10 T.C. 715">*716 The respondent determined deficiencies of $ 1,222.91, $ 1,246.43, and $ 2,906.96 in the petitioner's income tax, declared value excess profits tax, and excess profits tax, respectively, for the year 1941. The issues are:

1. Is the petitioner, on the accrual basis, entitled to deduct rent expense incurred and accrued during its taxable year and owed to an individual, the petitioner's controlling stockholder, who reported such rent in his income tax return for the year 1941?

2. Is the petitioner entitled to deduct expenses similarly incurred, accrued and owed to its officers, who were also its controlling stockholders, as portions of their salaries for the taxable year, credited on its books to them and covered by its demand noninterest-bearing notes, payable to such officers, who reported such unpaid portions of their salaries in their respective income tax returns for the year 1941?

FINDINGS OF FACT.

Certain facts were stipulated. In so far as they are material to the issues, they are as follows:

The petitioner1948 U.S. Tax Ct. LEXIS 207">*210 is a corporation, with its principal office in Akron, Ohio. Its tax returns for the taxable year were filed with the collector of internal revenue for the eighteenth district of Ohio.

During the taxable year 1941, 250 shares of the petitioner's capital stock were outstanding. George I. Stuver, its treasurer, owned 220 shares and George W. Stuver, its president, owned 12 shares. George I. Stuver is the father of George W. Stuver.

The petitioner keeps its books and records on the accrual basis and also files its tax returns on that basis. Throughout the taxable year the petitioner occupied a building owned by George I. Stuver. During the same year the petitioner caused its rent expense account to be debited and a liability account, entitled "Rents Payable and Accrued, George I. Stuver," to be credited in the amount of $ 800 per month, totaling $ 9,600 for the year.

As of the close of business on December 31, 1941, there remained in the liability account, "Rents Payable and Accrued, George I. Stuver," a balance, shown to be unpaid and due from the petitioner to George I. 10 T.C. 715">*717 Stuver, in the amount of $ 5,646.87. That amount was not paid by the petitioner within two and one-half1948 U.S. Tax Ct. LEXIS 207">*211 months after the close of the calendar year 1941.

During the taxable year, petitioner caused its expense account entitled "George I. Stuver, Salary" to be debited and a liability account entitled "Payroll Accrued" to be credited in the amount of $ 100 per month. These amounts, totaling $ 1,200 for the year, were paid to George I. Stuver before the close of 1941. In addition, pursuant to a resolution adopted by its board of directors on December 26, 1941, the petitioner, as of December 31, 1941, charged to its expense account entitled "George I. Stuver, Salary" and credited to the liability account entitled "Payroll Accrued" the amount of $ 5,100. Of such $ 5,100, $ 2,600 was paid in cash to George I. Stuver on December 29, 1941, and pursuant to the said resolution the petitioner, on December 29, 1941, issued to George I. Stuver its demand noninterest-bearing promissory note in the amount of $ 2,500. On December 31, 1941, the petitioner caused its accrued pay roll account to be debited and a liability account entitled "Notes Payable, George I. Stuver" to be credited in the amount of $ 2,500.

The pertinent portions of the minutes of the petitioner's directors held on December 26, 1948 U.S. Tax Ct. LEXIS 207">*212 1941, and of the resolution then adopted, are as follows:

The President of the Company then outlined to the Board of Directors that the volume of business transacted by said Company had substantially increased during the year 1941 and the difficulties of transacting business were greater than ever previously encountered by those charged with the responsibilities of management; that furthermore the costs of living and expenses which representatives of the Company were required to make were on the increase and it was advisable that the Board of Directors consider increasing the salaries of George I. Stuver, George W. Stuver and William S. Parry.

After some discussion, upon motion duly seconded, the following resolution was unanimously adopted:

"Resolved that the salary of George I Stuver be increased for the year 1941 from Twelve Hundred ($ 1200.00) Dollars to Sixty-three Hundred ($ 6300.00) Dollars and that the increase of Fifty-one Hundred ($ 5100.00) Dollars, be paid Twenty-six Hundred ($ 2600.00) Dollars in cash and Twenty-five Hundred ($ 2500.00) Dollars by a discountable note of the corporation payable on demand; that the salary of George W. Stuver be increased from Forty-eight1948 U.S. Tax Ct. LEXIS 207">*213 Hundred ($ 4800.00) Dollars to Seventy-eight Hundred ($ 7800.00) Dollars for the same period and that said increase amounting to Three Thousand ($ 3,000.00) Dollars be paid Fifteen Hundred ($ 1500.00) Dollars in cash and Fifteen Hundred ($ 1500.00) Dollars by a discountable note of the corporation payable on demand; * * * that the cash payments be made as of December 29, 1941 and that said notes be executed by the corporation through its President and Secretary and delivered to the payees thereof on December 29, 1941."

