Jones Brothers Bakery, Inc. v. United States

• Decision Date: 20 June 1969
• Docket Number: No. 9-66.,9-66.
• Citation: 411 F.2d 1282,188 Ct. Cl. 226
• Parties: JONES BROTHERS BAKERY, INC. v. The UNITED STATES.
• Court: U.S. Claims Court

188 Ct. Cl. 226, 411 F.2d 1282 (1969)

JONES BROTHERS BAKERY, INC. v. The UNITED STATES.

No. 9-66.

United States Court of Claims.

June 20, 1969.

COPYRIGHT MATERIAL OMITTED

William C. Gifford, Jr., Washington, D. C., for plaintiff. Richard B. Barker, Washington, D. C., attorney of record. Ivins, Phillips & Barker, Washington, D. C., of counsel.

Norman J. Hoffman, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

OPINION

PER CURIAM:^*

The plaintiff is seeking in this case to recover refunds of income taxes previously paid for the fiscal years 1959, 1960, and 1961.¹

It is our opinion that the plaintiff is entitled to a partial recovery for each of the years involved in the present action.

Introduction

The plaintiff is a corporation, organized under the laws of the State of North Carolina. Since its incorporation in 1928, the plaintiff has been engaged in the baking business. It bakes bread and rolls, and sells them at wholesale, principally under the trade name "Holsum." The plaintiff also sells cakes at wholesale. It does not bake the cakes, but purchases them elsewhere for resale.

The plaintiff's sales are all on consignment, in that its bread, rolls, and cakes are initially sold to a retail outlet, such as a grocery store, where the products are put on the grocery store's racks or shelves for sale to consumers. Each product is "coded" in relation to a date; and any product that is not sold by the retail outlet within the "code" period is picked up by the plaintiff's salesman, and credit is given the grocery store for it. For example, the plaintiff allows bread to stay on a grocery store's shelves no longer than 2 days. The "stales," as the returned loaves are called, are disposed of at salvage prices through several retail outlets maintained by the plaintiff for that purpose. If the surplus stores are unable to sell them, the "stales" are sold to farmers for livestock feed at 2½ to 3 cents a pound.

The plaintiff's principal place of business is located in Greensboro, North Carolina. Its sales territory during the years in issue encompassed approximately 16 counties in the area around Greensboro.

The plaintiff was founded by O. C. Jones. He was the plaintiff's principal shareholder and chairman of the plaintiff's board of directors as long as he lived, and he was also the plaintiff's president for more than 18 years.

For a number of years after the plaintiff's incorporation in 1928, brothers of O. C. Jones were shareholders, officers, and directors of the plaintiff — hence, the corporate name, "Jones Brothers Bakery, Inc." However, the brothers of O. C. Jones ceased their connection with the plaintiff long before the time that is involved in the present litigation. O. C. Jones himself died on August 8, 1953, which was several years before the period in issue.

During the period with which we are concerned, the plaintiff's shareholders and officers were Paul C. Jones, Miss Ora E. Jones, Mrs. Gladys J. Chappell (nee Gladys Jones), and Mrs. Claudia L. Jones. Mrs. Claudia L. Jones is the widow of O. C. Jones; and Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell are the children of O. C. Jones and Mrs. Claudia L. Jones.

During the years in issue, Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell each owned 44½ shares (or 27.8 percent) of the plaintiff's 160 outstanding shares of common stock, and Mrs. Claudia L. Jones owned 26½ shares (or 16.6 percent) of the plaintiff's stock. Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell constituted the plaintiff's board of directors.

Officers' Compensation

The principal problem in the present case is to determine whether the Internal Revenue Service acted properly or improperly in disallowing portions of the amounts which the plaintiff paid to Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell as compensation for the fiscal years 1959, 1960, and 1961, and which the plaintiff claimed on its Federal income tax returns for those years as deductible business expenses.

For the fiscal year 1959, the plaintiff paid a total of $68,778.03 to Paul C. Jones as compensation, it paid a total of $36,941.81 to Miss Ora E. Jones as compensation, and it paid a total of $21,986.21 to Mrs. Gladys J. Chappell as compensation; and the plaintiff claimed these several amounts as deductible business expenses on its Federal income tax return for 1959. Upon auditing the plaintiff's income tax return for 1959, the Internal Revenue Service determined that $24,508.03 of the amount paid to Paul C. Jones, that $15,691.81 of the amount paid to Miss Ora E. Jones, and that $12,056.21 of the amount paid to Mrs. Gladys J. Chappell constituted unreasonable compensation. Thus, the IRS allowed the plaintiff to deduct only $39,270 as reasonable compensation to Paul C. Jones, $21,250 as reasonable compensation to Miss Ora E. Jones, and $9,930 as reasonable compensation to Mrs. Gladys J. Chappell.

