Patton v. C.I.R., 85-4822
| Decision Date | 05 September 1986 |
| Docket Number | No. 85-4822,85-4822 |
| Parties | -5709, 86-2 USTC P 9670 Luther R. PATTON, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Summary Calendar. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Albert Sidney Johnston, Jr., Biloxi, Miss., for petitioner-appellant.
Fred T. Goldberg, Jr., Chief Counsel, I.R.S., Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Michael L. Paup, Chief, Appellate, Charles E. Brookhart, Atty. Sec., Murray S. Horwitz, Atty., Washington, D.C., for respondent-appellee.
Appeal from the Decision of the United States Tax Court.
Before REAVLEY, JOHNSON, and DAVIS, Circuit Judges.
Luther R. Patton seeks review of a tax court judgment upholding tax deficiencies and fraud penalties assessed by the Commissioner of Internal Revenue ("Commissioner"). Finding Patton's contentions on appeal unpersuasive, we affirm the judgment of the tax court.
In 1967, Luther Patton was elected sheriff of Harrison County, Mississippi. As sheriff, Patton was the county's chief law enforcement officer and tax collector. During the period Patton was in office, a Mississippi sheriff would run his office much like an ordinary business venture. The sheriff received fees for collecting taxes and enforcing laws. These fees came partly from tax collections and partly from a percentage of fines levied for criminal offenses. The sheriff also received a salary as an elected official for his services from the county. However, the sheriff paid his office expenses including personnel costs from the fees he made for collecting taxes and from fines.
As sheriff, Patton was also authorized by Mississippi law to appoint bail bondsmen for Harrison County. After his election in 1967, Patton appointed two political supporters, John Gill and Earl Owen, to serve as bail bondsmen. Gill and Owen operated the bail bonding business in Harrison County as a partnership and were the only two bail bondsmen in Harrison County for the years relevant to the instant case.
In January 1972, a federal grand jury was empaneled in Biloxi, Mississippi, to investigate criminal activities in Harrison County, Mississippi. One subject of the investigation was the practice, common in Harrison County, of using pinball machines for illegal gambling. Several operators of pinball gambling machines were subpoenaed to testify before the grand jury. Much of that testimony focused on bribes paid to Patton to prevent Patton from enforcing state gambling laws. 1
Subsequent to the initiation of the federal grand jury investigation, the Commissioner audited Patton's 1968, 1969 and 1970 federal income tax returns. After completing its audit and investigation, the Commissioner determined that Patton had received and failed to report the following amounts of income during the relevant years:
Year Amount
---- -------
1968 $28,100
1969 $22,800
1970 $17,000
According to the Commissioner, Patton had derived this unreported income from bribes paid by local gamblers as well as kickbacks paid by the two bail bondsmen Patton had appointed.
The Commissioner also disallowed numerous salary deductions Patton had made on his tax returns (as business expenses) pursuant to 26 U.S.C. Sec. 162(a)(1). In particular, the Commissioner disallowed the following claimed salary deductions:
1968 1969 1970
------------------- ------------------- -------------------
Claimed Disallowed Claimed Disallowed Claimed Disallowed
------- ---------- ------- ---------- ------- ----------
L.S. Broadus $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000.00
Maxie Broadus 12,000 12,000 12,000 12,000 12,000 --0--
R. Hart Chinn 1,800 1,800 1,800 1,800 1,800 1,800.00
Ed Owen 3,600 3,600 3,600 3,600 1,500 1,500.00
G.L. Pemberton 6,000 3,000 6,000 3,000 6,000 3,000.00
Ronnie Patton 3,600 1,800 3,700 1,850 2,925 1,462.50
Hunter Patton 3,600 1,800 3,700 1,850 3,174 1,587.00
Delores Patton -- -- -- -- 1,600 1,600.00
Faye Pattone -- -- -- -- 2,350 2,350.00
J.R. Flynt -- -- 287 287 -- --
------- ---------- ------- ---------- ------- ----------
TOTAL $30,000 $30,387 $19,299.50
According to the Commissioner, several of Patton's payees had been paid for political favors and not for any personal service provided to Patton's "business" as required by section 162(a)(1). The Commissioner also determined that several employees had been paid an excessive and unreasonable amount for those services actually provided.
