Brandtjen & Kluge, Inc. v. Comm'r of Internal Revenue

• Citation: 34 T.C. 416
• Decision Date: 07 June 1960
• Docket Number: Docket No. 66583.
• Court: United States Tax Court
• Parties: BRANDTJEN & KLUGE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

34 T.C. 416

BRANDTJEN & KLUGE, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 66583.

Tax Court of the United States.

Filed June 7, 1960.

[34 T.C. 417]

William R. Busch, Esq., for the petitioner.

Leonard A. Hammes, Jr., Esq., for the respondent.

1. Held: On the facts, that the salary paid by petitioner to Henry A. Brandtjen, Jr., in the years 1953, 1954, and 1955 was in excess

of a reasonable allowance for salary or compensation for the personal services actually rendered by him. The amount representing such reasonable amount determined.

2. Petitioner in 1954 and 1955 concluded that its accounts receivable from its Canadian subsidiary were partially worthless and took steps which were designed and intended to charge off on its books worthless portions of such indebtedness. Held, that the entries made on its books with respect to such portions of the said indebtedness were effective as chargeoffs within the meaning of the statute and that the indebtedness was worthless in the amounts charged off.

3. With respect to the stock of the subsidiary, the cost of which was deducted for 1954 as a loss due to worthlessness, held that petitioner has not shown that the stock became worthless in that year.

4. For 1953, which was the 25th year of ownership of a building used by petitioner in its business and in respect of which petitioner deducted depreciation allowances based on a useful life of 25 years, petitioner deducted as a depreciation allowance the balance of the undepreciated cost of the building. Respondent determined that the salvage value of the building was in excess of such remaining balance of undepreciated cost and disallowed the depreciation deduction claimed. The petitioner not having shown that respondent was in error in his determination of the salvage value of the building, the respondent's disallowance of the claimed deduction is sustained.

5. Petitioner from time to time made loans to its officers and employees, in respect of which it followed a long-established and well-settled practice of charging no interest. In keeping with that practice, it did not accrue on its books or collect interest on two loans made to its president. Held, that respondent erred in determining that there was an accrual of interest to petitioner on the said loans.

The respondent determined deficiencies in income tax against the petitioner for the taxable years 1952 and 1953 in the respective amounts of $26,463.09 and $21,780.07. By amended answer, the respondent has made claim for deficiencies in amounts increased to $29,661.25 and $25,534.47. The years 1954 and 1955 are involved only because of a claimed operating net loss carryback from the year 1954 to the year 1952, and from the year 1955 to the year 1953.

The only adjustment involved in the year 1952 relates to the operating net loss carryback from the year 1954.

The questions presented are (1) the amount of deduction allowable, if any, for salary of Henry A. Brandtjen, Jr., for the period extending from May 19,1953, to December 31, 1955; (2) whether deductions in 1954 and 1955 in the respective amounts of $28,000 and $12,000, for partial worthlessness of accounts receivable from petitioner's Canadian subsidiary, were properly disallowed by respondent; (3) whether petitioner is entitled to a worthless stock loss deduction in 1954, in the amount of $5,000, on the capital stock of its Canadian subsidiary; (4) whether petitioner is entitled to a deduction in 1953 for depreciation in the amount of $2,298.17; and (5) whether petitioner should have reported in 1955 accrued interest on loans to its president in the amount of $5,500, as income.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

Petitioner is a minnesota corporation, with its principal place of business in St. Paul, Minnesota, having been incorporated on November 7, 1919. It filed its income tax returns for the years 1952, 1953, 1954, and 1955 with the director or district director of internal revenue for Minnesota.

Petitioner was organized by John Brandtjen, his son, Henry A. Brandtjen, sometimes referred to hereafter as Henry, Sr., Abel Kluge and the latter's brother, Eneval Kluge. During the years material herein, it was engaged in the manufacture of platen printing presses in two sizes and in selling them to large and small users of printing presses. It was the originator of the use of air as a means of feeding paper through the process of printing. It designs and manufactures the presses it sells, including the parts, except castings and automatic screw machine parts, which are purchased. Its basic patents relating to its presses have expired.

[34 T.C. 418]

Abel Kluge and his brother were joint inventors of the Kluge printing press. Abel, though not an engineer, is an expert in printing equipment as well as an outstanding machinist. He is one of petitioner's vice presidents and is responsible for most of the mechanical work, discoveries, improvements, design changes, and patents in connection with the Kluge press.

