79 U.S.P.Q. (BNA) 242">*242 11 T.C. 704">*704 Respondent determined deficiencies in petitioner's excess profits tax for the years 1942 and 1943 in the respective amounts of $ 3,030.97 and $ 35,840.88, and in declared value excess profits tax for 1943 in the amount of $ 1,517.57.

Two issues are contested: (1) Whether petitioner is entitled to a deduction in 1943 of the sum of $ 35,000, or any portion thereof, which it claims represents royalty payments accrued by it in that year; (2) whether additional compensation to petitioner's president, amounting to $ 1,279.02, claimed for the year 1942, was paid within the purview of Internal Revenue Code, section 1948 U.S. Tax Ct. LEXIS 47">*49 24 (c). A third issue as to the 11 T.C. 704">*705 basis for depreciation for the years 1942 and 1943 of certain patents can be resolved upon the concessions of the parties.

Some of the facts have been stipulated.

FINDINGS OF FACT.

The stipulated facts are hereby found accordingly.

Petitioner is a corporation, duly organized on September 20, 1937, under the laws of the State of California, with its principal office at Oakland, California. On August 29, 1945, it changed its name from "Granberg Equipment, Incorporated" to "Granberg Corporation." Petitioner's Federal income and excess profits tax returns for the periods here involved were filed with the collector of internal revenue for the first district of California. Petitioner keeps its books and files its Federal income and excess profits tax returns on a calendar year and accrual basis.

The objects and purposes for which it was incorporated, inter alia, are as follows:

79 U.S.P.Q. (BNA) 242">*243 To design, patent, manufacture, sell, distribute, repair, encumber, finance, and otherwise acquire, handle or deal in pumps, meters, engines, motors, valves, gears, equipment and machinery of every kind, character, nature or purpose, and all devices or attachments convenient1948 U.S. Tax Ct. LEXIS 47">*50 or appertaining thereto, and generally to manufacture, purchase, sell, or otherwise acquire or deal in, goods, wares, merchandise and personal property of any kind and description.

Petitioner's stockholders as of the last day of the years 1937 to 1943, and their respective stockholdings, were as follows:

At all times material, petitioner's principal stockholder was A. J. Granberg, a married1948 U.S. Tax Ct. LEXIS 47">*51 man and a resident of California. He is an inventor and, since petitioner's incorporation, has been its president and general manager.

Commencing in 1916, Granberg invented methods of controlling petroleum delivery and designed a meter in 1917, for which he received letters patent in 1918. Of his 50 inventions, many of which have been patented, most are in the petroleum meter field.

11 T.C. 704">*706 His 1918 patent was assigned to a corporation known as the Granberg Meter Co., which he organized.

For the use of this patent, Associated Supply Co., a subsidiary of Associated Oil Co., paid a minimum royalty of $ 25,000 per year for several years to Granberg Meter Co., of which Granberg was then an officer.

From 1926 to 1936 Granberg was employed by the Ralph N. Brodie Co., hereinafter sometimes referred to as Brodie. On October 28, 1929, Granberg entered into a written contract with Brodie under which Granberg assigned to that company all patents theretofore acquired or applied for by him relating to liquid meters and improvements thereon, and all future patents or patent rights which he might thereafter acquire, and all improvements which he might thereafter conceive or design relative 1948 U.S. Tax Ct. LEXIS 47">*52 thereto, and the company promised to pay certain royalties to him. The contract included the following paragraph:

Any inventions which Granberg may hereafter conceive relating to Liquid Meters, shall be submitted to the corporation first, and the corporation shall have the option -- within thirty (30) days thereafter to acquire and use the same provided, however, that in such event the corporation shall pay the expense of perfecting and patenting the same; provided, further, that any principle of such inventions which may be utilized for other purposes than Liquid Meters, shall remain always the property of Granberg, and shall be deemed as not within the purpose of this agreement; except insofar as the corporation may use the same in connection with manufacture of Liquid Meters only.

This 1929 contract was modified by a supplemental agreement dated December 1, 1934, but the provisions of the original agreement regarding future inventions were not altered thereby.