The Commissioner finally determined that Patton had acted fraudulently in failing to report his full income and in claiming excessive deductions during the relevant years. Based on this fraud determination, the Commissioner imposed penalties pursuant to 26 U.S.C. Sec. 6653(b).
Patton received a statutory notice of deficiency dated October 21, 1977, informing him of the Commissioner's conclusions. The notice informed Patton of the following deficiencies:
Year Tax Penalty
1968 $27,391.17 $13,695.59
1969 $35,158.24 $17,579.12
1970 $20,132.06 $10,066.13
On January 23, 1978, Patton petitioned the tax court for a redetermination of the Commissioner's deficiency findings. The tax court eventually entered a decision on July 9, 1985, 2 reaching in large part the same findings and conclusions as those reached by the Commissioner. 3 Patton filed timely notice of appeal raising several challenges to the findings of the tax court.
On appeal, Patton first challenges the tax court's finding that a number of payments by Patton between 1968 and 1970 were not deductible under 26 U.S.C. Sec. 162(a)(1). Section 162(a)(1) permits a deduction for all ordinary 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." To determine whether payments are deductible under section 162(a)(1), three questions must be resolved: (1) is the payment in fact compensation for services rendered in connection with taxpayer's business, or is the payment for something else; (2) have personal services actually been rendered by the payee; and (3) is the payment reasonable when measured by the quality and amount of the services performed. Trinity Quarries, Inc. v. United States, 679 F.2d 205, 210 (11th Cir.1982); Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1243 (9th Cir.1983); 26 C.F.R. Sec. 1.162-7 (1985) (). The finding of the tax court in regard to each of the above factual inquiries is reversible only if clearly erroneous. See C.A. White Trucking Co., Inc. v. Commissioner, 601 F.2d 867 (5th Cir.1979).
The tax court found in the instant case that Patton had claimed excessive salary deductions under section 162(a)(1). In particular, the tax court found that amounts paid to Maxie Broadus, L.S. Broadus, Delores Patton and Juanita Flint were not compensation for services performed in connection with Patton's "business." Regarding the payments to Maxie Broadus and L.S. Broadus, the tax court found that the payments were in return for political support and not for services rendered in connection with either the sheriff or tax collector's office. Regarding the payments to Delores Patton and Juanita Flint, the tax court found that neither woman had performed any services in connection with Patton's "business." After carefully reviewing the record, we conclude that the foregoing findings were not clearly erroneous. Although uncontradicted evidence established that both Maxie Broadus and L.S. Broadus did provide some assistance to Patton's "business," the tax court could properly conclude that the payments were not in exchange for that assistance. In addition, the tax court found that amounts paid to R. Hart Chinn, Ed Owen, G.L. Pemberton and Hunter Patton were excessive. Our review of the record reveals that the tax court's findings regarding excessive and unreasonable compensation were also not clearly erroneous.
Patton contends that the Commissioner offered no evidence regarding the reasonableness of that compensation paid for services provided to the sheriff's office. Patton concludes that because the tax court had no evidentiary basis for determining the reasonable value of services provided, the case must be remanded. We disagree. First, we note that the burden was on Patton, not the Commissioner, to establish that Patton was entitled to the claimed section 162(a)(1) deductions. See C.A. White Trucking Co., Inc. v. Commissioner, 601 F.2d 867, 869 (5th Cir.1979); Cagle v. Commissioner, 539 F.2d 409, 416 (5th Cir.1976); Trinity Quarries, Inc. v. United States, 679 F.2d 205, 210 (11th Cir.1982). Thus, it was Patton who was required to establish the reasonableness of compensation paid.
Second, Patton cannot seriously contend that the tax court lacked an evidentiary basis to determine the reasonable value of services provided by Chinn, Owen, Pemberton and Hunter Patton. In each case, the tax court considered evidence regarding (1) the amount of services provided by the employee; (2) the sum paid to full-time employees providing similar services; and (3) each employee's outside activities and obligations. In Pemberton's case, the tax court also considered evidence regarding the sum paid to Pemberton's predecessor. These factors were all relevant to the tax court's inquiry...
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