* * * *

During the taxable year the petitioner caused its expense account entitled "Salary Expense, George W. Stuver" to be debited and its liability account entitled "Payroll Accrued" to be credited in the 10 T.C. 715">*718 amount of $ 400 per month. These amounts, totaling $ 4,800 for the year, were paid to George W. Stuver before the close of 1941. In addition, pursuant to the resolution adopted by its board of directors on January 26, 1941, the petitioner, as of December 31, 1941, charged to its expense account entitled "Salary Expense, George W. Stuver" and credited to the liability account entitled "Payroll Accrued" the amount of $ 3,000. Of such $ 3,000, $ 1,500 was1948 U.S. Tax Ct. LEXIS 207">*214 paid in cash to George W. Stuver on December 29, 1941, and pursuant to the said resolution, the petitioner, on December 29, 1941, issued to George W. Stuver its demand noninterest-bearing promissory note in the amount of $ 1,500. On December 31, 1941, the petitioner caused its accrued pay roll account to be debited and the liability account entitled "Notes Payable, George W. Stuver," to be credited in the amount of $ 1,500. Also on that date, the petitioner debited its account entitled "Notes Payable, George W. Stuver" with amounts totaling $ 204.22, representing obligations of George W. Stuver to the petitioner for merchandise. As a result of these entries, the account showed a balance due to George W. Stuver on December 31, 1941, of $ 1,295.78.

In computing and reporting its taxable net income for the year 1941, in its income and excess profits tax returns for the year 1941, the petitioner deducted from gross income the following items designated by it as rent and compensation of officers:

Of such amounts claimed by the petitioner as deductions, the respondent has disallowed1948 U.S. Tax Ct. LEXIS 207">*215 the following as deductions under the provisions of section 24 (c) of the Internal Revenue Code:

The amounts of $ 6,300 and $ 7,800 which were recorded by the petitioner on its books and records as salary expense and claimed as deductions for the taxable year as compensation of George I. Stuver and George W. Stuver, respectively, and the amount of $ 9,600 which was recorded by the petitioner on its books and records as rent payable to George I. Stuver and claimed as a deduction as rent expense, were reported as income by George I. Stuver and George W. Stuver, respectively, on their income tax returns for the year 1941. Both of those returns were made on the cash basis.

The petitioner's balance sheet appearing in its return for 1941 shows the sum of $ 59,145 in notes payable to its officers, rent of $ 5,646.87 (payable to George I. Stuver), accounts payable amounting to $ 14,469.75, 10 T.C. 715">*719 and a deficit of $ 15,790.15 at the end of that year. Its cash on hand at that time was $ 3,227.39 and it had $ 24,430 in accounts receivable, $ 42,318 in inventories, and $ 8,373 1948 U.S. Tax Ct. LEXIS 207">*216 in capital assets.

The record discloses the following additional facts:

The $ 5,646.87 due to George I. Stuver was paid to him by the issuance of the petitioner's stock in 1942. Six hundred shares of new stock of the petitioner, valued at $ 100 per share, were issued to George I. Stuver after August 31, 1942. Such shares were issued in payment of the said unpaid rent item and also the amount covered by the item of $ 59,145.87 representing notes payable to the petitioner's officers, including sums lent by George I. Stuver to the petitioner many years before 1941.

In June 1942 the petitioner paid the note of $ 2,500 which it gave to George I. Stuver to cover the unpaid salary due to him. The balance of the note due to George W. Stuver ($ 1,295.48), due on December 31, 1941, was paid to him subsequently.

George W. and George I. Stuver had unrestricted authority to issue checks on the petitioner's bank account and to borrow money on its behalf, pledging its assets as security therefor. The petitioner could have borrowed approximately $ 20,000 on December 31, 1941, by pledging its accounts receivable as collateral security.

OPINION.

The single issue before us is whether or not the petitioner1948 U.S. Tax Ct. LEXIS 207">*217 is entitled to deductions for rent and salaries due to its principal stockholders, George I. Stuver and George W. Stuver, and duly accrued on its books during the taxable year, as provided by section 23 (a), Internal Revenue Code, ¹1948 U.S. Tax Ct. LEXIS 207">*218 modified by section 24 (c). ²10 T.C. 715">*720 Respondent disallowed the items as deductions under the provisions of section 23 (c) of the code. It is well established that all three conditions set forth in section 24 (c) must co-exist in order to make that section operative. Michael Flynn Mfg. Co., 3 T.C. 932; Fincher Motors, Inc., 43 B. T. A. 673. It is conceded that the third condition exists in the case at bar.