After leaving Brodie in 1936, Granberg entered into negotiations with the Aro Equipment Co. of Bryan, Ohio, hereinafter sometimes referred to as Aro, with a view toward his employment by that company in the development 1948 U.S. Tax Ct. LEXIS 47">*53 of a petroleum meter for it. Attorneys for Aro suggested that, inasmuch as Granberg had been employed as an inventor by Brodie, he should get a letter from Brodie stating that it held no claim on him. Granberg attempted to secure such a release from Brodie, but was unable to do so.

Upon Brodie's failure to release him and upon the abandonment of negotiations with Aro, Granberg consulted his attorney, C. M. Walter, who later became petitioner's attorney also. Walter 79 U.S.P.Q. (BNA) 242">*244 recommended court action against Brodie and advised that Granberg could enter the pump business, as Brodie was not engaged in that field. Accordingly, Granberg requested Walter to take the necessary steps to organize a company to engage in the manufacture and sale of pumps, which became petitioner herein upon its incorporation in 1937.

11 T.C. 704">*707 Granberg filed applications for United States patents on a positive pressure rotary pump and on a rotary pump on May 8, 1937, and September 7, 1937, respectively. Patents were granted on these inventions on September 13, 1938, and August 13, 1940, respectively.

Granberg assigned to petitioner his two applications for pump patents in return for 51 per cent of whatever stock petitioner1948 U.S. Tax Ct. LEXIS 47">*54 might issue.

Granberg then personally undertook to obtain the investment money in the corporation, and his first solicitations were unsuccessful. Finally, he gathered groups of prospective investors together and explained to them that, because of his difficulties with Brodie, he had nothing but the pump patents to put into the corporation at that time, but that he had certain other inventions, including a meter, and he promised that if and when he settled his differences with Brodie the investors would all participate in these other inventions. The initial subscriptions to stock in petitioner were obtained at these meetings.

It was Granberg's intention at the time of petitioner's formation to ultimately exploit and handle his meter inventions through petitioner, and their development was intended by him to be part of its program.

Thereafter, Granberg was employed as general manager of petitioner at a salary of $ 175 per month, and a resolution of petitioner dated December 4, 1937, adopted by the board of directors, recited that Granberg as general manager was "to have the usual duties and responsibilities of such office in the corporation. Mr. Granberg being personally present 1948 U.S. Tax Ct. LEXIS 47">*55 at the meeting accepted his assignment as such general manager by the board of directors."

On August 25, 1939, Granberg settled his differences with Brodie and was free to develop meters. Included in the contract of August 25, 1939, were provisions whereby Brodie agreed to pay Granberg royalties upon liquid meters as well as certain royalties upon prior production, and a provision whereby Granberg assigned to Brodie "all patents heretofore acquired or applied for by him and all inventions heretofore conceived or designed by him which have been reduced to the form of drawing or model and which are in his possession or now known to him relating to liquid meters and improvements thereon and devices relating to liquid meters and improvements thereon and devices relating to liquid meters and accessories thereto; * * *"

The agreement further provided:

From and after July 1, 1939 the said Granberg may design, invent, improve, manufacture, sell, distribute or otherwise deal in meters or devices of any kind or character without duty or liability to the Ralph N. Brodie Company under this agreement and may patent any such design, invention or improvement conceived 11 T.C. 704">*708 subsequent to July1948 U.S. Tax Ct. LEXIS 47">*56 1, 1939 or conceived prior to that date so far as the same is not assigned to the Corporation under the terms of this agreement.

Even while the controversy with Brodie continued, and after its settlement, Granberg continued to receive royalties from Brodie on his meter inventions. The royalties were in the following amounts:

Two months after Granberg's settlement with Brodie petitioner's board of directors adopted the following resolution: "Resolved, That the corporation proceed with the development of a meter." Pursuant to this resolution, petitioner, during 1940, was formulating plans for the production of meters, and so reported to its stockholders; and in 1941 it reported that it was "gradually making plans for the sale and marketing of meters which we have started in production * * *."

Even prior to petitioner's incorporation in 1937, Granberg had conceived five inventions, involved under the first issue of this proceeding to which he had reference in his discussions with petitioner's1948 U.S. Tax Ct. LEXIS 47">*57 probable investors. They were:79 U.S.P.Q. (BNA) 242">*245

Each of the assignments to petitioner on its face appeared to be unqualified and unconditional, and to be made for a valuable consideration. The minutes of a special meeting of petitioner's board, purportedly held on February 18, 1942, recited in part, however:

The matter of progress in the development and manufacture of meters, water separators, and similar devices under the designs, applications and patents of the1948 U.S. Tax Ct. LEXIS 47">*58 President, Mr. A. J. Granberg were discussed and thereupon the following resolution was duly and unanimously passed:

Whereas, A. J. Granberg, prior to the incorporation of Granberg Equipment Inc., has conceived, designed, and patented new meters and other devices; and

Whereas, some of the devices so conceived and designed have been patented and assigned to the Company.

Now, Therefore, in consideration of the premises and for the purpose of making a matter of record the policy and understanding of the parties with reference thereto, it is agreed that at any time after a year from the date any patent is so assigned said Granberg may demand that the Company enter into a mutually satisfactory royalty manufacturing arrangement with reference to any patent so 11 T.C. 704">*709 assigned to the Company and if within sixty days thereafter, said agreement is not accomplished said Granberg may demand reassignment of said patent and all interest of Granberg Equipment Inc., therein shall cease and terminate. It is also understood that the failure on the part of said Granberg to make demand or secure such contract or assignment within the time respectively set forth above shall not be considered as a 1948 U.S. Tax Ct. LEXIS 47">*59 waiver of such right. * * *

Granberg's understanding of the conditions was that, after petitioner had determined the desirability of the devices through construction, testing, and sales, a royalty contract would be issued to him. He recognized that petitioner would be compelled to expend substantial sums of money in creating test models, in the tests themselves, in assaying the public reaction, and in like activities. Before any royalty contract would be consummated, petitioner should be entitled to know whether the investment would be a sound one.

The minutes of a meeting of petitioner's directors, purportedly held on January 12, 1943, stated:

On motion duly made, seconded and unanimously carried it was resolved that attorney C. M. Walter be instructed to negotiate for and draw up a contract whereby the corporation may be licensed to manufacture liquid meters, bulk plant recording system, airport fuelling system, water separators, the contract to be effective as of the first of this calendar year.

There being no further business to come before the meeting it was duly adjourned.

[Signed, A. J. Granberg, R. W. Lindsay, A. S. Kozman.]

The minutes of a directors' meeting said to have1948 U.S. Tax Ct. LEXIS 47">*60 been held on June 4, 1943, revealed that Walter reported on the proposed contract with Granberg. The minutes further recited:

Mr. Granberg again stated his intention, understanding and desire that those stockholders who had furnished encouragement, assistance and so called "risk money" in the early days of the enterprise participate in the proposed contract and the applications and patent connected therewith and according to their respective "risk money" investment.

Mr. Walter stated that as presently outlined, the contract would cover the following patent and applications for patent:

79 U.S.P.Q. (BNA) 242">*246 Mr. Walter further stated that the patent and the first three of the applications listed above should not properly have been assigned to the Corporation but that all inventions applications and patents assigned to the Corporation by Mr. Granberg which were in fact owned by Mr. Granberg should1948 U.S. Tax Ct. LEXIS 47">*61 be reassigned to him and then at the time the occasion arose suitable royalty or manufacturing agreement should be entered into. He further recommended that for the purposes of the present contract now under discussion and negotiation the Board of Directors should immediately authorize the reassignment of Patent No. 2,292,63111 T.C. 704">*710 and application Nos. Serial 431,239, Serial 433,299, and Serial 447,421 (reassignment of the remainder to be accomplished at a convenient future date).

Thereupon by motion duly made, seconded and unanimously adopted it was resolved:

That Patent No. 2,292,631 and Patent Application Nos. Serial 431,239, Serial 433,299 and Serial 447,421 be reassigned by the Corporation to Mr. A. J. Granberg and that Charles O. Bruce, Patent Counsel for the Corporation, be requested by Mr. Walter to prepare suitable instruments of assignment and when so prepared that the same be executed by A. J. Granberg, President of the Corporation and Robert W. Lindsay secretary thereof, and that he attach the corporate seal, on behalf of said Corporation and deliver to Mr. Granberg.

