Huckins Tool and Die, Inc. v. CIR
| Decision Date | 11 April 1961 |
| Docket Number | No. 13105.,13105. |
| Citation | 289 F.2d 549 |
| Parties | HUCKINS TOOL AND DIE, INC., an Indiana corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Seventh Circuit |
James F. Thornburg, Edward J. Gray, John L. Carey, South Bend, Ind., for petitioner.
Lee A. Jackson, Chief, Appellate Section, Harold M. Seidel, Atty., U. S. Dept. of Justice, Washington, D. C., Abbott M. Sellers, Acting Asst. Atty. Gen., Robert N. Anderson, Atty., Dept. of Justice, Washington, D. C., for respondent.
Before SCHNACKENBERG and CASTLE, Circuit Judges, and GRUBB, District Judge.
From the Tax Court's decision determining deficiencies in income tax of Huckins Tool and Die, Inc., an Indiana corporation, petitioner, for the years 1951, 1952, and 1953, it appeals to this court.
The court heard the testimony of witnesses and received documentary evidence. Based thereon, as well as upon a stipulation of facts, the court made findings of fact, the most salient of which we now state, in substance.
Petitioner was organized under Indiana law in 1937. In the taxable years of 1951-1953 inclusive, ownership of the outstanding shares of petitioner was as follows:
James R. Huckins 501 shares
Robert J. Huckins 249 shares
Richard E. Huckins 249 shares
Cora R. Huckins 1 share
These persons were also petitioner's board of directors. In these years the officers were: James R. Huckins, president, Robert J. Huckins, secretary and assistant treasurer, and Richard E. Huckins, treasurer. James R. is the father of Robert and Richard.
In the taxable years the petitioner's plant and principal place of business of a tool and die shop was located in South Bend, Indiana, where it was operated under the direction of the officers who devoted their time and efforts exclusively thereto. In a tool and die business the complexities of design and fabrication are such that highly skilled labor and technical skill are required to manufacture tools, dies and fixtures where tolerances in some instances must be held to a range of no greater than .0001 of an inch.
James R. Huckins was born in 1889, Richard E. in 1918 and Robert J. in 1915.
During the taxable years petitioner had no pension or profit-sharing plan, or any other form of deferred compensation plan except a small group life insurance plan which included all employees and which insured the life of each executive. On January 30, 1950, petitioner's board of directors fixed the following basic salaries: James R. Huckins, $36,000; Robert J. Huckins, $24,000; and Richard E. Huckins, $24,000. At the same time and again in each taxable year the board adopted a resolution providing for supplemental annual compensation of 30 percent of petitioner's net earnings before federal income taxes, the amount to be apportioned according to the following ratio: James R., three-sevenths; Robert J., two-sevenths; and Richard E., two-sevenths.
Under these arrangements the following amounts of compensation were paid:
1950 1951 1952 1953
James R. Huckins $ 54,177 $ 73,999 $ 64,220 $ 77,795
Robert J. Huckins 36,118 49,332 42,813 51,863
Richard E. Huckins 36,118 49,332 42,813 51,863
________ ________ ________ ________
$126,413 $172,663 $149,846 $181,521
The type of plan on which the compensation was based, namely, a base salary plus a bonus of a share of the profits, is neither unusual in industry in general, nor in the tool and die business in particular. Such a plan had been in effect in the petitioner's business for a long period of time, altho the above plan or formula began in 1950.
Petitioner's books and federal income tax records reflect the following:
Officers' Salaries Net Income
Paid Before Taxes
1947 $ 81,000 $ 43,207
1948 81,000 50,236
1949 84,000 10,788
1950 126,414 98,968
1951 172,665 206,885
1952 148,848 153,645
1953 181,523 227,555
1954 124,777 95,146
1955 104,075 46,842
The business activities of the tool and die industry are cyclical in nature and tend, over the years, to fluctuate widely. Petitioner was particularly busy in the years 1951 to 1953, due in substantial measure to the Korean conflict. During these years petitioner did not find it necessary to actually engage in selling its services, as customers sought out petitioner in order for them to meet the requirements of the wartime economy.1
The increase in production and sales during this period, which was due in substantial measure to the Korean conflict, did not result in a commensurate increase in the duties and responsibilities of petitioner's officers although such increases in business activity did add, to some extent, additional burdens and responsibilities to their existing workload.
The only cash dividend ever declared or paid by petitioner was in the amount of $30,000 in the year 1943.
The Commissioner of Internal Revenue determined that the salaries paid to petitioner's executives were unreasonable and excessive and to the extent below indicated disallowed the amounts of deductions therefor.
Amounts Amounts
Year Claimed Disallowed
1951 $172,665 $112,665.08
1952 149,848 89,848.14
1953 181,523 121,523.74
The effect of the foregoing was to allow compensation deductions in the amount of $60,000 for all three executives for each of said years without designating particular amounts as reasonable for any one of said executives.
Thereupon, the Tax Court held that (1) a portion of the compensation deducted by petitioner and paid to James, Robert, and Richard Huckins for each of the years 1951, 1952, and 1953, was in excess of reasonable; (2) reasonable compensation and compensation in excess of reasonable, as to each of said executives, for each of the years, are, as follows:
In excess of
Year Reasonable reasonable
James R. Huckins 1951 $58,999 $15,000
1952 51,700 12,500
1953 62,295 15,500
Robert J. Huckins 1951 $39,332 $10,000
1952 34,313 8,500
1953 41,613 10,250
Richard E. Huckins 1951 $39,332 $10,000
1952 34,313 8,500
1953 41,613 10,250
In its opinion, the Tax Court remarked:
The court in its decision ordered deficiencies for the taxable years pursuant to its findings and opinion.
1. 26 U.S.C.A. § 23, 1939 Internal Revenue Code, provides:
Ascertainment of what is reasonable compensation for services rendered is one of fact to be decided by the Tax Court upon the evidence presented and its findings thereon we will not disturb unless they are clearly erroneous. Fed.Rules Civ.Proc. 28 U.S.C.A. Rule 52 (a). United States v. United States Gypsum Co., 333 U.S. 364, 393, 68 S.Ct. 525, 92 L.Ed. 746, and Gilman Paper Co. v. Commissioner, 2 Cir., 284 F.2d 697, 699. Thus in Wisconsin Memorial Park Co. v. Commissioner, 7 Cir., 255 F.2d 751, at page 753, we recognized the application of Rule 52(a) to our review of decisions of the Tax Court. In our determination of whether there is substantial evidence to support the findings of the Tax Court, the evidence before the court must be viewed in the light most...
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...services is a question of fact to be determined on the basis of the particular circumstances of each case. Huckins Tool and Die, Inc. v. Commissioner, 289 F.2d 549 (7th Cir. 1961), affg. a Memorandum Opinion of this Court. When the parties are related, the burden of demonstrating the reason......
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