Heil Beauty Supplies v. Commissioner of Internal Rev.

• Decision Date: 15 October 1952
• Docket Number: No. 14360.,14360.
• Citation: 199 F.2d 193
• Parties: HEIL BEAUTY SUPPLIES, Inc. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

199 F.2d 193 (1952)

HEIL BEAUTY SUPPLIES, Inc. v. COMMISSIONER OF INTERNAL REVENUE.

No. 14360.

United States Court of Appeals Eighth Circuit.

October 15, 1952.

Jerome F. Duggan and Dubinsky & Duggan, St. Louis, Mo., on the brief, for petitioner.

Harry Marselli, Sp. Asst. to Atty. Gen. (Ellis N. Slack, Acting Asst. Atty. Gen., Robert N. Anderson and L. W. Post, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before SANBORN, JOHNSEN and COLLET, Circuit Judges.

JOHNSEN, Circuit Judge.

A corporate taxpayer seeks review of a decision of the Tax Court, which held that the amounts paid by it as "commission" to one of its officers — the owner of approximately 70 per cent of its capital stock — did not represent "compensation for personal services actually rendered", but constituted in reality and fact a distribution of corporate profits in lieu of dividends, and that such payments therefore were not deductible, for income tax purposes, as "ordinary and necessary expenses" in carrying on the corporate business, under section 23(a) (1)(A) of the Internal Revenue Code, 26 U.S.C.A. § 23(a)(1)(A).

The facts which follow are taken from the findings of the Tax Court, and these facts are not assailed here.

The corporation had been organized in 1941 by Melvin H. Heil and Carol W. Schuermann for the purpose of engaging in the business of selling beauty-parlor supplies. Mrs. Schuermann contributed $3400 in cash and Heil $1500, for which amounts stock was issued to them. The corporation thus had a paid-in capital of $4900, and this amount was never increased. Both contributors became officers of the corporation.

Heil, who had previously been a beauty-supply salesman, was made president, took charge of the selling activities and devoted his full time to the business. The corporation had a force of four to seven salesmen. Mrs. Schuermann, who was the operator of a local beauty shop, devoted no regular time to the affairs of the corporation. "From time to time", however, she did render "certain services", such as "aiding and assisting customers of beauty supply equipment by explaining hair dyes, permanent waving and hair tinting, and by showing them how to handle and use certain equipment." "On occasion she also participated in discussion * * * regarding the problem of business expansion." All of these services "she was always available to render * * * whenever needed."

Her position as officer carried no prescribed salary, but each year the board of directors adopted a resolution allowing her "5% of the total net sales for the year" as "commission", the amount of which was computed and credited to her account at the close of the year. For the years 1943, 1944 and 1945, which are the taxable years here involved, these amounts had been, respectively, $6,305.75, $7,112.53, and $10,054.56.

The Tax Court made the following appraisal of the various elements of the situation: "The record does not show that the sale of petitioner's products was in any way increased as a result of services rendered by Mrs. Schuermann. There is no showing that the petitioner's volume of business increased or decreased in any proportion to an increase or decrease in Mrs. Schuermann's activities. The so-called commissions paid by petitioner to its major stockholder apparently bear no demonstrable relation to any personal services actually rendered by the recipient. * * * The facts that the payments bore no relation to the amount of services rendered and were a fixed percentage of net sales, which percentage did not vary from year to year, coupled with the facts that the recipient was a 74 per cent sic stockholder and that there is no evidence that, although the business was profitable, any dividends, as such, were ever paid, leads us to conclude that these payments were, in fact and in reality, distributions of profits in lieu of dividends."

Any payment arrangement between a corporation and a stockholder — and particularly a major stockholder, with his normal power of control — is always subject to close scrutiny for income tax purposes, so that deduction will not be made, as purported salary, rental or the like, of that which is in the realities of the situation an actual distribution of profits. 4 Mertens Law of Federal Income Taxation § 25.46, pp. 399, 400. And we have previously held that whether or to what extent payments made by a corporation to a stockholder represent compensation for services or constitute a distribution of profits is essentially the determination of "a matter purely of fact." Twin City Tile & Marble Co. v. Commissioner of Internal Revenue, 8 Cir., 32 F.2d 229, 231. See also Ecco High Frequency Corp. v. Commissioner of Internal Revenue, 2 Cir., 167 F.2d 583; Gem Jewelry Co. v. Commissioner of Internal Revenue, 5 Cir., 165 F.2d 991.

Such a determination is one that is entitled to be made on all the elements of the particular case. Ordinarily, where the payments are found to constitute a distribution of profits, the evaluation will be one that has been arrived at by conclusionary inference. But where the inference has a rational basis, in the sense that there are circumstances of logical probative force to support it, in relation to and on a consideration of the evidence as a whole, there is no...