The minutes of a directors' and stockholders' meeting, purportedly held on August 5, 1943, stated 1948 U.S. Tax Ct. LEXIS 47">*62 that Walter produced a proposed draft of an agreement between Granberg and his assigns and petitioner, which was approved, and was to be executed if approved by C. O. Bruce, petitioner's and Granberg's patent counsel. It was stated therein, inter alia:

The Second Party [Granberg] has also conceived, designed, patented and made applications for patent upon certain meters, water separators and other devices, many of which said patents and the applications therefor have been conditionally assigned to the First Party with the understanding that the Second Party should be compensated in a manner to be agreed upon after the practicability, marketability, costs of manufacture and general commercial possibilities have been established.

The draft agreement included the five inventions, heretofore mentioned, as well as four other inventions, covering, in the main, rotary-type meters. It provided for aggregate annual minimum royalties of $ 30,000, with a royalty of 8 per cent on the gross selling price of each invention. The 8 per cent royalty was to be applied against $ 10,000 of the minimum royalty, but the remaining $ 20,000 of the minimum royalty was to be in addition to the 8 per 1948 U.S. Tax Ct. LEXIS 47">*63 cent royalty.

At the time the draft was approved by the directors and stockholders, it was Granberg's intention that any royalties he might receive thereunder would be divided with the seven other stockholders who were present at the meeting, and the seven other stockholders were aware of that intention.

Bruce disapproved of the draft and suggested numerous changes. He suggested that four inventions be eliminated from the final draft for the reason that petitioner already had the right to manufacture, use, and sell three of the inventions by virtue of assignments from Thomas A. McCoy, who was the sole inventor of one of the inventions and was a coinventor with Granberg of two others. The fourth invention to be excluded was an improvement on a pump invention and was covered by Granberg's original assignment of pump patents and improvements thereon to the petitioner in return for stock. Bruce redrafted the licensing agreement in the form in which it was finally executed.

11 T.C. 704">*711 The agreement as so redrafted was executed on December 30, 1943, covering the five patents previously assigned by Granberg to petitioner. It provided for a royalty of 8 per cent of the list price of the1948 U.S. Tax Ct. LEXIS 47">*64 devices and aggregate minimum annual royalties of $ 35,000, to be effective as of January 1, 1943. Granberg considered this plan reasonable.

Contemporaneously therewith, petitioner reassigned four of the patents to Granberg, the water separator being the one not reassigned.

On the same date Granberg assigned interests in the five inventions to the following stockholders in the following percentages:

79 U.S.P.Q. (BNA) 242">*247 These percentages were substantially identical with the stock ownership of the eight persons in petitioner on December 31, 1941. This date was selected as a cut-off date in determining who the original "risk-money" investors were, because Granberg considered those persons to be the original investors who promised to finance petitioner. Lindsay was the last one to pay up his subscription, and did so by December 31, 1941, and, therefore, that date was selected as the cut-off date.

At the time of the discussions which finally culminated in the execution of the various documents on December 30, 1943, 1948 U.S. Tax Ct. LEXIS 47">*65 petitioner and Granberg were kept advised of the tax consequences, and the arrangements as finally made were for the primary purpose of saving taxes for the petitioner corporation.

On its Federal income tax returns for the years 1938 to 1943 petitioner reported gross sales and income in the following amounts:

Petitioner's equity invested capital as of the beginning of 1942, as reported on its tax returns, was $ 55,097.

The aggregate list price of all goods sold by petitioner and manufactured under the five patents covered by the agreement executed on December 30, 1943, was in amounts as follows for each of the years 1943 through 1947:

11 T.C. 704">*712 Petitioner's early intention was to manufacture devices under each of the five inventions, and it had made plans for plant expansion and retooling. But by 1943, due to lack of priorities, among other reasons, it became impossible to carry out this program1948 U.S. Tax Ct. LEXIS 47">*66 and substantial production could not be undertaken.

In the statement attached to the notice of deficiency, respondent recited the following reasons for disallowing the claimed royalty deduction of $ 35,000:

(1) You had an equity or property right in the patent or patent applications for which the royalties were claimed.

(2) The assignment by you of property and reacquisition by agreement to pay royalties was part of a general plan without adequate consideration and without business purpose but solely for the purpose of claiming a deduction for royalties.

(3) The amount of the royalties was excessive, out of proportion and wholly incommensurate with the value received by you.

