GOLDEN CONSTRUCTION COMPANY INC. v. Commissioner, Docket No. 48546.
| Decision Date | 16 December 1954 |
| Docket Number | Docket No. 48546. |
| Citation | 13 TCM (CCH) 1124,1954 TC Memo 221 |
| Parties | Golden Construction Company, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
E. Lael Alkire, Esq., for the petitioner. Melvin A. Bruck, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's income tax for the fiscal year ended July 31, 1950, in the amount of $13,065.38.
The sole question presented is what was reasonable compensation for the services rendered by A. C. Golden, president of petitioner corporation, during the fiscal year ended July 31, 1950.
Other adjustments in the deficiency notice are not contested by petitioner.
Some of the facts were stipulated and are made a part thereof.
Petitioner is a Kansas corporation, incorporated in 1944, with its principal office in Wichita, Kansas. Its income tax return for the fiscal year ended July 31, 1950, was filed with the then collector of internal revenue for the district of Kansas. Its principal business was the construction of houses for sale.
A. C. Golden, hereinafter called Golden, was at all times petitioner's sole stockholder, except for qualifying shares, and was also its president. From 1939 to 1944 Golden, as an individual, was engaged in the business of building houses for sale.
The number of housing units completed by petitioner each year was as follows:
Number
of Units
Year Ended Completed
------------------------------------------
July 31, 1945............... 35
July 31, 1946............... 10
July 31, 1947............... 46
July 31, 1948............... 49
July 31, 1949............... 96
July 31, 1950............... 60
Statistics respecting the sale of houses, profits, officer's salary and taxable income, according to petitioner's books of account, are as follows:
Profit Before Officer's Salary1
Fiscal Year Houses Sold Accrual Installment
Ended Number Amount Basis Basis
---------------------------------------------------------------------------------------
7/31/45.......... 15 $ 90,000.00 $ 4,473.27 $ 4,473.27
7/31/46.......... 25 136,635.65 3,937.62 3,937.62
7/31/47.......... 48 337,108.23 30,221.72 20,633.20
7/31/48.......... 49 376,585.00 31,471.95 16,061.83
7/31/49.......... 94 683,989.10 119,122.21 83,695.90
7/31/50.......... 64 508,620.85 77,399.313 82,181.863
Percent of Officer's Salary
to Profits
Fiscal Year Officer's Net Taxable Accrual Installment
Ended Salary Income2 Basis Basis
-----------------------------------------------------------------------------------------
7/31/45.......... $ 4,025.93 $ 440.60 90.0% 90.0%
7/31/46.......... 3,543.86 387.64 90.0% 90.0%
7/31/47.......... 12,088.69 8,410.31 40.0% 58.6%
7/31/48.......... 12,588.78 3,417.28 40.0% 78.4%
7/31/49.......... 47,648.88 35,552.94 40.0% 56.9%
7/31/50.......... 44,437.60 37,265.673 57.4%4 54.1%4
Petitioner paid no dividends prior to July 31, 1950.
Golden's reputation in the community is that he is far above the average builder.
Golden managed and operated the corporation. He was the only executive officer actively engaged in carrying on the corporation's business. He negotiated loans for the purchase of development land, and for the financing of the housing. He determined the places where houses would be built. He purchased all the building materials, except for minor supplies. He supervised the building of the houses, along with a job foreman. He alone had the authority to hire and fire workers.
The most men ever employed by the corporation during the year in question was seventy-five or one hundred.
Golden had no business activity other than the operation of the corporation, to which he customarily devoted twelve or fourteen hours a day.
Completed houses were customarily marketed through a real estate firm. Golden sold a number of houses, but generally a real estate agent sold them. The agent was paid a commission of five per cent of the selling price.
Residential construction was discontinued in the latter part of the fiscal year in question, about which time Golden was hospitalized by illness. He was hospitalized a couple of times during 1950.
The sixty units completed by the corporation during the year in question included some projects which had been started prior to the beginning of that year. Houses in process of construction at the beginning of the year amounted to $96,230.50. At the end of the fiscal year, construction in process amounted to $24,629.96 consisting solely of a commercial building.
Golden, as sole owner of petitioner's stock, fixed his own salary as its president each year. Usually his salary was based on a percentage of petitioner's accrual profits. For the fiscal year in question Golden's salary was computed at approximately 60 per cent of petitioner's accrual profit for that year. For the three preceding fiscal years, Golden's salary was computed at 40 per cent of petitioner's accrual profit. Golden's duties in the year in question were not different from what they had been theretofore.
Petitioner paid Golden $44,437.60 as compensation for his services for the fiscal year ended July 31, 1950, and in its income tax return for that fiscal year claimed said amount as a deduction.
Respondent, in his notice of deficiency, determined and held that $20,000 was reasonable compensation for the services rendered by Golden to petitioner, and disallowed the sum claimed in excess of that amount, viz: $24,437.60.
Reasonable compensation for the services actually performed by Golden for petitioner for the fiscal year ended July 31, 1950, was $31,000.
OpinionSection 23(a)(1)(A), Internal Revenue Code of 1939, allows taxpayers to deduct from gross income "all ordinary and necessary expenses" incurred in carrying on a trade or business "including a reasonable allowance for salaries or other compensation for personal services actually rendered."
Was the sum of $44,437.60 paid by petitioner to Golden, its president, for services in the taxable year, deductible in full, as claimed by petitioner, or was only $20,000 thereof deductible, as the Commissioner determined?
There is no fixed and mathematical rule by which reasonable allowance can be...
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