Opinion
Docket No. 15379.
1949-03-9
LUCILLA DE V. WHITMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Watson Washburn, Esq., for the petitioner. Sheldon V. Ekman, Esq., for the respondent.
1. Petitioner received a salary of $20,000 from Countess Mara, Inc., in 1943 and on her income tax return for that year claimed the benefits of section 107 to allocate this compensation over five prior years of service. The Commissioner disallowed application of section 107 to this sum. Held, petitioner does not come within the provisions of section 107 because the salary she received in 1943 was in compensation for services rendered in that year alone.
2. A deduction for the payment of state income tax is not permissible in computing victory tax net income. Watson Washburn, Esq., for the petitioner. Sheldon V. Ekman, Esq., for the respondent.
The Commissioner determined a deficiency in petitioner's income and victory taxes for the year 1943 in the amount of $5,214.14, and petitioner claims a refund in the amount of $2,243.84. The principal question for determination is whether petitioner is entitled to apply the provisions of section 107 of the Internal Revenue Code, as amended, to the salary of $20,000 she received from Countess Mara, Inc., in 1943. If this question is answered in the affirmative, then we must determine whether the forgiveness features of the Current Tax Payment Act of 1943 apply to compensation allocated to a prior year under section 107. An additional matter for our decision is whether petitioner had the right to deduct the amount of the New York State income tax she paid in 1943 in 1943 in computing her victory tax net income for 1943.
Petitioner filed her income and victory tax return for 1943 with the collector of internal revenue for the third district of New York.
FINDINGS OF FACT.
Petitioner is an individual, residing at 320 Park Avenue, New York, New York. In November 1938 petitioner organized a New York corporation, Countess Mara, Inc., to engage in the men's apparel and specialty necktie business. At the time the corporation was formed petitioner owned all the common stock, but shortly thereafter she gave each of her three daughters 25 shares and retained 1,925 of the 2,000 shares outstanding. Petitioner was president and treasurer of Countess Mara, Inc. from its inception through 1944, the last year with which we are concerned in the instant proceeding.
On its income tax returns for the fiscal years ended November 30, 1939, through November 30, 1944, Countess Mara, Inc., reported gross income, expenses, and net income (or loss) as follows:
+-----------------------------------------------------+ ¦ ¦Gross ¦ ¦Net income ¦ +-------------------+----------+----------+-----------¦ ¦Year ended Nov. 30—¦income ¦Expenses ¦(or loss) ¦ +-------------------+----------+----------+-----------¦ ¦1939 (Orig. return)¦$12,901.75¦$15,349.91¦($2,448.16)¦ +-------------------+----------+----------+-----------¦ ¦1939 (amended) ¦11,101.75 ¦12,799.91 ¦(1,698.16) ¦ +-------------------+----------+----------+-----------¦ ¦1940 ¦13,164.13 ¦15,014.64 ¦(1,850.51) ¦ +-------------------+----------+----------+-----------¦ ¦1941 ¦19,777.70 ¦18,434.93 ¦1,342.77 ¦ +-------------------+----------+----------+-----------¦ ¦1942 ¦21,743.42 ¦19,947.79 ¦1,795.63 ¦ +-------------------+----------+----------+-----------¦ ¦1943 ¦45,479.11 ¦38,969.37 ¦6,509.74 ¦ +-------------------+----------+----------+-----------¦ ¦1944 ¦115,094.81¦81,687.18 ¦33,407.63 ¦ +-----------------------------------------------------+
Over this same period the corporation paid no dividends. It reported on its tax returns for those fiscal years salary paid to petitioner as follows:
+---------------------------+ ¦1939 (Orig. return) ¦$2,550¦ +--------------------+------¦ ¦1939 (Amended) ¦None ¦ +--------------------+------¦ ¦1940 ¦None ¦ +--------------------+------¦ ¦1941 ¦2,900 ¦ +--------------------+------¦ ¦1942 ¦None ¦ +--------------------+------¦ ¦1943 ¦20,000¦ +--------------------+------¦ ¦1944 ¦25,000¦ +---------------------------+
