Pepsi-Cola Bottling Co. of Salina v. Comm'r of Internal Revenue
| Citation | 61 T.C. 564 |
| Decision Date | 29 January 1974 |
| Docket Number | Docket No. 6362-72. |
| Parties | PEPSI-COLA BOTTLING COMPANY OF SALINA, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Thomas J. Kennedy, for the petitioner.
Joe K. Gordon, for the respondent.
Sole executive officer of a corporation had been compensated for the years in issue under a corporate resolution which had remained unchanged for 12, 13, and 14 years, respectively, and which was no longer realistic because of related changing factors and circumstances. On consideration of all relevant facts of record, reasonable compensation for personal services actually rendered is found under sec. 162, I.R.C. 1954.
Respondent has determined deficiencies in the income taxes of the petitioner for the calendar years 1968, 1969, and 1970 in the respective amounts of $35,158.05, $47,859.44, and $50,783.89. The sole issue now remaining for our decision is whether the salary paid by petitioner to its president and sole stockholder, Verla Nesbitt Joscelyn, was excessive to the extent that it exceeded $40,000 for each of the years in issue.
Some of the facts have been stipulated and are so found.
Petitioner's registered and principal office has at all times been located in Salina, Kans., and was so located at the time the petition was filed. Its corporate income tax returns for the years in issue were filed with the district director of internal revenue at Austin, Tex.
Verla Nesbitt Joscelyn (Verla) and her then husband, R. W. Nesbitt, moved to Salina, Kans., and started a Pepsi-Cola bottling business in about 1941. An explosion occurred in the bottling plant in 1945 which killed R. W. Nesbitt and Verla continued operating the business as sole proprietor until July 1, 1955, at which time she caused the business to be incorporated as Pepsi-Cola Bottling Co. of Salina, Inc. (petitioner), under the laws of the State of Kansas. Petitioner has been engaged continuously since that time in such business which involved the manufacture, packaging, and distribution of Pepsi-Cola, 7-Up, Dr. Pepper, and other soft drink beverages within franchised territories in north-central Kansas, which territories were and are geographically exclusive in nature.
Verla has served as president and general manager of petitioner since its incorporation and has at all times held 248 of its outstanding 250 shares of stock.
Less than a year after its incorporation and on February 14, 1956, petitioner's directors adopted the following resolution which has remained continuously in effect since that time and which sets forth the compensation arrangement for Verla as follows:
BE IT RESOLVED, THAT the compensation of Verla Nesbitt, for her services as Manager of the business of this corporation, be and the same is hereby fixed at an annual salary of $6,000.00 per year, and an annual bonus based on the net income of this corporation for its respective calendar year after deduction of all expenses other than Federal and State corporate income taxes, in an amount to be determined by totaling the sums resulting from application of percentages to brackets of such net income, as follows: 10% of the first $10,000.00; 20% of the next $10,000.00; and 30% of all such net income in excess of the first $20,000.00.
Verla has been compensated in accordance with this resolution since its adoption and the following table shows petitioner's net sales, taxable income, stockholder's equity, and Verla's compensation (salary plus bonus) for the years 1956 through 1970:
During the years in issue Verla was 63, 64, and 65 years old, respectively, was in good health and continued to be active in petitioner's business. She was petitioner's only active executive officer for all of the years since its inception, had no other business activities and worked 50 to 70 hours a week, 6 days a week and on Sundays, if necessary, in petitioner's behalf.
During the years in issue petitioner employed a total of 56, 60, and 64 persons, respectively.
Pepsi-Cola Co. (the national company) considers that one of the best measures of a successful Pepsi-Cola franchise holder is the per capita consumption within its franchise territory. By this standard petitioner ranked first in the State of Kansas and in the top 5 percent of the approximately 500 Pepsi-Cola bottling plants in the United States.
Petitioner has never paid a dividend.
The parties have presented as a joint exhibit, and both seem to rely upon, the Fourth Financial Survey of the Soft Drink Industry published in 1969 by the National Survey of the Soft Drink Industry published in 1969 by the National Soft Drink Association of Washington, D.C. This survey was conducted and compiled by Arthur Young & Co. during 1968 and also includes certain data from previous surveys conducted in 1962, 1964, and 1966. Because of the disparity of the sizes of reporting companies, compilations and specific items are all expressed as percentages of net sales. The survey reports 1968 data from all reporting companies (92); reports 1968 data for companies with gross sales of from $1 to $2 million1 (25 companies); and reports 1968 data for companies located in the west-central geographic region (region No. 4) which includes Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota (14 companies).
We make the following findings of fact based upon such survey, and from evidence of record regarding petitioner for 1968:
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¦ ¦ ¦ ¦ ¦ ¦
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¦ ¦ ¦Companies ¦ ¦ ¦
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¦ ¦All ¦with $1 to¦Geographic ¦ ¦
¦ ¦reporting ¦ ¦ ¦ ¦
+-----------------------------+------------+----------+------------+----------¦
¦ ¦companies ¦$2 million¦region 4 ¦Petitioner¦
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¦ ¦(92) ¦sales (25 ¦(14 ¦ ¦
¦ ¦ ¦ ¦companies) ¦ ¦
+-----------------------------+------------+----------+------------+----------¦
¦ ¦ ¦companies)¦ ¦ ¦
+-----------------------------+------------+----------+------------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
+-----------------------------+------------+----------+------------+----------¦
¦Net operating income 1 ¦7.67% ¦7.84% ¦8.89% ¦7.58% ¦
+-----------------------------+------------+----------+------------+----------¦
¦Salaries 1 of owners, ¦ ¦ ¦ ¦ ¦
¦partners, ¦ ¦ ¦ ¦ ¦
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¦and executive officers ¦ ¦ ¦ ¦ ¦
¦(number ¦ ¦ ¦ ¦ ¦
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¦not specified except one as ¦ ¦ ¦ ¦ ¦
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¦regards petitioner) ¦3.10% ¦2 2.82% ¦3.97% ¦3 3.40% ¦
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¦Total number of employees ¦83 ¦60 ¦42 ¦4 56 ¦
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¦ ¦ ¦ ¦ ¦ ¦
+-----------------------------+------------+----------+------------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
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1 Expressed as a percentage of net sales.FN2 This figure is expressed for various sized companies as follows:FN3 Petitioner's figure for 1969 is 4 percent and its figure for 1970 is 4.1 percent.FN4 This figure was 60 for 1969 and 64 for 1970.
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¦Companies with gross sales of ¦Executive officers ¦
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¦ ¦salaries ¦
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