is a "reasonable and fair compensation for services rendered regardless of the amount of stock such officer may hold." We are asked to approve this executive construction of the statute as though it were a part of it. In order not to beg the question, we must look to the statute alone to find the power which the Government asserts.

Confining our inquiry to the statute, it appears that the basis on which a salary may be allowed as a valid deduction is that it was in fact an "ordinary and necessary expense (of the corporation) actually paid . . . in the maintenance and operation of its business." To be a necessary expense it must have been paid for services actually rendered. Jacobs & Davies, Inc. v. Anderson, 228 Fed. 505, 506, 143 C. C. A. 87. Whether services were rendered and whether also they were commensurate with the salary paid are matters of judgment and discretion reposed by general law in the board of directors of the corporation. As the board of directors is charged with the duty and clothed with the discretion of fixing the salaries of the corporation's officers, the Government has no right (until expressly granted by statute) to inquire into and determine whether the amounts thereof are proper, that is, whether they are too much or too little. But, while the amount of salary fixed by a board of directors is presumptively valid, it is not conclusively so, because the Government may inquire whether the amount paid is salary or something else. Admittedly the Government has a right to collect taxes on net income of a corporation based on profits after all ordinary and necessary expenses, including salaries, are paid. It has a right, therefore, to attack the action of a board of directors and show by evidence, not that a given salary is too much, but that, in the circumstances, the whole or some part of it is not salary at all, but profits diverted to a stockholding officer under the guise of salary and as such is subject to taxation.

Of the same opinion was the learned trial judge, though in entering judgment of nonsuit he raised and ruled upon a second question which was, not whether the salaries paid were commensurate with the services rendered but whether there was evidence which would sustain a finding that the sums paid were not all salaries but were part profits.

An inquiry of this kind is directed to a fact; and, as in all cases turning on a fact, the attention of the trial judge is

directed to the sufficiency of the evidence to establish the fact. The question of fact here was whether the money paid was all salary or part profits. The presumption arising from the action of the board of directors was that it was all salary. In order to overcome this presumption the burden was on the Government to produce evidence, not necessarily conclusive, but sufficient to raise a valid inference that some definite part of the compensation was not salary but was profits. The evidence which in this respect the trial judge found insufficient was, briefly stated, as follows:

Philadelphia Knitting Mills Company was a close corporation with an outstanding capital of $330,000, of which William H. Bilyeu, its president, owned in stock approximately $240,000; his daughter, Mrs. Richards, $30,000; and Charles Moller, its vice-president, manager, and superintendent, $60,000. The business of the corporation was started and its success established by Bilyeu at a time when Moller's connection with the company and his stockholding were small. As Bilyeu advanced in years and his activities in the business decreased, Moller's duties and interests correspondingly increased until, at the time in question, Bilyeu did almost nothing and Moller did almost everything in the management of the corporation's affairs.

In July, 1909—a month before the Corporation Excise Tax Act was approved-the board of directors increased the annual salary of Moller to $10,000, and in 1913 to $20,000. At the same meeting in 1909, the board of directors-the personnel of which was wholly controlled by Bilyeu's dominating stock ownership increased his salary from $7,500 to $20,000 a year, at which figure it has ever since remained. It was testified that Bilyeu, being greatly advanced in years, had nothing to do with the operation of the plant or with the conduct of the business. He would come to the office, open the mail, sign checks, and make deposits, and then would sit around an hour or two reading the newspaper until his chauffeur came to take him home. The only reason for the substantial increase in the salary of the president was given by Bilyeu himself. It was simply to the effect that as Moller's salary was $20,000, he thought his salary should be the same. In the corporation's

tax returns both salaries were deducted from gross profits in ascertaining taxable net profits. The Government raised no question about Moller's salary.

On this evidence we think a jury could find that, as the increase of Bilyeu's salary as president was made without a corresponding increase of service or business responsibility-in fact, in the face of a progressive decrease of service and responsibility—the amount paid him was not all for service rendered. Just how much of the annual compensation paid Bilyeu was salary and how much was profits would not be left for the jury to conjecture, for there was evidence of the amount of salaries paid presidents of like concerns of relative output and earnings. This evidence was in no sense conclusive but it was admissible and it had probative value. There was in addition evidence of the salary which the defendant corporation itself paid Bilyeu, its president, before it was increased without any reason except that Bilyeu thought his salary (for decreasing services) should keep apace with Moller's salary for steadily increasing services.

