JD Van Hooser & Co. v. Glenn
| Decision Date | 18 February 1943 |
| Docket Number | No. 439.,439. |
| Parties | J. D. VAN HOOSER & CO. v. GLENN, Collector of Internal Revenue. |
| Court | U.S. District Court — Western District of Kentucky |
Lewis C. Carroll and Raymond F. Bossmeyer, both of Louisville, Ky., for plaintiff.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Andrew D. Sharpe and Edward First, Sp. Assts. to Atty. Gen., and Eli H. Brown, III, U. S. Atty., of Louisville, Ky., for defendant.
J. D. Van Hooser & Company is a corporation organized under the laws of Delaware on June 14, 1934, with an authorized capital stock of $25,000, par value $100.00 per share. 144 shares of capital stock were issued to J. D. Van Hooser; 3 shares to Mrs. J. D. Van Hooser (wife of J. D. Van Hooser), and 3 shares to L. W. Keller, an employee of the company. The ownership of the stock continued unchanged up to and including the entire year of 1936.
On March 15, 1937, the plaintiff filed its Income and Excess Profits Tax Return for the calendar year 1936, showing a tax due of $1,185.38, which was paid in full on that day.
The said return was thereafter examined by representatives of the Bureau of Internal Revenue, and on July 7, 1939, an additional tax in the sum of $1,449.67 was assessed against the plaintiff.
On July 21, 1939, the plaintiff, by and through Yeager & White, its agent, acting under a power of attorney, entered a protest against said assessment with the Internal Revenue Agent in Charge, on the ground that $30,000 paid to J. D. Van Hooser in the year in question was a reasonable deduction for compensation, and that no part thereof should have been disallowed; the protest was disallowed, and on January 23, 1940, notice and demand was made on this plaintiff for the above assessment, with interest, in the total sum of $1,695.28 for the said year; the plaintiff paid the above amount to Seldon R. Glenn, Collector Internal Revenue, February 5, 1940; on July 28, 1940, a claim for refund was filed by this plaintiff for the recovery of said taxes, penalties and interest. Under date of November 4, 1940, the Commissioner of Internal Revenue notified the plaintiff by registered mail that his claim for refund of $1,695.28 for the year 1936 was rejected in full.
The aforesaid assessment of additional tax resulted from the disallowance of $10,000 of the claimed compensation for the year 1936 from the plaintiff to J. D. Van Hooser of $30,000, and from the further net adjustment to income of $79.99, which is not now in dispute. The adjustments referred to are as follows:
Addition to profits on sales .................... $ 418.54
Disallowance of depreciation .................... 104.06
Disallowance of $10,000 of the claimed $30,000
compensation to J. D. Van Hooser .............. 10,000.00
__________
10,522.60
Less deduction of non-taxable income ............ 442.61
__________
Net adjustment .................................. 10,079.99
The gross profit on the sale of securities by the plaintiff for the year 1936, as adjusted by the Examining Agent's report, was as follows:
"Sales ................................... $3,005,787.08
Less: Cost of sales
Inventory 1/1/36 .... 107,886.58
Purchases ........... 2,938,034.35
_____________
3,045,920.93
Inventory 12/31/36 101,850.76 2,944,070.17
_____________ ____________
Gross Profit on Sales ............ $ 61,716.91"
The net taxable income of the plaintiff for the year 1936, as disclosed on its tax return, which reported a deduction of $30,000 for compensation to J. D. Van Hooser, was $7,548.71. If the item of $10,000, which is now in dispute, is eliminated from the adjustment referred to in Paragraph 4, the net taxable income of the plaintiff for the year 1936 would be $7,628.70.
The balance sheet of the plaintiff as reflected on its books of account, as of December 31, 1935, and December 31, 1936 was as follows:
Balance Sheet
"Dec. 31, 1935
Assets: Per Books
Accts. Rec. ...................... 6.00
Inventory ........................ 107,886.58
Impr. to Leased Prop. ............ 2,460.00
Furn. & Fixt. .................... 1,047.65
Premium Warrants ................. 363.17
__________
Total Assets ................. 111,763.40
Liabilities
Notes Pay ........................ 76,600.00
Due J. D. Van Hooser ............. 6,500.00
Cash Overdraft ................... 52.86
Res. for Deprec
Capital Stock .................... 15,000.00
Surplus .......................... 13,610.54
___________
Total ........................ 111,763.40
Dec. 31, 1936
Assets
Cash ............................. 4,580.50
Accts. Rec. ...................... 45.23
Inventory ........................ 108,795.39
Furn. & Fixt. .................... 1,061.65
Leasehold Impr. .................. 1,771.06
__________
Total Assets .................. 116,253.83
Liabilities:
Notes Payable .................... 55,000.00
Due J. D. Van Hooser ............. 19,778.74
Accrued Taxes .................... 1,652.99
Repurchase agreement ............. 7,000.00
Deprec. Reserve .................. 210.23
Capital Stock .................... 15,000.00
Surplus .......................... 17,611.87
__________
Total ......................... 116,253.83"
On December 19, 1936, a meeting of the Board of Directors of the plaintiff was held, at which there were present all the directors, to-wit: J. D. Van Hooser; Mrs. J. D. Van Hooser; and Wm. B. Holton.
The following is a copy of the minutes of that meeting which reflect the action then taken by the Board:
During the year 1936 the $30,000 referred to in the above resolution was paid by the company to J. D. Van Hooser, or any part thereof that was not paid was accrued as a liability on the books of the company, and credited thereon to his account. The company used an accrual system of accounting, and made its income and excess profits tax return likewise on that basis.
The amount of $41,150 claimed by the plaintiff as a deduction for compensation of officers on the 1936 income and excess profits tax return consisted of the following items:
J. D. Van Hooser, President ... $30,000.00
Wm. B. Holton, Vice-President 8,900.00
Harry L. Russell, Secretary ... 2,250.00.
J. D. Van Hooser, President of the plaintiff company, was approximately 42 years of age in 1936. His business training and experience was as follows: Beginning 1916 he was employed for about two years in the finance department of the City of Nashville, Tennessee. He then was employed by the National City Bank of New York, working for about a year in its bond department in the Chicago office, and acting for about two years as manager of its Kentucky office in Louisville, Kentucky. About June 1920 he became manager of the bond department of the Security Trust Company of Lexington, Kentucky, later became Vice President of that institution, which was one of the leading financial institutions in Eastern Kentucky. He remained with the Security Trust Company until 1934, and while with that institution he also operated, with the approval of the Trust Company, a separate company which handled financial transactions which were not eligible for handling by the Trust Company. He had particular experience in public utility company transactions. His compensation from the Security Trust Company was a guaranteed minimum of $6,000 per year with a bonus depending upon the earnings of his department for the particular year in question. In every year, except one, he received more than the minimum of $6,000. The banking laws were changed in 1934 in such a way as to materially affect the business which Van Hooser was handling for the Security Trust Company and accordingly, he resigned his position at the Trust Company and in June 1934 organized the J. D. Van Hooser and Company Corporation, the plaintiff in this action. This company took over the business which the Security Trust Company had been handling and could not continue with by reason of the change in the banking laws.
J. D. Van Hooser and Company was an investment house, engaged chiefly in the purchase and sale of securities of different types, and buying securities as a member of a buying syndicate and marketing them to the public through its own organization. The successful operation of such a company required not only training and experience, but also initiative in discovering and analyzing possible favorable transactions. Technical investigations of particular situations were often required in...
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