Kerrigan Iron Works, Inc.
v.
Comm'r of Internal Revenue

Tax Court of the United States.Sep 28, 1951
17 T.C. 566 (U.S.T.C. 1951)
17 T.C. 566T.C.

Docket No. 19767.

1951-09-28

KERRIGAN IRON WORKS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cecil Sims, Esq., W. W. Berry, Esq., and Hilary H. Osborn, Esq., for the petitioner. S. Earl Heilman, Esq., for the respondent.


The amounts petitioner is entitled to deduct as ordinary and necessary business expenses in the taxable years 1941, 1942, and 1943 are determined with respect to the following: (1) compensation paid to its president, Philip Kerrigan, Jr.; (2) rental of trucks; (3) rental of Northside Plant and equipment; and (4) compensation paid to Regina Kerrigan. The deduction of the amount paid in 1943 to McCarver in connection with petitioner's labor difficulties is disallowed for failure of proof. Cecil Sims, Esq., W. W. Berry, Esq., and Hilary H. Osborn, Esq., for the petitioner. S. Earl Heilman, Esq., for the respondent.

This proceeding involves deficiencies in income, declared value excess-profits and excess profits taxes for the years and in amounts as follows:

+---------------------------------------------+ ¦ ¦ ¦Declared value¦ ¦ +----+----------+--------------+--------------¦ ¦Year¦Income tax¦excess-profits¦Excess-profits¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦tax ¦tax ¦ +----+----------+--------------+--------------¦ ¦1941¦$1,867.12 ¦$1,964.54 ¦$5,042.21 ¦ +----+----------+--------------+--------------¦ ¦1942¦ ¦569.11 ¦14,178.01 ¦ +----+----------+--------------+--------------¦ ¦1943¦ ¦2,795.33 ¦3,871.09 ¦ +---------------------------------------------+

By amended answer respondent requests an increase in deficiency in income tax for 1941, if any, which may result from the adjustment of petitioner's excess profits tax for that year in a recomputation under Rule 50 in accordance with our decision.

The issues are:

(1) Whether the respondent erred in disallowing in part the amounts claimed by petitioner as deductions for salary paid to Philip Kerrigan, Jr., in the respective taxable years 1941, 1942, and 1943.

(2) Whether the respondent erred in disallowing in part the amounts claimed by petitioner as deductions for the respective years 1942 and 1943 as rental for the use of certain trucks owned by Philip Kerrigan, Jr.

(3) Whether the respondent erred in disallowing the amount of $2,282.48 of the amount of $2,750 claimed by petitioner in 1943, as rent paid to Philip Kerrigan, Jr., for the use of the so-called Northside Plant and certain equipment therein.

(4) Whether the respondent erred in disallowing $2,600 of the amount of $3,400 claimed by petitioner as a deduction for salary paid to Regina Kerrigan for 8 months of 1943.

(5) Whether the respondent erred in disallowing the amount of $500 which petitioner claimed as a deduction in 1943 as ‘Labor Relations Expense.‘

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

FINDINGS OF FACT.

Petitioner is a Tennessee corporation, organized in May 1929 with an original invested capital of $1,700. During the taxable periods involved its authorized and issued capital stock consisted of 150 shares of no-par common stock, all of which shares were owned by Philip Kerrigan, Jr.

Prior to 1941 petitioner engaged principally in the business of manufacturing fine hand-wrought iron work, ornamental iron such as entrances to estates, balconies, fine hardware and miscellaneous items of an ornamental kind generally used by the building and construction industry. In 1941 petitioner began to engage in war work, and during that year manufactured truck parts, tank towbars, oil settling tanks, ammunition boxes and cases, and prefabricated high-pressure pipe lines for ships, among other iron and steel products.

In 1942 the principal items which petitioner manufactured were landing mats for airfields or air strips, truck cabs, many miscellaneous parts for trucks, including radiator grills, siren guards, bumpers, motor supports, transmission housing supports and welding screens.

During the year 1963 the principal items which petitioner manufactured were T-6-V pontoons for the Bureau of Yards and Docks, locomotive cabs and ash pans, and cabs for large Army trucks. During the taxable years involved the great bulk of petitioner's production was in connection with the war effort.

During the taxable years petitioner's officers were Philip Kerrigan, Jr., president and treasurer, and Regina Kerrigan, secretary. Its board of directors consisted of Philip Kerrigan, Jr., his brother, Frank P. Kerrigan, and his sister Regina Kerrigan. Regina Kerrigan was 20 years of age in the year 1943.

During the taxable period involved Philip Kerrigan, Jr., was general manager and sole executive. He devoted 12 to 18 hours a day, except Sundays, to the business. He attended to all of the sales, contacting buyers, writing contracts and overseeing the fulfillment of the contracts. He attended to the procurement of materials, the hiring of labor, the engineering, the cost estimating and the blueprints. He handled all the collections and arranged all the petitioner's financing. He was responsible for the procurement of petitioner's business and its production, although he had a superintendent at each plant who worked with the men and expedited production.

The following schedule shows the amount of net sales, the net income after Federal income and excess-profits taxes, the salary of the president, and the percentage of the salary to net sales, for the years 1938 to 1943, inclusive:

+--------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦Percentage ¦ +----+------------+-----------+-----------+--------------¦ ¦ ¦ ¦Net income ¦President's¦of president's¦ +----+------------+-----------+-----------+--------------¦ ¦Year¦Net sales ¦after taxes¦salary ¦salary to ¦ +----+------------+-----------+-----------+--------------¦ ¦ ¦ ¦ ¦ ¦net sales ¦ +----+------------+-----------+-----------+--------------¦ ¦1938¦$62,692.80 ¦$2,668.17 ¦$2,350 ¦3.7484 ¦ +----+------------+-----------+-----------+--------------¦ ¦1939¦120,484.23 ¦182.98 ¦4,800 ¦3.9839 ¦ +----+------------+-----------+-----------+--------------¦ ¦1940¦127.575.36 ¦2,606.30 ¦9,500 ¦7.4466 ¦ +----+------------+-----------+-----------+--------------¦ ¦1941¦262,824.22 ¦11,577.25 ¦25,000 ¦9.5121 ¦ +----+------------+-----------+-----------+--------------¦ ¦1942¦374,854.42 ¦9,613.99 ¦25,000 ¦6.6693 ¦ +----+------------+-----------+-----------+--------------¦ ¦1943¦1,660,205.77¦142,828.48 ¦25,000 ¦1.5058 ¦ +--------------------------------------------------------+

The number of petitioner's employees and their classification for the years 1941, 1942, and 1943 were as follows:

+--------------------------------------------+ ¦ ¦ ¦Office ¦ ¦ ¦ +----+---------+---------+---------+---------¦ ¦ ¦Number ¦ ¦ ¦ ¦ ¦ +----+---------+---------+---------+---------¦ ¦Year¦of ¦ ¦Engineers¦Draftsmen¦ +----+---------+---------+---------+---------¦ ¦ ¦employees¦ ¦ ¦ ¦ ¦ +----+---------+---+-----+---------+---------¦ ¦ ¦ ¦Men¦Women¦ ¦ ¦ +----+---------+---+-----+---------+---------¦ ¦1941¦119 ¦2 ¦2 ¦1 ¦1 ¦ +----+---------+---+-----+---------+---------¦ ¦1942¦157 ¦2 ¦3 ¦1 ¦2 ¦ +----+---------+---+-----+---------+---------¦ ¦1943¦222 ¦5 ¦3 ¦1 ¦2 ¦ +--------------------------------------------+

Two shifts were working from September 1942 through August 1945.

During the taxable years 1941, 1942, and 1943 petitioner paid no dividends.