(4) The amount which was accrued and payable to your only stockholders was really dividends in the guise of royalties.

The payment of the so-called royalties of $ 35,000 claimed as a deduction was tantamount to a distribution of a dividend by petitioner to the named stockholders.

In addition to his salary for the year 1942, Granberg was entitled to a bonus based on petitioner's profits for 1942. On or about February 13, 1943, the amount of the bonus due Granberg for the year 1942 was determined to be $ 1,279.02, 1948 U.S. Tax Ct. LEXIS 47">*67 and this amount was credited to Granberg's account on petitioner's books.

The entry on petitioner's books, dated February 13, 1943, was as follows:

79 U.S.P.Q. (BNA) 242">*248 The bonus was paid Granberg by petitioner's check dated October 26, 1944.

11 T.C. 704">*713 No part of the bonus was taken into income for Federal tax purposes for the years 1942 and 1943 by Granberg or his wife. He and his wife prepared their returns on a cash-calendar year basis.

Petitioner's balance sheets as of January 1, 1943, and February 8, 1943, show cash in bank in the sums of $ 40,914.35 and $ 45,435, respectively. The balance sheets show further total current assets in the sums of $ 94,689.27 and $ 107,847.46, respectively. They also show current liabilities1948 U.S. Tax Ct. LEXIS 47">*68 in the sums of $ 48,818.20 and $ 45,009.96, respectively.

During the years 1938 to 1943, inclusive, petitioner capitalized patent costs, including amounts attributable to the five inventions heretofore discussed, totaling $ 3,556.47. The expenditures on the five inventions aggregated $ 1,087.45, leaving a balance of $ 2,469.02 as of the end of 1943. Exclusive of expenditures on the five inventions, costs in the sum of $ 297.75 were capitalized in 1942, and costs in the sum of 20 cents were capitalized in 1943.

OPINION.

When the course of dealings between Granberg and petitioner relating to the first issue is subjected to the scrutiny which such transactions require, cf. Twin City Tile & Marble Co. v. Commissioner (CCA-8), 32 Fed. (2d) 229, and Gould Merserau Co., 21 B. T. A. 1316, it is at once apparent that form and substance are not one and the same. And substance must control. Limericks, Inc. v. Commissioner (CCA-5), 165 Fed. (2d) 483. "In tax matters the realities of a transaction, not artificialities, are given effect." Nordling v. Commissioner (CCA-9), 166 Fed. (2d) 703.1948 U.S. Tax Ct. LEXIS 47">*69

Although the parties argue whether petitioner owned equitably or otherwise the five inventions from the outset, or at least when they were later absolutely assigned to it, we need not resolve that question. We believe that the first issue raised in this proceeding can be decided on the narrower ground, also urged by respondent, of whether the retroactive payment of royalties for the year 1943 by petitioner to Granberg and other of its stockholders was an ordinary and necessary business expense. Respondent contends that the payment was not in reality the payment of royalties, but, to the contrary, was in reality the distribution of a dividend. We agree with respondent that it was not in reality the payment of an ordinary and necessary business expense, and that the claimed deduction was nothing more than an attempt to disguise a dividend distribution. Accordingly, it is not deductible for tax purposes. ¹

1948 U.S. Tax Ct. LEXIS 47">*70 11 T.C. 704">*714 The picture petitioner seeks to create is not convincing, to say the least. From the time of petitioner's inception until the end of the tax years involved, all of the events point to a lack of arm's length dealings between Granberg and petitioner. Motives other than the necessities of the business dictated the form of transactions which would not have been entered upon by unrelated persons. Wilhelmina Dauth, 42 B. T. A. 1181. Hence, it is not surprising that minutes of alleged meetings speak of events occurring after the dates upon which the meetings were supposed to have been held. It is not surprising that when petitioner's and Granberg's attorney, who incorporated the business and who was apparently quite familiar with all of its activities and operations, submitted his draft agreement in August 1943, there were included in it inventions that Granberg did not invent and others that even petitioner concedes had been unconditionally assigned to it prior thereto. It is not surprising that documentary evidence and oral testimony do not coincide.

