Mayson Mfg. Co. v. Commissioner of Internal Revenue
| Decision Date | 17 November 1949 |
| Docket Number | No. 10878.,10878. |
| Citation | 178 F.2d 115 |
| Parties | MAYSON MFG. CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
William C. Allee, Detroit, Mich., (William C. Allee, Detroit, Mich., Edward A. Smith, Detroit, Mich., on the brief), for petitioner.
Harry Marselli, Washington, D. C., (Theron Lamar Caudle, Ellis N. Slack, Fred E. Youngman, Washington, D. C., on the brief), for respondent.
Before HICKS, Chief Judge; SIMONS and MILLER Circuit Judges.
The petitioner, Mayson Manufacturing Company, seeks a review of the ruling of the Tax Court which sustained a deficiency assessment of the Commissioner of Internal Revenue in declared value excess-profits tax and excess-profits tax for the calendar year 1943 in the respective amounts of $2,460.40 and $31,899.14. The assessment was the result of disallowances by the Commissioner of a portion of the compensation paid to three officers of the petitioner as being unreasonable in amount. Since the question involved is factual, the evidence is reviewed in some detail.
Petitioner was organized under the laws of Michigan on July 1, 1929 by Frank L. Wurl, Edward M. May and Lynn L. Hosier. Its 800 shares of capital stock were owned as follows: Wurl 401 shares, May 300 shares, Hosier 79 shares and G. E. Hohner 20 shares. Petitioner's organizers became acquainted while employed by the Nizer Corporation of Detroit. Each had varied experience in their respective lines of work which proved to be of great benefit in petitioner's development.
Wurl provided most of the financial backing. His compensation is not involved in the present case. The compensation of May, Hosier and Otto Peterson are here under review.
May, who was the President and General Manager in 1943, began his career in 1914 when he was employed by the Ford Motor Company. He became foreman in the gear cutting department. He later worked for the American Car and Foundry Company and as a tool maker with several large concerns in Detroit, including Packard Motor Co., Dodge Bros., and Pontiac Motor Company. In 1921, he worked for the Chrysler Corporation as a checker and tool designer. He later engaged in experimental work in the refrigeration field for the Nizer Corporation, serving approximately 4½ years as head of the tool designing department. He was later employed at the Kelray Laboratory which was also engaged in refrigeration experimentation, which employment he left when he helped to organize the petitioner.
Hosier, who was Secretary-Treasurer and sales manager of petitioner in 1943, had engaged in purchasing work for several corporations around Detroit and during 1927 became a sales representative on his own of forgings, castings, patterns and screw machine products. He had acquired many contacts in the refrigeration trade which later proved valuable in developing petitioner's business.
Wurl felt that the Company would prosper more if a bonus system was established. Accordingly, the Board of Directors at a meeting held on July 31, 1929, took appropriate action by which May, then Vice President, was appointed General Manager at a salary of $4,800 per year plus a bonus fund equal to 25% of the anual net profits for distribution by him among employees in his discretion. The compensation to Hosier was fixed at a commission of 5% of the gross value of the corporation's sales.
Petitioner's first work, obtained through the efforts of Hosier, was the repairing of some valves for Kelvinator Corporation. The business immediately prospered. In 1932, May developed and patented a refrigerator valve, using stellite material as its needle tip, which proved very successful until another concern in 1938 introduced a capillary tube which performed the same function at a much lower cost. In 1938, May designed a large expansion valve which was used in the steam heating of pullman car compartments. Petitioner also began the production of an expansion valve for use in commercial refrigerators, and a valve used as an oil burner control, both of which were designed and developed by May.
Otto Peterson, who was Vice President and Factory Superintendent in 1943, was asked to join the Company in 1932. He graduated from the Naval Academy in Copenhagen, Denmark, in 1905 with a degree in Marine Engineering, and then came to the United States in 1906, where he was first employed by the Ford Motor Company. He held responsible positions in several companies around Detroit and Cleveland in the capacity of a tool designer. While employed by Nizer Corporation he met May and Hosier who were very much impressed by his ability as a tool designer. When Peterson joined petitioner it was agreed that he would be paid a fixed salary and in addition receive a bonus of one-fourth of May's bonus fund of 25% of the net profits.
On January 15, 1930, the Directors fixed the basic salary of May at $1,000 per month and of Hosier at $300 per month for duties to be performed aside from sales effort. On January 24, 1933, the Directors fixed May's basic salary at $3,400 per month, Hosier's at $725 per month, and Peterson's, who then was not a Director, at $1,600 per month. These basic salaries were continued in force for 1934, 1935 and 1936. The basic salaries were reduced in 1937, and again reduced for the years 1938 through 1943. In December 1936, following conferences with the Internal Revenue Agent, the original basic salaries for 1934, 1935 and 1936 were retroactively reduced to the amounts established for the year 1937. The following tables show the basic salary, total compensation paid, and total compensation allowed by the Commissioner, to May, Peterson and Hosier respectively, for each of the years 1934 through the years 1943:
Otto Peterson (Vice President in Charge of Mfg.)
On October 18, 1932, after Peterson joined petitioner, the stock ownership of the Company was as follows:
Wurl 250 shares
May 300 shares
Hosier 100 shares
Peterson 150 shares
Wurl died on April 6, 1936. On December 12, 1936, following a redistribution of his stock and the issuance of a large number of new shares of stock, the stock ownership of the $10.00 par value stock was as follows: May owned 300 shares and his wife owned 900 shares; Peterson owned 150 shares and two daughters owned 225 each; Hosier owned 100 shares, his wife owned 200 shares, and two daughters owned 50 shares each.
