294OPINION.
Phillips:
The contention of the taxpayer with reference to the computation of its invested capital must, under the provisions of section 1207 of the Revenue Act of 1926, be decided adversely to it. Russel Wheel amp; Foundry Co., 3 B. T. A. 1168.
The remaining question is whether the additional amounts paid to employees by the petitioner in January, 1920, may be deducted in computing the net income for 1919. There is nothing in the record from which we may doubt the reasonableness of the deduction claimed. While the bonus is distributed among these employees in the same percentage as their stockholdings, the testimony discloses that the amount of stock which each employee was allowed to purchase was determined upon ivhat was considered to be the value of his services to the corporation and the distribution of the bonus was made upon the same basis. It will also be noted that these employees own 165 shares of a total of 2,000 shares outstanding, 295the balance being owned by the two Bandalls, who did not share in the bonus.
The Bevenue Act of 1918 provides for the deduction of:
AH tlie ordinary and necessary expenses paid or incurred 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.
It appearing that the bonus was a reasonable allowance for compensation for personal services actually rendered, it becomes necessary to determine whether these payments were incurred during the taxable year.
The testimony is that these employees were dissatisfied with the salary that was being paid to them and were in a position to procure employment elsewhere at an increased salary, that this situation was communicated to the two principal stockholders during 1919, and that during that year they made promises to distribute a bonus among these employees if the business warranted. L. Kendrick testified that sometime during the year 1919 he spoke with P. H. Bandall and states the substance of the agreement to be:
Tliat I was to receive extra pay. At tliat time business was in sueli a condition witli everything going up, tlie cost of living and everything, and lie agreed with me, if I would stay wilh him, that he would see, if the business made anything, that I would get extra pay according to what the business made.
W. L. Bandall testified:
They were dissatisfied with the amount of pay they were getting for the services they were rendering and we wanted to retain their services, and I agreed with them verbally that we would allow them 25 or 80 per cent of the net earnings of the business that year, to be divided among all the employees of both the coal and lumber departments.
Q. Do I understand from you that, in the event an employee had ceased working from December 31, 1919, he would still have had a claim against your company?
A. If he had worked up through the year. I do not think though that that was brought into the agreement. Nobody didnt expect that they would leave, but if they left right immediately, of course, they would not have participated in any of the gains.
H". T. Heery testified, concerning a conversation with T. H. Bandall:
Well, he agreed to see that we got an additional wage or bonus provided the business would allow it.
W. W. Snodgrass testified with reference to 1919:
Mr. P. H. Randall and myself talked the matters over. I worked on a commission basis strictly, and business was very plentiful in my particular Une, and I had a fixed rate of commission. Rather than increase my commission, the rate we agreed on was that we would see how business 296turned out at the end o the year. Mr. Randall said he would treat me right in regard to it.
Q. Did Mr. Randall say anything to you about paying you any percentage of the profits, paying employees any percentage of the profits?
A. No, sir. I dont think there was anything like that said . He said he would treat us right; that I would not have any reason to complain.
Q. You always found him a man that lived up to what he says?
A. Yes, sir, absolutely, both of them.
Q. Did you or not feel sure after the conversation that you would be treated as well as the business justified?
A. Yes, sir, I was perfectly satisfied.
A. C. Spinks testified concerning a conversation with W. L. Randall during 1919 as follows:
I told Mr. Randall that I felt like I was worth more money than the amount he was paying me; that I was handling a larger volume of business; that I had been with him some time; and that higher salaries were being paid to almost everybody in every line; I felt like X was due more money. Mr. Randall assured me he would take care of me. Knowing Mr. Randall like I did, I knew he would do it.
Q. As I understand your testimony, there was no specific amount stated at this time in the spring of 1919?
A. No.
Q. Merely that Mr. Randall would treat you right, or something to that effect?
A. Thats right.
T. C. Burford testified with reference to his knowledge concerning the bonus:'
It was during the latter part of January, 1919, at the first directors' meeting that was held in that year, which meeting was the final meeting covering 1918 business. I was told that if the business showed a profit worth while during the year that instead of a raise of salary I would get a substantial bonus; that that was going to be more or less the policy of the company rather than to increase salaries. in my conferences with the president, W. L. Randall, the matter, as well as I remember, was referred to, I would say, some two or three different times during the year, and the sum and substance of the conversation regarding it was substantially what he said to me in the previous meeting; the meeting at the first of the year.
One witness testifies that the agreement was to distribute between 25 per cent and 30 per cent of the profits of the business as a bonus. On the other hand, we have no such testimony from any of the other witnesses, all of whom indicate that the amount to be distributed was extremely indefinite and to all practical intents and purposes was to be determined by the two Randalls. Two of such witnesses deny that there was any agreement as to the amount or percentage of the profits to be distributed. We do not believe that in such circ*mstances any legally enforcible obligation to the employees had been incurred. Neither the amount to be paid each employee, the total amount or percentage of the profits to be' dis297tributed as a bonus among all employees, nor tbe proration among the employees of the amount finally determined, had been agreed upon.
Counsel for the taxpayer cite several instances where agreements to pay additional compensation or bonus have been upheld by the courts, but in each such instance there was an agreement sufficiently definite to fix the compensation or the manner of computing the compensation. Here we have neither. It is true that there was a moral obligation, but even this obligation was so indefinite that its interpretation depended upon the understanding and good business judgment of the two Randalls.
It is urged that these persons had been associated for many years, that the agreement was as definite as amicable business relations required, and that under such circ*mstances the solemn and binding effect of the understanding must be recognized to the same extent, as the parties themselves were willing to recognize it. There is much merit in the suggestion, which was fully considered by the Board at the time of its decision in the Appeal of Van De Kamps Holland Dutch Bakers, 2 B. T. A. 1247. The Board then reached the conclusion that compensation for services is deductible only in the year in which a legal obligation is incurred, and we believe the decision in that appeal covers the decision in this. Appeal of Arter Paint amp; Glass Co., 2 B. T. A. 1256.
The deficiency is redetermined to he $15,-784-48. Order of redetermination will he entered accordingly.
