17 T.C. 187">*188 This proceeding involves deficiencies in income tax, declared value excess-profits tax and excess profits tax, 1951 U.S. Tax Ct. LEXIS 110">*111 for the years 1945 and 1946, as follows:

The issues involved are:

1. Whether the amounts paid by petitioner to any or all of its three executives in the taxable years 1945 and 1946, for services rendered in those years, were reasonable.

2. Whether amounts, the payment of which petitioner authorized and accrued in the taxable years 1945 and 1946 as gifts to educational institutions are deductible in the year accrued, where the actual payment was made in a subsequent year, the respective dates of such actual payments being January 26, 1946 and February 3, 1947.

The case was submitted on a stipulation of facts, oral testimony and exhibits. The stipulated facts are found accordingly.

FINDINGS OF FACT.

Petitioner is a Tennessee corporation. Its returns for the periods involved were filed with the collector of internal revenue for the district of Tennessee. Petitioner's books of account were kept and its returns filed on an accrual basis of accounting.

Petitioner is engaged in the business of selling at wholesale and retail, china, glassware, 1951 U.S. Tax Ct. LEXIS 110">*112 metalware, hosiery, toys, and notions. It is the successor of a business founded in 1900 by J. D. Faucette, the father of J. E. Faucette and L. M. Faucette, two of the present officers of petitioner.

In 1900 the business was organized and operated as a Virginia corporation known as Faucette Grocery Company. It was then located in Bristol, Virginia, and sold wholesale groceries. In 1907 the name was changed to Faucette Company, Inc. The reason for the change was to provide for an expansion of the business into other lines.

From about 1900 to 1915, the principal source of income was from the sale of wholesale groceries. In 1915 the company bought the 17 T.C. 187">*189 stock of a defunct china company in Bristol and opened a china department. In addition, the company opened a retail china store in Bristol. Thereafter it began to sell other lines of merchandise. In 1920 the company purchased a store on the Tennessee side of Bristol. In 1922 it moved to a new location in Bristol, Tennessee, and was reincorporated as a Tennessee corporation. It has since continued to do business at the same location. Petitioner's stores and warehouse properties cover approximately 40,000 square feet. 1951 U.S. Tax Ct. LEXIS 110">*113 The retail store sells to customers in Bristol and surrounding territory.

The wholesale business is carried on by having traveling salesmen call upon retail merchants within a radius of approximately 200 miles of Bristol. The territory covered is east Tennessee, southwest Virginia, eastern Kentucky, southern West Virginia, western North Carolina, northern Georgia, and Alabama. In addition to selling wholesale to retail merchants, petitioner sells to institutions of all kinds, such as hospitals, schools, hotels, and restaurants. During 1945 and 1946 petitioner employed 10 traveling salesmen.

Petitioner sells approximately 4,000 different items wholesale and in the retail store. In the latter are sold many of the same items that are sold wholesale, but the retail store carries a better grade of merchandise, with a wider price range than is sold through the wholesale department. The wholesale department sells a complete line of men's, women's, children's, and infants' hosiery, also china, glassware, metalware, toys, shelf hardware, and notions. The retail store, in addition to the above lines, sells paints, oilcloth, houseware lines, cutlery, silverware, unpainted furniture, stepladders, 1951 U.S. Tax Ct. LEXIS 110">*114 garden equipment, electrical appliances, farm supplies, fireplace equipment, picnic and camping supplies, and notions. The retail store carries branded lines which are nationally advertised of glassware, china, and sterling silver. Petitioner uses the retail store to predetermine the demand for certain items before it accepts or stocks them for wholesale.

Petitioner's salesmen sell the various merchandise by exhibiting catalogues and samples to customers. Orders are mailed to the Bristol store and warehouse. Upon its receipt the order is sent to the particular department where the merchandise is assembled and shipped to the consumer. Special effort is made to ship the order on the day it is received. As a result of the policy of filling and shipping the orders on the date of receipt, the officers of petitioner have been highly complimented by many of their customers.

Petitioner uses only one truck in its business. The truck is used for hauling goods from the depot or sidetrack to petitioner's store or warehouse, hauling merchandise to the depot and making local deliveries. Petitioner does not deliver to customers outside the city limits of Bristol.