This evidence was, to be sure, only prima facie, and might have been overturned by evidence produced by the defendant corporation showing that its president, because of his position in the trade, his connection with the banks, or otherwise, rendered services on which the board of directors had exercised a bona fide discretion in voting him this substantial salary. But until some evidence of this character was produced by the defendant, we think the evidence for the Government was sufficient to sustain a finding by fair-minded men that a part, and a definite part, of the compensation paid Bilyeu as salary was profits distributed to him by reason of his stockholding.

We are constrained to reverse the judgment below and direct a new trial.32

32 For a similar case, see People v. Gilchrist, (1924) 209 App. Div. 120, 204 N. Y. Supp. 509.

Suppose a corporation agrees in advance with certain of its officers who are also stockholders that it will pay them $10,000 per annum each, and in addition will give them each 10 per cent of the net profits over certain reserves. Are the latter amounts deductible by the corporation? See Jacobs & Davies, Inc. v. Anderson, (1915) 228 Fed. 505; 1 Am. Fed. Tax R. 586, Becker Bros. v. U. S., (1925) Fed. (2nd) —, (C.C.A., 2nd), June 1, 1925.

II. TAXES

Regulations 65.

ART. 131. Taxes.- Federal taxes (except income, warprofits, and excess-profits taxes), state and local taxes (except taxes assessed against local benefits of a kind tending to increase the value of the property assessed), and taxes imposed by possessions of the United States or by foreign countries (except the amount of income, war-profits, and excess-profits taxes allowed as a credit against the tax), are deductible from gross income. (See section 222 of the statute and articles 381-387 as to tax credits.) Postage is not a tax. Amounts paid to states under secured debts laws in order to render securities tax exempt are deductible. Automobile license fees are ordinarily taxes. The gift tax imposed by section 319 of the statute is deductible from the gross income of the donor.

Taxes are deductible as such only by the person upon whom they are imposed. Thus the taxes imposed by section 600 of the Act upon sales by the manufacturer are not deductible by the individual purchaser, even though such taxes are actually billed to him as separate items.

ART. 132. Federal duties and excise taxes. -Import or tariff duties paid to the proper customs officers, and business, license, privilege, excise, and stamp taxes paid to internal revenue collectors, are deductible as taxes imposed by the authority of the United States, provided they are not added to and made a part of the expenses of the business or the cost of articles of merchandise with respect to which they are paid, in which case they cannot be separately deducted.

ART. 133. Taxes for local benefits.-So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare by the proper taxing authorities at

a like rate against all property in the territory over which such authorities have jurisdiction. Assessments under the statutes of California relating to irrigation and of Iowa relating to drainage, and under certain statutes of Tennessee relating to levees, are limited to property benefited, and when it is clear that the assessments are so limited, the amounts paid thereunder are not deductible as taxes. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct the assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation cannot be made, none of the amounts so paid is deductible.

ART. 134. Federal estate and state inheritance taxes.Federal estate taxes, paid or accrued during the taxable year, are an allowable deduction from the gross income of the estate in computing the net income thereof subject to tax. The whole amount of such taxes, irrespective of when paid, is deemed to have accrued on the due date thereof, namely, one year after the decedent's death (sec. 305, Title III, Revenue Act of 1924), and, if the accounts of the estate are kept on an accrual basis, are deductible from gross income of the taxable year in which such due date falls, or for the taxable year in which paid, if paid before the due date. If the accounts are kept on the basis of cash receipts and disbursements, deduction may be taken from gross income of the taxable year or years in which the payment or payments may have been made.

Estate, succession, legacy, or inheritance taxes, imposed by any State, Territory, or possession of the United States, or foreign country, are deductible by the estate, subject to the provisions of section 214, where, by the laws of the jurisdiction exacting them, they are imposed upon the right or privilege to transmit rather than upon the right or privilege of the heir, devisee, legatee, or distributee to receive or to succeed to the property of the decedent passing to him. Where such