KING, QUIRK & CO., INC. v. Commissioner, Docket No. 72395.
| Decision Date | 29 September 1961 |
| Docket Number | Docket No. 72395. |
| Citation | 1961 TC Memo 274,20 TCM (CCH) 1429 |
| Parties | King, Quirk & Co., Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Rollin Browne, Esq., and Cecil Browne, Esq., 30 Broad St., New York, N. Y., for the petitioner. Dean P. Kimball, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's income tax for the taxable years ended May 31, 1954 and 1955, in the amounts of $9,337.26 and $41,137.96, respectively.1 The issues for decision are:
(1) Whether the 1955 bonuses of petitioner's three officers, when added to their fixed salaries for that taxable year, constituted unreasonable compensation.
(2) Whether the fixed annual salary accrued for petitioner's secretary-treasurer in the amount of $15,000 constituted unreasonable compensation to that officer, and if not, whether petitioner's deduction for such compensation was limited under the provisions of section 24(c) of the Internal Revenue Code of 1939 to the amounts of such compensation actually paid in 1952 and 1953.
(3) Whether petitioner is entitled to deduct more than 50 percent of the club dues and charges and miscellaneous entertainment expenses incurred by its officer-stockholders and the floral expenses claimed by it on its returns for the taxable years 1954, 1955, 1956, and 1957.
Some of the facts have been stipulated and are found accordingly.
Petitioner is a corporation organized and existing under the laws of the State of New York, with its principal place of business in New York City. At all times pertinent hereto petitioner has kept its books and filed its income tax returns on the accrual method and on the basis of a taxable year ended May 31. When there is reference herein to a taxable year it is deemed to refer to a fiscal year ended May 31. Its business is that of underwriting and selling municipal bonds.
Petitioner timely filed its Federal income tax returns for the taxable years 1954, 1955, and 1956 with the district director of internal revenue for the Lower Manhattan District of New York.
Petitioner was incorporated on May 19, 1949, at which time Joseph C. Quirk, William P. King, and Richard H. Migel (hereafter sometimes called Quirk, King, and Migel, respectively) each acquired 2,000 shares of petitioner's common stock, having a par value of $10 per share. Each paid $25,000 for his shares of common stock. Migel also acquired 500 shares of petitioner's 6 percent cumulative nonvoting nonparticipating preferred stock, having a par value of $50 per share, for which he paid the sum of $25,000. The preferred stock was redeemable at $55 per share. Except for the foregoing shares of common and preferred stock, no shares of petitioner's stock have been issued or outstanding.
There have been no sales or transfers of any of the stock of petitioner, except that on January 1, 1954, petitioner purchased from Migel his 500 shares of preferred stock for which petitioner gave Migel its notes in the amount of $25,000. None of these notes have been paid but interest has been paid on them at the rate of 6 percent per annum. The shares of preferred stock have not been reissued.
During the period under review Quirk was president of petitioner, King was vice president, and Migel was secretary-treasurer. In 1958 King became president when Quirk decreased his activity in the company because of ill health.
King started in the securities business in 1929. From 1933 to 1940 he was employed by Lazard Freres & Company, an investment banking firm. From 1940 to 1942 he was a partner in and manager of the New York office of Kaiser and Company, an investment banking firm of San Francisco. From 1942 to 1949, when he helped form petitioner, he was vice president and manager of the New York office of Harris, Hall and Company, a Chicago investment banking firm.
Before 1949 Quirk had had his own personal bond business since 1930, except for the period 1942 to 1945 when he was in the Armed Forces.