The amounts paid as salary to petitioner's president, Philip Kerrigan, Jr., and claimed as deductions, and the amounts disallowed by the respondent in the taxable years 1941, 1942, and 1943 are as follows:

+--------------------------------+ ¦ ¦Amounts paid¦Amounts ¦ +----+------------+--------------¦ ¦Year¦and ¦disallowed by ¦ +----+------------+--------------¦ ¦ ¦claimed as ¦respondent ¦ +----+------------+--------------¦ ¦ ¦deductions ¦ ¦ +----+------------+--------------¦ ¦1941¦$25,000 ¦$15,000 ¦ +----+------------+--------------¦ ¦1942¦$25,000 ¦12,500 ¦ +----+------------+--------------¦ ¦1943¦25,000 ¦10,000 ¦ +--------------------------------+

A reasonable salary for the services which Philip Kerrigan, Jr., rendered to petitioner as its president and treasurer in the respective taxable years 1941, 1942, and 1943 is as follows:

+----------------+ ¦Year ¦Amount ¦ +------+---------¦ ¦1941 ¦$15,000 ¦ +------+---------¦ ¦1942 ¦20,000 ¦ +------+---------¦ ¦1943 ¦25,000 ¦ +----------------+

During the year 1942 Philip Kerrigan, Jr., owned a 1/2-ton Chevrolet truck and a 1 1/2-ton G.M.C. truck and stakebody trailer. The Chevrolet truck was a used truck purchased in April 1941 at a cost of $849.16. The G.M.C. truck was purchased in the early part of 1942 at a cost of about $1,150. It was unsatisfactory, and was sold at some undisclosed date in 1942 for $500. Kerrigan leased these two trucks to petitioner. The expenses paid by Kerrigan for maintenance and operation, including wages of drivers during the year, amounted to $3,152.26. Petitioner paid Kerrigan for the use of such trucks, during 1942, the sum of $5,590.91, which amount it claimed as a deduction for that year. In determining the deficiency the respondent allowed petitioner a deduction in connection with these trucks in the sum of $1,390.

During the year 1943 Philip Kerrigan, Jr., owned and leased to petitioner the aforementioned 1/2-ton truck, a new 1942 1 1/2-ton G.M.C. truck, which he had purchased in April 1943 at a cost of $1,496.97, and a 1 1/2-ton 1939 used Diamond T truck, which he had purchased in April 1943 at a cost of $1,050. During the year 1943 Kerrigan incurred expenses in maintaining and operating the three trucks, including wages of the drivers, in the amount of $3,357.15. Petitioner paid Kerrigan for the use of these trucks in the year 1943 the sum of $8,906.27, which amount petitioner claimed as a deduction on its return for that year. The respondent allowed the sum of $3,475.

Said trucks leased to petitioner were at the sole disposal of petitioner during the period they were leased. There was no written lease between petitioner and Kerrigan and no fixed amount of rent per day, week, month or year. The amount of rent which petitioner paid Kerrigan was arrived at on the basis of what he thought was fair and reasonable from information he had, such as U-Drive-It companies and express and freight charges.

In the years 1942 and 1943 Philip Kerrigan, Jr., on his individual return, claimed and was allowed deductions, as expenses incurred in connection with such trucks, in the respective amounts of $2,323.46 and $3,357.15. It is not disclosed whether or not he claimed any depreciation deduction with respect to such trucks in either of those years.

A proper allowance or rental for the use of said trucks by petitioner was the sum of $4,928.46 for the taxable year 1942 and the sum of $6,093.16 for the taxable year 1943.

On November 13, 1943, Philip Kerrigan, Jr., purchased certain real estate, machinery, and equipment in Nashville, Tennessee, at a cost of $57,602.50. The real estate was valued at $46,000 and the remainder of the purchase price was paid for cranes and other machinery and equipment. Petitioner had a certificate of necessity for amortization for certain pieces of machinery in the plant but not on the plant.

Philip Kerrigan, Jr., leased the plant and equipment to petitioner for a term of 1 year from December 1, 1943, for a monthly rental of $2,750. The lease further provided that petitioner was to pay insurance, taxes and assessments. Lessee was given permission to erect additional buildings or improvements which, if constructed, were to immediately become the property of the lessor. The property was located at Eleventh and Herman Streets and was referred to as petitioner's ‘Northside Plant.‘

Prior to the leasing of the Northside Plant petitioner was operating two plants in Nashville, Tennessee. Philip Kerrigan, Jr., purchased the Northside Plant solely for the purpose of enabling petitioner to manufacture pontoons for the Navy, which the Navy urged petitioner to produce.

In order for petitioner to obtain a contract to produce the pontoons it was necessary that it acquire another plant. Kerrigan acquired the plant with the idea that it would be used during the war to manufacture items for defense, and after the war petitioner would have no need for it.

