Builders Center, Inc. v. United States
| Decision Date | 12 July 1983 |
| Docket Number | Civ. A. No. 80-785-A. |
| Citation | 571 F. Supp. 83 |
| Parties | BUILDERS CENTER, INC. v. UNITED STATES of America. |
| Court | U.S. District Court — Middle District of Louisiana |
Leon Gary, Jr., Gary & Field, Baton Rouge, La., for plaintiff.
Stanford O. Bardwell, U.S. Atty., Baton Rouge, La., Steven Gremminger, Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Findings of Fact
The parties have stipulated the following facts:
1. Builders Center, Inc. is a Louisiana corporation domiciled in East Baton Rouge Parish, and was incorporated in 1956.
2. Builders Center, Inc. timely filed its federal income tax return for its fiscal year ending October 31, 1976 and paid the taxes shown thereon to be due.
3. During FYE 7610 or within 2½ months thereafter, the Company paid $136,000.00 in total compensation to Lamar N. Coxe and $141,000.00 in total compensation to Sidney E. Coxe.
4. Subsequently, defendant, through its agents, assessed additional income taxes for that year in the amount of $45,501.00 (plus interest).
5. The Company has paid to defendant the sum of $45,501.00 (plus interest) in satisfaction of the assessment referred to above.
6. On June 20, 1980, the Company filed a timely claim for refund of the above taxes, asserting that the tax had been illegally and erroneously assessed and collected.
7. The Company's claim for refund was disallowed by defendant on July 21, 1980.
8. In 1976, the Company had issued 2,574 shares and the shareholders of the Company were the following parties holding the number of shares set forth opposite their respective names:
Lamar N. Coxe -- 458 shares
Sidney E. Coxe -- 1,287 shares
Lamar N. Coxe, Jr. -- 304.5 shares
William E. Coxe -- 273.5 shares
Sherri D. Coxe -- 30 shares
Glenda L. Coxe -- 30 shares
Carey E. Coxe -- 30 shares
Barbara A. Coxe -- 47 shares
William E. Coxe, Jr. -- 47 shares
Charlotte B. Coxe -- 47 shares
Martha L. Coxe -- 20 shares
9. Sherri, Glenda and Carey Coxe are the children of Lamar N. Coxe, Jr. and the grandchildren of Lamar N. Coxe, Sr.
10. Martha L. Coxe is the former wife of Lamar N. Coxe, Jr.
11. William E. Coxe, Jr. and Charlotte B. Coxe are the children of William E. Coxe and the grandchildren of Lamar N. Coxe, Sr.
12. From November 1, 1975 through October 31, 1976, the Company's directors were Lamar N. Coxe, Sr., Sidney E. Coxe, Lamar N. Coxe, Jr. and William E. Coxe.
13. Lamar N. Coxe, Sr. is the President of the Company and the Chief Executive Officer of its building materials division; Sidney E. Coxe is the Vice President of the Company and Chief Executive Officer of its real estate division; William E. Coxe is the Secretary of the Company and is employed in its building materials division; Lamar N. Coxe, Jr. is the Treasurer of the Company and supervises the activities of its home appliance and decorating sales service.
14. The Internal Revenue Service agent who conducted the examination of the Company's tax return for FYE 7610 was Eugene D. Maillet.
15. The "Audit Technique Handbook for Internal Revenue Agents" (IRM 4231) was available to Agent Maillet during his examination of the Company's FYE 7610 income tax return.
16. The Company's taxable income for its fiscal year 1972 through 1976 was as follows:
1972 -- $ 540,981.00
1973 -- $1,132,055.00
1974 -- $ 356,537.00
1975 -- $ 582,529.00
1976 -- $ 587,158.00
17. From incorporation and through FYE 7610, the Company did not declare or pay dividends to its stockholders; the company has been audited but never assessed an excess accumulated earnings penalty tax.
The court makes the following additional findings of fact:
18. The taxpayer corporation was originally organized by Sidney E. Coxe and two other persons who maintained brief affiliation. Shortly after its inception the late Warren O. Watson, Sr., a prominent Baton Rouge attorney and investor, and Lamar N. Coxe, Sr. became shareholders and joined management.
19. Mr. Watson provided legal counsel and guidance to the corporation maintaining its minute books and records. Since Mr. Watson's death, the same level of detail and careful attention to corporate record keeping has not occurred.
20. Management of the corporation is a close-knit family group, meeting frequently but without particular formality.
21. Prior to 1974, much of the company's real estate activities was conducted through separate corporations. Sidney Coxe during those years was compensated directly by most of the other corporations and received only a small amount of compensation from Builders Center.
