Ox Fibre Brush Co. v. Blair

• Decision Date: 09 April 1929
• Docket Number: No. 2753.,2753.
• Citation: 68 ALR 696,32 F.2d 42
• Parties: OX FIBRE BRUSH CO. v. BLAIR, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — Fourth Circuit

68 ALR 696, 32 F.2d 42 (1929)

OX FIBRE BRUSH CO. v. BLAIR, Commissioner of Internal Revenue.

No. 2753.

Circuit Court of Appeals, Fourth Circuit.

April 9, 1929.

Harry B. Sutter, of Chicago, Ill. (Albert L. Hopkins, O. John Rogge, and John Enrietto, all of Chicago, Ill., on the brief), for petitioner.

Morton P. Fisher, Sp. Asst. Atty. Gen. (Mabel Walker Willebrandt, Asst. Atty. Gen., and Dorothy A. Moncure, Atty., C. M. Charest, Gen. Counsel, and L. W. Scott, Sp. Atty., Bureau of Internal Revenue, all of Washington, D. C., on the brief), for respondent.

Before PARKER and NORTHCOTT, Circuit Judges, and COLEMAN, District Judge.

WILLIAM C. COLEMAN, District Judge.

This is an appeal for review of a decision of the United States Board of Tax Appeals, affirming the finding of the Commissioner of Internal Revenue that there was a deficiency of $24,091.60 in the income and profits tax for the calendar year 1920, paid by the petitioner, the Ox Fibre Brush Company, hereinafter called the company. The deficiency as claimed arose from the fact that the company had deducted from its net income the sum of $48,000, one-half of which having been voted in 1920 to the company's president as "extra compensation for his past services," and a like sum, by similar resolution, to the company's treasurer. The company claimed the right to make this deduction by virtue of section 234(a) (1) of the Revenue Act of 1918 (40 Stat. 1077), which is as follows:

"That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

"(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered. * * *"

The material facts as disclosed by the evidence are as follows:

The company, a West Virginia corporation, during the year 1920 and for many years prior thereto, had been engaged in the manufacture of brushes, its factory being located at Frederick, Md., with executive offices and sales headquarters in New York City, and branch sales offices in St. Louis, Cincinnati, Philadelphia, and Boston. Mr. Robinson, the company's president during the year 1920, had served the company in this same capacity since 1906, and Mr. McEwen, the treasurer in 1920, had held the same office since 1907. Both of these officers had devoted their entire time to the company's interests since 1907. Each year they had personally guaranteed bank loans of considerable size made to the company. Prior to 1917, a technical expert had managed the company's plant, for which he received $10,000 per annum; but in that year the president and treasurer assumed general management of the plant. The services of the technical expert were dispensed with, and in his place a factory superintendent was employed at a much lower salary. In addition to their regular executive duties, the president and treasurer handled all large purchases, directed all sales, the hiring of personnel, and also directed the general policies of the company. Prior to Mr. Robinson's and Mr. McEwen's administration of the business, it had been in a chaotic state and operated at a loss, but under their direction and control the gross sales of the company increased from $374,236.66 in 1909 to $1,273,474.72 in 1920; the net income increased from an operating loss of $3,972.44 in 1908 to net earnings, after deduction of salaries, including the amounts here in question, of $158,753.67 in 1920. No dividends were paid until 1910, but were increased from $4,500, in 1911 and 1912, to $433,275, in 1920, represented by 50 per cent. stock dividend of $300,000 and cash dividends aggregating $123,275, or 25.98 per cent. on the outstanding capitalization at the beginning of that year; that is to say, under the new management, the company advanced from the status of a poor competitor with other corporations employing contract prison labor in the manufacture of brushes to a leading place in the brush trade. The percentage of officers' salaries to gross income for 1920 was 5.8 per cent. The percentage of officers' salaries to net income, before deducting salaries, was 32.08 per cent., and the percentage of net income, after paying salaries and all other expenses, to outstanding capital stock, was 33.44 per cent. The net income in 1920, namely, $158,753.67, after deduction of all expenses including officers' salaries, represented a return of 21.13 per cent. on invested capital of $751,038.31, as determined by the Commissioner of Internal Revenue for that year. As a result of the bureau's disallowance of the $48,000 here in question, the taxable net income for 1920 of the company was $206,753.67, or a return of 27.53 per cent. on invested capital and surplus.