The Northside Plant was purchased by Philip Kerrigan, Jr., personally, rather than by petitioner, because it was not desired to burden petitioner's financial statement with such additional liability, and petitioner was advised that to do so might jeopardize its credit; also petitioner was advised by its bank that it would be better for this plant to be purchased by Kerrigan individually and leased to petitioner.

At the beginning of 1943 petitioner had bonds, notes, and mortgages payable with original maturity of less than 1 year in the amount of $87,400. At the date of the acquisition of the plant by Kerrigan, on November 13, 1943, petitioner had cash of approximately $618,000. At the end of the year it had no bonds, notes or mortgages payable; it had cash of $318,135.98, and tax anticipation certificates of $300,000. It had accrued taxes of $593,528.21 set up as a liability. Its earned surplus and undivided profits were $206,712.48.

Philip Kerrigan, Jr., borrowed $25,000 of the purchase price of the Northside Plant from a local bank and the remainder of the purchase price was obtained from Kerrigan's life savings. As security for its loan the bank insisted that the rental to be paid by petitioner be fixed at the sum of $2,750 per month and that the lease be assigned to the bank.

Prior to the purchase of the Northside Plant Philip Kerrigan, Jr., attempted to lease it from its then owner, who offered to lease it for a monthly rental of $5,000, but Kerrigan refused the offer.

Petitioner paid Philip Kerrigan, Jr., as rental for the Northside Plant and equipment for the month of December 1943, the sum of $2,750, which amount it claimed as a deduction on its 1943 return. In determining the deficiency, the respondent disallowed the sum of $2,282.48.

A reasonable rental for the Northside Plant and equipment for the month of December 1943 is the sum of $1,500.

Regina Kerrigan (nor Mrs. D. G. Everett), sister of Philip Kerrigan, Jr., was elected secretary of petitioner on December 16, 1939. At that time she was 16 years of age and in school. She attended meetings of the directors, signed corporate documents and minutes of the meetings, which were dictated by Philip Kerrigan, Jr., and typed by a typist. After Regina Kerrigan was graduated from high school she was employed in the mailing, shipping and receiving department of the Loveman Department Store. She served as secretary of petitioner without pay until the Spring of 1943.

At a meeting of petitioner's board of directors held on July 17, 1943, a resolution was adopted fixing the salary of the secretary at $425 per month.

At this meeting it was stated that ‘Mrs. D. G. Everett had been functioning without any particular defined hours or relationship as to time, up until the last of April, 1943, but that beginning with May, 1943, she was devoting her entire time and services to the corporation; therefore, the Chairman announced that her salary of $425.00 per month should commence as of the month of May, 1943 and thereafter her full salary should be paid. The Chair further stated that, anticipating this meeting, the bookkeeping personnel had been instructed to pay her $425.00 per month, commencing as of May, 1943.‘ Whereupon, upon motion duly made, seconded and unanimously adopted, it was ‘RESOLVED, that the action of the President as to putting the Secretary upon a salary of $425.00 per month, commencing as of the month of May, 1943, he hereby ratified and confirmed.‘

Petitioner was having trouble with its employees at its River Plant, and Philip Kerrigan, Jr., thought it would be advantageous to have someone by the name of Kerrigan at the office there. Regina Kerrigan was placed in charge of the office and, in addition to keeping a watchful eye on the employees, worked on the payroll, made out shipping and receiving papers, and did clerical work such as typing and keeping records. The morale of the employees at the River Plant improved after Regina Kerrigan was employed at the plant.

During the year 1943 petitioner paid its other female office employees who had several years' experience in stenographic and clerical work $45 or $50 per week.

On its 1943 return petitioner claimed the sum of $3,400 as a deduction for salary paid to Regina Kerrigan for 8 months of 1943. The respondent disallowed $2,600 of the amount claimed.

A reasonable salary for the services rendered to petitioner by Regina Kerrigan for the 8 months of 1943 is $1,600.