On her individual tax returns for these same years petitioner, who was on the cash and calendar year basis, reported salary received from Countess Mara, Inc., as follows:
+---------------------------+ ¦1938--------------- ¦$525 ¦ +--------------------+------¦ ¦1939--------------- ¦None ¦ +--------------------+------¦ ¦1940--------------- ¦None ¦ +--------------------+------¦ ¦1941--------------- ¦2,900 ¦ +--------------------+------¦ ¦1942--------------- ¦None ¦ +--------------------+------¦ ¦1943--------------- ¦20,000¦ +--------------------+------¦ ¦1944--------------- ¦25,000¦ +---------------------------+
The formation of Countess Mara, Inc., was petitioner's own idea. She organized it, and she was almost wholly responsible for its growth from its humble inception in 1938 to its prosperous status in 1944. The necessary capital to start the business venture came from petitioner and she constantly loaned the corporation funds to keep it in operation during the formative period. Occasionally she paid expenses of Countess Mara, Inc., for which she did not even seek reimbursement. During the major part of this period her apartment served as a workshop for the corporation and one of her rooms was used exclusively for the storage of goods and materials. Executive responsibility for managing the corporation's business also rested largely on her shoulders as its president and treasurer. The directors of the company were never assembled for a formal meeting from the time of incorporation in 1938 until November 1943. Petitioner alone determined the payments she received from Countess Mara, Inc., during the intervening years, basing the amount thereof on her personal needs and the character of the payments, whether salary or repayment of her loans, on the financial condition of the company at the time. In addition to her executive duties she took full charge of the designing, production, and sale of the neckwear and performed many of the tasks incident thereto. Her manifold duties remained virtually the same during the period from 1938 through 1944. In short, over these years she staked all her resources, time, and talent on the eventual success of Countess Mara, Inc.
The first payments by the corporation to petitioner were made in the fiscal year 1939 and totaled $2,550. Of this sum $525 was paid during the calendar year 1938 and the balance in the calendar year 1939. On the corporate books all these payments were entered in a ledger account entitled ‘Mrs. Lucilla de V. Whitman,‘ with no further designation. At the close of the fiscal year the $2,550 was transferred to another account bearing the same name by an adjusting and closing entry in the general journal which read: ‘Debit Mrs. Lucilla de V. Whitman loan account $2,550; credit salary account (surplus) $2,550.‘ The corporation's original tax return for the fiscal year 1939 included the $2,550 as salary, but an amended return eliminated this item entirely. On her individual return for the calendar year 1938 petitioner reported $525 of the $2,550 as salary. On her 1939 return she reported no salary. The full amount of the $2,550 constituted compensation to petitioner for services rendered.
In 1940 petitioner received payments from the corporation totaling $900. These sums constituted repayments on her loans to the corporation. In the same year petitioner sold neckwear designs to Countess Mara, Inc., at a profit of $800.
During the year 1941 the corporation paid petitioner $2,900 as compensation for her services. On the corporate books this total was derived from a $1,200 balance in the corporation's ledger account ‘Mrs. Lucilla de V. Whitman‘ and a $1,700 balance in an account designated ‘Salary, Lucilla de V. Whitman‘ in the special general ledger.
In 1942 the corporation made payments totaling $900 to petitioner. These sums represented repayment of money loaned by her to the corporation.
In 1943 Countess Mara, Inc., paid petitioner $1,100 which constituted rent for the use of her apartment during that year.