For the fiscal year 1960, the plaintiff paid to Paul C. Jones as compensation the total amount of $58,627.08 (of which the Internal Revenue Service disallowed the sum of $28,350.68 and allowed the sum of $30,276.40 as reasonable compensation); the plaintiff paid to Miss Ora E. Jones as compensation the total amount of $33,851.25 (of which the Internal Revenue Service disallowed the sum of $17,419.25 and allowed the sum of $16,432 as reasonable compensation); and the plaintiff paid to Mrs. Gladys J. Chappell as compensation the total amount of $19,925.83 (of which the Internal Revenue Service disallowed the sum of $12,244.23 and allowed the sum of $7,681.60 as reasonable compensation).

For the fiscal year 1961, the plaintiff paid to Paul C. Jones as compensation the total amount of $48,370.93 (of which the Internal Revenue Service disallowed the sum of $17,136.93 and allowed the sum of $31,234 as reasonable compensation); the plaintiff paid to Miss Ora E. Jones as compensation the total amount of $27,697.56 (of which the Internal Revenue Service disallowed the sum of $10,752.56 and allowed the sum of $16,945 as reasonable compensation); and the plaintiff paid to Mrs. Gladys J. Chappell as compensation the total amount of $15,823.37 (of which the Internal Revenue Service disallowed the sum of $7,902.37 and allowed the sum of $7,921 as reasonable compensation).

In determining whether the claimed deductions were or were not properly allowable as reasonable compensation, the court is dealing with a question of fact that must be decided in the light of all the facts and circumstances involved in the case. Bringwald, Inc. v. United States, 334 F.2d 639, 643, 167 Ct.Cl. 341, 347 (1964); Boyd Construction Co. v. United States, 339 F.2d 620, 624, 168 Ct.Cl. 579, 586 (1964). Accordingly, it is necessary to set out the pertinent facts in considerable detail.

Paul C. Jones was born on November 30, 1921. As a young boy and while attending high school, he worked in the plaintiff's bakery at various points along the production line on Saturdays and in the summertime.

Paul C. Jones received 2 years of junior college training at the Oak Ridge Military Institute, where he took a liberal arts course, including mathematics and science. He did not receive an academic degree.

In 1942, Paul C. Jones was commissioned a second lieutenant in the United States Army. After attending schools in the military service and receiving additional training, he served as an instructor in armored vehicles at Fort Knox, Kentucky. Thereafter, he transferred to the Army Air Corps and became a fighter pilot in 1945. He was released from the military service in the latter part of December 1945 as a captain. He became a full-time employee of the plaintiff upon his release from the military service, and he has worked full-time for the plaintiff ever since then.

Miss Ora E. Jones began working at the plaintiff's bakery during her high school years on a part-time basis in the wrapping and retail departments. She graduated from Greensboro High School in 1935.

After graduating from high school, Miss Ora E. Jones attended Salem Academy in Winston-Salem, North Carolina, for a year, and then attended Greensboro College, from which she graduated magna cum laude in 1940, with a liberal arts major in mathematics and a minor in English.

In August 1940, Miss Ora E. Jones went to work for the plaintiff on a full-time basis, and she has continued to work full-time for the plaintiff ever since 1940. She started out as an assistant to the office manager. She held this position until January 30, 1945, when she became the office manager.

While in high school, Mrs. Gladys J. Chappell — then Miss Gladys Jones — began working part-time at the plaintiff's bakery on weekends, on holidays, and during the summer months.

After graduating from Greensboro High School, the then Miss Gladys Jones attended Greensboro College for 2 years, taking courses principally in home economics, and she attended Guilford College for ½ year. She did not graduate from college.

When Paul C. Jones returned to Greensboro from the military service in December 1945 and became a full-time employee of the plaintiff, O. C. Jones was a very sick man. He had suffered a heart attack and was not physically capable of any sustained activity. Because of this, O. C. Jones turned over the responsibility for managing the bakery to his children as soon as possible. On February 25, 1946, O. C. Jones' brothers, who had been serving as members of the plaintiff's board of directors, resigned as directors, and Paul C. Jones and Miss Ora E. Jones were elected to serve with their father as members of the board.

The then Miss Gladys Jones became a full-time employee of the plaintiff in May 1946, when she was 20 years old. She worked in the office.

On June 4, 1946, Paul C. Jones...