In 1919 and 1920, $12,000 and $15,000 had been paid as salaries to the president and treasurer, respectively. In 1918 their combined salaries were approximately $25,000. The record does not disclose what they received in 1915, 1916, and 1917, but in 1914 they together received $16,000; in 1913, $11,000; in the three preceding years, $10,000, before which they received $6,000. On May 6, 1920, the board of directors, at a meeting duly called, unanimously voted to pay each of these officers additional compensation of $24,000. The following appears from the minutes of this meeting:

"This meeting having been specially called for the purpose of considering and acting upon the proposal for a grant of additional compensation to Mr. J. K. Robinson, Jr., and to Mr. Alfred McEwen, for their past services to the company, * * *

"Resolved, that this board hereby authorize and direct the payment of the sum of twenty-four thousand ($24,000) dollars to Mr. J. K. Robinson, Jr., as extra compensation for his past services to this company as an officer thereof, and in any other capacity, the same to be paid when in the discretion of the officers, funds of this corporation for this purpose are available.

"Resolved, that this board authorizes and directs the payment of the sum of twenty-four thousand ($24,000) dollars, to Mr. Alfred McEwen as extra compensation for his past services to this company as an officer thereof and in any other capacity, the same to be paid when, in the discretion of the officers, funds of this corporation for this purpose are available."

The petitioner's books were kept on an accrual basis, and during the month of May, 1920, proper entries were made therein, crediting the accounts of the president and the treasurer with the additional compensation voted as aforesaid, and charging the expense accounts therewith. The president and treasurer and their immediate families owned approximately 36 per cent. of the stock of the company. The remaining stock was mostly owned by the company's employees.

On this evidence, the Board of Tax Appeals found, first, that the additional compensation voted to the company's president and treasurer in 1920 was intended to be as and for, and was as and for, salaries for the year 1920; second, that the action of the company's board of directors in so voting did not raise a presumption that the extra compensation was in fact reasonable for services actually rendered; and, third, that such extra compensation was in excess of reasonable compensation for services performed in 1920, on the ground that the duties performed were not materially different from those performed in preceding or succeeding years for which the compensation received was, the board asserted, not shown to have been inadequate, although it was conceded that the officers were efficient and brought prosperity to the company, and that the additional compensation was a merited recognition by the company of their valuable services rendered prior to 1920. There are 14 assignments of error, which, summarized, question all three of these findings. We will consider these findings in the order stated.

First. To say that the additional compensation voted to the company's president and treasurer in 1920 was intended to be as and for, and was as and for, salaries for the year 1920, is to torture the very language of the resolutions themselves. The payment to each officer is expressly stated to be "extra compensation for his past services," not merely measured by such services. The wording could scarcely be clearer. Whether, if the resolution had been differently worded — for example, if the extra compensation had been voted "to make up for lack of same in past years" — the present finding of the Board of Tax Appeals on this point might have been justified, it is not necessary for us to decide. See Vaughn & Barnes, Inc., v. Commissioner, 6 B. T. A. 1279. Therefore this first conclusion of the board we find to be erroneous and not binding. While the board's findings of primary facts are conclusive, the court must inquire into other facts in order correctly to determine whether the board's conclusion is supported by the evidence, namely, whether it is in accordance with law. We find no evidence whatsoever to support this conclusion. The jurisdiction of this court to review decisions of the Board of Tax Appeals is conferred by the Revenue Act of 1926 (26 USCA § 1226(b), which is as follows: "Upon such review, such courts Circuit Courts of Appeals shall have power to affirm or, if the decision of the board is not in accordance with law, to modify or to reverse the decision of the board * * * as justice may require." As was said in Bishoff v. Commissioner (C. C. A.) 27 F.(2d) 91, 92:

"This provision is within the trend of recent legislation respecting fact finding tribunals with special judicial powers such as the Federal Trade Commission whose `findings of fact, if supported by testimony,' are made conclusive (Comp. Stat. § 8836a-k 15 USCA §§ 41-51; Curtis Pub. Co. v. Federal Trade Commission C. C. A. 270 F. 881, 911), and is generally regarded, because of...