On November 30, 1943, the first formal meeting of the board of directors since 1938 was held, and a resolution was passed which authorized the payment of $20,000 to petitioner in compensation for her services over the past five years. The resolution reads in pertinent part:
WHEREAS, approximately 5 years have elapsed since founding the business, during which time through the efforts of its President, recurrent losses have been overcome and the business has now for the first time reached a stable and profitable level, and
WHEREAS, it has been the intention of the owners adequately to compensate the President for her organizational and promotional work of putting the corporation on a paying basis when that task was completed, subject to deferment during period when cash was short, and
WHEREAS, the task of putting the corporation on a paying basis is now substantially complete and the company is in a position to pay back salary, unpaid except for $525 in 1939 and $2,900 in 1941.
NOW, THEREFORE, be it
RESOLVED, that the salary of the President for the five-year formative period of the corporation ended November 30, 1943 be fixed at the sum of $20,000, in addition to the $3,425 already paid.
At the same meeting petitioner and the corporation came to an oral understanding that, if at a later date the Salary Stabilization Unit of the Bureau of Internal Revenue disallowed any part of the $20,000 as a deduction by the corporation, she would return the amount disallowed.
The $20,000 compensation was entered on the corporate books as a debit to an account ‘Salary, Lucilla de V. Whitman‘ in the regular general ledger.
On her tax return for 1943 petitioner reported $20,000 salary and allocated it over the past five years under the provisions of section 107. On the same return, in computing her victory tax net income, petitioner deducted $356.35 representing the amount she had paid as her New York State income tax for that year.
In 1944 Countess Mara, Inc., paid petitioner $25,000 as compensation for her services in that year.
On June 26, 1945, the corporation sent an application to the Salary Stabilization Unit seeking approval of the salaries paid to petitioner in 1943 and 1944. The application stated in part:
8. Rate or rates of compensation of this EMPLOYEE:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Jan. 1, 1941¦Oct. 3, 1942 ¦Present ¦Proposed ¦ ¦ ¦ ¦ ¦* ¦ ¦ ¦ +---+------------+------------+---------------+---------------+---------------¦ ¦ ¦ ¦None ¦None ¦ ¦ ¦ ¦ ¦ +---+------------+------------+---------------+-------+-------+-------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦(a)¦Basic salary¦$_ ¦per_ ¦$_ ¦per_ ¦$25,000¦per yr.¦$25,000¦per yr.¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦(b)¦Overtime ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦(c)¦Commission ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦(d)¦Bonus or ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦ ¦the like ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦(e)¦Other ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦ ¦(specify ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦ ¦basis) ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦$_ ¦per_ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +---+------------+---+--------+-----+---------+-------+-------+-------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------¦ ¦* * * * * * * ¦ +-----------------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
FN *Or Oct. 27, 1942, if basic salary was $5,000 or less per annum.
10. Submit the following information relative to this POSITION:
+-----------------------------------------------------------------------------+ ¦ ¦Annual basis¦ ¦ ¦ ¦ ¦ ¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦ ¦salary rate ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------------------+----------+---------+---------+---------¦ ¦ ¦beginning of ¦Commission¦Bonus ¦Other ¦ ¦ +-------------+----------------------+----------+---------+-------------------¦ ¦ ¦accounting ¦Overtime ¦for ¦for ¦compensation ¦ +-------------+------------+---------+----------+---------+-------------------¦ ¦ ¦year and ¦for the ¦the year ¦the ¦for the ¦Aggregate¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦ ¦on dates ¦year ¦ ¦year ¦year ¦ ¦ +-------------+------------+---------+----------+---------+-------------------¦ ¦ ¦specified ¦ ¦ ¦ ¦(specify) ¦ +-------------+------------+---------+----------+---------+-------------------¦ ¦1938 ¦$Zero ¦ ¦$ ¦$ ¦$ ¦$ ¦ +--------------------------+---------+----------+---------+---------+---------¦ ¦through 1942 ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+---------+----------+---------+---------+---------¦ ¦1939 ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦1940 ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦Jan. 1, 1941 ¦X X X X X ¦X X X X X¦X X X X X ¦X X X X X¦X X X X X¦X X X X X¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦1941 ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦Oct. 3, 1942 ¦ ¦X X X X X¦X X X X X ¦X X X X X¦X X X X X¦X X X X X¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦Oct. 27, 1942¦ ¦X X X X X¦X X X X X ¦X X X X X¦X X X X X¦X X X X X¦ +-------------+------------+---------+----------+---------+---------+---------¦ ¦1942 ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
