 614 shares of the voting stock of said corporation out of a total of 3,500 shares issued and outstanding. The voting control of 2,383 shares was exercised by the taxpayer and the said Henry A. Gaede, as executors of the estate of the taxpayer’s father. Of the remaining shares, 50 were owned by the taxpayer’s wife, 191 by his son-in-law, 150 by his daughter, 1 by his brother-in-law, and 1 by the said Henry A. Gaede. The books of account of said Charles F. Mattlage & Sons were kept on the basis of a fiscal year ending on the 30th day of April. During the period that the taxpayer was president, he directed all the activities of the corporation. It was agreed by all of the directors of the corporation that the taxpayer, taking into consideration the net income of the corporation, should determine the amounts to be paid by the corporation to executives, including himself, and that the board of directors would ratify his decision in this respect. For the years prior to the fiscal year ended April 30, 1919, the taxpayer did so fix the amount of the salary to be paid to him by the corporation and the board of directors ratified his decision in this respect. In accordance with the said understanding, he determined that the amount to be paid to him by said corporation as compensation for services rendered during the fiscal year ended April 30, 1919, should be $25,000, and the board of directors of said corporation, at a meeting held on June 22, 1919, ratified his decision in this respect. The said amount of $25,000 was credited to the taxpayer’s account on the books of the said corporation as of April 30, 1919. In his tax return for the calendar year 1919, there was included $8,333.33, being that part of the sum of $25,000 paid for services rendered for the period from January 1 to April 30, 1919. The Commissioner, in determining the deficiency, included all of the said amount of $25,000 in the taxpayer’s gross income for the calendar year 1919. No money was actually paid as salary, but it was the practice of the corporation to pay all of the personal and household expenses of the taxpayer and to charge the same to his account upon the company’s books, his account also being credited with his salary. No separate books of account were maintained by the taxpayer. All of his personal financial transactions went through, the company’s books. At December 31, 1918, there was a debit balance on the company’s books against him of $7,100. At December 31, 1919, the debit balance was about $36,000. At a meeting of the company’s board of directors, held on June 22, 1919, it was voted that the taxpayer give the company his note for the overdraft of $7,100. At the same meeting the directors ratified the salary of $25,000 to the taxpayer covering the company’s fiscal year from May 1, 1918, to April 30, 1919. Of the amount of $25,000 so ratified as salary for said fiscal year, the taxpayer actually received, as income during the calendar year 1919, the amount of $8,333.33. During the balance of the taxpayer’s calendar year 1919, he received as salary $16,666.67. In the year 1913, the taxpayer, as president and on behalf of the said Charles F. Mattlage & Sons, employed one Alexander E. Lawson as a bookkeeper. In 1914 said Lawson misappropriated moneys of said corporation amounting to $1,894.40. The taxpayer paid the amount of the said misappropriation to the said corporation, taking from said Lawson said Lawson’s promissory note for $1,894.40, and, as collateral security, an assignment of a 20-payment life insurance policy for $2,000 on the life of said Lawson issued by the Pittsburgh Life & Trust Co. The said policy had theretofore been pledged by said Lawson as security for a loan of $328. In 1917, the liability of said Pittsburgh Life & Trust Co. under said policy was assumed by the Metropolitan Life Insurance Co', of New York. During the years 1914 to 1919, inclusive, the taxpayer paid' the premiums upon said policy in the aggregate amount of $299.04. In 1919 the said policy became paid up, and in October, 1919. the taxpayer, as assignee, received from said Metropolitan Life Insurance Co. of New York the sum of $722.55, being the cash surrender value of said policy, amounting to. $1,079.70, less the loan of $328 and interest thereon of $29.15. Thereafter, and during the calendar year 1919, the taxpayer paid $25 to one PI. J. Schultz, a collection agent of 299 Broadway, New York City, for services rendered in connection with an unsuccessful attempt to collect the balance due from said Lawson. In his return for 1919 he charged off $1,495.89, the balance of the account then owing from Lawson as a bad debt. In 1920 a judgment by consent was obtained against Lawson in a suit brought in the Pennsylvania courts, and the judgment was returned unsatisfied. The judgment was obtained for the purpose of preventing the running of the statute of limitations. The amount of $1,495.89 represented a debt which was ascertained to be worthless and was charged off in 1919. In 1919 the taxpayer paid $152.50 to a firm of accountants for services rendered in connection with the preparation of his individual Federal income-tax return for the year 1918. This decision was prepared during Mr. Iyins’s term o£ office. [MAJORITY] DECISION. The deficiency should be computed in accordance with the foregoing findings of fact, disallowing the deduction of the $152.50. Final determination will be settled on 10 days’ notice, under Rule 50.