Roth Office Equipment Co. v. Gallagher, 10643.
| Decision Date | 10 February 1949 |
| Docket Number | No. 10643.,10643. |
| Citation | 172 F.2d 452 |
| Parties | ROTH OFFICE EQUIPMENT CO. v. GALLAGHER. |
| Court | U.S. Court of Appeals — Sixth Circuit |
William G. Pickrel, of Dayton, Ohio (William G. Pickrel, of Pickrel, Schaeffer & Ebeling, all of Dayton, Ohio, on the brief), for appellant.
Louise Foster, of Washington, D. C. (Theron L. Caudle, Sewall Key, Robert N. Anderson and S. Dee Hanson, all of Washington, D. C., and Ray J. O'Donnell and William J. Dammarell, both of Cincinnati, Ohio, on the brief), for appellee.
Before HICKS, Chief Judge, and McALLISTER and MILLER, Circuit Judges.
The appellant, The Roth Office Equipment Company, brought suit in the District Court to recover $27,703.12 representing deficiencies in income and excess profits taxes paid for the taxable years ended June 30, 1941 and June 30, 1942. The deficiencies were the result of a disallowance by the Commissioner of deductions taken for compensation paid to three officers of the Company for personal services, the Commissioner holding such payments unreasonable in part. The District Court approved the deductions in full for the year ended June 30, 1941, and in part for the year ended June 30, 1942, and allowed a recovery in the amount of $14,398.60. The appeal is from the disallowance of the remainder of Appellant's claim for the year ended June 30, 1942, in the amount of $13,304.52.
The Appellant is an Ohio corporation organized in 1915 with its principal place of business at Dayton, Ohio. Its business is commercial stationers and office outfitters. During the years in question, the Company had only three officers, C. W. Roth, D. B. McConnaughey and Dayton Storch, who were also stockholders and directors. There were three other directors, one of whom was the wife of the president C. W. Roth. The other two were not associated with the Company. The following chart shows the amounts paid by the Company to each of the three officers, the amounts allowed by the Commissioner and the amounts allowed by the District Court for each of the two fiscal years in question:
Fiscal Year 1941
Officer Claimed Commissioner Court
Roth ................. $24,700.08 $21,900.08 $24,700.08
McConnaughey ......... 13,681.92 12,181.92 13,681.92
Storch ............... 8,070.00 7,170.00 8,070.00
__________ __________ __________
Total ............. $46,452.00 $41,252.00 $46,452.00
Fiscal Year 1942
Officer Claimed Commissioner Court
Roth ................. $45,125.04 $26,825.04 $35,000.00
McConnaughey ......... 26,176.96 15,576.96 20,000.00
Storch ............... 15,180.00 9,080.00 12,500.00
___________ __________ __________
Total .............. $86,482.00 $51,482.00 $67,500.00
In 1937, the three officers received the following compensation: Roth, $13,000; McConnaughey, $4,000; Storch, $3,500. In 1940 Roth received $15,000; McConnaughey, $7,840; Storch, $4,500. The compensation of each was successively and materially decreased in each of the years 1943, 1944 and 1945 from that received in 1942, until in 1945 Roth received $20,600; McConnaughey received $11,650; and Storch received $6,480.
C. W. Roth, the president, had 45 years experience in the business, the last 30 or so with the Appellant. McConnaughey had been with Appellant approximately the same length of time and had several years previous experience in related lines. Storch, the treasurer, had about 15 years experience before joining the Appellant in 1916. Between 1925 and 1939, the Company had five officers, one of whom died in 1939 and another who died in 1940, and who were not replaced. Two other experienced employees left the Company about the same time to enter a competing business. A number of salesmen who the Company was unable to replace were taken by the Selective Service draft. To a large extent the work of those who died or left was taken over by the remaining three officers who also had the duty of training new personnel. Government priorities added substantially to the duties of the officers during the periods in question. All three of the officers were very experienced and capable in the business of the Company, and during the periods in question often worked from 14 to 16 hours per day and on Sundays, and took no vacations.
During the year ending June 30, 1940, out of 525 outstanding shares of stock Roth owned 364 shares, Mrs. Roth owned 5 shares, McConnaughey owned 100 shares and Storch owned 50 shares, for a total of 519 shares. Out of the 600 shares outstanding on June 30, 1941, the same persons owned the same number of shares. Out of 995 shares outstanding on June 30, 1942, Roth owned 584 shares, Mrs. Roth owned 5 shares, McConnaughey owned 165 shares and Storch owned 85 shares, for a total of 839 shares.
The Appellant dealt in some 25,000 different items and had many customers in and around Dayton, Ohio, and through the Miami Valley. Most of the business was obtained through personal solicitation and contacting prospective customers. The expansion of the Army Air Force facilities in the Dayton area contributed to the increase in the Company's business, but this was not the sole reason. The Company had three types of sales: (1) Regular sales which were made out of inventory, (2) brokerage sales where the goods were delivered direct from the manufacturer to the purchaser on the Company's credit, the Company in turn adding a brokerage fee and billing the customer, and (3) commission sales where the manufacturer shipped direct to the customer on the customer's credit and paid the Company a small commission. Commission sales often required considerable planning, solicitation and layout work. Government sales involved competitive bidding with keen competition. Many bids requiring considerable preliminary work were unsuccessful. All types of sales involved a large amount of work, including preliminary work of solicitation and preparation of bids, priority problems after the sales were made, and problems connected with delivery and installation after the orders were filled by the manufacturers. The greater portion of sales on which commissions were received during the fiscal years in question were made before the start of the war in December, 1941.
The growth and success of the Company from 1937 through 1942 is shown by the following table:
1937 1940 1941 1942
Total sales ................. $292,199 $479,310 $1,876,863 $5,029,006
Gross profit ................ 103,398 112,633 169,150 286,539
(Before salaries, commissions
and general expenses)
Net profit .................. 30,613 23,016 38,958 57,015
The compensation which the Commissioner found unreasonable was paid in the form of bonuses. For bonus purposes the employees were divided into three groups: (1) The three officers, Roth, McConnaughey and Storch; (2) eight salesmen, a bookkeeper and two buyers; and (3) the remaining employees eligible for bonus payments. The formula used for computing the amount of bonus payments in Group 1 was the average weekly salary for the calendar year of 1940, not including bonuses, plus $1 for each year of service, the total of which was multiplied by six. For the year ended June 30, 1941, one bonus payment was made in each of the months of February, March, May and June and two in April. For the year ended June 30, 1942, a one-half bonus payment was made in September and one in each of the months of October, November and December, plus a regular Christmas bonus. Commencing with January 1, 1942, the bonus payments were increased to an even $100 and two bonus payments were made in each of the months of January to June inclusive. The basis for computing the amount of bonus payments in Group 2 was the individual's average salary for the calendar year 1940 plus $1 for each year of service, the total of which was multiplied by 3. The basis for bonus payments in Group 3 was the average weekly salary plus $1 for each year of service.
The Board of Directors of the Company passed the following Resolution on September 11, 1939:
"Resolved that after providing for a $5,000.00 addition to surplus and a dividend of not less than $2.00 per share, the company pay bonuses out of excess earnings on the basis of salaries and length of service, at the discretion of the Board of Directors."
On September 15, 1941, the Board of Directors passed the following Resolution:
"Resolved that the Board of Directors, after setting aside suitable reserves, in its discretion fix and pay to its officers and employees salaries and also bonuses out of excess earnings on the basis of past salaries and length of service and value of services to the Company."
The officers-stockholders determined the amount of each bonus payment and the times when such bonus payments were to be...
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