Miller Mfg. Co. v. Commissioner of Internal Revenue
| Decision Date | 02 May 1945 |
| Docket Number | No. 5353.,5353. |
| Citation | 149 F.2d 421 |
| Parties | MILLER MFG. CO., Inc., v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Collins Denny, Jr., of Richmond, Va. (R. E. Cabell, Cabell & Cabell, and Denny, Valentine & Davenport, all of Richmond, Va., on the brief), for petitioner.
Fred E. Youngman, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Robert N. Anderson, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before PARKER, SOPER and DOBIE, Circuit Judges.
Section 23(a) (1) (A) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 23(a) (1) (A), reads:
Under this section, Miller Manufacturing Company, Incorporated (hereinafter called petitioner) claimed, in computing its net income for the taxable years 1940 and 1941, the following amounts paid as compensation to its officers:
1940 1941
T. B. Saunders Fixed ................... $ 11,000 $ 11,000
(President) Contingent .............. 24,000 30,450
________ ________
Total ................... $ 35,000 $ 41,450
H. A. Taylor Fixed ................... $ 11,000 $ 11,000
(Vice-President) Contingent .............. 24,000 30,450
________ ________
Total ................... $ 35,000 $ 41,450
H. S. Winston, Jr. Fixed ................... $ 6,000 $ 7,500
(Secretary) Contingent .............. 20,000 26,250
________ ________
Total ................... $ 26,000 $ 33,750
Geo. Wright, Jr. Fixed ................... $ 2,600 $ 3,600
(Treasurer) Contingent .............. 12,000 17,850
________ ________
Total ................... $ 14,600 $ 21,450
________ ________
Grand Total ................... $110,600 $138,100
Of these amounts, the Commissioner disallowed as excessive compensation, $69,800 for the year 1940, and $94,000 for the year 1941, and thus allowed petitioner, in computing its net income, to deduct, as compensation to these officers, $40,800 for the year 1940 and $44,100 for the year 1941. In his deficiency notice, the Commissioner disallowed the amounts in question in a lump sum as "excessive compensation * * * paid to the officers of the corporation", without specifying what amount would be a reasonable compensation for each of the four officers. The Tax Court of the United States, also without attempting to fix a reasonable compensation for each of the four officers, affirmed the Commissioner's determination. Petitioner has appealed to us.
We must consider three grounds of attack, advanced by petitioner, on the Tax Court's decision: (1) The Commissioner in the first instance, and the Tax Court, in the second instance, should have fixed the reasonable compensation of each of petitioner's four officers instead of making an aggregate finding of a lump sum for all of them together. (2) The basing of its decision on petitioner's failure to prove (a) the comparable salaries of officers in similar competitive corporations, (b) the amount of time given by these officers of petitioner to the affairs of the corporation. (3) The Tax Court failed generally to consider all the evidence and particularly disregarded the highly pertinent testimony of the witness, J. L. Camp, Jr.
Elaborate findings were made by the Tax Court concerning the history, management and business activities of petitioner.
We attempt only a brief outline of a few of the most salient facts.
Petitioner was incorporated in 1909 to take over a business previously conducted as a partnership, in which a dominant interest was owned by J. C. Miller, who was president, and a majority shareholder, of the corporation until he died in 1927. The officers, whose compensations are now before us, have for many years constituted a majority of petitioner's board of directors and, through ownership or proxy, have controlled the vote of a majority of the shares of petitioner's capital stock.
In 1920, petitioner's board of directors adopted a resolution providing additional compensation for the officers, in specified percentages, equal to one-half (½) of petitioner's net earnings in excess of $52,000. Similar resolutions were from time to time adopted. Yet, generally because the profits did not permit, additional compensation was paid to the officers only in the years 1920, 1923, 1924, 1937, 1939, 1940, 1941. These amounts were relatively small, save for the years here in question, 1940, 1941. Petitioner's net profit (before federal taxes) was $159,308.91 for the year 1940, $263,311.45 for the year 1941. The amount of additional compensation accepted by the officers for 1940, 1941 was less than the amount to which they were entitled under the arrangement adopted by the board of directors. From the record before us, it is not altogether clear just how much of this unusual prosperity for 1940 and 1941 was due to the competency of these officers, or how much was due to unusual war contracts and exceptional economic conditions.
To receive the benefit of a deduction or exemption from federal income taxes, the taxpayer must bring itself squarely within the statutory provisions granting such a benefit. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S. Ct. 788, 78 L.Ed. 1348; Helvering v. Northwest Steel Rolling Mills, 311 U.S. 46, 49, 61 S.Ct. 109, 85 L.Ed. 29.
It is well settled that the question of what constitutes, for the tax deduction here in issue, reasonable compensation to a specific officer of a corporation, is essentially a question of fact, to be determined by the peculiar facts and circumstances in each particular case. H. Levine & Bros. v. Commissioner of Internal Revenue, 7 Cir., 101 F.2d 391; Long Island Drug Co. v. Commissioner of Internal Revenue, 2 Cir., 111 F.2d 593; L. & C. Mayers Co. v. Commissioner of Internal Revenue, 2 Cir., 131 F.2d 309, certiorari denied 318 U.S. 773, 63 S.Ct. 770, 87 L.Ed. 1143. These facts and circumstances vary so widely that each corporate tub must more or less stand upon its own bottom. Shipyard River Terminal Co. v. Commissioner (decided Dec. 9, 1944), 14281 C.C.H. No. 3173; M. W. Parsons Imports and Plymouth Organic Laboratories v. Commissioner (decided Jan. 3, 1945), 14310 C.C.H. No. 3068.
A determination by the Commissioner of a reasonable allowance for compensation, in a specific case, carries a clear presumption of correctness and places upon the taxpayer the burden of proving that it is entitled to a deduction larger than that determined by the Commissioner. Crescent Bed Co. v. Commissioner of Internal Revenue, 5 Cir., 133 F.2d 424; Wagegro Corporation v. Commissioner of Internal Revenue, 38 B.T.A. 1225. And the finding here of the Tax Court is binding upon us, if it be...
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