CAPITOL-BARG DRY CLEAN. CO. v. Commissioner of Int. Rev.
| Decision Date | 02 December 1942 |
| Docket Number | No. 9114.,9114. |
| Citation | 131 F.2d 712 |
| Parties | CAPITOL-BARG DRY CLEANING CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Robert S. Marx, of Cincinnati, Ohio (Robert S. Marx, Frank E. Wood, Milton H. Schmidt, and Nichols, Wood, Marx & Ginter, all of Cincinnati, Ohio, on the brief), for petitioner.
Arthur Manella, Spec. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Arthur Manella, Spec. Assts. to Atty. Gen., on the brief), for respondent.
Before HICKS, SIMONS, and ALLEN, Circuit Judges.
Petition by the Capitol-Barg Dry Cleaning Company, a corporation, to review a decision of the Board of Tax Appeals determining a deficiency in the income tax of petitioner for the year 1937 in the amount of $2,283.97. The alleged deficiency resulted from the disallowance by the Board of $9,010 of compensation paid to William F. Hummel, secretary and general manager, and to J. D. Shanman, assistant secretary and manager of the retail department of petitioner.
In 1920 Louis E. Block and William F. Hummel, experienced and capable dry cleaners, organized the corporation, which has since been engaged in the dry cleaning business. Shortly after its organization Block died and his widow, Rose Block, a competent and efficient woman, became president of the company.
After Block's death Hummel managed the business, assisted by Mrs. Block. In 1930 Mrs. Block married Hummel but remained actively in the business.
From its organization until 1934, petitioner devoted its activities almost exclusively to the wholesale field, and prior to 1937, it had become the largest wholesale dry cleaning establishment in Ohio. J. D. Shanman, son-in-law of Mrs. Hummel, came into the business in 1934, and after serving an apprenticeship, organized a retail division in the subsequent year, to which he primarily devoted himself and which was developed until, in 1937, petitioner did a gross retail business of over $83,000.
In 1936, the company began specialty work which involved the cleaning of carpets, industrial wiping cloths, and of athletic goods, and servicing of clothing manufacturers and stores by cleaning garments soiled on display. In 1937, its plant covered approximately an acre of ground and employed from 150 to 165 workers. It had more than 300 wholesale and several thousand retail customers.
In 1937, petitioner had 1470 shares of outstanding capital stock. Of these, Mrs. Hummel, president and treasurer, owned 1017 shares; Wm. F. Hummel, 150 shares; Shanman, 3 shares, and Anna Bernstein, a sister of Mrs. Hummel, 300 shares. Hummel and wife, Shanman, Anna Bernstein and Emma Hummel constituted the board of directors. The executive management was in the hands of the Hummels and Shanman. Their duties were divided.
Hummel was the directing head and had general supervision especially of the wholesale division. He promoted and developed the wholesale business and saw that it was properly and expeditiously handled. He employed labor, kept a close watch over the various departments and did a large part of the buying of materials and supplies.
Shanman, as hereinbefore indicated, was in charge of the retail division which he had developed from nothing. He also had charge of advertising and publicity, including radio and newspaper programs. In addition he had general supervision of the bookkeeping.
Mrs. Hummel co-operated with Hummel in hiring and discharging employees. She handled complaints and made adjustments and assisted in determining all financial policies.
In 1937 petitioner had a very substantial increase in its business. Its total sales increased by $50,000, or more than 20% and the percentage of gross profit to sales increased from 32% in 1936, to 41% in 1937. The net income after deduction of salaries and profit-sharing payments to the executive officers had increased more than four times in 1937, as compared with 1936. The income tax was more than six times greater in 1937, than in 1936. The total volume of sales in 1937 was higher than for any year since 1926. The net sales, gross profit and net profit for 1935, 1936 and 1937 are tabulated as follows:
"1935
Net Sales ........................... $243,243.20
Gross Profits ....................... 85,791.16
Net Profits ......................... 8,868.52
1936
Net Sales ........................... $273,906.20
Gross Profits ....................... 87,944.25
Net Profits ......................... 3,365.09
1937
Net Sales ........................... $329,757.91
Gross Profits ....................... 133,382.88
Net Profits ......................... 14,654.82"
This splendid financial position was achieved notwithstanding lower prices than in previous years and was outstanding among dry cleaning concerns, many of which had failed or were on the verge of bankruptcy.
On January 6, 1936, petitioner's board of directors by resolution adopted a policy of distributing its net profits, 33 1/3% each to stockholders, employees and the management. As a result, petitioner never had any work stoppages or other labor troubles.
On November 30, 1936, the board by resolution, increased the salaries for 1937 and succeeding years, of Hummel, secretary and general manager, from $12,000 to $16,000, and of Shanman assistant secretary and general manager, from $3,500 to...
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