Transport Manufacturing & Equipment Co. v. CIR

• Decision Date: 05 November 1970
• Docket Number: No. 19695,19696.,19695
• Citation: 434 F.2d 373
• Parties: TRANSPORT MANUFACTURING & EQUIPMENT COMPANY, a Delaware Corporation, Transferee, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. TRANSPORT MANUFACTURING & EQUIPMENT COMPANY, an Illinois Corporation, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

434 F.2d 373 (1970)

TRANSPORT MANUFACTURING & EQUIPMENT COMPANY, a Delaware Corporation, Transferee, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

TRANSPORT MANUFACTURING & EQUIPMENT COMPANY, an Illinois Corporation, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Nos. 19695, 19696.

United States Court of Appeals, Eighth Circuit.

October 1, 1970.

As Amended On Rehearing November 5, 1970.

COPYRIGHT MATERIAL OMITTED

Guy A. Magruder, Jr., Kansas City, Mo., for appellants, and filed brief and reply brief.

Daniel B. Rosenbaum, Atty., Dept. of Justice, Washington, D. C., for appellee, and filed brief; Johnnie M. Walters, Asst. Atty. Gen., and Meyer Rothwacks and Michael B. Arkin, Attys., were on the brief.

Before BLACKMUN,^* MEHAFFY and LAY, Circuit Judges.

LAY, Circuit Judge.

Two appeals have been lodged by taxpayers from adverse decisions of the Tax Court. They have been consolidated for review in this court. The petitioner contests in No. 19,696 the Tax Court's decision (T.C. Memo 1964-190) upholding the Commissioner's disallowance of certain deductions for unreasonable compensation, non-business expenses and capital expenditures. In No. 19,695 the taxpayer contests the Tax Court's decision (T.C. Memo 1968-189) adjudicating interest on the interest assessed under a jeopardy assessment pursuant to § 273 of the 1939 Internal Revenue Code.¹ We affirm the findings of deficiencies by the Tax Court in No. 19,696. We reverse the determination as to the interest question in No. 19,695 because of lack of jurisdiction of the Tax Court to pass upon this issue.

Two corporations are generally involved here: Riss & Company and Transport Manufacturing & Equipment Company (hereinafter TM&E).² During the years in question, 1949-1953, Riss & Co. was a common carrier engaged in interstate and intrastate motor freight transportation. TM&E's principal business was the owning and leasing of tractors, trailers and terminal facilities to Riss & Co. TM&E was organized chiefly as a business convenience to Riss & Co. Richard R. Riss, Sr., the founder of Riss & Co., was chairman of the board and the chief executive officer of both Riss & Co. and TM&E. He owned all of the voting stock of Riss & Co. He and his family were essentially equal shareholders of TM&E. Robert Riss, son of Riss, Sr., became president of Riss & Co. in 1950. Richard R. Riss, Jr., another son, became president of TM&E in 1951. The two companies had their offices at the same location, and, for the most part, utilized the same office force and facilities. TM&E had usually three or four employees who were office workers and secretaries. The supervisors and terminal managers were on the Riss & Co. payroll.

No. 19,696: Deficiencies

(1) Unreasonable compensation.

The Commissioner urges the disallowance of the excess salaries paid to Richard R. Riss, Jr., in the years 1951 to 1953 on the ground that the payments constituted unreasonable compensation. The Commissioner had previously determined $12,000 to be the reasonable amount. The Tax Court found that any salary to Richard over $15,000 was excessive. Richard's salaries for the years in question were as follows: 1951, $24,688.26; 1952, $31,807.81; 1953, $46,286.36.

We affirm the Tax Court's disallowance of the deductions to the extent they exceed $15,000 per year. The evidence showed that Richard, at age 26, succeeded his father as president of TM&E in 1951 and held that position until his resignation in April, 1955, at which time his father again assumed the presidency. His only previous executive experience had been as the vice-president of TM&E during 1950. Richard testified that he had worked for the company since age 14, that he put in long hours and was concerned with all phases of the company's business. Notwithstanding these facts, the Tax Court had before it evidence that Riss, Sr. had authority to, and on occasion did, sign his son's name as president to various TM&E contracts. It was further testified that Riss, Sr. retained control over the company's policy and over the final decisions concerning the company. Riss, Jr. testified that the filial relationship could have been instrumental in his appointment.