22. During 1974, all real estate activities were merged into Builders Center and thereafter Sidney's compensation came almost exclusively from the taxpayer.
23. From its incorporation, plaintiff has successfully engaged in the sale of building materials and the development of real estate and income (investment) properties, including shopping centers, subdivisions, commercial developments and apartments.
24. Builders Center's relative success against larger competitors (e.g. national home center chain stores) is directly attributable to its competent management and the corporation's willingness to extend substantial credit to home builders and other contractors engaged in construction activity.
25. Builders Center does not have a similarly situated competitor (an integrated building materials real estate development operation) in its market area. Thus, there are no market area companies from which meaningful compensation data might be derived for purposes of comparison nor has any evidence of comparable compensation been tendered by either side.
26. After audit, the Internal Revenue Service allowed the following compensation for the four principal officers:
Lamar Coxe, Sr. -- $ 86,000.00
Sidney Coxe -- $ 91,000.00
L.N. Coxe, Jr. -- $ 89,600.00
William E. Coxe -- $ 89,600.00
27. The examining Internal Revenue Service agent concluded that the compensation paid to Bill and L.N., Jr. was reasonable and further concluded that all four of the principal officers provided approximately the same level of services to the corporation and were of approximately equal value to the corporation. The evidence shows that the agent was flatly wrong in that conclusion.
28. The examining agent acknowledged, as does the government in brief, that the Coxe brothers both worked long hours and performed substantial services which benefited the corporation but the agent did not recognize that Sidney Coxe does not simply "manage" the real estate division, he is the real estate division and no other corporate employee could perform his services. Sidney Coxe's personal knowledge, experience, contacts and reputation are essential to the successful functioning of that part of the corporation's business.
29. By the same token, Lamar Coxe still personally conducts and supervises the building materials division and his skill and experience as a lumber trader are not matched by those of any other employee. L.N. Coxe, Jr. and Bill Coxe competently administer the portion of the business delegated to them but Lamar and Sidney Coxe provide the top management which is and was essential to the success of the corporation.
30. During 1976, the real estate division had 4 full-time employees and the building materials division had 75 full-time employees.
31. Builders Center paid its employees in ascending amounts, dependent upon their responsibilities and performance except that, prior to 1976, Lamar Coxe, Sr. was significantly underpaid.
32. Historically and during the year 1976 Lamar and Sidney Coxe each worked 60 to 72 hours per week on behalf of the company.
33. Lamar and Sidney Coxe have each committed personal credit to enable the corporation to acquire inventory, extend credit to homebuilders and other contractors and to engage in substantial real estate development activities which accounts for a significant portion of the corporation's building material sales, profits and taxable income.
34. Both have personally endorsed surety bonds to home builder customers of the corporation.
35. The taxpayer reported taxable income for 1976 of $587,158.00 on gross sales of $9,826,910.00. Gross profit in 1976 was $2,212,333.00 and net assets were $2,263,910.00 producing a 5.98% return on sales, a 26.58% return on gross profit and a 26.2% return on investment. The company paid $307,096.00 in federal income tax for 1976 before the audit adjustment.
36. The taxpayer paid the following amounts in prior years:
Year Gross Income Taxable Income Taxes Paid
1972 $6,970,267.00 $ 908,375.00 $ 418,463.00
1973 $6,690,544.00 $1,555,090.00 $ 533,053.00
1974 $6,321,700.00 $ 356,537.00 $ 150,707.00
1975 $7,530,780.00 $ 582,579.00 $ 86,387.00
37. During 1976, Sidney Coxe was personally responsible for the confection of numerous leases and the start-up of numerous real estate operations which at that time were anticipated to be very profitable in the future and they have proven to be so.
38. Sidney Coxe is and has been regarded in this community as an extremely skilled real estate investor and developer. He serves on the board of directors of a local bank and is instrumental in promoting the overall financial well-being of the taxpayer.
39. Lamar Coxe enjoys a reputation in the community as an extremely skilled lumber trader. He also possesses substantial experience and skill in the credit analysis field and is largely responsible for credit evaluation of customers which enables the...
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Patton v. C.I.R., 85-4822
...v. Commissioner, 725 F.2d 945, 952 (3d Cir.1984); Kennedy v. Commissioner, 671 F.2d 167, 173 (6th Cir.1982); Builders Center, Inc. v. United States, 571 F.Supp. 83, 88 (M.D.La.1983). III. Patton also challenges the tax court's finding that Patton had understated his income for the three yea......