Drew v. Commissioner
| Citation | 31 TCM (CCH) 143,1972 TC Memo 40 |
| Decision Date | 17 February 1972 |
| Docket Number | 4154-69,Docket No. 4134-69,4156-69.,4155-69 |
| Parties | Horace Drew and Betty B. Drew, et al., v. Commissioner. |
| Court | United States Tax Court |
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William R. Frazier, 816 Atlantic Nat'l Bank Bldg., 121 West Forsyth St., Jacksonville, Fla., for the petitioners. Robert W. Goodman, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal income taxes and additions thereto under section 6653(a)2 as follows:
The issues for decision are as follows:
(1) Whether The H. & W.B. Drew Company is entitled to deductions under section 162(a) for salary payments to Marguerite Drew Bardin for each of its taxable years ending June 30, 1960, through June 30, 1967;
(2) Whether The H. & W.B. Drew Company is entitled to deductions under section 162(a) for travel expenditures in excess of the amounts allowed by respondent for each of its taxable years ending June 30, 1960, through June 30, 1964;
(3) Whether The H. & W.B. Drew Company is entitled to deductions under section 162(a) for dues and subscription expenses in excess of the amounts allowed by respondent for each of its taxable years ending June 30, 1960, through June 30, 1964;
(4) Whether The H. & W.B. Drew Company is entitled to a deduction under section 165(g) for a loss resulting from the worthlessness or abandonment of a debenture and stock in Selva Marina Country Club in its taxable year ending June 30, 1963;
(5) Whether The H. & W.B. Drew Company is entitled to deductions for additions to its reserve for bad debts under section 166(c) in its taxable year ending June 30, 1965, to correct an error in its accounts receivable control account and to adjust for uncollectible accounts receivable (6) Whether The H. & W.B. Drew Company is entitled to a deduction in excess of the amount allowed by respondent under section 165(a) for a loss resulting from the abandonment of its building plans during its taxable year ending June 30, 1967;
(7) Whether, for purposes of computing the alternative tax under section 1201, The H. & W.B. Drew Company is entitled to reduce its net long-term capital gain for its taxable year ending June 30, 1963, by the excess of its net operating loss deduction under section 172 over its ordinary income for that year;
(8) Whether The H. & W.B. Drew Company is liable for additions to tax under section 6653(a) for its taxable years ending June 30, 1963, 1964, and 1967;
(9) Whether E. Hodson Drew converted to his own use funds advanced to him by The H. & W.B. Drew Company and thereby realized dividends under section 301 during 1959 through 1964;
(10) Whether E. Hodson Drew is entitled to deductions under section 162(a) for 1964, 1965, and 1966 for expenses incurred as a commission salesman for Automatic Voting Machine Corporation in excess of the amounts allowed by respondent;
(11) Whether E. Hodson Drew is entitled to a deduction under sections 165(a) and 1231 for a loss incurred on the foreclosure during 1966 of a mortgage on a building which he owned;
(12) Whether E. Hodson Drew is entitled to a loss deduction under section 165(a) for freeze damage to two citrus groves during 1962;
(13) Whether E. Hodson Drew is entitled to a casualty loss deduction under section 165(a) for 1964 for storm damage to a boat dock;
(14) Whether E. Hodson Drew omitted from his returns for 1959 and 1960 amounts of gross income in excess of 25 percent of the amounts thereof stated in his returns for each of those years so that the bar of the statute of limitations on assessments is lifted by section 6501(e)(1);
(15) Whether Horace Drew received income from The H. & W.B. Drew Company during 1962 and 1963 in addition to the amounts reported in his income tax returns for those years as a result of his personal use of travel and other expense funds advanced to him by The H. & W. B. Drew Company;
(16) Whether Charles Fleming Parke converted to his own use funds advanced to him by The H. & W.B. Drew Company and thereby realized income during 1958 through 1963;
(17) Whether Charles Fleming Parke omitted from his income tax returns for 1958, 1959, and 1960 amounts of gross income in excess of 25 percent of the amounts thereof stated in his returns for each of those years so that the bar of the statute of limitations is lifted by section 6501(e)(1); and
(18) Whether Charles Fleming Parke is liable for additions to tax under section 6653(a) for the years 1958 through 1963.
