Commercial Iron Works v. Commissioner of Int. Rev., 12011.
| Decision Date | 18 March 1948 |
| Docket Number | No. 12011.,12011. |
| Citation | 166 F.2d 221 |
| Parties | COMMERCIAL IRON WORKS v. COMMISSIONER OF INTERNAL REVENUE. BARNES v. SAME. COTTON'S ESTATE v. SAME. |
| Court | U.S. Court of Appeals — Fifth Circuit |
W. J. Knight, of Houston, Tex., for Taxpayers.
Theron L. Caudle, Asst. Atty. Gen., Austin Hoyt, Sewall Key, Helen R. Carloss, A. F. Prescott and Louise Foster, Sp. Assts. to the Atty. Gen., and Charles Oliphant, Chief Counsel, Bureau of Internal Revenue, and Bernard D. Daniels, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for Commissioner of Internal Revenue.
Before SIBLEY, HOLMES, and WALLER, Circuit Judges.
The Commercial Iron Works was incorporated under the laws of Texas in 1936, with John L. Barnes and Cyrus R. Cotton each owning fifty per cent. of its capital stock. Barnes has been president and Cotton vice president ever since.
The corporation engaged in the fabrication of steel from its inception until its dissolution on April 29, 1942, whereupon its assets were transferred to its two stockholders, who assumed all of its liabilities, and who, as transferees, are admittedly liable for any taxes that may be due by the corporation.
The payments as salaries to Barnes and Cotton from the date of the organization of the corporation until February 28, 1942, are as follows:
----------------------------------------------------------------------
Ratio of
officers'
salaries
to gross
Fiscal year Total sales John L. Barnes Cyrus R. Cotton
----------------------------------------------------------------------
2/28/37 $ 3,750.00 32% $ 3,750.00
2/28/38 9,200.00 36% 5,500.00 $ 3,700.00
2/28/39 10,800.00 38% 5,400.00 5,400.00
2/28/40 6,300.00 25% 2,700.00 3,600.00
2/28/41 7,200.00 21% 3,600.00 3,600.00
2/28/42 59,500.00 65% 40,000.00 19,500.00
The $40,000.00 credited to Barnes on February 28, 1942, contained $3,000.00 as salary from March 1, 1941, to December 31, 1941, and $5,000.00 as salary from January 1, 1942, to February 28, 1942. The remaining $32,000.00 was designated as payment for extraordinary services by Barnes for prior years, according to an authorization in a resolution which Barnes and Cotton, as the Board of Directors, passed on December 15, 1941. Likewise, the $19,500.00 credited to Cotton included $3,000.00 of back salary from March 1, 1941, to December 31, 1941, $2,500.00 for salary from January 1, 1942, to February 28, 1942, and the remaining $14,000.00 was for compensation for extraordinary services during prior years. The amounts so credited to Barnes and Cotton in the tax year were paid through obligations of the corporation executed to them, which were in turn surrendered in exchange for the transfer of the assets to Barnes and Cotton upon dissolution of the corporation.
The Tax Court found that Barnes, before the organization of the petitioner, had had some ten years' experience as a steel fabricator and was a capable executive. Cotton was a lawyer of ability, possessed of substantial means. Both devoted their full time to the business which, because of efficient management, increased yearly until the year 1941, when its productive capacity was greatly enhanced and likewise its prospect of earnings. From the time of the creation of the corporation through the fiscal year 1941-1942 the corporation had never paid any dividends and during the whole five years had paid only $48.85 as income tax. In 1942 it paid an income tax of $1,028.87 after taking the deduction of $59,500.00 as salaries of Barnes and Cotton.
The Commissioner disallowed all salaries to Barnes and Cotton in excess of $22,500.00, holding that $15,000.00 to Barnes and $7,500.00 to Cotton was reasonable for their services. By virtue of the disallowance of this $37,000.00 there accrued the following deficiencies for the fiscal tax year ending February 28, 1942; (1) income tax liability in the amount of $6,476.40; (2) declared value excess profits...
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