At all times material herein, if not from the date of its organization, members of the Brandtjen family, originally Henry, Sr., and his father, John Brandtjen, owned and controlled petitioner corporation through the ownership of a majority of its stock. During the years 1952 through 1955, petitioner's outstanding stock was held as follows:

+--------------------------------------------------------------+
                ¦ ¦ ¦Stock publicly held¦ ¦
                +-------------------+---------+-------------------+------------¦
                ¦Year ¦Brandtjen¦ ¦ ¦Total shares¦
                +-------------------+---------+---------+---------+------------¦
                ¦ ¦holdings ¦Number of¦Number of¦issued and ¦
                +-------------------+---------+---------+---------+------------¦
                ¦ ¦ ¦holders ¦shares ¦outstanding ¦
                +-------------------+---------+---------+---------+------------¦
                ¦1952 ¦ ¦ ¦ ¦ ¦
                +-------------------+---------+---------+---------+------------¦
                ¦H. A. Brandtjen, Sr¦59,170 ¦37 ¦11,379 ¦75,569 ¦
                +-------------------+---------+---------+---------+------------¦
                ¦H. A. Brandtjen, Jr¦2,510 ¦ ¦ ¦ ¦
                +-------------------+---------+---------+---------+------------¦
                ¦John Brandtjen II ¦2,510 ¦ ¦ ¦ ¦
                +-------------------+---------+---------+---------+------------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +--------------------------------------------------------------+
                

1953
                H. A. Brandtjen, Sr 59,170 37 11,379 75,569
                H. A. Brandtjen, Jr 2,510
                John Brandtjen II 2,510
                

1954
                H. A. Brandtjen, Sr 59,170 37 11,229 75,419
                H. A. Brandtjen, Jr 2,510
                John Brandtjen II 2,510
                

1955
                H. A. Brandtjen, Sr 59,170 33 11,229 72,919
                H. A. Brandtjen, Jr 2,510
                John Brandtjen II 2,510
                

At different times prior to 1953, petitioner in promoting and making sales within the United States had set up various sales districts. It also made sales of its presses in South America, Mexico, and Canada. During the years 1953, 1954, and 1955, it had 11 branch offices in the United States for handling the sales of its presses and parts. In 1955 it had no district managers. It did have a few branch office managers and at one time it had only three salesmen working the entire United States.

John Brandtjen and Henry A. Brandtjen were respectively petitioner's president and secretary-treasurer from 1919 through November 1, 1950. Each drew the same salary, which ranged from $12,000 from 1929 through 1935, to $14,400 from 1935 through 1946, to $17,280 in 1947, and $19,008 in 1948 to November 1,1950. Similarly, Abel and Eneval Kluge were paid identical salaries. Each was paid $5,200 in 1929 through 1935, $6,240 in 1936 through 1939, and $7,000 in 1940. Thereafter only Abel was on the payroll, and

[34 T.C. 419]

he was paid $7,000 through 1946, $8,400 in 1947, and $9,240 to November 1, 1950.

Henry A. Brandtjen and his wife, Gladys, had two sons, John Brandtjen II, HEREAFTER referred to as John II or John, and Henry A. Brandtjen, Jr., hereafter referred to as Henry, Jr., or Junior. John was born in 1927, and Henry, Jr., on November 29, 1928.

Henry, Sr., acquired a farm of approximately 520 acres in or about the year 1933. At some undisclosed date, John became the owner of a farm of 160 acres, and in 1940 Henry, Jr., became the owner of a farm also of 160 acres.¹ Henry, Sr., rented his sons' farms and with his operated the three as one 840-acre farm. The operation consisted of growing grain, raising purebred Guernsey cattle, running a dairy, and raising horses. All of the acreage was located near Farmington, Minnesota, 20 miles south of St. Paul, and was known as the Brandtjen farms. The family home was located on one of the farms. From the acquisition of his farm in 1933 through the years herein, Henry Sr., never realized a profit from his farming operations.

On June 7, 1938, Henry, Sr., purchased $300,000 of life insurance on a 10-year term plan, the policies, their respective amounts, and the gross premiums being as follows:

+-------------------------------------------------------------+
                ¦Policy ¦Amount ¦Gross ¦
                +-------------------------------------------+-------+---------¦
                ¦ ¦ ¦premiums ¦
                +-------------------------------------------+-------+---------¦
                ¦New England Mutual, No. 990194 ¦$50,000¦$1,095.00¦
                +-------------------------------------------+-------+---------¦
                ¦Phoenix Mutual Life Ins. Co., No. 770979 ¦100,000¦1,914.00 ¦
                +-------------------------------------------+-------+---------¦
                ¦Bankers Life Co. of Iowa, No. 1156829 ¦35,000 ¦698.60 ¦
                +-------------------------------------------+-------+---------¦
                ¦National Life of Vermont, No. 692245 ¦65,000 ¦1,282.45 ¦
                +-------------------------------------------+-------+---------¦
                ¦State Mutual Life Assurance Co., No. 481340¦50,000 ¦993.00 ¦
                +-------------------------------------------+-------+---------¦
                ¦Total ¦300,000¦5,983.05 ¦
                +-------------------------------------------------------------+
                

Henry, Sr.,‘s purpose in buying the insurance was to protect the interest of his wife and family in his estate by providing cash for the payment of estate...