Botany Worsted Mills v. United States, 278 U.S. 282 (1928)
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U.S. Supreme Court BOTANY WORSTED MILLS v. UNITED STATES, 278 U.S. 282 (1929)
[Page 278 U.S. 282, 285]
interest-alleging that the disallowance of part of the compensation paid the directors was illegal. [Footnote 3] After a hearing on the merits the court, upon its findings of fact, dismissed the petition upon the ground that the additional tax was imposed under an agreement of settlement which prevented a recovery. 63 Ct. Cl. 405. And this writ of certiorari was granted.
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the amount of tax assessed, ... and the amount actually paid in accordance with the terms of the compromise.' [Footnote 5]
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agreed to furnish; and the additional assessment was made in accordance with this return. [Footnote 6]
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and did not intend to intrust the final settlement of such matters to the informal action of subordinate officials in the Bureau. When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode. Raleigh & G. Railroad Co. v. Reid, 13 Wall. 269, 270; Scott v. Ford, 52 Or. 288, 296, 97 P. 99.
It is plain that no compromise is authorized by this statute which is not assented to by the Secretary of the Treasury. Leach v. Nichols (C. C. A.) 23 F.(2d) 275, 277. For this reason, if for no other, the informal agreement made in this case did not constitute a settlement which in itself was binding upon the Government or the Mills. And, without determining whether such an agreement, though not binding in itself, may when executed become, under some circumstances, binding on the parties by estoppel, it suffices to say that here the findings disclose no adequate ground for any claim of estoppel by the United States.
We therefore conclude that the Mills was not precluded by the settlement from recovering any portion of the tax to which it may otherwise have been entitled.
This brings us to the question whether on the findings of fact the Mills is entitled to recover the portion of the additional tax attributable to the disallowance of $783,656.06 of the amount paid to the directors which it had claimed as a deduction. [Footnote 7]
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The findings do not show the nature or extent of the services rendered by the board of directors or its individual members, either as directors, executive officers or department managers-the amounts apportioned and paid to each director-the basis of apportionment, whether the nature and extent of their individual services, the amount of their stockholdings, or otherwise-the value of their services-or the reasonableness of the purported compensation.
We do not find it necessary to determine here whether the amounts paid by a corporation to its officers as compensation for their services cannot be allowed as 'ordinary and necessary expenses' within the meaning of section 12(a), merely because, and to the extent that, as compensation, they are unreasonable in amount. [Footnote 9] However this may be, it is clear that extraordinary, unusual and extravagant amounts paid by a corporation to its officers in the guise and form of compensation for their services, but having no substantial relation to the measure of their services and being utterly disproportioned to their value, are not in reality payment for services, and cannot be regarded as 'ordinary and necessary expenses' within the meaning of the section; and that such amounts do not become part of the 'ordinary and necessary expenses' merely because the payments are made in accordance with an agreement between the corporation and its officers. Even if binding upon the parties, such an agreement does not change the character of the purported compensation or constitute it, as against the Government, an ordinary and necessary expense. Compare 20 Treas. Dec., Int. Rev., 330; Jacobs & Davies v. Anderson (C. C. A.) 228 F. 505, 506;
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United States v. Philadelphia Knitting Mills Co. (C. C. A.) 273 F. 657, 658; and Becker Bros. v. United States (C. C. A.) 7 F.(2d) 3, 6.
In the light of this principle it is clear that the findings do not show, as a matter of necessary inference resulting as a conclusion of law, that the amount paid the directors in excess of the $782,083.33 allowed by the Commissioner, 10 constituted part of the ordinary and necessary expenses of the Mills. On the contrary, as this amount so greatly exceeded the amounts which, as a matter of common knowledge, are usually paid to directors for their attendance at meetings of the board and the discharge of their customary duties, and was much greater than the amounts that had been paid in prior years,11 and as there is no showing as to the amounts paid the individual directors, in addition to the salaries of $9,000 which each received-presumably for his services as an executive officer or department manager-or as to the nature, extent or value of their services, the findings raise a strong inference that the unusual and extraordinary amount paid to the directors was not in fact compensation for their services, but merely a distribution of a fixed percentage of the net profits that had no relation to the services rendered.
Therefore, as the Mills has not sustained the burden of showing that the amount disallowed by the Commissioner was in fact part of its ordinary and necessary expenses, the judgment must, for this reason, be
AFFIRMED.
Mr. Justice HOLMES agrees with the result. Footnotes
Footnote 1 39 Stat. 756, c. 463.
Footnote 2 40 Stat. 300, c. 63.
Footnote 3 Section 3226 of the Revised Statutes had been previously amended by section 1318 of the Revenue Act of 1921, 42 Stat. 227, 314, c. 136 (26 USCA 156), so as to provide that no suit or proceeding should be maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected until a claim for refund or credit had been duly filed with the Commissioner of Internal Revenue; and further amended by section 1014(a) of the Revenue Act of 1924, 43 Stat. 253, 343, c. 234 (26 USCA 156), so as to provide that such suit or proceeding might be maintained, whether or not such tax had been paid under protest or duress. And the right of the Mills to maintain this suit, although the tax had not been paid under protest or duress, is not questioned by the Government.
Footnote 4 U.S.C. tit. 26, 158.
Footnote 5 Since the date of the settlement here involved sections 1312 and 1313 of the Revenue Act of 1921, section 1006 of the Revenue Act of 1924 ( 26 USCA 1249 note), and section 1106(b) of the Revenue Act of 1926 (26 USCA 1249 note) have dealt specifically with agreements in writing made by a taxpayer and the Commissioner, with the approval of the Secretary, that the previous determination and assessment of a tax shall be final and conclusive.
Footnote 6 The findings indicate inferentially that some tax claims of the Mills for two other years were also included in the settlement; but the precise facts do not appear.
Footnote 7 This is claimed in the brief filed for the Mills; and in the oral argument its counsel specifically stated that the Mills relied on the sufficiency of the findings and made no request that the case be remanded to the Court of Claims for additional findings, as the Solicitor General had suggested.
Footnote 8 The figures for some other years are also given in tabulated statements included in the findings.
Footnote 9 Later, by section 214(a) of the Revenue Act of 1918, 40 Stat. 1057, c. 18, it was specifically provided that 'the ordinary and necessary expenses' should include 'a reasonable allowance for salaries or other compensation for personal services actually rendered.'
Footnote 10 The amount allowed, it may be noted, was, in itself, $481,934.02 more than the average of the amounts that had been paid in the seven years immediately preceding, and $88,466.17 more than the greatest amount that had been paid in any one year.
Footnote 11 See note 10, supra.
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