The facts of the instant case are very similar in their import to the facts which we had before us in the cases of Max Schott, 5 B. T. A. 79, and Theodore Stanfield, 8 B. T. A. 787.

In the Schott case the taxpayer was in the employ of a corporation and received the larger part of his compensation through bonuses and commissions called tantiemes. The taxpayer in that case was entitled to receive a certain percentage of the net profits for each fiscal year. The company kept its accounts on the accrual system and credited the bonus and commissions of the taxpayer during the year in which they were earned and took deductions accordingly. In some years the computations and entries were not made until after the close of the fiscal year when the books were closed, but, when made, were entered as of the last day of the year and interest paid thereon until collected. Taxpayer kept an open account with the company, in which was recorded his various transactions with the company (some on the accrual basis and some on the cash receipts and disbursements basis), such as tantiemes earned, dividends on stock, and various purchases and sales of securities. Upon his balances the company allowed and paid interest. The taxpayer also kept a book of accounts of his own in which were reflected his transactions with the company and whatever income was carried to his credit on the company's books was entered as income on his books when accrued, irrespective of the time when the amounts were paid to or withdrawn by him. The Board said:

Passing without discussion the contention that because the tantieme recipients were in control of the Company there was constructive receipt by them of these tantiemes, we find that this taxpayer kept an account book in which he recorded his various transactions. Included in this are accounts and nctes receivable and payable, upon which interest is annually accrued, whether or not paid or payable. Taxes were entered in the year in which payable. Sums credited to his account by his employer were entered as of the date credited, whether paid or not. While there are departures from a strict accrual system of accounting, it is manifest that the primary purpose of the taxpayer's accounts is to reflect income and expense upon an accrual basis, and the returns of the taxpayer were uniformly made upon that basis. In such circumstances it is immaterial that some items may not have been treated upon a strictly accrual basis. Appeal of Bartles-Scott Oil Co., 2 B. T. A. 16; Appeal of John F. Cook, 4 B. T. A. 916. In such cases the net income will be adjusted to correctly reflect it upon the accrual basis.

It seems evident that these tantiemes were accruable for the year in which earned. The amount which each person was to receive was a mere matter of computation, being a percentage of the profits for the year. When such amounts are definitely ascertainable as of the close of the year, the fact that the computation and entry on the books is made after the close of the year is immaterial. In such a case the amounts are properly to be accrued as an expense by the corporation for the year in which the services were rendered. The Commissioner has so treated the amounts so far as the corporation is concerned. Upon the same facts, the amounts are to be accrued as income for the

same year by a taxpayer upon an accrual basis. The deficiencies so far as they arise from the errors alleged in the petition, are disallowed.

The case of Theodore Stanfield, supra, is a companion case to the Schott case and involved the same question and the same employer. The Board said in part:

It can scarcely be contended that the tantiemes did not accrue to the peti tioners in the years in which the services, for which they were payment, were rendered. While the exact amount was not known at the close of each year, all facts necessary to a computation were ascertainable at that time. That the computation and entry are subsequently made is immaterial. See United States v. Anderson, 269 U. S. 422; Max Schott, 5 B. T. A. 79.

Discussing the question as to when a taxpayer is properly held to be on an accrual basis, the Supreme Court, in Aluminum Casting Co. v. Routzahn, 282 U. S. 92, said:

Petitioner, relying on the declarations in its returns that they were made on the basis of actual receipts and disbursements, contends that for that reason they must be deemed made under Section 12(a) and not under Section 13(d). But whether a return is made on the accrual basis, or on that of actual receipts and disbursements, is not determined by the label which the taxpayer chooses to place upon it. The use of inventories and the inclusion in the returns of accrual items of receipts and disbursements appearing on petitioner's books, indicate the general and controlling character of the account. Niles Bement Pond Co. v. United States, 281 U. S. 357, 360, 50 S. Ct. 251, 74 L. Ed. 901; U. S. v. Anderson, supra, 269 U. S., pages 442, 443, 46 S. Ct. 131; 70 L. Ed. 347 and support the finding of the trial court that books and returns were on the accrual basis. [Italics ours.]

Under the authority of these cases we are convinced that the petitioner was keeping his accounts and made his returns upon an accrual system for 1913 to 1923, inclusive, and that such system fairly reflected his income. This being true, petitioner had no right to change in 1924 from the accrual basis of reporting his income to the cash receipts and disbursements basis without securing the permission of the Commissioner to make such change. Art. 23 (3), Regulations 65 (Revenue Act of 1924); Clendening Co., 1 B. T. A. 622; American Conservation Service Corp., 24 B. T. A. 183. In the latter case we said:

The Commissioner found the petitioner had kept its books and made its returns in years prior to 1922 on the cash receipts and disbursements basis and as there was never any consent shown to have been given by the Commissioner for the petitioner to change its method of accounting and making its tax returns, the Commissioner's determination is approved.

From the foregoing it logically follows that as the petitioner did not obtain the permission of the respondent to change his system of making his return for 1924, petitioner's return for that year, in which he omitted the bonus and commissions earned during that year, was erroneous. The return should have been made on the same basis as for previous years.

