8 T.C. 247">*247 The respondent has determined deficiencies in income tax, declared value excess profits tax, and excess profits tax against the petitioner1947 U.S. Tax Ct. LEXIS 294">*295 for the year 1941 in the respective amounts of $ 1,204.98, $ 3,168.85, and $ 33,521.70.

The questions presented are (1) whether respondent correctly disallowed salary deductions claimed for two of petitioner's principal stockholder-officers, under the provisions of section 23 (a) of the Internal Revenue Code, and (2) whether an excess profits net loss may be added to the excess profits credit in computing unused excess profits credit, which may be carried from 1940 to 1941.

FINDINGS OF FACT.

Petitioner was organized on March 25, 1936, under the laws of the State of Wyoming, with an authorized capital stock of $ 100,000, divided into 100 shares of a par value of $ 1,000 each. It was organized for the purpose of promoting, developing, and improving the Wood Roadmixer, a traveling machine for mixing aggregates in the construction of roads, dams, airports, etc. Its principal place of business was located in Los Angeles, California, and it filed its income and excess profits tax returns for the year 1941 in the sixth collection district of California.

Petitioner filed an income and declared value excess profits tax return, Form 1120, reporting total gross profits from its business in1947 U.S. Tax Ct. LEXIS 294">*296 the 8 T.C. 247">*248 amount of $ 192,306.54; total deductions of $ 112,953.88 (including a net operating loss carry-over of $ 2,982.25); and net income of $ 79,352.66, upon which income tax of $ 23,212 and declared value excess profits tax of $ 287.28 were reported. Deductions for administration expenses in the amount of $ 112,953.88 include "Compensation of Officers, $ 71,398.17," which item was detailed in petitioner's income tax return as follows:

1947 U.S. Tax Ct. LEXIS 294">*297 Petitioner filed a corporation excess profits tax return, Form 1121, for the year 1941, reporting a normal tax net income of $ 79,065.38, which was adjusted by the elimination of net gains from the sale or exchange of depreciable property held more than 18 months in the amount of $ 8,763.46, leaving an excess profits net income of $ 70,301.92, upon which an excess profits tax of $ 3,384.09 was reported.

Petitioner kept its books and accounting records and filed its returns on the accrual basis. On March 25, 1936, of the authorized capital stock of $ 100,000, there were 76 shares, of a par value of $ 76,000, outstanding: 45 shares were issued to C. W. Wood, president; 10 shares to Lemuel Pope, vice president and one share to Ed Wenzel, secretary. The shares issued to Wood were issued in consideration of his transferring to petitioner cash, accounts receivable, machinery, equipment, and patents of a value of $ 46,176.65. Pope contributed cash in the amount of $ 9,823.35. The property transferred to petitioner by Wood for stock constituted the assets of one of the departments of his individual businesses. Petitioner's officers were the same during the period from 1936 to 1941.

From1947 U.S. Tax Ct. LEXIS 294">*298 1936 to 1940 petitioner was primarily engaged in promoting, developing, and leasing the roadmixer. It was in the nature of an experimental company. Petitioner did not actually commence to sell the roadmixer until the latter part of 1940 and during 1941. Wood designed, patented, and developed the roadmixer. As president of the petitioner, Wood presided at its board of directors' meetings, signed contracts, controlled and supervised its management, and generally performed the functions of president of a company. He had 8 T.C. 247">*249 no regular hours for conducting petitioner's business. The record does not show how much time he devoted to his individual businesses.

Lemuel Pope, vice president and general manager, was an engineer, a graduate of West Point, and a post graduate of Massachusetts Institute of Technology. He formerly had been sales manager for the Soule Steel Co. of San Francisco, California. He negotiated for and signed contracts on behalf of the petitioner, and was engaged generally in the promotion of the roadmixer. He gave technical data and engineering advice to various agencies, such as states, cities, and counties, and contacted and advised them concerning the1947 U.S. Tax Ct. LEXIS 294">*299 oil mix and the use of the roadmixer.

Petitioner had 40 to 50 employees and paid them salaries from $ 50 to $ 300 a month. Some of them were part time employees, in that they put in part of their time for petitioner and part with Wood's activities.

Petitioner paid no salary to Wood in 1936, 1938, and 1939. In 1937 it paid him a salary of $ 4,500, and in 1940 a salary of $ 6,000. In 1941 petitioner claimed a deduction of $ 9,500 as regular salary for Wood and $ 20,633.69 as a bonus salary, or a total of $ 30,133.69.

Petitioner deducted salary and bonus for Pope during the same period as follows:

Wood's salary was contingent on the amount of money in the corporate fund. Pope had an agreement whereby, in addition to regular salary, he was to be paid 25 per cent of the net earnings of petitioner. At a special meeting of the board of directors on December 29, 1941, the following minutes were adopted:

1947 U.S. Tax Ct. LEXIS 294">*300 A special meeting of the Board of Directors of the Wood Roadmixer Company was held at its office, Room 1005, Lane Mortgage Building, Los Angeles, California at 10:00 A. M., December 29, 1941.

There were present at the meeting the following directors:

Clyde W. Wood

Lemuel Pope

Ed Wenzel

The above named directors represent all of the directors of the Wood Roadmixer Company. Mr. Clyde W. Wood, president, called the meeting to order and Mr. Ed Wenzel, secretary, acted as secretary of the meeting.

8 T.C. 247">*250 On motion duly made and seconded, the following resolution was unanimously passed:

Whereas, the net operating profits of the Wood Roadmixer Company will exceed One Hundred Thousand Dollars ($ 100,000.00) for the calendar year 1941 and,

Whereas, the Wood Roadmixer Company has contracted and it has been the custom to pay Lemuel Pope, its manager, twenty-five per cent (25%) of its net operating profits and,

Whereas, the increase in business and the increase in the net operating profits for the calendar year 1941 has been largely due to the activities and efficiency of Mr. Clyde W. Wood, president of the company.

Now Therefore, Be It Resolved that in addition to their present salaries, 1947 U.S. Tax Ct. LEXIS 294">*301 Clyde W. Wood, president of the company, and Lemuel Pope, manager of the company, participate in the net operating profits of the company as shown by the books at the close of the business year in the following proportion:

That the above credits have been earned by Clyde W. Wood and Lemuel Pope during the calendar year 1941 and are available to them upon demand.

There being no further business to come before the meeting, upon motion duly made and seconded, the meeting was adjourned.

Petitioner's balance sheets at December 31 of the calendar years 1936 to 1941, inclusive, were as follows:

8 T.C. 247">*251 The petitioner's income and profit and loss statement from March 25, 1936, to December 31, 1941, is as follows:

1947 U.S. Tax Ct. LEXIS 294">*304 An analysis of petitioner's surplus from January 1, 1936, to December 31, 1941, shows the following:

1947 U.S. Tax Ct. LEXIS 294">*305 8 T.C. 247">*252 Wood conducted a large contracting business in his individual capacity from 1936 to 1941. In 1940 he received $ 812,830.04 from the individual business, which income had no connection with that of petitioner's business. In 1941 he received "Gross Estimates from Contracts $ 468,878.53." This income had no relation to petitioner's. Wood also was engaged in the mining business and several joint ventures.

8 T.C. 247">*253 An analysis of earnings from Wood's individual returns for 1937 to 1941 shows the following:

During 1941 petitioner1947 U.S. Tax Ct. LEXIS 294">*307 sold 27 roadmixers. Wood and Pope were instrumental in making these sales. No commissions were paid to them and petitioner went to no expense in making the sales.

Petitioner's business, when compared to the income received by Wood from his individual business represented a small part of his business. The increase in petitioner's business in 1940 and 1941 was primarily attributable to war conditions. In April 1944 Pope was discharged by petitioner, and on August 1, 1944, petitioner was dissolved. Petitioner claimed deduction of $ 30,133.60 as salary for Wood, which was paid as follows:

The respondent determined that $ 12,000 was reasonable compensation for the services performed by Wood, as president, and that $ 16,816 8 T.C. 247">*254 was reasonable compensation for the services performed by Pope. These amounts are reasonable and commensurate with the services rendered.

As to the unused excess profits carry-over, the parties have stipulated as follows: That the net gain realized on the sale of depreciable property in 1940 was $ 52,253.12, $ 12,584.04 of which was on property held less1947 U.S. Tax Ct. LEXIS 294">*308 than 18 months and $ 39,669.08 on property held more than 18 months. No part of the $ 39,669.08 was used as an "unused excess profits credit carry-over" by the respondent in the computation of excess profits tax for 1941. It is further stipulated that the respondent allowed petitioner an "unused excess profits credit carry-over in the amount of $ 6,438.31 for computing its excess profits tax for 1941, computed as follows:

OPINION.

(1) With respect to the deductions claimed for compensation paid, three questions are presented: (a) Was the compensation paid to Wood a reasonable amount for the services rendered during 1941, the tax year? (b) does the oral contract under which Pope was paid 25 per cent of the net earnings permit a deduction of the compensation paid to him? and (c) should a new issue be considered that was not joined at the time of the hearing?

