LE Pinkham Med. Co. v. Com'r of Internal Revenue
| Decision Date | 26 June 1942 |
| Docket Number | No. 3764.,3764. |
| Citation | 128 F.2d 986 |
| Parties | LYDIA E. PINKHAM MEDICINE CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — First Circuit |
Joseph W. Worthen, of Boston, Mass., for petitioner for review.
Samuel H. Levy, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Mamie S. Price, Sp. Assts. to Atty. Gen., on the brief), for the Commissioner.
Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.
This is a petition to review a decision of the Board of Tax Appeals. It involves income taxes for the years 1936 and 1937. The sole issue is whether the amounts paid in these years to Aroline P. Gove, Treasurer, and Lydia P. Gove, Assistant Treasurer, are deductible as reasonable allowances for personal services actually rendered to the taxpayer under Section 23(a) of the Revenue Act of 1936, 49 Stat. 1648, Ch. 690, 26 U.S.C.A. Int.Rev.Acts, page 827, § 23(a).1
The pertinent facts as found by the Board are as follows:
The taxpayer, a Maine corporation, with its laboratories and principal offices in Lynn, Massachusetts, was founded by Lydia E. Pinkham and was incorporated in 1882 as the Lydia E. Pinkham Medicine Company. It is engaged in the manufacture, distribution and sale of a product known as "Lydia E. Pinkham Vegetable Compound". Aroline P. Gove, the daughter of Lydia E. Pinkham, was the treasurer of the company since its incorporation until her death in 1939; Lydia P. Gove, the granddaughter of Lydia E. Pinkham, was assistant treasurer from 1925 until her mother's death, and thereafter was elected treasurer. The President, Arthur W. Pinkham, is a grandson of the founder of the business.
In 1921, the capital stock of the taxpayer consisting of 112 shares, was divided into two equal parts designated in the by-laws as the Pinkham and the Gove stock. It is recited in the by-laws that a majority of the Gove stock and a majority of the Pinkham stock constitute a quorum; that there should be six directors, three representing the Goves and three representing the Pinkhams; that the president, one vice president and secretary should be from the Pinkham stockholders, and the treasurer, assistant treasurer and one vice president from the Gove stockholders. There were other provisions to prevent one faction from doing anything without the approval of the other. Article VII, Section 7, of the By-laws, which deals with the question of compensation to the officers and directors, provides:
In 1928, the aggregate compensation was fixed by the Board of Directors at $60,000. This sum was distributed in each of the taxable years as follows:
Director's
Name Office Salary fees Total
Arthur W. Pinkham President $14,000 $1,000 $15,000
Daniel R. Pinkham Vice-President 6,500 1,000 7,500
Charles H. Pinkham Secretary 6,500 1,000 7,500
Caroline G. Doty Vice-President 1,000 1,000
Aroline P. Gove Treasurer 20,000 1,000 21,000
Lydia P. Gove Asst. Treasurer 7,000 1,000 8,000
Aroline was paid $20,000 a year as treasurer since 1926, and Lydia has been paid $7,000 a year since 1928 as assistant treasurer and purchasing agent. The Board found that they had direct supervision of the treasury department of the corporation. The financial affairs of the taxpayer were conducted by its treasury department. This entailed the handling of several bank accounts, matters of foreign exchange, employing six bookkeepers, keeping books, preparing many and frequent reports, supervising all credit problems with almost complete success, keeping records of stock in various warehouses and orders for stock, taking care of all securities owned by the petitioner, disbursing large sums for advertising, and paying all bills, including wages of about one hundred employees.
Lydia P. Gove, as purchasing agent of the corporation, received all bids and supervised all purchases made by the petitioner. She signed about twenty-four hundred requisitions, involving supplies costing from $300,000 to $350,000 in each year. Aroline and Lydia were absent and did not attend to the affairs of the petitioner for a considerable period of time. Aroline was away from some time in May, 1936, until March, 1937, and Lydia from some time in May, 1936, until October, 1936, and then from early in 1937 to March, 1937. It was their custom when attending to the business of the petitioner during the taxable years to go together to the office daily for two or three hours. At these times Lydia signed many checks.
The Commissioner determined the net income of the petitioner for the taxable years to be $504,631.68 and $429,327.53. During this same period the gross sales were $1,244,293.60 and $1,421,943.73. The business was conducted in the United States and in many foreign countries. The sums of $20,000 paid to the treasurer and $7,000 paid to the assistant treasurer as salaries for the taxable years were disallowed by the Commissioner as deductions, on the ground that such payments did not represent reasonable compensation for personal services actually rendered to the taxpayer. Upon petition for redetermination, the Board of Tax Appeals found that the reasonable annual compensation for these services during the years in question was $2,500 for Aroline and $5,000 for Lydia.
The petition urges that since the directors determined the total sums to be paid the officers and directors, their determination is presumptively correct. It is true, as a general proposition, that a determination by the directors of the value of the services rendered to the corporation is entitled to some weight. Ox Fibre Brush Co. v. Blair, 4 Cir., 1929, 32 F.2d 42, 45, 68 A.L.R. 696, affirmed Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 50 S.Ct. 273, 74 L.Ed. 733. But we think that the Board was entirely justified in attaching no significance to the determination of the Board of Directors in this case because the payments made to the Goves and to the Pinkhams were in accordance with the stockholding interests of each group, and not as a result of an objective determination of the value of the services rendered by the officers to the petitioner. See General Water Heater Corp. v. Commissioner, 9 Cir., 1930, 42 F.2d 419, 420; Am-Plus Storage Battery Co. v. Commissioner, 7 Cir., 1929, 35 F.2d 167, 169.
A novel argument is made by petitioner that the payments to Aroline and Lydia should be computed in the aggregate because they represent payments to a group. It is contended that the work of the corporation was divided equally between the Pinkhams and the Goves and that the equal division of the sum allocated to salaries...
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