The deficiency should be computed by including in petitioner's income for 1924 the sum of $130,647.94, bonuses and commissions earned and accrued in that year, instead of $151,038.98, earned and accrued in 1923, and erroneously included in 1924 by respondent. Decision will be entered under Rule 50.

CONNELLSVILLE CENTRAL COKE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 21798, 24226. Promulgated February 20, 1933.

1. Invested capital can not be determined, therefore the profits taxes must be determined as provided in section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918.

2. Disallowance of an additional deduction for officers' salaries approved where the amounts paid represented a distribution of profits in the guise of salaries.

Thomas Watson, Esq., and D. G. Sisterson, C. P. A., for the petitioner.

James L. Backstrom, Esq., and P. A. Sebastian, Esq., for the respondent.

The Commissioner determined deficiencies in income and profits taxes of $752.83, $127,210.24 and $25,079.52 for the years 1917, 1918, and 1920, respectively.

The respondent concedes that he committed certain of the errors assigned by the petitioner. He also concedes that, after the correct tax liability for the earlier years involved herein is determined, the liability thus determined should be used in computing invested capital for the later years involved herein. The issues raised by the pleadings on which the parties still disagree are: (1) Whether the petitioner's profits taxes should be computed in accordance with section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918; (2) how much the petitioner is entitled to deduct in 1920 as officers' salaries; and, in the event (1) is decided favorably to the petitioner; (3) whether certain amounts allowed as deductions for expenses should have been capitalized and not allowed as deductions. The third issue is raised by the respondent.

FINDINGS OF FACT.

The petitioner is a corporation organized in 1903 under the laws of the Commonwealth of Pennsylvania. Its principal office is in Pittsburgh, Pennsylvania.

Prior to 1903 Herbert DuPuy, J. H. Hillman, John F. Brennan, and John C. Neff had been buying and selling coal lands and options on coal lands in Fayette County, Pennsylvania, as partners. They had acquired there, among other properties, several contiguous tracts containing in all about 550 acres of land underlaid with the Pittsburgh vein of coal. They conveyed this property to the petitioner in 1903 for all of its capital stock, having a total par value of $500,000, and its noninterest-bearing non-negotiable note for $325,000. The stock was issued and the note was payable to the individuals as follows:

The note was paid in full. Payments were made as follows:

The petitioner at once began to mine the coal from its property. Practically all of the coal produced has been manufactured into coke and sold as such by the petitioner. It has sold some coal to employees and others at its mines but the amount sold has been negligible.

It first constructed its Low Phos mine. This mine was almost exhausted at the beginning of the year 1917 and is not here in controversy. In 1906 it began a second mine known as the Herbert mine. The shaft was completed in 1907. This shaft was located so that its base would be at the lowest point in the coal. Two hundred and ten rectangular coke ovens were constructed at the Herbert plant in 1906, 1907 and 1908. The mine was intended to supply coal for these ovens.

The Herbert mine was designed and operated upon what is known as a "retreat" system as opposed to an "advance" system. In the latter system most of the coal is extracted as the mining operations proceed outward or away from the base of the shaft. In the retreat system entries are driven in the coal from the base of the shaft to the extreme limits of the property with a minimum of delay and most of the coal is mined as the operations retreat from these limits towards the shaft. In 1913 the most advanced entries or headings had reached the extreme limits of the property and by 1915 this part of the plan had been completed.

After 1915 all coal was mined on the retreat. In 1908 all coal produced was mined from entries. In 1910 and 1911 about one half of the coal produced was obtained from entries. The remainder, and in later years most, of the coal was obtained from rooms and pillars.

Ventilation of the mine was accomplished in a large part through the headings driven to the limits as above described. Ditches were dug and pumps installed in them. Drainage of the mine was obtained through these headings. Main permanent haulage ways were built in some of them after any necessary grading and timbering. The cost of mining coal from entries was, at all times material hereto, greater than the cost of mining the same amount of coal from rooms. The system thus constructed prior to 1915 was a useful and valuable asset of the petitioner throughout the life of the mine. The part of the system which remained had a substantial value during the years 1917, 1918, and 1920. No part of the large amount expended in constructing this system was ever capitalized on the petitioner's books. All amounts expended for labor and ma÷ terials were charged to expense. Because of the method of keeping the books and records and the fact that some of the original records were destroyed in a fire in 1917, it is now impossible to determine how much was actually spent in this connection. No part of these expenditures has been included in the petitioner's invested capital for the years 1917, 1918, or 1920.

During the years 1917, 1918 and 1920, the taxpayer did not have any gains, profits, commissions, or other income derived on a cost plus basis from a Government contract or contracts made between. April 6, 1917, and November 11, 1918, both dates inclusive.

Originally Neff's annual salary as general manager was $2,000. In 1906 it was increased to $5,000, and in 1917 it was increased to $6,000. He also received a 10 per cent bonus in 1916 and 1917. Dupuy received no salary as president prior to 1920. In that year, in addition to the amount hereinafter mentioned, he was paid a salary of $3,000 as president. The petitioner's books of account show that directors' salaries were paid as follows: