500 F.2d 148 (8th Cir. 1974), 73-1798, Charles Schneider & Co., Inc. v. C.I.R.

Docket Nº:73-1798 to 73-1802.
Citation:500 F.2d 148
Party Name:CHARLES SCHNEIDER & CO., INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. FUTURE FOAM, INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. CHARLES, INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. CENTRAL WOODWORKING CO. INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
Case Date:July 10, 1974
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 148

500 F.2d 148 (8th Cir. 1974)

CHARLES SCHNEIDER & CO., INC., Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Appellee.

FUTURE FOAM, INC., Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Appellee.

CHARLES, INC., Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Appellee.

CENTRAL WOODWORKING CO. INC., Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Appellee.

Nos. 73-1798 to 73-1802.

United States Court of Appeals, Eighth Circuit.

July 10, 1974

Submitted May 13, 1974.

Page 149

Joel Davis, Omaha, Neb., for appellants.

Louis A. Bradbury, Atty. Tax Div., Dept. of Justice, Washington D.C., for appellee.

Before JOHNSEN and VAN OOSTERHOUT, Senior Circuit Judges, and TALBOT SMITH, Senior District Judge. [*]

VAN OOSTERHOUT, Senior Circuit Judge.

The taxpayer corporations in the above-entitled cases, which were consolidated in the Tax Court and here, have taken timely appeals from the decision of the Tax Court determining deficiency income tax liability against Charles Schneider & Co., Inc. (C.S. & Co.), for the taxable years ending June 30, 1966, 1967 and 1968, in the amounts of $23,512.40, $15,333.42 and $21,721.05 respectively, and determining income tax deficiency against Future Foam, Inc., for the taxable years ending August 31, 1966, 1967 and 1968, in the amounts of $18,130.17, $3,475.46 and $7,365.58 respectively. The Tax Court's opinion filed June 18, 1973 is reported at 31 TCM 553 (1973). Decision was entered in accordance with the opinion on August 22,1973. This appeal followed.

Many issues involved in this litigation have been resolved and are no longer in

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controversy. Taxpayers in their brief challenge the Tax Court's determination that under the facts of this case Charles, Inc., was not entitled to file a consolidated return with its subsidiary Chemical Corporation of America. Such issue was specifically abandoned by taxpayers on oral argument. In any event, the decision of the Tax Court on the issue is entitled to be affirmed on the basis of the Tax Court's opinion.

The issue before us is whether taxpayers C.S. & Co. and Future Foam, Inc., are entitled to ordinary and necessary business expense deductions under § 162(a)(1) I.R.C. 1954 for the compensation paid their chief executive officers for the years ending in 1966, 1967 and 1968, in excess of the amount which the Tax Court found to be reasonable compensation for services rendered to the corporations. 1 More specifically, the issue is whether the Tax Court's determination of the amount of executive compensation paid by C.S. & Co. and Future Foam, Inc., which is deductible as a reasonable expense, is clearly erroneous. We hold that the Tax Court's decision is supported by substantial evidence and is not clearly erroneous and affirm the judgment.

The record in this case is long. Much of the evidence is stipulated. Evidence was offered in the Tax Court by both parties. Many exhibits were received in evidence. The pertinent evidence is fairly set out in considerable detail in the Tax Court's opinion. An attempt to set out all of the facts would unduly prolong this opinion. We shall briefly summarize the basic facts. Taxpayers C.S. & Co., Future Foam, Inc., Charles, Inc., and Central Woodworking Co., Inc., are all active in various aspects of the furniture and upholstering manufacturing business at Council Bluffs, Iowa. Charles Schneider played the principal part in organizing and developing such corporations. His efforts contributed significantly to the successful operation of the corporations. During the tax years here in controversy all of the stock in C.S. & Co., 60% Of the stock in Future Foam, Inc., 50% Of the stock in Central Woodworking Co., Inc., and possibly all of the stock in Charles, Inc. 2 was owned by Charles Schneider. Schneider, after substantially completing a law school course and serving in World War II, started a furniture and upholstery business about 1946. In 1954 this business was incorporated as C.S. & Co. with Schneider as president and his brother-in-law, Leon Summer, as vicepresident. Summer became president in 1963 and assumed active management. Summer had an option to purchase C.S. & Co. stock which he never exercised. Schneider at all times owned all of the corporate stock and maintained an active role in the company's affairs. In 1963 an agreement was entered into providing a basic salary of $351.00 per week for Summer and $230.00 per week for Schneider, plus bonuses to be computed as follows:

Bonus No. 1.

If there was sufficient net income

Three-fourths of 1% Of annual net sales divided equally between Schneider and Summer. Bonus No.2.

After deductions from net profits for: (a) Schneider's and Summer's salaries and No. 1 bonuses. (b) 2% Of net sales for retained earnings;

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(c) federal income taxes; (d) state income taxes; remainder to be divided equally between Schneider and Summer.

The amount of compensation paid by C.S. & Co. based on basic salaries and bonuses No. 1 and No. 2 for the fiscal years ending in 1966, 1967 and 1968 was $65,104.94, $59,052.98 and $65,000.00 to Schneider and $74,414.50, $66,357.95 and $74,089.36 to Summer. Bonus No. 2 provided the major portion of the compensation paid to the executives. It is undisputed that C.S. & Co. has never paid a dividend. With respect to each of the taxable years here involved, the Commissioner disallowed deductions to C.S. & Co. for compensation paid...

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