453 F.2d 451 (6th Cir. 1972), 71-1223, Lakewood Mfg. Co. v. C. I. R.

Docket Nº:71-1223, 71-1224.
Citation:453 F.2d 451
Party Name:LAKEWOOD MANUFACTURING COMPANY, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Case Date:January 04, 1972
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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Page 451

453 F.2d 451 (6th Cir. 1972)

LAKEWOOD MANUFACTURING COMPANY, Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Nos. 71-1223, 71-1224.

United States Court of Appeals, Sixth Circuit.

January 4, 1972

William F. Snyder, Cleveland, Ohio, for petitioner-appellant; Marshman,

Page 452

Snyder & Seeley, Cleveland, Ohio, on brief.

Robert S. Watkins, Atty., Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellee; Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Elmer J. Kelsey, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief.

Before BROOKS, MILLER and KENT, Circuit Judges.

KENT, Circuit Judge.

This is an appeal by the Taxpayer from an adverse decision by the Tax Court. 1 The Taxpayer is a corporation, the stock of which is held by Stephen Peplin and the members of his family. The Taxpayer contests deficiencies in corporate income tax found by the Commissioner resulting from the Commissioner's determination that for the tax years ending May 31, 1962 through May 31, 1967, the salary deducted by the Taxpayer for compensation paid to Stephen Peplin as president was unreasonably high.

Effective June 1, 1959, Stephen Peplin was paid $60,000 as President of the company. One of his sons was paid $27,500 as Secretary of the company, and the other son was paid $27,500 as Treasurer of the company. On June 1, 1961, the salaries of the officers were changed. Stephen Peplin's salary was fixed at $80,000 annually and the salaries of his sons were fixed at $32,500. On January 1, 1967, the salaries were again adjusted; Stephen Peplin's salary was fixed at $60,000, and the salaries of his sons were fixed at $40,000. As shown, the sales and profits 2 of the company each increased substantially until a disastrous fire occurred on October 3, 1961. The dividends paid were as follows:

Upon review of the Taxpayer's tax returns for the years in question the Commissioner determined, among other things, that for each of the taxable years ending May 31, 1962 through May 31, 1967, the salary paid to Stephen Peplin was unreasonably high, and determined further that the Taxpayer should not be allowed to deduct more than $60,000 of the salary paid to Stephen Peplin as a business expense for the years in question.

On the trial before the Tax Court only three witnesses were called for the Taxpayer and none for the Government. The Taxpayer called Stephen Peplin, President, one of his sons, Richard Peplin, Secretary of the corporation, and a management consultant, Mr. Richard M. Walker. The testimony of the corporate officers dealt with the activities of Stephen Peplin as President of the company with particular attention to the fact that he had built the company, that he was responsible for the sales and personally supervised production. However, Stephen Peplin testified that the company employed a full-time superintendent whose job it was to supervise plant production. With respect to...

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