Migel was educated at a preparatory school, attended Wesleyan University, and graduated from Babson Institute in 1935, when he went to work for the American Radiator Company. In 1936 he began working for Hemphill, Noyes & Company (hereafter referred to as Hemphill), an investment and stock brokerage firm in New York. He started as a messenger at a salary of $15 per week. He was a trainee with no experience, learning the investment business, and his low pay was ordinary for such trainees. At this time the investment banking business was suffering from the depression. He later worked in various departments of Hemphill, learning the different phases of the business. However, he never worked in the sales department at Hemphill and he was not called upon to devote any time or attention to getting customers for the firm. By 1942 Migel was earning $50 per week and working in the buying department, where the employees were concerned with preparing new bond issues for salesmen in the selling department. The more important departments in Hemphill were the buying and selling departments and employees in these departments were usually more highly paid, both by base salaries and by extra compensation, than other employees. It was possible for employees in the sales departments to earn extra compensation by placing or selling securities brought in by the buying department, and it was possible for employees in the buying department to earn extra compensation by bringing in a new underwriting or a deal. This pattern of compensation was typical for investment banking firms in New York City. Until 1942 when he went into the buying department, Migel had no opportunity to earn extra compensation at Hemphill.
In 1942 Migel enlisted in the army as a private. He was assigned to the Supply Division of the Air Technical Service Command, and in 1945 he was discharged as a major. His duties involved the purchasing and distribution of supplies, and he received a commendation for his work.
Migel returned to the buying department of Hemphill when he was discharged from the army in 1945. His salary when he returned was $100 per week. He had no administrative or financial responsibilities with the firm. His duties included working on plans of reorganization, merger, financing and recapitalization, field and office analyses of companies and products, and security analysis and investment analysis service. Migel's business income for the years 1946, 1947, and 1948 was $5,300, $5,100, and $5,200, respectively. In 1949 when he left Hemphill, Migel's salary was about $6,000 per year. This was his base salary; he would have participated in bonuses and, in 1949 after he went with petitioner, Migel received a bonus from Hemphill in the amount of $1,200.
Migel's progress with Hemphill was about average for that firm and for the financial area of New York City generally. It was in line with others in the same circumstances. Migel's immediate supervisor in the buying department at Hemphill left that firm shortly before Migel did and has since become president and chairman of the executive committee of a large, publicly held corporation. Migel's supervisor in the research department at Hemphill became a partner in that firm after Migel left.
In early 1949 Migel had several opportunities to leave Hemphill. He was offered the chance to become head of the New York branch of a medium-sized Chicago investment banking firm at an annual salary of $10,000 plus bonuses. Migel did not take this opportunity because he wanted to be in the home office of any firm with which he might be connected. Also, he was approached about the possibility of becoming assistant treasurer of the subsidiary of a large oil company at a starting salary of $10,000 to $15,000 per year, but he did not follow up the opportunity because he did not want to leave New York City. Migel was approached by Quirk and King, who told him that they were starting a new firm which would require some capital and asked him if he would be interested in coming with them.
Migel, who was well connected, enjoying the acquaintance of wealthy men of influence in finance, and who was active and prominent in civic and philanthropic affairs, knew Quirk as one of the leading municipal bond salesmen in the area and he knew that King was the vice president of a respected investment banking company. He told them that he was interested and they met several times before they decided to form petitioner.
Under the original plan for the capitalization of petitioner, Quirk and King were to put up $25,000 each in common stock of petitioner; Migel was to put up $25,000 in common stock and $25,000 in preferred stock. A personal friend of Quirk was to put up a substantial amount in preferred stock but for reasons of health he decided not to do it. The three men talked to bankers and found they could obtain loans for which they could put up purchased securities as collateral. Such ability to obtain loans was vital to petitioner's business and was dependent upon the personal reputations of Quirk, King, and Migel among bankers. The three men thereupon decided to go ahead with their own capital and they incorporated petitioner.
During the period here involved petitioner's business was divided into two interrelated types. Petitioner joined with other underwriters in forming syndicates to bid for new issues of bonds. Petitioner also engaged in buying and selling securities as a dealer. The syndicate work was done by King and Migel, who also engaged in the buying and distribution of securities and buying for inventory. Quirk attended primarily to selling and distribution.
On June 27, 1949, the directors of petitioner, who were King, Quirk, and Migel, fixed the salaries of the officers. The annual salaries of King and Quirk were fixed at $25,000 each; that of Migel was fixed at $15,000. However, at a meeting held on June 28, 1951, the directors...
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