Lakewood Manufacturing Company v. CIR

• Citation: 453 F.2d 451
• Decision Date: 04 January 1972
• Docket Number: 71-1224.,No. 71-1223,71-1223
• Parties: LAKEWOOD MANUFACTURING COMPANY, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

453 F.2d 451 (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, 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 profits² of the company each increased substantially until a disastrous fire occurred on October 3, 1961. The dividends paid were as follows:

                                                 Dividends
                   Fiscal Year                    Paid to
                      Ended          Dividends    S.C.P.*
                  May 31, 1959      $ 4,000       $ 3,000
                  May 31, 1960       ______        ______
                  May 31, 1961       12,000         9,000
                  May 31, 1962       19,500        14,500
                  May 31, 1963        4,875         3,625
                

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 the sales work, Stephen Peplin testified that the company preferred to have two or three customers and tried not to exceed a half dozen. Stephen Peplin also testified as to his extensive activities in connection with the settlement with the insurance companies for the loss sustained as a result of the fire on October 3, 1961.

The Management Consultant in forming the opinion that Stephen Peplin's salary was reasonable relied upon the fact that other companies would under most circumstances have a sales manager, a production manager and other similar staff personnel. He pointed out that the salary paid to Stephen Peplin was substantially less than would have been required to compensate the staff members whom he found present in other companies.

The scope of appellate review in tax disputes has been determined by the Supreme Court of the United States in Commissioner v. Duberstein, 363 U.S. 278, 290, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), as follows:

But the question here remains basically one of fact, for determination on a case-by-case basis.

One consequence of this is that appellate review of determinations in this field must be quite restricted. Where a jury has tried the matter upon correct instructions, the only inquiry is whether it cannot be said that reasonable men could reach differing conclusions on the issue. Baker v. Texas & Pacific R. Co., supra, at 228. Where the trial has been by a judge without a jury, the judge\'s findings must stand unless "clearly erroneous." Fed.Rules Civ.Proc., 52(a). "A finding is `clearly erroneous\' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746. The rule itself applies also to factual inferences from undisputed basic facts, id., at 394, 68 S.Ct. 525, 92 L.Ed. 746, as will on many occasions be presented in this area. Cf. Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 609-610, 70 S.Ct. 854, 94 L.Ed. 1097. And Congress has in the most explicit terms attached the identical weight to the findings of the Tax Court. I.R.C., § 7482(a).

and this Court has long recognized that the issue of the reasonableness of the compensation of corporate officers is a question of fact; Al Haft Sport Enterprises v. C. I. R., 189 F.2d 384 (6th Cir., 1951); Wright-Bernet, Inc. v. C. I. R., 172 F.2d 343 (6th Cir., 1949); Roth Office Equipment Co. v. Gallagher, 172 F. 2d 452 (6th Cir., 1949); Mayson Mfg. Co. v. C. I. R., 178 F.2d 115 (6th Cir., 1949), and the other Circuits are in accord. Golden Construction Co. v. C. I. R., 228 F.2d 637 (10th Cir., 1955); Huckins Tool and Die, Inc. v. C. I. R., 289 F.2d 549 (7th Cir., 1961); Perlmutter v. C. I. R., 373 F.2d 45, (10th Cir., 1967). The factors to be considered in determining the reasonableness of compensation paid to corporate officers are set forth in Patton v. C. I. R., 168 F.2d 28, 31 (6th Cir., 1948):

There is no hard and fast rule by which reasonableness of compensation may

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