Beginning in 1940 and through the taxable year in question, petitioner's sales increased materially. Orders arising out of war work were very material in 1941, 1942 and 1943. In 1942, the Norge Division of Borg-Warner Corporation consulted petitioner about manufacturing a valve for a hydraulic gun turret. May spent about a month's time in designing and developing such a valve, often working 14 hours a day, seven days a week. It was very successful. May also designed a hydraulic amplifier, a time-delay valve, and a micro-valve for various companies, which resulted in substantial income to petitioner during 1943. His duties increased substantially during the war; he worked overtime and took almost no time off.
Peterson's duties increased during 1942 and 1943. He was charged with the responsibility of seeing that all production in the shop was done properly and on time. In 1943, petitioner employed three shifts. In addition to the usual hours in day time work, he spent a few hours at the factory at night approximately three nights a week. During 1943, his work averaged from 10 to 14 hours a day, most of the time seven days a week, with week-ends out only occasionally.
Hosier's work increased materially during 1942 and 1943. During 1943, he had the problem of procuring material for the production of petitioner's goods, which entailed contacting Government officials on numerous occasions for the purpose of getting priorities as well as completing many Government forms and reports. The commercial sales during 1943 were the result of his contacts made in previous years. In addition, he successfully solicited war contracts from Bendix...
To continue reading
Request your trial
-
Hudlow v. Commissioner
...the amount of compensation paid to the particular employee in previous years. Mayson Mfg. Co. v. Commissioner 49-2 USTC ¶ 9467, 178 F. 2d 115, 119 (C. A. 6, 1949), revg. a Memorandum Opinion of this Court Dec. 16,701(M) Dahlem Foundation, Inc., supra at 1580. A bonus which might reasonably ......
-
Proctor v. Commissioner
...The Sixth Circuit (the court to which an appeal in this case would lie) in Mayson Mfg. Co.v. Commissioner 49-2 USTC ¶ 9467, 178 F. 2d 115, 119 (6th Cir. 1949), revg. a Memorandum Opinion of this Court Dec. 16,701(M), set forth a list of pertinent factors to be considered in deciding an issu......
-
United States v. Kessler
...87 L. Ed. 530 (inference applied against taxpayer where he refuses to supply records which supposedly support his claim); Mayson v. C.I.R., 178 F.2d 115 (C.A.6 1949) (inference applied against government where it failed to produce expert witness as to reasonableness of certain salaries); in......
-
SUWANNEE LUMBER MANUFACTURING COMPANY v. Commissioner, Docket No. 2912-76
...the amount of compensation paid to the particular employee in previous years. Mayson Mfg. Co.v. Commissioner 49-2 USTC ¶ 9467, 178 F. 2d 115, 119 (6th Cir. 1949), revg. a Memorandum Opinion of this Court Dec. 16,701(M). See also Laure v. Commissioner Dec. 35,441, 70 T.C. 1087 (1978); "The L......
-
Taxpayer Prevails With Respect To Claimed Research And Development Tax Credits In Eric G. Suder, Et Al. V. Commissioner, TC Memo 2014-201
...that must be resolved on the basis of all of the facts and circumstances. Citing the multi-factor test in Mayson Mfg. Co. v. Commissioner, 178 F.2d 115, 119 (6th Cir. 1949), for determining the reasonableness of compensation the opinion listed the factors to be applied: (1) the employee's q......
-
PSCs--beware of unreasonable compensation.
...to the Code and regulations, several cases have articulated methods for analyzing reasonable compensation; see e.g., Mayson Mfg. Co., 178 F2d 115 (6th Cir. 1949), and Elliotts, Inc., 716 F2d 1241 (9th Cir. The courts have used several criteria from Mayson to support their rulings, including......
-
Current developments.
...Medical Inc., 172 F2d 942 (6th Cir. 1999)(83 AFTR2d 99-1922, 99-1 USTC [paragraph]50,461), rev'g TC Memo 1997-464. (30) Mayson Mfg. Co., 178 F2d 115 (6th Cir. 1949)(38 AFTR 1028, 49-2 USTC (31) IRS Letter Ruling 9914032 (1/13/99). (32) See, e.g., IRS Letter Rulings 9536014 (6/8/95) and (TAM......
-
Exacto Spring Corp. breaks new ground in reasonable compensation.
...tests have varied significantly in size and scope from case to case. A classic example is the Sixth Circuit's decision in Mayson Mfg. Co., 178 F2d 115 (1949), which used the following nine factors: (1) the employee's qualifications, (2) the nature, extent and scope of the employee's work, (......
-
Unreasonable compensation for employee-stockholders of a professional corporation: it is not an unreasonable proposition.
...Rutter, 853 F2d 1267 (5th Cir. 1988)(62 AFTR2d 88-5594 88-2 USTC [paragraph]9500), aff'g TC Memo 1986-407. [7] Mayson Manufacturing Co., 178 F2d 115 (6th Cir. 1949)(38 AFTR 1028, 49-2 USTC [paragraph]9467), rem'g TC Memo [8] Owensby & Kritikos, Inc., 819 F2d 1315 (5th Cir. 1987)(60 AFTR......