In 1943 petitioner was having labor difficulties. Philip Kerrigan, Jr., was introduced to a Mr. McCarver, a public relations man, who represented himself as having influence with certain union officials. On behalf of petitioner, Kerrigan paid McCarver a fee of $500. Kerrigan did not know what McCarver did with the money. Thereupon petitioner's labor difficulties ceased. About five or six weeks later the labor situation ‘tightened up‘ and McCarver requested more money, which Kerrigan refused, and he terminated the relationship.

Petitioner, on its 1943 return, claimed the amount of $500 paid to McCarver as an ordinary and necessary business expense. The respondent, in determining the contested deficiency, disallowed the entire amount as not representing an allowable deduction.

OPINION.

LEECH, Judge:

Our first question relates to the reasonableness of the salary paid by petitioner to its president, Philip Kerrigan, Jr., in the taxable years 1941, 1942, and 1943. In each of those years petitioner paid Kerrigan the sum of $25,000, which amount it claimed as a deduction. In determining the deficiency the respondent disallowed $15,000 in 1941, $12,500 in 1942 and $10,000 in 1943.

What constitutes a reasonable allowance for salary expense is a question of fact under the circumstances of each particular case. Gem Jewelry Co. v. Commissioner, 165 F.2d 991, certiorari denied 334 U.S. 846. Where the challenged payment is made to an officer who is the sole owner of the capital stock of the corporation, as in the instant case, the transaction is subjected to rigorous scrutiny.

The record establishes that Kerrigan was petitioner's sole executive. He was responsible for the entire management of the business. He had charge of the sales, the engineering and general supervision of the entire production, including the procurement of materials and the hiring of labor. In addition, he had the responsibility of obtaining the necessary finances and the collection of accounts receivable. Although the rapid growth of petitioner's business in the taxable years was due largely to the impetus of defense contracts, nevertheless Kerrigan's industry, ingenuity and ability to produce efficiently at low cost were principal factors in the procurement for petitioner of the large volume of war contracts. Kerrigan testified that he devoted 12 to 18 hours per day to the business. Commencing in September 1942, petitioner operated two shifts per day. It also appears that the articles which petitioner produced for the war effort were different from those produced in prewar years. Such fundamental conversion necessarily imposed new burdens upon petitioner's sole executive. While added responsibilities warrant increased compensation, the amount must not be disproportionate to the value of the services rendered.

In support of petitioner's contention that the amount of $25,000 paid to Kerrigan in the taxable years involved should be allowed, it is argued that the salary was fixed by the board of directors; that the War Price Adjustment Board, in determining petitioner's excessive profits in renegotiation proceedings, did not disturb the salary paid to its president; and that we are obligated to accept the opinion testimony of petitioner's expert witnesses, since the respondent offered no witnesses in support of his position.

Ordinarily we hesitate to disagree with the judgment of directors where exercised in an arm's-length transaction. But the fact that the salary was fixed by the board of directors is not persuasive under the circumstances existing here. Philip Kerrigan, Jr., owned all of petitioner's capital stock except two qualifying shares. In addition to Kerrigan, petitioner's board of directors consisted of his brother Frank and his sister Regina. It also appears that during the taxable years involved Regina Kerrigan was a minor and not qualified to act as a director. The corporate law of the State of Tennessee provides that the business of a corporation is to be managed by a board of directors of not less than three directors, all of whom shall be full age. The presence of Philip Kerrigan, Jr., was therefore necessary to constitute a quorum and his vote was required to adopt a resolution. The courts of Tennessee have held that a director may not vote to fix his own salary. Harris v. Lemming-Harris Agricultural Works, 43 S.W. 869. Under these circumstances, the action of petitioner's board of directors in fixing Kerrigan's salary is without significance.

Williams Tennessee Code (1934), vol. 3, Sec. 3742.

Nevertheless, Kerrigan is entitled to receive a reasonable compensation for the services he rendered to petitioner.

The fact that the War Contracts Price Adjustment Board, in its proceedings to renegotiate petitioner's excessive profits, did not adjust the salary petitioner paid Kerrigan, while of some evidentiary value, is not binding upon this Court. Clearly it was not the intent of Congress that a taxpayer who was subjected to renegotiation should be given any preferred treatment in the administration of the revenue laws.

Nor do we find any merit in petitioner's further contention that we are obligated to accept the opinion of petitioner's expert witnesses as to the reasonableness of the salary paid to Kerrigan, in the absence of such testimony being offered by the respondent. We know of no such rule. Oswald Co. v. Commissioner, 185 F.2d 6, certiorari denied 340 U.S. 953.

In the recent case of Sartor v. Arkansas Gas Corp., 321 U.S. 620, the Supreme Court, at page 627, said:

In considering the testimony of expert witnesses as to the value of gas leases, this Court through Mr. Justice Cardozo has said: ‘If they have any probative effect, it is that of expressions of opinion by men familiar with the gas business and its opportunities for profit. But plainly opinions thus offered, even if entitled to some weight, have no such conclusive force that there is error in law in refusing to follow them. This is true of opinion evidence generally, whether addressed to a jury or to a judge or to a statutory board.‘ (Citing cases)

Petitioner offered the testimony of three experts, who expressed the opinion that the salary paid to petitioner's executive in the taxable years was reasonable. W. J. Diehl is chairman of the board of the Third National Bank of Nashville, Tennessee. It was through this bank that Kerrigan financed the operations of petitioner in the taxable years involved. When asked the question, ‘What was your judgment as to the reasonableness or the unreasonableness of Mr. Kerrigan's salary?‘ he replied, ‘We accepted it as being reasonable.‘

C. H. Maltby, a senior vice-president of the Lincoln National Bank of Syracuse, New York, became connected with the Government in October, 1942. In June 1944 he became chairman of the Price Adjustment Board for the South Atlantic Division, Corps of Engineers, at Atlanta. The petitioner was then under investigation by that office with respect to renegotiation for 1943, an analysis having already been made for the year 1942. His opinion as to the reasonableness of Kerrigan's salary was based on the testimony which Kerrigan gave at the hearing of this proceeding. It does not appear that Maltby had ever visited the plant of petitioner or had any personal contact with Kerrigan during the taxable years.

George P. Rice, a civil engineer, was commissioned as an officer in the Corps of Engineers, A.U.S., and was assigned as Chief of the Engineering Branch of the Construction Division of the Southwest Pacific area. In August 1944 Rice became a negotiator with the Price Adjustment Board for the South Atlantic Division, under Maltby. His testimony was taken by deposition and his opinion as to the reasonableness of Kerrigan's salary was in answer to a hypothetical question.

Upon the basis of the entire record, giving due consideration to the fact that Kerrigan was the sole owner of petitioner, that no dividends were paid, and that Kerrigan was the sole executive, and to his industry, experience, ability, the long hours he devoted to the business, the added responsibility imposed upon him in successfully producing for the war effort, and the amount of petitioner's net earnings and sales and according due weight to the opinions of the expert witnesses and all other relevant factors, we have found as a fact a reasonable compensation for the services which Kerrigan rendered to petitioner in the taxable years 1941, 1942, and 1943 to be the respective amounts of $15,000, $20,000, and $25,000. We hold such amounts to constitute ordinary and necessary business expenses, deductible in the respective taxable years under section 23(a)(1)(A) of the Internal Revenue Code.

The second issue involves the question of the amounts petitioner is entitled to deduct in the taxable years 1942 and 1943 as rental for the use of certain trucks owned by Kerrigan and leased to petitioner.

In 1942 Philip Kerrigan, Jr., rented to petitioner a 1/2-ton truck and a 1 1/2-ton truck. The latter was purchased early in 1942. Kerrigan had no written lease or agreement as to a fixed rental, but charged petitioner what he thought it would cost the latter for cartage by commercial companies. In 1942 petitioner paid Kerrigan as rental for the use of such trucks the sum of $5,590.91. This transaction was not one entered into at arm's length. Nevertheless we think petitioner is entitled to a deduction of an amount approximating what it would be required to pay commercial companies for similar services.

The record shows that the Office of Price Administration had established a regulation fixing the base rental to be charged for various types of trucks. The rate fixed for trucks of the type here in question was $85 for the 1/2-ton truck and $150 for the 1 1/2-ton truck, on the basis of a 30-day month of 240 hours. Petitioner's plant was operated on a 24-day work month, so that the proportionate rate would be four-fifths of $85 and $150, or $68 per month for the 1/2-ton truck and $120 for the 1 1/2-ton truck. The 1/2-ton truck was available for the entire year, so that the base rental would be $816 ($68 x 12). The 1 1/2-ton truck was purchased early in 1942, and on a basis of 8 months the base rental for such truck would be $960 ($120 x 8). The total rental for the two trucks would be $1,776. It is stipulated that Kerrigan expended for drivers, operation, maintenance, repairs, insurance, etc., the sum of $3,152.26 in 1942. The base rental of $1,776, plus the expenses of $3,152.26, makes a total of $4,928.26, which amount we have found as a fact was the reasonable rental value of the two trucks used by petitioner in 1942.

In the taxable year 1943 Kerrigan leased to petitioner three trucks, the 1/2-ton truck and two 1 1/2-ton trucks. The latter two trucks Kerrigan had purchased in April 1943. Petitioner paid Kerrigan for the use of the three trucks the sum of $8,906.27. It is stipulated that Kerrigan expended in 1943 for drivers, maintenance, repairs, etc., the sum of $3,357.15. Using the same basis for 1943 that we have above applied to 1942, the base rental for the 1/2-ton truck would be $816, and for each of the two 1 1/2-ton trucks the sum of $960, or an aggregate amount of $2,736. The base rental of $2,736, plus the expenses of $3,357.15, makes a grand total of $6,093.15, which amount we have found to be a reasonable rental value for the use of the three trucks in the taxable year 1943. The amounts of $4,928.26 and $6,093.15 constitute ordinary and necessary business expenses of petitioner, deductible in the respective years 1942 and 1943, under section 23(a)(1)(A) of the Internal Revenue Code.

The third issue presents the question whether the respondent erred in disallowing the amount of $2,282.48 of the $2,750 claimed in 1943 as rental paid to Philip Kerrigan, Jr., for the use of the so-called Northside Plant and certain equipment therein. The respondent contends that the difference between the amount he allowed and the amount claimed by petitioner was in effect a distribution of profits.

In 1943 Philip Kerrigan, Jr., was urged by the Navy to manufacture pontoons. The plant facilities of petitioner were not adequate to enable it to enter into such a contract. Kerrigan was able to locate only one plant in Nashville available and suitable to such production. The plant is known as the Northside Plant. A real estate agent was engaged to negotiate with its then owner for the rental of such plant. The owner was asking a monthly rental of $5,000, which amount was considered absurd by Kerrigan. Later the owner offered to sell, and Kerrigan purchased the plant and its equipment on November 13, 1943, for a total consideration of $57,602.50. Kerrigan did not want to burden petitioner's financial statement with such an obligation, and so arranged with the Third National Bank of Tennessee for a loan and purchased the plant in his individual name. The bank, as a condition to making the loan, insisted that the property be leased to petitioner at a monthly rental of $2,750, and that the lease be assigned to the bank as security. Kerrigan thereupon leased the plant and its equipment to petitioner for 1 year at the monthly rental of $2,750. The contested deduction is for the rental paid by petitioner for the month of December 1943.

The contract with the Navy for the manufacture of pontoons was subject to cancellation at any time, and Kerrigan felt that if the contract was terminated he would not have any need for the plant. He testified that he thought the real property, which was valued at $46,000, would have a resale value of $25,000 in the event the contract was cancelled. In support of the contention that the rent paid by petitioner was reasonable under the circumstances, petitioner offered the opinion of the same three experts heretofore referred to in connection with the reasonableness of Kerrigan's salary and, in addition, the testimony of the real estate agent who negotiated the sale. All of the expert witnesses except Rice expressed the opinion that the rental of $2,750 per month was reasonable. Rice testified that a reasonable rental would range between $1,500 and $2,500 per month. The respondent offered no witnesses with respect to this issue. At a monthly rental of $2,750, the annual return would be $33,000, which would exceed the maximum amount of risk Kerrigan was assuming in the event of immediate cancellation of the contract by the Navy. We regard such a result as too abnormal to justify our approval, especially since the transaction was between Kerrigan and his solely-owned corporation, and therefore not one entered into at arm's length. We find it rather difficult, in view of the evidence, to evaluate the reasonable rental under the unusual circumstances existing. However, upon considering all relevant factors and giving due weight to the opinions expressed by the expert witnesses, we have found as a fact that a reasonable rental for the month of December 1943 of the Northside Plant and equipment was $1,500.