17 T.C. 187">*190 From the organization1951 U.S. Tax Ct. LEXIS 110">*115 of petitioner until his death, J. D. Faucette was president. On August 2, 1942, the date of his death, he was 78 years of age. Upon the death of J. D. Faucette, J. E. Faucette was elected president and chairman of the board of directors. L. M. Faucette was elected vice-president, and P. Buchanan secretary and treasurer. Petitioner did not have any other employees in executive positions. During the years 1945 and 1946 the board of directors consisted of five members. In addition to the above-mentioned officers, the other directors were W. R. Faucette and P. L. Buchanan.

J. E. Faucette, president of petitioner, is 53 years of age. While in grammar school he worked in the business after school hours and during vacation periods. He was graduated from King College in Bristol, Tennessee, in June 1918 and, except for a period of 11 months when he served in the Army in the first World War, he has been associated with the business. From 1922 to 1942 he was vice-president of petitioner. He developed and had charge of the hosiery department. In 1945 and 1946 the hosiery department was the main department of the business. On May 20, 1918, he first became a stockholder in the predecessor1951 U.S. Tax Ct. LEXIS 110">*116 company.

As president of petitioner, J. E. Faucette had direct supervision of all activities of petitioner. During 1945 and 1946 he devoted his full time to the business. His normal working hours were from 6:45 a. m. to 6:00 p. m., with half hour for lunch. However, he put in much overtime and worked many nights. Through the medium of his personal contacts with manufacturers and mills, J. E. Faucette was able to procure more merchandise than petitioner was entitled to on an allotment basis.

P. Buchanan was one of the founders of the business and has been associated therewith since 1902. During 1945 and 1946 he was in charge of the notions department and of the shipping and receiving departments, which include the warehouse. He was also the buyer and in charge of sales in the notion department. During 1945 and 1946 he devoted full time to the business. His normal working hours were from 7:30 a. m. to 5:30 p. m. During this period he also worked overtime.

L. M. Faucette, vice-president of petitioner, is 46 years of age. He is a brother of J. E. Faucette. He was brought up in the business in which he was required to work when not in school. He attended King College, University1951 U.S. Tax Ct. LEXIS 110">*117 of Virginia, University of Florida, and Webb School. He was graduated in 1926. Upon graduation L. M. Faucette went to work for the F. W. Woolworth Co. to receive training in retail merchandising. He began working full time for petitioner in 1928, when he was made manager of the retail store which employs an average of 10 employees.

17 T.C. 187">*191 During the period 1942 to 1946 merchandise normally sold in the retail store became less available. Imported china, which previously had comprised 60 per cent of the retail store's business, became unavailable, as did hosiery and electrical appliances. L. M. Faucette made special efforts to find substitute lines of merchandise. He added a paint and a furniture department. He found substitutes for various types of houseware. He made trips to New York for brass and irons and antique items and for silverware. He made trips to various other cities for the purpose of obtaining merchandise. During the period 1942 to 1946 he was away from the business, on trips to obtain merchandise, about one fourth of the time.

In 1942, when he was unable to procure an adequate supply of china, L. M. Faucette decided to open a manufacturing department to 1951 U.S. Tax Ct. LEXIS 110">*118 produce such supply. This operation consisted of purchasing plain white dishes and other china art objects, having them decorated by artists and firing them in a kiln at high temperatures. This enabled petitioner to purchase a plain white dish, decorate it and retail it for two, three, or four dollars. During 1945 and 1946 petitioner employed as many as 18 artists in decorating chinaware. Prior to the war the metallic colors which were used in decorating china were obtained from Germany and England. The war eliminated this source of such supplies. One of the major problems was the procuring of metallic colors. Finally L. M. Faucette located a supply in New York. Petitioner engaged brokers in New York City, Chicago, San Francisco, and Dallas and salesmen in certain southern states in marketing its chinaware. During 1945 and 1946 the decoration and manufacturing of china was a profitable part of petitioner's business.

L. M. Faucette devoted full time to petitioner's business and put in many extra hours. When the decoration of china was first inaugurated, L. M. Faucette had to attend personally to the kiln, oftentimes devoting as much as 18 hours a day attending it.