The petitioner contends that all payments in controversy were either constructively or actually made; constructively, because they all were unrestrictedly subject to the officers' command and the petitioner was amply1948 U.S. Tax Ct. LEXIS 207">*219 able to pay them and, actually, because the amounts due for unpaid salaries were paid by the petitioner's notes duly issued to the officers during the taxable year. It is stipulated that all the items were accrued on the books of the petitioner, which kept such books on an accrual basis.

The respondent challenges the factual contentions of the petitioner and also maintains that it never was the real intention of the petitioner to make actual payments of the liabilities as accrued.

We first consider the two items of $ 2,500 and $ 1,295.78, allegedly due to George I. Stuver and George W. Stuver, respectively, for unpaid salaries and covered by the petitioner's notes. Under circumstances essentially similar to those present here, in Musselman Hub-Brake Co. v. Commissioner, 139 Fed. (2d) 65, the Circuit Court of Appeals for the Sixth Circuit held that whenever a corporation, on an accrual basis, gives to its controlling stockholders demand notes having a cash par value for patent rights and interest, and credits such sums on its books to its stockholding officers, who report the notes on their returns made on a cash basis, such sums are deductible 1948 U.S. Tax Ct. LEXIS 207">*220 in computing the income of the corporation, on the ground that they had been paid within the meaning of section 24 (c).

On the record as we find it, no question is raised as to the reasonableness of the salaries paid to the petitioner's officers, no doubt is cast upon the issuance or delivery of the notes and the circumstances surrounding that transaction, and no serious contention is made that the notes were not worth their face value on December 29, 1941. The critical question is that of payment. If the notes were given and received as payment, they constituted payment under the law. The resolution of December 26, 1941, states specifically that the portions of the salaries due to the petitioner's officers be "paid" in cash and "discountable note(s) of the corporation payable on demand." Although there was no categorical evidence that the notes were received as payment, the terms of the resolution and the collateral treatment of the same convince us that the notes were given and received in payment of the petitioner's obligations. They were so treated on its books. Hence, payment was made within the time specified in section 24 (c) (1) and the first condition for disallowance1948 U.S. Tax Ct. LEXIS 207">*221 was not fulfilled. 10 T.C. 715">*721 There can be no question of the ability of petitioner to pay the two items, nor is there any doubt that the cash was available to the officers on demand.

We see no evidence of a purpose or intention to evade taxes on the part of the petitioner or its officers. We note also that during 1942 (but not within the statutory time limit) the notes were paid by the petitioner. If there were any question of the same, this fact is persuasive that the notes were worth their face value at the time of execution.

In view of our conclusion that the issuance of the notes constituted payment to the officers, it is obvious that they should have reported in their income tax returns for 1941 (as they did) the amounts represented by the notes and should have paid the tax thereon, thus rendering them "includible" in the individual returns, as required under the statute in order to make section 24 (c) (2) inapplicable to the petitioner's disbursements. Consequently, neither of the conditions for disallowance imposed by subsection (1) or subsection (2) of section 24 (c) existed and the face value of the notes is deductible as provided by section 23 (a) (1).

The respondent1948 U.S. Tax Ct. LEXIS 207">*222 on brief cites and relies strongly on Anthony P. Miller, Inc., 7 T.C. 729. After the briefs were filed in the instant case, however, our decision in the Miller case was reversed by the Third Circuit Court of Appeals in Anthony P. Miller, Inc. v. Commissioner, 164 Fed. (2d) 268, the Circuit Court holding that the notes given in that case constituted payment of the salary of the taxpayer's president. Our decision in the Miller case will no longer be followed.

The facts relating to the item of $ 5,646.87 credited to the open account of George I. Stuver on the petitioner's books under the heading "Rents Payable and Accrued, George I. Stuver" present a far different situation. They show clearly that neither the petitioner nor George I. Stuver ever intended that the delinquent rent account should be paid in cash or its equivalent. No note was given to cover the amount due. In answer to the question "You stated that your loans were intended to be capital contributions by you?" George I. Stuver replied, "I intended to increase the business. Well, yes. I intended to increase the business. I felt it was my pet1948 U.S. Tax Ct. LEXIS 207">*223 baby, and that is why I was hanging onto it." In the cross-examination of George I. Stuver appears the following:

Q. At the end of 1941 how many notes of the Petitioner did you hold? In what amount?

A. I would have to look at the books. I couldn't tell that. You mean for --

Q. There were others besides the salary in question here; is that correct?

Q. And this was all taken care of in 1942, approximately, by the issuance of stock?

A. If that is when the stock was issued, it was; yes, sir. I am not so sure about the date on that. I don't know about that exactly. I know I got the stock.