1943 20,000 1944 25,000 Present 25,000 Proposed 25,000
11. Describe the duties of the position affected by the proposed adjustment (if supervisory, show number of employees supervised). See attached statement
For the first few years of operations, when products were being introduced and volume was small, no salary was paid except for irregular intervals, and none was fixed. By the close of the year ended in 1943, the company's operations were advanced to the point that both its wholesale and retail markets were assured, and it was in a position to and did for the first time fix a salary for Mrs. Whitman commensurate with her talents of $20,000 for that year. By reason of the growth and volume of business, the duties of Mrs. Whitman, who took entire executive responsibilities, as President and Treasurer, and her unique gifts as a designer and merchandiser, this rate of salary was fully justified in view of the fact that she actually serviced four functions, as president, treasurer, designer, and sales director. This rate also reflected the fact that she had been largely uncompensated during earlier years and the further fact that she possessed and employed a unique combination of artistic skill, personal good taste, elegant appearance and charming personality, all of which endowed her with the invaluable gift to meet and deal with her most important suppliers and customers on an unusually favorable basis for doing business. The photograph to be submitted discloses to some extent Mrs. Whitman's charming personality. As a testimonial of Mrs. Whitman's artistic and merchandising talents, applicant states that at the Seventh Annual Fashion Exhibition of Neiman-Marcus Company, Dallas, Texas, she was given an award for distinguished service in the field of fashion as an outstanding designer of men's ties and for the daring and originality of the designs of the screen-printed ties created by her. The actual award, consisting of a handsome, engraved silver plaque will be submitted for inspection. Similar awards have been given to Adrian (Designer), Lilly Dache (Hats), Elsa Schiaparelli (Dressmaker), Nettie Rosenstein (Dresses), John Frederics (Hats), Hattie Carnegie (Dresses) and Elizabeth Arden. The first time this award was given to anyone in the men's field was to Mrs. Whitman (Countess Mara) on September 4, 1944.
On October 8, 1945, the corporation made a written proposal to the Salary Stabilization Unit concerning the same matter, part of which reads:
1. That the salary rate of Lucilla Whitman, President and Treasurer, was fixed at $20,000 per annum effective December 1, 1942 and increased to $25,000 per annum effective December 1, 1943 and a bonus of $1,500 was paid to Hilda Rothman, Production Assistant and Manager of Wholesale Department for the fiscal year ended November 30, 1944, without the prior approval of the Commissioner;
4. AND AGREES: That inasmuch as the salary and bonus payments to the above-named, employees were made in contravention of the Act of October 2, 1942, as amended, the sum of $5,000 for the fiscal year ended November 30, 1943 and $6,250 for the fiscal year ended November 30, 1944 shall be disregarded by executive departments and other governmental agencies in determining costs or expenses of Countess Mara, Inc., for the purpose of calculating deductions under the Revenue Laws of the United States.
On October 26, 1945, the Salary Stabilization Unit accepted the corporation's proposal and held that $5,000 of petitioner's 1943 salary and $5,000 of her 1944 salary was considered excessive. As a consequence of these negotiations petitioner in 1946 returned $5,000 of her 1943 salary to the corporation.
In determining a deficiency of $5,214.14 in petitioner's income and victory taxes for 1943, respondent refused to allow the application of section 107 to the $20,000 salary reported by her and disallowed the deduction of $356.35 paid as New York State income tax in computing her victory tax net income.
The $20,000 Countess Mara, Inc., paid to petitioner in 1943 was in compensation for services rendered in that year only.