Almost immediately1951 U.S. Tax Ct. LEXIS 110">*119 after the death of J. D. Faucette, in August 1942, the newly elected officers effected changes in policy. The first major change was to close out the grocery department, where the margin of profit was small. The liquidation of the grocery department was accomplished without any appreciable loss. The new officers undertook to increase the capital of the company, retire the preferred stock and liquidate a mortgage on its premises and other indebtedness. The capital stock was increased from $ 120,000 to $ 175,000. The outstanding preferred stock in the amount of $ 18,900 was retired. The mortgage in the amount of $ 17,000 on its real estate was liquidated. For the first time in the history of the business all bank loans were paid off.

Prior to 1942 petitioner's retail sales were made only on a cash basis. After 1942 petitioner enlarged its service by extending credit on a 17 T.C. 187">*192 customary 30-day basis. Later a deferred payment plan of selling was installed to meet competition.

As of December 31, 1944, petitioner had outstanding capital stock of $ 138,900 and a surplus of $ 47,630.98.

As of December 31, 1945, the outstanding capital stock was $ 168,900, paid-in surplus $ 11,9071951 U.S. Tax Ct. LEXIS 110">*120 and earned surplus $ 62,643.10.

As of December 31, 1946, the outstanding capital stock was $ 175,000, paid-in surplus $ 21,829.50 and earned surplus $ 80,308.62.

For the years 1935 through 1946, the sales, net profits after deducting officers' salaries, and dividends paid by petitioner were as follows:

As of December 31, 1944, 1945, and 1946, ownership of the taxpayer's common stock was as follows:

For the years 1937 through 1946, the compensation paid the officers of the petitioner was as follows:

17 T.C. 187">*193 The respondent disallowed the amounts of $ 21,576 and $ 33,403 from the total salaries paid for the years 1945 and 1946, respectively. The amounts disallowed were as follows:

1951 U.S. Tax Ct. LEXIS 110">*122 The minutes of a meeting of petitioner's board of directors held on March 9, 1945, disclose the following:

After a general discussion of the affairs of the company, upon motion by L. M. Faucette, duly seconded and carried, it was decided that should the government remove the order freezing wages and salaries during the calendar year then adjustments in wages and salaries would be made by the board of directors as they deem advisable.

At a meeting of petitioner's board of directors held on November 6, 1945, which was called for the purpose of adjusting salaries for the year 1945 after the removal of the wage and salary freeze, a resolution was adopted fixing the salaries of J. E. Faucette, president, at $ 25,344, L. M. Faucette, vice-president, at $ 16,896, and P. Buchanan, secretary and treasurer, at $ 16,896.

At a meeting of petitioner's board of directors held on December 20, 1946, the minutes disclose that on motion "Salaries and bonuses as per list with bookkeeper were approved and ordered paid."

No other resolution fixing the salaries of petitioner's three executive officers appears in the minutes of the corporation.

A reasonable compensation for the services of each of the three1951 U.S. Tax Ct. LEXIS 110">*123 executives actually rendered to petitioner in each of the taxable years 1945 and 1946 is as follows:

During 1945 the board of directors of petitioner orally authorized a donation or contribution to King College, Bristol, in the amount of $ 2,500. Petitioner drew a check payable to the First National Bank for $ 2,500 to pay for United States Government bonds, which were given to King College. Petitioner accrued the sum of $ 2,500 on its books for 1945, but the check was not actually paid until January 26, 1946. Petitioner, on its 1945 income and declared value excess-profits tax return, claimed a deduction for the contribution to King College, which respondent disallowed for the reason that the check was not paid until 1946.

17 T.C. 187">*194 During 1946 the board of directors of petitioner orally authorized a donation or contribution to Emory and Henry College in the amount of $ 1,200. Petitioner made the contribution by check drawn payable to Emory and Henry College. Petitioner accrued the amount on the books but the check was not paid until February 3, 1947. 1951 U.S. Tax Ct. LEXIS 110">*124 On its 1946 income and declared value excess-profits tax return it claimed the amount of $ 1,200 as a deduction, which was disallowed by the respondent.