10 T.C. 715">*722 It is thus apparent that the various obligations of the petitioner to its chief stockholder, including the unpaid rent for 1941, were intended to be capitalized when the money which they represented was contributed by George I. Stuver. The issuance of the new stock to him in 1942 confirms such intention, as explained by Stuver.

Certainly we can not conclude that the book entry of the item as "rent payable" evidences constructive payment when we are convinced that George I. Stuver intended, and subsequently agreed, to increase his capital1948 U.S. Tax Ct. LEXIS 207">*224 investment in the petitioner in the amount of the unpaid rent for his building accumulated during 1941 and of the other aggregate obligations which the petitioner owed him.

The subsequent issuance of the petitioner's stock to cover the prior loans of long standing, as well as the rent item in controversy, manifestly shows that such items of indebtedness were and were intended to be capital contributions of the petitioner's principal stockholder and were so considered and treated by him and the petitioner. Hence, they are not deductible as expenses under the provisions of section 23 (a) (1).

Decision will be entered under Rule 50.

Hill, J., dissenting: I disagree with the majority herein in respect of its holding that notes given on account of salary constituted payment of the salary. In my opinion, such holding is contrary to, and nullifies, the provisions of section 24 (c) of the code.

The effect of the majority holding is that a debt can be paid by a promise in writing to pay it. To my mind, such holding is repugnant to the inherent meaning of "paid." To say that a debt can be paid by a promise to pay it carries its own refutation and is pure sophistry. 1948 U.S. Tax Ct. LEXIS 207">*225 No amount of sophistry even in the guise of reasoning can demonstrate a thing to be a fact which inherently is not a fact, either in the concept of the law or of common understanding.

I deem it not only safe, but imperative, to credit Congress with meaning what the language of its enactments unequivocally and unambiguously provide. When it used the word "paid" in section 24 (c), it meant just that and did not mean that the requirement of payment is satisfied with a promise to pay.

The identical question we have here was involved in the case of Anthony P. Miller, Inc., 7 T.C. 729. We held in that case contrary to the holding in the instant case. I adhere to and adopt the reasoning for our holding in that case in support of my dissenting views here.

10 T.C. 715">*723 Disney, J., dissenting: I am impelled to dissent from the majority opinion. I find nothing in the facts to justify the conclusion that the notes involved were given in payment of the antecedent debts. The general rule on the point is stated in 48 C. J. 610, as follows:

The rule obtaining in most jurisdictions is that, in the absence of agreement or consent to receive it as such, a draft or1948 U.S. Tax Ct. LEXIS 207">*226 bill of exchange, although accepted by the drawee, or a promissory note of the debtor, or his acceptance of a draft or bill of exchange drawn upon him, does not in itself constitute payment or amount to a discharge of the debt * * *.

The above statement is supported by several columns of citations, including some from Ohio, the state of the situs of the matter here involved. In A. Leschen & Sons Rope Co. v. Mayflower Gold Mining & Reduction Co., 173 F. 855, it was said, by the Circuit Court of Appeals for the Eighth Circuit, in the headnote:

An agreement that a debt shall be paid, or that it has been paid, by the note of the debtor, is a contract for an extension of time, and that the debt shall be paid, or has been paid, by the note on condition that the note is paid.

In the body of the opinion, the court said, citing many cases, including several in the Supreme Court and the Federal courts:

The acceptance by a creditor of the promissory note of his debtor for his antecedent debt does not extinguish it, unless the note is paid. It is not an absolute, but a conditional, payment of the debt. * * *

The court continued:

A clear agreement by 1948 U.S. Tax Ct. LEXIS 207">*227 the creditor that he will take the risk of the payment of the note and that the debt is discharged thereby, or the indubitable intention of both the parties to that effect, is requisite to extinguish a debt by the taking of the debtor's note.

Then, referring to the fact in that case that the contract provided that $ 4,200 "should be paid by the note of the mining company," it was said:

* * * The ordinary meaning of that term was that the debt should be paid by the note on condition that the note was paid, but should not be extinguished otherwise, and the common and customary meaning of an expression is to be preferred to an unusual and ingenious interpretation of it. * * *

An Ohio case on the point is Nunn v. Hubacher, 158 N.E. 9. Therein an heir accepted a note from her brother for the amount due her out of the estate, and it was held that by such acceptance she was not bound, "in absence of special stipulation and agreement that acceptance of note was in payment of face thereof."

In the light of what I consider well settled law, nothing appears in the facts in this case to indicate such definite agreement as is requisite to make payment out of1948 U.S. Tax Ct. LEXIS 207">*228 mere acceptance, by the acceptance of a note. I, therefore, respectfully dissent.