J. H. Martinus & Sons v. Commissioner

Petition to review a decision of the Board of Tax Appeals sustaining the assessment of a deficiency in income taxes paid for the year 1935. The question presented is whether the taxpayer may deduct as a business expense salaries authorized but not paid during the tax year, where the return was prepared on the cash basis.

The taxpayer is a small family corporation engaged in farming. The officers and principal stockholders, members of the Martinus family, give their full time to the business. At a meeting of the directors and stockholders held during 1935 salaries of $3,400 were authorized for each of three officers. Each officer had the privilege of drawing on the corporate bank account without consulting any of the others, and it was their custom to draw salaries as needed. The salaries authorized were drawn to a partial extent only, that is, the officers actually drew during 1935 the total sum of $1,131.07 on salary account. In computing the net corporate income for the year the whole authorized amount of $10,-200 was deducted. The Commissioner allowed salary deductions in the amounts actually paid but disallowed the excess.

The corporate accounts were kept and income tax…