By letter dated February 10, 1950, addressed and mailed to the Commissioner of Internal Revenue and received on February 14, 1950, petitioner gave notice that it elected to deduct the contribution of $ 2,500 to King College, accrued in the year 1945, and the contribution of $ 1,200 to Emory and Henry College, accrued in the year 1946, in the respective years in which they were accrued. In said letter petitioner consented to the assessment of any deficiency for any other taxable year to the extent resulting from such election.

Petitioner filed its original petition in this proceeding on July 7, 1949. Public Law 378, 81st Congress, was approved on October 25, 1949. On February 27, 1950, this Court granted petitioner's motion for leave to file an amended petition raising the issue of petitioner's right to deduct the donations to King College and Emory and Henry College under section 23 (q) of the Internal Revenue Code as amended.

Petitioner is entitled to a deduction in the taxable year 1945 in the amount of $ 2,500, representing1951 U.S. Tax Ct. LEXIS 110">*125 a contribution to King College, and to a deduction in the amount of $ 1,200 in the taxable year 1946, representing a contribution to Emory and Henry College.

OPINION.

The first issue presents the question of the reasonableness of the salaries paid by petitioner to its three executives in the taxable years 1945 and 1946. Petitioner has the burden of establishing the fact of reasonableness.

Petitioner is the successor of a business originally founded in 1900 for the purpose of engaging in the wholesale grocery business. It was originally organized by J. D. Faucette, father of J. E. Faucette and L. M. Faucette, president and vice-president, respectively, of petitioner since the death of their father in August 1942. P. Buchanan, secretary and treasurer, became associated with the predecessor company in 1902 and has since been connected with the business. Until 1915 the principal source of income was from the sale of groceries at wholesale. In 1915 the stock of a defunct china store was purchased and a china department was opened. Thereafter the business began to take on various lines of merchandise for sale. Petitioner operates both a wholesale and a retail business. After the1951 U.S. Tax Ct. LEXIS 110">*126 death of J. D. 17 T.C. 187">*195 Faucette in 1942 the grocery business was closed out. Thereafter and during the taxable years, petitioner handled a complete line of men's, women's, children's, and infants' hosiery, glassware, china, silverware, electrical appliances, garden and farm supplies, hardware, paints, toys, notions, and other wares, carrying approximately 4,000 different articles of merchandise.

The stock of petitioner is owned by the Faucette and Buchanan families.

J. E. Faucette, president of petitioner, is 53 years of age. He was brought up in the business. While in grammar school he worked after school hours and during vacations. In 1918 he was graduated from King College and except for a period of 11 months, when he served in World War I, he has been intimately associated with the business. From 1922 to 1942 he was vice-president of petitioner. He developed the hosiery department, the main department of the business, and had complete charge of it. As president he had direct supervision of all of petitioner's activities. He was also in charge of credit and sales, had charge of personnel and all of petitioner's financing. His normal working hours were from 6:45 a. m. 1951 U.S. Tax Ct. LEXIS 110">*127 to 6:00 p. m. Because of the difficulty of procuring merchandise, he was required to put in considerable overtime.

L. M. Faucette, vice-president of petitioner, was also raised in the business. He became a full-time employee in 1928, after being graduated from college and after receiving training in retail merchandising from F. W. Woolworth Co. Since 1928 he has been the manager of the retail store and has charge of the buying and selling of retail merchandise. He was required to travel about one fourth of his time to obtain merchandise and to find substitutes for merchandise which had been scarce or entirely unavailable. In order to procure an adequate supply of china for the retail department, he opened a manufacturing department for the decoration of chinaware.

P. Buchanan, secretary and treasurer of petitioner during the taxable years, was in charge of the notions department, doing the buying for that department. He also had charge of the shipping and receiving departments, which included the warehouse. His normal working hours were from 7:30 a. m. to 5:30 p. m., and during the period in question he was required to work overtime to a considerable extent.