OPINION.
HILL, Judge:
The principal question in this case is whether section 107 of the Internal Revenue Code, as amended,
was applicable to the salary of $20,000 received by petitioner from Countess Mara, Inc., in 1943. If so, we must then decide whether compensation allocated to a prior year under section 107 is subject to the forgiveness features of the Current Tax Payment Act of 1943. A final question for decision is whether petitioner was entitled to deduct $356.35 she paid the State of New York as income tax in computing her victory tax net income for 1943.
Decision will be entered for the respondent. SEC. 139 (Revenue Act of 1942). COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE.(a) Section 107 is amended to read as follows:‘SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE.‘(a) PERSONAL SERVICES.— If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.‘(b) The amendment made by subsection (a) shall be applicable to taxable years beginning after December 31, 1940, but with respect to a taxable year beginning after December 31, 1940, and not beginning after December 31, 1941, the period specified in such subsection shall be sixty months in lieu of thirty-six months, and the percentage specified in such subsection shall be 75 per centum in lieu of 80 per centum.
On her tax return for 1943 petitioner claimed that the $20,000 salary paid her that year was in compensation for services rendered from December 1, 1938, through November 30, 1943, and allocated this amount over the 5-year period as permitted under section 107(a). In his notice of deficiency respondent determined the 1943 salary did not come within the terms of this statute.
In weighing petitioner's contention that her 1943 salary meets the requisites of section 107(a), we were mindful that it is an exemption statute and she must bring herself squarely within its terms. Smart v. Commissioner, 152 Fed.(2d) 333, 335; Lindstrom v. Commissioner, 149 Fed.(2d) 344, 346. In the light of all the evidence, we found as a fact that the 1943 salary constituted compensation for services rendered in that year alone. Thus, the statutory requirement that the services cover a period of at least 36 months is not fulfilled. Furthermore, assuming that the $20,000 was for services over a 5-year period, petitioner still fails to qualify under section 107(a), for less than 80 per cent of the total compensation was paid in any one taxable year.
Petitioner's testimony that at the meeting of the board of directors on November 30, 1943, she insisted on getting substantial recompense for the past five years' work, the resolution passed by the board at that meeting, and petitioner's 1943 tax return constituted evidence supporting petitioner's contention that the $20,000 was paid her for services rendered over a 5-year period. Because of their self-serving nature, we can not give great weight to petitioner's testimony or return. The recital in the resolution is also subject to close scrutiny due to the fact that the beneficiary of the resolution was largely in control of the corporation and thus in a position to dictate its terms to satisfy her own tax needs. Compliance on paper with factual prerequisites for invoking a statute can not serve to bring petitioner within its provisions where actual circumstances fail to corroborate statements made therein. Such is the situation here.
If the $20,000 was actually compensation for five years' services, it is difficult to understand why the corporation would anticipate that the Salary Stabilization Unit might disallow a portion of it as excessive. Yet an oral agreement at the time the salary was voted was based on just such contingency. Such a possibility is conceivable only if the salary was compensation for one year's work.
The petitioner's relationship to Countess Mara, Inc., prior to November 30, 1943, refutes her proposition that salary paid her in that year covered services performed over the previous five years. Certainly there is no evidence of any obligation, express or implied, on the corporation's part to pay her further compensation for work performed from 1938 through 1942. When petitioner commenced to perform her duties for the corporation in 1938, no understanding was reached concerning salary. Thereafter, on the intermittent occasions when petitioner received compensation for her services there was no express agreement that she would receive additional pay for such work at a future date. In fact, petitioner alone determined what salary she would take during these years and the record reveals no claim on her part to further compensation for her past services.