The principal place of business of The H. & W.B. Drew Company (hereinafter referred to as Drew Company or Company) at the time it filed its petition in docket No. 4154-69 was located in Jacksonville, Florida. It filed corporate income tax returns for its taxable years ending June 30, 1960, through June 30, 1967, with the district director of internal revenue, Jacksonville, Florida.
The Estate of E. Hodson Drew, Deceased, Edward deBelle Drew and Sherwood Drew Robinson, as Administrators, and Jessie deBelle Drew, Surviving Wife, are the petitioners in docket No. 4156-69. The administrators and Jessie deBelle Drew were legal residents of Jacksonville, Florida, at the time the petition was filed. E. Hodson Drew and Jessie deBelle Drew filed joint Federal income tax returns for 1959 through 1966 with the district director of internal revenue, Jacksonville, Florida. E. Hodson Drew died July 26, 1967.
Horace Drew and his wife, Betty B. Drew, were legal residents of Tallahassee, Florida, at the time they filed their petition in docket No. 4134-69. They filed joint Federal income tax returns for the years 1962 and 1963 with the district director of internal revenue, Jacksonville, Florida.
Charles Fleming Parke and his wife, Regina W. Parke, were legal residents of Jacksonville, Florida, at the time they filed their petition in docket No. 4155-69. They filed joint Federal income tax returns for the years 1958 through 1963 with the district director of internal revenue, Jacksonville, Florida.
Many of the issues presented for decision arise from the operations of Drew Company. This company was incorporated in 1893 under the laws of Florida. Since that time its principal business has consisted of the sale of office supplies, office equipment, and office printing; about 85 percent of this business has been done with government agencies. For 1960 through 1967, Drew Company kept its books and filed its income tax returns, using the accrual method of accounting and a fiscal year ending June 30.3 The Company's gross income during that period declined from a high in 1960 of about $1,769,000 to a low in 1967 of about $598,000.
Issue 1. Bardin's Salary
E. Hodson Drew (hereinafter Hodson) and Marguerite Drew Bardin (hereinafter Bardin), brother and sister, were the major beneficiaries of the Estate of Mary H. Drew which owned 75 percent of the outstanding common and preferred stock of Drew Company. By the terms of Mary H. Drew's will, Hodson was given the right to vote this stock while it was held by the estate; the estate continued to hold the stock throughout the years here in issue. In addition, Hodson individually owned 21 percent of the Company's outstanding common stock. During its taxable years ending in 1960 through 1967, Drew Company paid no dividends.
Bardin was a vice president and director of Drew Company. In these capacities she was frequently called upon by Hodson for advice in making business decisions, and was occasionally requested to sign checks. Bardin also attended meetings of the board of directors which were held at least once a year. None of the directors were compensated for the services which they performed in that capacity, but most, if not all, of them drew salaries from the Company in other capacities.
Drew Company paid Bardin $6,000 per year during its taxable years ending in 1960 through 1967, and claimed deductions therefor in its returns for those years. Respondent has disallowed the claimed deductions. The sum of $1,500 per annum was reasonable compensation for the services performed by Bardin.
OpinionTaking all relevant factors into account, Mayson Mfg. Co.v. Commissioner 49-2 USTC ¶ 9467, 178 F. 2d 115, 119 (C.A. 6, 1949); Dahlem Foundation, Inc. Dec. 30,272, 54 T.C. 1566, 1580 (1970), we think the $6,000 annual payment was excessive, i.e., that it exceeded a "reasonable" allowance for salaries or other compensation, within the meaning of section 162(a)(1), for the services performed by Bardin. We find that $1,500 per annum for the period in dispute is deductible as compensation for her services as...
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