The petitioner's1951 U.S. Tax Ct. LEXIS 110">*128 continuous growth and increase in gross sales from $ 415,603.72 in 1939 to $ 1,352,242.80 in 1946, in the difficult war period, are convincing evidence that these three executives were experienced, competent, aggressive, and resourceful. After the death of J. D. Faucette these officers effected advantageous changes in policy. They closed out the grocery department because the margin of profit was small; the preferred stock was retired and the capital increased by the sale of additional common stock; the mortgage indebtedness and 17 T.C. 187">*196 the bank loans were paid off; they changed the policy of selling for cash and inaugurated credit service and later a deferred payment plan. The record shows that petitioner has paid dividends since 1935 and that the dividend distributions were increased in the taxable years 1945 and 1946.

This record, however, is rather unusual in that petitioner offered no evidence of salaries paid for similar services by comparative businesses, which is recognized as one of the most satisfactory tests; no expert opinion testimony was presented, and the two executives who testified did not express any opinion as to the reasonableness of the salaries paid. Petitioner1951 U.S. Tax Ct. LEXIS 110">*129 relies upon the evidence as to gross sales, the net profits, the dividends paid, the capital investment and the evidence as to the experience and ability of the three executives, their efficient management, and the time devoted by them to the business. We agree.

The respondent, in determining the deficiency, has disallowed in the taxable years all increase in salaries over what was paid in 1943 and 1944. We are unable to accept such an arbitrary appraisal. The salaries paid to each of such officers in 1943 and 1944 were $ 16,140 to J. E. Faucette, $ 10,560 to L. M. Faucette and $ 10,860 to P. Buchanan.

During the years 1943 and 1944 the Wage Stabilization Act, freezing salaries and wages, was still in effect. The minutes of a meeting of the directors held on March 9, 1945, disclose that it was the intention of the directors to adjust the salaries of petitioner's executive officers when the salary freeze was removed. On November 6, 1945, after the controls were lifted, the directors fixed the salary of J. E. Faucette at $ 25,344, and of L. M. Faucette and P. Buchanan at $ 16,896 each. The aggregate salaries of $ 59,136 fixed for 1945 were 5.03 per cent of the gross sales of $ 1951 U.S. Tax Ct. LEXIS 110">*130 1,174,668.57. The ratio of total salaries to gross sales in the years 1941 and 1942 was 5.49 per cent and 6.39 per cent, respectively.

After considering all the facts disclosed by this record, we think the amounts paid to petitioner's three top executives in the taxable year 1945 were reasonable, and have so found as a fact.

For the taxable year 1946 the salary of J. E. Faucette was increased to $ 30,413 and the salaries of J. E. Faucette and P. Buchanan to $ 20,275 each. The aggregate salaries paid in 1946 of $ 70,963 bear a ratio of 5.25 per cent to the gross sales of $ 1,352,242.80. Although the gross sales increased in 1946 over 1945, the net profits decreased from $ 79,962.73 in 1945 to $ 59,548.92 in 1946. It is obvious that the increase in gross sales was largely the result of the general increase in the sales price of merchandise and the decrease in net profits was due to increase in the cost of operation.

We are unable to find any evidence in this record to support the increase in salaries for the year 1946. The war with Japan ended 17 T.C. 187">*197 in August 1945. Thereafter the availability of consumer merchandise had somewhat improved and the demand by consumers had greatly1951 U.S. Tax Ct. LEXIS 110">*131 increased. There is no claim made that petitioner's officers put in more time or effort in 1946 than in 1945 or that the responsibilities or difficulties experienced during the war years increased in 1946. All of the new policies inaugurated by the new officers, upon which petitioner relies in support of the 1945 salary increases, were put into effect prior to the taxable year 1946. In the light of such circumstances we do not regard the increase in the salaries of the executives in 1946 as warranted. We have found as a fact that the amounts paid to these three executives in 1945 constitute reasonable compensation for the services rendered by each to petitioner in the taxable year 1946.

We, therefore, hold that petitioner is entitled to deduct in each of the taxable years 1945 and 1946 the amount of $ 59,136, representing salaries paid to its three executives as ordinary and necessary business expenses under section 23 (a) (1) (A) of the Internal Revenue Code.

The second issue presents the question whether petitioner is entitled to deductions in the respective taxable years 1945 and 1946 of the amounts contributed to educational institutions.

