Bringwald, Inc. v. United States
| Decision Date | 16 October 1964 |
| Docket Number | No. 136-61.,136-61. |
| Citation | 334 F.2d 639 |
| Parties | BRINGWALD, INC. v. The UNITED STATES. |
| Court | U.S. Claims Court |
John E. McClure, Washington, D. C., for plaintiff. John P. McClure, Washington, D. C., was on the brief.
Robert Livingston, Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner, Philip R. Miller, and Earl L. Huntington, Washington, D. C., were on the brief.
Before JONES, Senior Judge, WHITAKER, LARAMORE, DURFEE and DAVIS, Judges.
This is an action to recover $15,729.58 as alleged overpayment of Federal income tax and interest for the years 1953-1955. The principal issue in this case concerns the reasonableness of salaries paid a husband and wife who were the officers and virtually sole stockholders of the corporate taxpayer.
The taxpayer is a small truck-leasing company in Terre Haute, Indiana. At all times material here, it had one class of stock of which 254 of the 256 outstanding shares were owned by Leo and Mildred Bringwald, husband and wife. The other two shares were owned by Leo's parents. Leo was the president and general manager of the taxpayer and Mildred was its secretary-treasurer.
In its tax returns for the fiscal years ending September 30, 1953-1955, the taxpayer deducted as salaries $21,000, $29,000, and $26,000, respectively to Leo,2 and $2,700 each year to Mildred. The Commissioner of Internal Revenue determined that the amounts claimed were unreasonable, and that $12,000 per year for Leo and $600 per year for Mildred were allowable for tax purposes. The taxpayer paid the resulting deficiencies and filed its claims for refund. After the claims for refund were disallowed by the Commissioner, the taxpayer timely instituted the present action.
Leo is the son of Will Bringwald, who owned the Bringwald Transfer, Inc., a certified truck-line carrier with its principal offices in Vincennes, Indiana. In 1938, the Weston Paper & Manufacturing Company of Terre Haute engaged Bringwald Transfer, Inc., to haul a few loads of paper between its plants in Terre Haute and St. Marys, Ohio. At the urging of his father, Leo purchased a truck and trailer and in late 1938 moved to Terre Haute with the idea of capitalizing on the business of Weston Paper. Leo operated as a sole proprietorship in Terre Haute until 1946 when the taxpayer was incorporated.
Approximately 98 percent of the taxpayer's business was obtained from hauling paper for customers of Weston Paper and its subsidiary, the Wabash Fibre Box Company of Terre Haute. Weston Paper actually paid for these services and billed its consignees on a freight prepaid basis, but Leo generated the business by persuading Weston Paper's customers to request shipping by truck instead of rail. Although Weston Paper paid the freight charges, it respected the wishes of its customers for business reasons.
Leo and Mildred Bringwald's home was located adjacent to the garages and parking area for taxpayer's trucks. The taxpayer had no office as such in Terre Haute. There was a desk in the living room of the house and a file cabinet in the children's room.
An undetermined part of Mildred's time was devoted to personal services for the taxpayer. However, her primary occupation was that of a housewife and mother. During the years in issue, she served as secretary-treasurer and a director of the taxpayer. Other than being a director, she answered the telephone in the house, helped in processing bills of lading and bills from creditors, and checked monthly statements against invoices and other charges. There was a telephone extension in the garage where Leo spent a fair amount of his time when not in the house. It was the practice that Mildred would let the phone ring a few times to see if Leo or one of the men would answer it in the garage. If no one answered the phone on the garage extension, Mildred would answer it and take any message.
For the years in issue, the operations of the taxpayer can be summarized by the following table:
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| | | | Total |
| | | | invested |
Year | Gross | Net income | Net income | capital | Rate of
| sales | before taxes3 | after taxes3 | as of the | return3
| | | | beginning |
| | | | of the year |
-----------|-------------|----------------|--------------|---------------|----------------
| | | | | Percent
| | | | |
1953 ......| $175,611 | $1,568 | $835 | $99,532 | 0.84
1954 ......| 203,068 | 1,664 | 382 | 100,367 | 0.38
1955 ......| 224,839 | 8,731 | 5,966 | 100,749 | 5.92
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No dividends have ever been formally paid by the taxpayer.
After dealing with Weston Paper for a while, Leo recognized the need for a trucking company in St. Marys, Ohio, in order to render better service to Weston. He therefore organized a new company, the St. Marys Trucking Company, for this purpose. The principal customer of this new company has also been Weston Paper. A Mr. Braunschweiger was hired as president of St. Marys Trucking Company. Braunschweiger acted both as president and general manager of the new company and Leo's supervision was primarily done by telephone. Braunschweiger's compensation was $6,148.79 in 1953, $8,149.15 in 1954, and $10,000 in 1955. Leo received no salary from the St. Marys Trucking Company, although he performed services for it. The operations of the St. Marys Trucking Company, for the years 1953-1955, can be summarized by the table below:
---------------------------------------------------------------------------------------
| | | | Total |
| | | | invested |
Year | Gross | Net income | Net income | capital | Rate of
| sales | before taxes | after taxes | as of the | return
| | | | beginning |
| | | | of the year |
-----------|-------------|----------------|-------------|-------------|----------------
| | | | | Percent
| | | | |
1953 ......| $87,530 | $1,849 | $1,168 | $45,841 | 2.55
1954 ......| 95,143 | 6,342 | 4,440 | 47,009 | 9.45
1955 ......| 147,054 | 12,660 | 8,862 | 51,449 | 17.23
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There is also in the record evidence as to amounts paid to the general managers of two other Terre Haute trucking companies, both of which were substantially larger companies than the taxpayer. In one, the Merchants Freight System, Inc., a Mr. Maloney was hired as the general manager in 1960 and he received $9,204 as compensation in 1961. In the other company, Motor Freight Corporation, the general manager was also an officer and a director and had been with the company since 1940. Its substantial growth was largely attributable to his efforts. Its net income during 1953-1955 was substantial; the rate of return on invested capital ranged from 19-33 percent per year before Federal income taxes. Neither of the above individuals owned stock in their respective companies. The latter individual received as total compensation $18,655, $19,431, and $21,653, for the years 1953-1955, respectively; from one-third to two-thirds of these amounts were in the form of a bonus which was dependent upon the amount of net income of the company.
Our trial commissioner, after hearing the evidence, concluded that there was no true comparison between the services rendered to the taxpayer by Leo Bringwald and those rendered by the general managers of the two other trucking companies in Terre Haute. It was his opinion that Leo Bringwald's "complete devotion to the plaintiff company from its inception many years before, his success and ingenuity in promoting the business from an idea to a prosperous reality over a period of 15 years, do not seem to make an annual salary of $24,000 unrealistically disproportionate to his worth to the company." The same was said of Mrs. Bringwald's salary of $2,700 during each of the three taxable years in issue.
The Government's position is that the taxpayer has not overcome the presumption of correctness in favor of the determinations of the Commissioner of Internal Revenue. The Government points to the low rate of return on invested capital and the fact that the taxpayer has never paid a formal dividend in its history and contends that these facts support an inference that the disputed payments, in part, constituted a distribution of profits because of ownership of the taxpayer rather than compensation for personal services rendered. Furthermore, the Government contends the comparative evidence introduced supports the determinations of the Commissioner of Internal Revenue as being reasonable.
The taxpayer appears to be contending that since the trial commissioner has found for the taxpayer, the sole question now before the court is whether those findings are clearly erroneous. The taxpayer's "ultimate...
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