Granberg himself testified that a royalty agreement was not to be executed until petitioner1948 U.S. Tax Ct. LEXIS 47">*71 had reasonable opportunity to determine the marketability of the five inventions and the soundness of any investment in them. Yet, as of the close of 1943, petitioner and Granberg must have fully realized that this time had not yet arrived. Sales of products under these inventions were exceedingly small. Plans for augmenting production had to be abandoned, and there was no likelihood that at any reasonable future time significant production could be undertaken. In fact, only one of the inventions had then been patented, and application for another had not even been made until the summer of 1943. Petitioner has not shown that it could not have obtained the license agreement, if one were even necessary, without making the minimum royalty retroactive. It is inconceivable why at the end of 1943 petitioner would encumber itself under such agreement at all, when opportunity to exploit the inventions during the war period had almost entirely faded.

The minutes of the corporate meetings can be viewed only in the setting of all of the dealings between the parties. Even if such meetings were held and the business transacted was accurately reported in the minutes, they would serve no 1948 U.S. Tax Ct. LEXIS 47">*72 more than to lend weight to the lack 79 U.S.P.Q. (BNA) 242">*249 of arm's length negotiations and expose the total lack of business reality in the transactions relating to the retroactive payment of the so-called royalties.

Not only the steps leading to the execution of the agreement, but the agreement itself, demonstrates that all were incidents of an artificial maneuver to avoid taxes. Few provisions protecting petitioner's interests were included, whereas an inordinately high minimum royalty was established. On its face it appears to be an agreement that 11 T.C. 704">*715 parties dealing at arm's length would not have formulated. "Surely, [the royalty] is not an ordinary and necessary business expense of carrying on petitioner's trade or business. Except for the close relationship of the parties, it seems hardly conceivable that such an agreement would ever have been entered into." Eskimo Pie Corporation, 4 T.C. 669, 677; affd. (CCA-3), 153 Fed. (2d) 301.

It is significant that the so-called "royalty" was payable to the stockholders in almost the same percentage that their stockholdings bore to petitioner's total stock as of the end of 1941. W. N. Thornburgh Mfg. Co., 17 B. T. A. 29.1948 U.S. Tax Ct. LEXIS 47">*73 There were variations as of the 1943 stockholdings, but that would not be sufficient to defeat the characterization of the payment as dividends; nor also would the absence of a formal declaration of dividends. Joseph Goodnow & Co., 5 B. T. A. 1154, Forcum-James Co., 7 T.C. 1195.

The only available explanation for such course of dealings as here evidenced is that the purpose of saving taxes -- particularly petitioner's excess profits taxes -- led the interested parties to embark on the unrealistic scheme followed. See W. N. Thornburgh Mfg. Co., supra.

What we said in Ingle Coal Corporation, 10 T.C. 1199, is pertinent here:

No authority is needed for the statement that the mere designation of the payments as royalties does not legally characterize them as such. Nor does the fact that the written obligation of the petitioner might, at least under some circumstances, have compelled their payment by the petitioner. Interstate Transit Lines, 44 B. T. A. 957; affd., 130 Fed. (2d) 136; affd., 319 U.S. 590">319 U.S. 590.1948 U.S. Tax Ct. LEXIS 47">*74 The question is whether, in fact, the payment was a deductible expense, as a royalty or otherwise, under the controlling statute. The answer to this question is, of course, purely factual.

In our opinion, the contested payments were neither royalties nor ordinary and necessary expenses, and therefore, they are not deductible.

The series of transactions between the * * * corporations and the stockholders * * * were obviously not at arm's length. * * * The series of transactions constituted integrated steps in a single plan and must be so considered for tax purposes, which resulted in an unnecessary "obligation" upon the part of petitioner to pay the so-called overriding "royalty." Commissioner v. Ashland Oil & Refining Co., 99 Fed. (2d) 588; certiorari denied, 306 U.S. 661">306 U.S. 661; Diescher v. Commissioner, 110 Fed. (2d) 90; certiorari denied, 310 U.S. 650">310 U.S. 650; Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179">315 U.S. 179; Heller v. Commissioner, 147 Fed. (2d) 376; certiorari denied, 325 U.S. 868">325 U.S. 868;1948 U.S. Tax Ct. LEXIS 47">*75 Koppers Coal Co., 6 T.C. 1209. We think, under the circumstances, the payment of this * * * overriding "royalty" was a distribution of corporate profits to the stockholders receiving the same and therefore was not a deductible expense, either as a "royalty" or otherwise. See also Atlantic Monthly Co., 5 T.C. 1025.