Furthermore, it is difficult to imply any agreement that petitioner should receive the value of her services over these early years. The vary manner in which she explained those payments she decided to take from the corporation negates this. She testified that she asked for money only when necessary to pay rent and eat, and that often when the corporation was hard pressed she treated these sums as in repayment of her loans rather than as salary. The findings of fact eloquently show that petitioner was no mere employee of Countess Mara, Inc., but financed and managed the corporation in the manner of a sole proprietor in the formative years. She worked night and day to the limit of her resources and skill to make her business enterprise a going concern. At the initial stage of the corporation's existence it was struggling to stay in operation, as evidenced by its early losses and subsequent scanty net income. It is only logical to conclude that as a substantial owner petitioner was willing to work for almost nothing at first in order to later reap the full fruits of eventual success. Since it was her corporation and her money staked therein, she naturally did not expect a fixed salary equal to the value of her services until Countess Mara, Inc., was financially strong enough to pay such amounts.
Events subsequent to November 30, 1943, also point strongly to the conclusion that the 1943 salary was in compensation only for services rendered that year. It is notable that the entries on the corporate books recording the 1943 salary payment do not reflect in any way the alleged retroactivity of the $20,000. Likewise the corporate tax return for the fiscal year 1943 makes no mention that the salary was in compensation for five years' work, despite the obvious advantage of claiming this to insure the deductibility of the full amount as a reasonable business expense.
The $25,000 salary paid to petitioner in 1944 is strong evidence that in 1943 for the first time the corporation undertook to pay her a fixed salary substantially worth the value of her services. It is conceded that the 1944 salary was paid for services rendered in that year only. The facts show her duties in 1943 and 1944 were virtually the same. If petitioner was worth $25,000 to the corporation in 1944, it is not logical that the $20,000 received at the end of 1943 was to compensate for five previous years of service rather than one.
The manner in which petitioner's 1943 salary was treated in the corporation's application to the Salary Stabilization Unit in 1945 and the subsequent agreement reached in the same year is inconsistent with the corporation's resolution of November 1943. In the ‘Employer's Application for Approval of Salary Adjustment‘ dated June 26, 1945, the corporation recites in the compensation tables that petitioner's annual basic salary rate for 1943 was $20,000 and her annual basic salary rate for 1938 through 1942 is stated to be zero. No mention of retroactivity of the $20,000 is made. Surely if the 1943 salary was intended to cover services from December 1, 1938, through November 30, 1943, the application would have stressed this point, since a $20,000 salary covering a five-year period would have been much more readily approved than such a salary covering twelve months.
While it is true that, in justifying her 1943 salary mention is made that this rate reflects lack of compensation in earlier years, yet the whole emphasis is centered on proving her services in 1943 were fully worth the $20,000 paid by the corporation. The application specifically states that in 1943 the corporation ‘was in a position to and did for the first time fix a salary for Mrs. Whitman commensurate with her talent of $20,000 for that year. ‘ This statement is understandable in view of the corporation's desire to justify the $25,000 paid petitioner in 1944 for services which were almost identical with those performed in 1943.
The final agreement between Countess Mara, Inc., and the Salary Stabilization Unit is even more damaging to petitioner's cause. It recites in part that ‘the salary rate of Lucilla Whitman, President and Treasurer, was fixed at $20,000 per annum effective December 1, 1942 * * *.‘ No mention whatsoever is made that this salary reflected compensation for services rendered in prior years. Had the Salary Stabilization Unit understood this to be true, it would hardly have determined that $5,000 of both the 1943 and 1944 salary was excessive.
We thus conclude that the 1943 salary was for services performed in that year alone and petitioner thus fails to satisfy this requirement of section 107(a) that the services cover a period of at least 36 months.
Even assuming that the 1943 salary covered services rendered from December 1, 1938, through November 30, 1943, yet the further requirement of section 107(a) that at least 80 per cent of the total compensation be received in one taxable year is not met.