In so holding, it is to be understood that we are here determining only the reasonable rental for the month of December 1943, which is involved in this proceeding.

We hold that petitioner is entitled to deduct the amount of $1,500 as an ordinary and necessary business expense incurred and paid in the taxable year 1943, under section 23(a)(1)(A) of the Internal Revenue Code.

The fourth issue presents the question whether the respondent erred in disallowing $2,600 of the amount of $3,400 claimed as a deduction for salary paid to Regina Kerrigan for 8 months of 1943.

The record shows that Regina Kerrigan is a sister of Philip Kerrigan, Jr. In the taxable year 1943 she was 20 years of age. She had served as a director and secretary of petitioner since December 1939. As secretary, Regina Kerrigan signed the corporate minutes dictated by Philip Kerrigan, Jr., and typed by someone else. She had not received any compensation for her services as secretary in the years prior to 1943. The services she rendered as secretary were nominal. After being graduated from school she was employed in the mailing and shipping department of a Nashville department store.

In 1943 Philip Kerrigan, Jr., on occasion detected the smell of whisky on the breath of the superintendent at the River Plant, and he thought it would have a good effect upon the employees in the plant if someone by the name of Kerrigan was in the office. He employed his sister Regina, and fixed her salary at $425 per month, which action was later approved by the directors. Regina's duties while employed at the River Plant were those of a clerk and typist. The other clerical and stenographic help employed by petitioner, with several years' experience, were paid $45 to $50 per week.

Petitioner contends that the amount of $425 was reasonable and should be allowed because it was fixed by the board of directors, who took into consideration the fact that Regina Kerrigan had not received any compensation for her services rendered as secretary during the period 1939 to May 1943. The record is silent as to what part of the amount fixed as salary was for back salary and what was for services currently rendered. Nor is there any evidence that there was any agreement or understanding that she was to be paid for her services in prior years.

It is well recognized that directors can not legally vote to themselves or other officers compensation for past services where there is no agreement that such officers should be paid. Services must not only be valuable but shall have been rendered with the understanding and intention that they were to be paid for, or under such circumstances as would raise a fair presumption of such intention. Fitzgerald Construction Co. v. Fitzgerald, 137 U.S. 98, 111; Church v. Harnit, 35 F.2d 499. Since the past services rendered by Regina Kerrigan were merely nominal and rendered while still in school or otherwise employed, and being a sister of Philip Kerrigan, sole stockholder of petitioner, we think the fair presumption, under the circumstances, is that it was the intent of all parties that the services were to be gratuitous.

On the basis of this record, we have found as a fact that the reasonable value of the services rendered by Regina Kerrigan for the period of 8 months in the taxable year 1943 is the sum of $1,600. Such amount constitutes a proper deduction for the year 1943, as an ordinary and necessary expense under section 23(a)(1)(A) of the code.

The final issue involves the propriety of respondent's disallowance of the amount of $500 paid by petitioner to McCarver in 1943 and claimed as a deduction as ‘Labor Relations Expense.‘

In 1943 petitioner has having labor troubles. Philip Kerrigan, Jr., was advised to contact one, McCarver, who might be able to help petitioner in it's labor troubles. McCarver convinced Kerrigan he could help the situation, and Kerrigan paid him the $500 fee he demanded. The labor disturbance did not materialize. The respondent disallowed the entire amount on the ground that the payment was not an ordinary and necessary business expense but was akin to a bribe and against public policy. We sustain the respondent. We think the petitioner has failed to show that this payment was not against public policy. Therefore its deduction as an ordinary and necessary business expense incurred and paid in the taxable year 1943 is denied. See Excelsior Baking Co. v. United States, 82 F.Supp. 423.

If, in the recomputation under Rule 50, any increase in the deficiency in income tax for the year 9141 is shown to result from the adjustments made in accordance with our decision, such increase is hereby allowed.

Decision will be entered under Rule 50.