The cases cited to us by petitioner, of which Webb Press Co., Ltd., 3 B. T. A. 247, and Buffalo Eagle Mines, Inc., 37 B. T. A. 843, are examples, are clearly distinguishable in that in all of those cases bona fide arrangements were involved.

11 T.C. 704">*716 The tax effect of these arrangements for years subsequent to 1943 is not before us, and we express no opinion with reference to that matter.

On this issue, respondent's determination is sustained.

The second issue raises the question of whether petitioner is precluded from deducting in 1942 a bonus payable to Granberg, which it entered on its books in February 1943 under the terms of section 24 (c) of the Internal Revenue Code. ²

1948 U.S. Tax Ct. LEXIS 47">*76 "It is well established that all three conditions set forth in section 24 (c) must coexist in order to make that section 79 U.S.P.Q. (BNA) 242">*250 operative." Akron Welding & Spring Co., 10 T.C. 715, 720.

Petitioner concedes the applicability of clauses 2 and 3, but contends that the conditions set out in clause 1 are not satisfied, and the deduction should, consequently, be allowed. Petitioner argues that the bonus was constructively received by Granberg in February 1943, when it was credited to his account on the books of petitioner, that it was therefore constructively paid by petitioner within two and one-half months after the close of 1942, and that therefore there was an expense "paid" within the meaning of clause (1) of section 24 (c).

We disagree with each step in petitioner's argument.

In order to prove that the bonus was constructively received by Granberg in February 1943, it is necessary that petitioner prove the amount credited to his account was unqualifiedly subject to his demand without restriction as to the time or manner of payment. See John A. Brander, 3 B. T. A. 231; Regulations 111, sec. 29.42-2. Granberg and his wife did1948 U.S. Tax Ct. LEXIS 47">*77 not report the bonus as income received by them in 1943. Although he was president, general manager, and principal stockholder of petitioner, and was petitioner's principal witness at the hearing herein, he was not asked to testify on this issue. Petitioner's secretary-treasurer testified that he knew of no restriction upon Granberg's right to withdraw the amount credited to him, but it is apparent from other testimony given by him that his knowledge concerning the granting of bonuses by petitioner was hazy and inconclusive. This being the state of the record, we are not satisfied that Granberg constructively received the bonus in February 1943.

11 T.C. 704">*717 Even though there was constructive receipt of the bonus by Granberg in 1943, that fact in and of itself does not compel a conclusion that there was constructive payment by petitioner. See Cox Motor Sales Co., 42 B. T. A. 192; P. G. Lake, Inc., 4 T.C. 1; affd., 148 Fed. (2d) 898.

And, finally, even though we agreed with petitioner that the crediting of the bonus to Granberg's account in February 1943 constituted constructive receipt by Granberg, 1948 U.S. Tax Ct. LEXIS 47">*78 and constructive payment by the petitioner corporation, we would be unable to conclude that there had been a payment by petitioner within the meaning of section 24 (c) (1) of the Internal Revenue Code. The same situation was presented and the same contention was made in P. G. Lake, Inc., supra. That case has not been overruled and is still valid authority for the proposition that "constructive payment" is not a payment within the meaning of section 24 (c) (1) of the code.

The cases of Akron Welding & Spring Co., supra;Miller, Inc. v. Commissioner, 164 Fed. (2d) 269; Michael Flynn Mfg. Co., 3 T.C. 932; and Ohio Battery & Ignition Co., 5 T.C. 283, are all distinguishable from and inapposite to the instant case in that in those cases (in so far as they were concerned with section 24 (c) (1), there were not "constructive payments" arising from credits on the books of the corporations, but, to the contrary, there were actual payments made by means of checks or notes which were worth their face amount when executed and delivered by1948 U.S. Tax Ct. LEXIS 47">*79 the corporation.

On this issue we also decide in favor of respondent.

The question as to petitioner's basis of certain patents can be resolved by using the figures conceded by the parties and stated in our findings of fact.

Decision will be entered under Rule 50.