Richard's compensation as president of TM&E was determined on the basis of a percentage of Riss & Co.'s gross revenue. The taxpayer contends that the Tax Court found this fact to render the compensation per se unreasonable. While it appears that the Tax Court placed strong emphasis on this evidence, there is no indication, nor can it be inferred from its opinion, that the Tax Court found this to be the sole reason for holding Richard's salary excessive. This was merely a factor to be considered. The percentage method is an accepted and recognized means of fixing compensation in business in which employee activity can stimulate net earnings. See 9 Mertens, Law of Federal Income Taxation § 25.75 (1965 Rev. ed.). It should be noted, however, that Riss, Jr. was the only TM&E officer whose compensation was determined on a percentage basis of Riss & Co.'s income. There was testimony by both Richard and his father that it was his father's desire that both his sons receive the same salary since their responsibilities were as great and because he "didn't want to cause any animosity between the two boys of one having a few dollars more salary than the other, so he made them exactly the same."

It is argued that the Commissioner produced no evidence of his own to demonstrate that the amount paid Richard as president of TM&E was unreasonable compared to similarly situated executives of other companies. However, this contention overlooks the essential issue. In dispute is not the salary of simply the president of a corporation, but rather, the salary paid to Richard as president. The Tax Court properly considered Richard's prior salaries in comparison, his lack of qualifications and executive experience, his virtually non-existent authority, and the basis of his compensation computation. Standard Asbestos Mfg. & Insulating Co. v. Commissioner, 276 F.2d 289 (8 Cir. 1960); Heil Beauty Supplies v. Commissioner, 199 F.2d 193 (8 Cir. 1952); Helvering v. Superior Wines & Liquors, 134 F.2d 373 (8 Cir. 1943); Julia Dahl et al., Executors, 24 B.T.A. 1167 (1931); Meyer Hecht, 2 B.T.A. 319 (1925). Cf. Robert Louis Stevenson Apartments, Inc. v. Commissioner of Internal Revenue, 337 F.2d 681 (8 Cir. 1964); Baltimore Dairy Lunch, Inc. v. United States, 231 F.2d 870 (8 Cir. 1956); Oscar Mitchell, 27 B.T.A. 101 (1932). We are satisfied there is nothing in the record which demonstrates the Tax Court's finding to be clearly erroneous. United States v. United States Gypsum Co., 333 U.S. 364, 394-395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). See also Jackson v. Hartford Acc. & Indem. Co., 422 F.2d 1272, 1275 (8 Cir. 1970) (concurring opinion).

(2) Deductibility of "business expenses" on residential properties.

During the years involved, TM&E owned three residential properties in the Kansas City area. All were rented to members of the Riss family and the taxpayer deducted the repair and maintenance costs exceeding rents as ordinary and necessary business expenses. The Tax Court held all of these to be improper corporate deductions. The taxpayer appeals only the disallowance relating to the maintenance and repair of the property located at 6505 State Line, Kansas City, Missouri. This property consists of a twenty-room residence situated on four and one-half acres of land. It was purchased by TM&E in 1949 for a little over $97,000 and was soon thereafter placed on the market, via a confidential listing, with a sale price of $125,000. It is contended that the residence was purchased as a business investment for the corporation.

Although conceding that payment of utilities and salaries of household employees were of substantial benefit to the occupants, the taxpayer contends that insurance, depreciation and identifiable maintenance costs should be deductible under § 23 of the 1939 Internal Revenue Code. Section 23(a) (1) (A) authorizes deductions for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *" Section 23(l) authorizes deductions for the depreciation "(1) of property used in the trade or business, or (2) of property held for the production of income." The Tax Court found the evidence affirmatively established that the property had no business use in conjunction with TM&E's leasing rolling stock and terminals to Riss & Co. We agree.

During the tax years in question the residence was used for the periodic occupancy of Riss, Sr.'s former wife (divorced in 1949) and their daughter and son Richard, Jr. Taxpayer contends the use as a family residency was at the recommendation of the real estate agent who advised the company that an occupied house would sell better. While the property was purportedly listed confidentially with several realtors, there was other evidence produced by the Commissioner which disputed TM&E's good faith attempt to sell. The home was shown only about eight or ten times in ten years. The rental proceeds amounted to a mere one-fourth of the deductions sought. TM&E purchased no similar "investments" which were not occupied by members of the Riss family. A combination of all of these factors fully justified the Tax Court in finding that the primary motive in owning the property was not for business or investment purposes but rather for the personal benefit of the Riss family. See e. g., Mel Dar Corp. v. Commissioner of Internal Revenue, 309 F.2d 525 (9 Cir. 1962) cert. denied, 372 U.S. 941, 83 S.Ct. 933, 9 L.Ed.2d 967 (1963); International Trading Co. v. Commissioner of Internal Revenue, 275 F.2d 578 (7 Cir. 1960).

The taxpayer additionally asserts that the only direct evidence on the investment motive was from the Riss family and that the conclusion reached by the Tax Court was not permissible under the undisputed...