Homes v. James Buckley & Co. Limited

• Decision Date: 13 February 1928
• Docket Number: 26703
• Citation: 116 So. 218,165 La. 874
• Parties: HOMES v. JAMES BUCKLEY & CO. Limited
• Court: Louisiana Supreme Court

116 So. 218

165 La. 874

HOMES v. JAMES BUCKLEY & CO. Limited

No. 26703

Supreme Court of Louisiana

February 13, 1928

Rehearing Denied March 12, 1928

Appeal from Civil District Court, Parish of Orleans; Percy Saint Judge.

Suit by Herbert B. Homes against James Buckley & Co., Limited, which filed a claim in reconvention. Judgment for plaintiff, and defendant appeals.

Judgment set aside, plaintiff's demand rejected, and judgment for plaintiff in reconvention ordered.

Wm McL. Fayssoux and McCloskey & Benedict, all of New Orleans, for appellant.

Monroe & Lemann and Walter J. Suthon, Jr., all of New Orleans, for appellee.

ROGERS J. ST. PAUL, J., dissents. THOMPSON, J., takes no part.

OPINION

ROGERS, J.

This is a suit for an accounting on a written contract of employment. The contract, which became effective December 1, 1915, is in the form of a letter dated September 3, 1915, addressed by the president of the defendant company to the plaintiff and accepted by him. It is couched in these words, viz.:

"* * * I will pay you a salary of $ 125.00 per month plus 5 per cent. of the net profits for the year up to $ 8,500.00. For all net profits over and above $ 8,500.00 per annum 50 per cent. of the excess net profit.

"The net profits, of course, are determined by the auditor of the company, and are arrived at after usual deductions are made for all current expenses, including all salaries and the proper deductions for depreciation on machinery, fixtures and stock and for all bad accounts which are charged off yearly. This is what we have been doing in the past and what is the usual and only proper method.

"It must be understood that the salary of $ 125.00 per month will be paid monthly, but no advances are to be made on profits before same are determined at the end of the fiscal period. * * *

"I have made it 5 per cent. to $ 8,500.00 instead of $ 8,000.00 for the reason that from now on rent has been reduced by $ 300.00 a year by the landlord in return for improvements which I am now making in our store."

There is no controversy about plaintiff's salary, which was subsequently increased to $ 150 per month, and regularly paid.

Plaintiff remained in the employ of the defendant until May 31, 1919, the end of its fiscal year, when he resigned, and the contract was terminated by mutual consent.

On June 25, 1919, the defendant company notified plaintiff in writing that its books had been balanced, and there was due him $ 658.53. Plaintiff refused to accept this amount, and instituted suit claiming a much larger sum as his percentage of the net profits during the period of his employment, after debiting himself with the payments he had received from time to time on account thereof.

The defendant company denied liability for any amount whatever, and alleged that its books had not been finally audited and closed when it notified plaintiff that he was entitled to a balance of $ 658.53; that, upon the completion of the audit of its books, it ascertained that plaintiff was overdrawn in the sum of $ 220.84, which it claimed by way of reconvention.

There were two hearings in the case. At the conclusion of the first hearing, the judge a quo appointed J. K. Byrne, a certified public accountant of New Orleans, to make an audit of the books of the defendant company with a view of ascertaining its net profits and the amount thereof due plaintiff under his contract.

The auditor appointed by the court duly filed his report, showing that plaintiff was credited on the books of the defendant company with $ 455.81 in excess of the amount to which he was entitled. Both parties filed exceptions to the report, and, after taking additional testimony, the case was submitted. The judge a quo adopted the report, except in one particular, viz. the deduction of the federal income and excess profits taxes from the gross profits in order to establish the net profits upon which the agreed percentage of plaintiff should be calculated. In accordance with this ruling, judgment was rendered in favor of plaintiff for $ 3,032.13. The defendant company appealed, and plaintiff answered the appeal, praying that the amount of the judgment be increased.

There are three questions involved in this case, viz.:

(1) Are the federal income and excess profits taxes paid by the corporation deductible before determining its net profits in which plaintiff is to share according to their contract?

(2) Does the reference in the contract to the reduction of the defendant company's rent in consideration of certain improvements it agreed to make to the leased premises justify a credit to the plaintiff?

(3) Is a depreciation charged on machinery prior to the contract properly made on its appreciated value before ascertaining the net profits, considering sound and replacement values?

First. There is a disagreement in opinion between the witnesses for plaintiff and thewitnesses for defendant as to whether the federal income and excess profits taxes are properly deductible as expenses in determining the net profits of the business. We think, however, that the weight of the testimony supports the affirmative side of the question.

The tax annually exacted by the federal government on net corporate income means, simply, that every dollar of net profit earned by a corporation during the year must bear a certain charge for governmental purposes. It is immaterial whether such charge be designated as an expense or a profit sharing tax neither the profits of a corporation, nor any one interested in its profits, is immune from its operation. The federal corporate income tax is, therefore, an expense of the corporate business. The mere fact that the tax before its deduction is computed on the basis of the corporate profits does not alter its character. According to the rules of accountancy, the expenditure of money must be considered either as an asset or as an expense. The income tax is clearly not an asset. It must necessarily, therefore, be considered and treated as an expense. Where an employee who, in addition to receiving a stipulated salary, also receives, in the nature of a salary, a percentage of the net profits of a corporation, the net profits necessarily cannot be determined until all expenses, including the income and excess profits tax, is deducted from the profits. And, inasmuch as such additional compensation is to be measured by the net profits the employee has helped to make, his percentage must also be deducted before the tax is found. This is recognized to be the correct rule by the federal revenue law, which provides that, in carrying on any trade or business, all necessary expenses, "including a reasonable allowance for salaries or other compensation for personal services actually rendered," may be deducted from the gross profits in order to arrive at the net profits on which the income tax is to be computed. Section 214 of...