(a) Petitioner has the burden of proving that the compensation paid was reasonable and that the officer rendered services for which the compensation1947 U.S. Tax Ct. LEXIS 294">*309 was paid. Petitioner contends that the regular and bonus salaries paid to Wood were reasonable, because the roadmixer machine was his idea, that it was developed through an experimental period when petitioner had lean years, and that it was not until the tax year, when petitioner's income was large, that it could pay Wood what he was entitled to have from the earnings. The proof does not support petitioner's contention. The minutes of the meeting held on December 29, 1941, by the three stockholder-officers recite that the compensation allowed petitioner's president and vice president was for services rendered by them during 1941. Petitioner has not established that Wood rendered such additional services during that year as to warrant the large increase in compensation paid him. He was engaged in many activities and petitioner's business was only a small portion of all his businesses. It is evident that the large volume of business done in 1941 was not due to any particular advertising program 8 T.C. 247">*255 or unusual activities of petitioner's officers and employees, but primarily to the activity of the Government in constructing national defenses, which put petitioner's "Roadmixer" 1947 U.S. Tax Ct. LEXIS 294">*310 in demand. It was that factor more than any other that attributed to the success of petitioner's business. Respondent allowed a salary of $ 12,000 as reasonable compensation for Wood's services. That appears to be a liberal amount under all the circumstances, and, since increased earnings by petitioner, rather than Wood's services, appear to be the real basis for the increased compensation, we find no justification for changing respondent's determination.

(b) Petitioner's contention that the compensation paid to Pope is reasonable is based on an oral contract between petitioner and Pope, under which he was to receive 25 per cent of the net earnings of petitioner in addition to his regular salary. While Pope was the manager of petitioner and devoted all of his time to its business, he was also a stockholder-officer. The fact that he had a contract does not relieve petitioner of the burden of proving that the services rendered by him to petitioner were sufficient to warrant the compensation paid him therefor as being reasonable. Petitioner is again confronted with the same conditions that attributed to the success of its business, that is, the Government's activities in its national1947 U.S. Tax Ct. LEXIS 294">*311 defense, and has failed to show increased or more valuable activities on the part of Pope, to any substantial degree, during the taxable year, or that his services had been unusual or greater than in previous years. Respondent has allowed a very liberal amount, $ 16,816, as compensation for Pope's services, about twice as much as had previously been paid him, and we conclude that that amount is reasonable, under all the circumstances.

There are many cases in which salaries have been held to be reasonable or unreasonable for the services rendered, but, as each case has been decided on its own set of facts, those cases are not of great value as precedents. Many factors may enter into what is reasonable or unreasonable compensation. In the instant case, we have a corporation with a comparatively small amount of stock outstanding, with Wood and Pope owning all but two shares of the stock, with an unusually large amount of net earnings during the year involved, attributable in the main, not to the services rendered by Wood and Pope, but to war conditions of the year, with the minutes of petitioner reciting a resolution adopted by its directors, two of whom were Wood and Pope, in which1947 U.S. Tax Ct. LEXIS 294">*312 Wood and Pope were allowed the compensation for services rendered in 1941, with such services having been little more, if any, in the taxable year over those rendered in prior years, with the compensation allowed being out of line with compensation previously paid, and finally with the compensation allowed being based primarily on not earnings of petitioner for the year. Under all the circumstances 8 T.C. 247">*256 and facts, we have concluded that respondent's determination should be upheld and that his allowance of compensation for Wood and Pope is reasonable.

(c) At the hearing respondent asked leave to amend his answer in order to raise a new issue, but upon learning that, in fairness to petitioner, the hearing would have to be delayed, he chose to abandon the issue and go to trial. On brief, however, he argues the new issue. We have not given consideration to his argument on the issue he has sought to raise, for the reason that he specifically abandoned the issue at the hearing and it was so understood by the parties and by the Court.

2. The remaining issue is with respect to the proper computation of petitioner's "unused excess profits credit carry-over." In the deficiency notice, 1947 U.S. Tax Ct. LEXIS 294">*313 it is stated:

In computing your excess profits tax for the year 1941 you deducted as "Excess profits credit carry-over the amount of $ 49,089.64" being the unused 1940 excess profits credit in the amount of $ 6,438.31 plus a computed amount which you explain as "Excess profits net loss $ 42,651.33". It is held that $ 6,438.31 constitutes the "unused excess profits credit carry-over" within the meaning of Section 710 (b) (c) of the Internal Revenue Code as amended and that this amount may not be increased by the addition of a computed "excess profits net loss" of the year 1940.

Petitioner seeks to take as an unused excess profits credit carry-over the excess profits credit, as computed under section 714 of the Internal Revenue Code, plus an amount which it terms as "excess profits net loss," resulting from the exclusion of gains realized from the sale of capital assets in computing its excess profits net income for 1940.

The term "unused excess profits credit" is defined by the statute ¹ as meaning the excess, if any, of the excess profits credit over the excess profits net income.

1947 U.S. Tax Ct. LEXIS 294">*314 Petitioner is entitled, therefore, to that part of the excess profits credit as a carry-over which it has not used. "Excess" credit could be a part of or all of the amount of the credit, but no more.

Under section 714 petitioner was entitled in 1940 to an excess profits credit of 8 per cent of its invested capital of $ 80,478.71, or $ 6,438.31. Since it has used none of that credit, it is entitled to all of it. The determination of the respondent is correct.

Decision will be entered under Rule 50.