We found as a fact that petitioner received a salary of $20,000 in 1943. It is unnecessary to advert to the evidence on this point, since the petitioner on brief concedes that such salary was $20,000. Thus we must inquire whether the $20,000 so received in 1943 was at least 80 per cent of the total compensation paid her for services from 1938 through 1943. What other compensation for her services was paid during that period? We found the facts supported her contention that payments totaling $900 in both 1940 and 1942 were repayments of loans made by her to the corporation, that the $800 she returned as income in 1940 was profit from the sale of necktie designs to the corporation, and that $1,100 received from Countess Mara, inc., in 1943 constituted rental payments for the use of her apartment. We may disregard all these sums, for they do not represent compensation for services.
It is conceded that petitioner received $2,900 as salary in 1941. We also found that the $525 paid her by the corporation in 1938 was compensation for services. She reported this amount as salary on her 1938 tax return, and this constitutes a damaging admission against interest on her part. While at present she contends this sum was in repayment of a loan, yet it is significant that she never filed a claim for refund on that ground. Furthermore, the resolution of the board of directors on November 30, 1943, states that $525 paid her in 1938 was salary, despite the fact the corporation failed to deduct it as a business expense.
The most troublesome payments to classify are those amounting to $2,025 which petitioner received in the calendar year 1939. They formed a part of the $2,550 total which the corporation paid her in the fiscal year 1939. This total was entered on the corporate books in an account entitled ‘Mrs. Lucilla de V. Whitman,‘ with no further designation. That this was a salary account is shown by two facts: First, when on the general journal the $2,550 was transferred to a loan payable account by a closing and adjusting entry, it expressly stated that the balance was being removed from the salary account; secondly, part of the $2,900 salary admittedly received by petitioner in 1941 was entered in the same account. As further evidence that the $2,025 was compensation for services is the fact that the corporation's original return for the fiscal year 1939 reported the total amount of $2,500 as salary. On the other hand, an amended return filed by the corporation for 1939 failed to take any deduction for salary payment and petitioner's 1939 return does not mention the $2,025. We have noted already the contradictory treatment given the $525 forming the balance of the $2,550. Due to such unexplained inconsistencies in the corporate books and the respective returns of both petitioner and Countess Mara, Inc., regarding the $2,025, we are unable to conclude that it did not represent salary, and, since petitioner has the burden of proof, we must uphold respondent's contention that it constituted compensation for services.
Adding together the salary payments of $525 in 1938, $2,025 in 1939, $2,900 in 1941 and $20,000 in 1943, we find petitioner's total compensation over the five-year period was $25,450. Petitioner thus did not receive at least 80 per cent of the total compensation in any one taxable year and fails again to qualify under section 107(a). We therefore hold that the entire $20,000 was taxable income to petitioner in 1943.
In view of the above holding it is unnecessary to consider the applicability of the forgiveness features of the Current Tax Payment Act of 1943 to compensation allocated over prior years under section 107.
The final question is whether for the purpose of computing her victory tax net income for 1943 petitioner was entitled to deduct $356.35 paid the State of New York as income tax. We decided in Anna Harris, 10 T.C. 818, 827, that payment of a state income tax does not come within the language of section 451(a)(3) of the code
so as to be deductible in computing her victory tax net income. This decision governs our determination of the issue. Thus we uphold respondent's disallowance of the deduction.
SEC. 451. VICTORY TAX NET INCOME.(a) DEFINITION.— The term ‘victory tax net income‘ in the case of any taxable year means (except as provided in subsection (c)) the gross income for such year (not including gain from the sale or exchange of capital assets as defined in section 117, or interest allowed as a credit against net income under section 25(a)(1) and (2), or amounts received as compensation for injury or sickness which are included in gross income by reason of the exception contained in section 22(b)(5)) minus the sum of the following deductions:(3) TAXES.— Amounts allowable as a deduction by section 23(c), to the extent such amounts are paid or incurred in connection with the carrying on of a trade or business, or in connection with property used in the trade or business, or in connection with property held for the production of income.