In 1945 petitioner's directors orally1951 U.S. Tax Ct. LEXIS 110">*132 authorized a contribution of $ 2,500 to King College, in Bristol, Tennessee. In that year petitioner drew a check payable to the First National Bank for the purchase of Government bonds, which were given to King College. Petitioner, on an accrual basis of accounting, accrued the amount of $ 2,500 on its books and claimed the deduction upon its return for that year. The check, however, was not paid until January 26, 1946. The respondent denied the deduction because the check was not paid in 1945.

In 1946 the directors similarly authorized a contribution of $ 1,200 to Emory and Henry College. The amount was likewise accrued in 1946 and claimed as a deduction on its return for that year. The check was not paid until February 3, 1947, and the respondent denied the deduction because the check was not paid in 1946.

Petitioner, in its petition to review the deficiency determined by the respondent for the years 1945 and 1946, did not assign as error the disallowance of such claimed deductions because section 23 (q) at that time permitted deductions for contributions by corporations on an accrual basis only in the year paid.

By section 3 of Public Law 378, 81st Congress, approved October1951 U.S. Tax Ct. LEXIS 110">*133 25, 1949, section 23 (q) of the Internal Revenue Code was amended to permit corporations on an accrual basis to elect to deduct contributions, authorized by the directors, in the year authorized provided the payment was actually made within 2 1/2 months after the close 17 T.C. 187">*198 of such year. ¹ By section (c) the amendment is made applicable to taxable years beginning after December 31, 1942. With respect to years beginning after December 31, 1942, and before January 1, 1949, election is to be made within one year after the date of the enactment of the act, and the taxpayer must consent in writing to the assessment in any other taxable year of any deficiency to the extent resulting from such election.

1951 U.S. Tax Ct. LEXIS 110">*134 Under date of February 10, 1950, and within the prescribed period, petitioner addressed a letter to the Commissioner of Internal Revenue at Washington, D. C., which letter was received on February 14, 1950. Therein petitioner stated that it elected to take such deductions in the respective taxable years 1945 and 1946, when the amounts were accrued, and consented to the assessment of any deficiency to the extent resulting from such election.

The only argument advanced by the respondent against the allowance of the deductions in the respective taxable years in which the contributions were authorized and accrued is that petitioner's board of directors did not authorize the contributions in writing. He bases his position on Treasury Regulations 111, sec. 29.23 (q)-1 as amended by T. D. 5796 which contains a provision that the authorization of the directors must be in writing.

Petitioner concedes the contributions in question were not authorized by its directors in writing. The testimony, however, is uncontradicted that the contributions were in fact authorized by the board of directors.

The statute is silent as to the manner in which the authorization is 1951 U.S. Tax Ct. LEXIS 110">*135 to be evidenced. It merely provides that the contribution be authorized by the board of directors in the year of accrual. (See infra).

17 T.C. 187">*199 "Authorization" is defined by Webster's New International Dictionary to mean "act of authorizing; sanction; warrant." It is a fact. And, as such, it may have occurred orally and may not have been reduced to writing, i. e., in the form of a written resolution. That such corporate authority, particularly where as here the corporation is relatively small and closed, may be evidenced orally. Benz Brothers Co., 20 B. T. A. 1214; Reub Isaacs & Co., 1 B. T. A. 45; The Parisian, 2 B. T. A. 415; W. H. Harris Grocery Co., 3 B. T. A. 216.

The purpose of the pertinent amendment was to liberalize the rule with respect to the time of payment of contributions authorized by the board of directors in the case of corporations on the accrual basis. ²

1951 U.S. Tax Ct. LEXIS 110">*136 We think that the regulation of the Commissioner providing that the authorization by the directors must be in writing is invalid as a limitation upon and inconsistent with the statute which it attempts to construe. International Ry. Co. v. Davidson, 257 U.S. 506">257 U.S. 506; Manhattan General Equipment Co. v. Commissioner, 297 U.S. 129">297 U.S. 129.

We therefore hold that petitioner is entitled to a deduction of the amount of $ 2,500 in the taxable year 1945, as a contribution to King College, and of the amount of $ 1,200 in the taxable year 1946, as a contribution to Emory and Henry College, pursuant to the provisions of section 23 (q) of the Internal Revenue Code as amended.

Decision will be entered under Rule 50.