Rutter v. Commissioner
| Decision Date | 28 August 1986 |
| Docket Number | Docket No. 15061-81,6343-82. |
| Parties | James H. Rutter and Marie R. Rutter v. Commissioner. J. H. Rutter Rex Manufacturing Co., Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Edward B. Benjamin, Jr. and Robert W. Nuzum, 201 St. Charles Ave., New Orleans, Louisiana for the petitioners. Linda J. Bourquin, Linda K. West and H. Carl Zeswitz, for the respondent.
Memorandum Findings Of Fact and Opinion
Respondent determined deficiencies in petitioners' income and accumulated earnings taxes in the amounts1 and for the years as follows:
Deficiency in Accumulated
Petitioner Year Income Tax Earnings Tax
James H. & .................................. 1977 $ 31,795 —
Marie R. Rutter ............................. 1978 11,694 —
1979 31,660 —
J.H. Rutter Rex ............................. 1976 367,621 —
Manufacturing, .............................. 1977 199,800 $446,658
Co., Inc. ................................... 1978 199,800 598,077
The issues for decision are:
1. Whether a Form 872, which was executed by Eugene J. Rutter, the president of J.H. Rutter Rex Manufacturing Co. (Rutter Rex), on November 25, 1980, was a valid consent to extend the statute of limitations for Rutter Rex's taxable years 1976 and 1977 to December 31, 1981.
2. Whether the amounts paid by Rutter Rex to James H. Rutter and Eugene J. Rutter for taxable years 1976, 1977, 1978 and 1979 constitute reasonable compensation for services rendered within the meaning of section 162(a)(1)2 and whether any part of such amounts paid to James H. Rutter during the years 1977, 1978 and 1979 constitute dividends which are not subject to the maximum tax on earned income.
3. Whether Rutter Rex was availed of so that its shareholders would avoid income tax by permiting earnings and profits to accumulate beyond the reasonable needs of the business in 1977 and 1978.
4. Whether Rutter Rex is entitled to deduct the $137,975 of repairs and maintenance expenses disallowed by respondent for the taxable year 1979.
Some of the facts have been stipulated and are found accordingly.
James H. Rutter and Marie R. Rutter, husband and wife, who resided in Covington, Louisiana at the time of the filing of the petition in this case, filed joint Federal income tax returns for the calendar years 1977, 1978 and 1979 with the Office of the Director, Internal Revenue Service Center, Austin, Texas. An amended return was also filed for calendar year 1979.
Rutter Rex is a Louisiana corporation with its principal place of business in New Orleans, Louisiana at the time of the filing of the petition in this case. Rutter Rex was incorporated on July 1, 1930 and is engaged in the clothing manufacturing business. James H. and Marie R. Rutter own 100 percent of the outstanding stock of Rutter Rex and have owned such stock since 1941. Of the 10,000 shares of stock of Rutter Rex outstanding, 9,990.8 were in the name of Mr. Rutter and the remaining 9.2 shares were in the name of Mrs. Rutter. Rutter Rex maintained its books and records and filed its Federal income tax returns on an accrual method of accounting and on a calendar year basis for the years in issue. Rutter Rex timely filed its Federal corporate income tax returns for the calendar years 1976, 1977, 1978 and 1979 with the Internal Revenue Service Center in Austin, Texas. Rutter Rex filed an amended return for taxable year 1979 and also timely filed corporate applications for tentative refund with respect to the 1979 taxable year.
From approximately 1942 through the years at issue, James H. Rutter (Mr. Rutter) has been the chairman of the board and chief executive officer of Rutter Rex and his son Eugene J. Rutter (Mr. Eugene Rutter) has been president and chief operations officer of Rutter Rex from 1960 through the years at issue.
From 1931 until 1980 dividends were paid to James and Marie Rutter as follows:
Amount
of
Year Dividend
1966 ................................ $ 24,136
1967 ................................ 4,850
1972 ................................ 400,000
The board of directors of Rutter Rex determined whether Rutter Rex would pay a dividend. During the years in issue, Mr. Rutter, who was chairman of the board, had the final responsibility for all the major decisions and overall management of Rutter Rex, and Mr. Eugene Rutter, who was president of Rutter Rex, a was responsible for the day to day operations of Rutter Rex. During the years in issue, Rutter Rex's board of directors consisted of Mr. Rutter and Mr. Eugene Rutter, Marie Rutter, Anna Mae Kenney and R.E. Vivien, Sr.
On December 28, 1979, Mr. Eugene Rutter, acting in his capacity as president of Rutter Rex, executed a Form 872, "Consent to Extend the Time of Assess Tax," extending the period for assessing the amount of any Federal income tax due from Rutter Rex for the period ending December 31, 1976 to any time on or before December 31, 1980.
On November 25, 1980, Mr. Eugene Rutter, acting in his capacity as president of Rutter Rex, signed another Form 872, "Consent to Extend the Time of Assess Tax," extending the periods for assessing the amount of any Federal income tax due from Rutter Rex for the periods ending December 31, 1976 and December 31, 1977 to any time on or before December 31, 1981. The consent was signed by Mr. Eugene Rutter in the presence of Jake Haney, controller for Rutter Rex, William Hogan, certified public accountant for Rutter Rex, Mr. Rutter, chairman of the board of Rutter Rex, and revenue agent McConnell who had presented the Form 872 to Mr. Eugene Rutter for signing. The signed Form 872 was date-stamped and received by respondent's audit division in New Orleans, Louisiana, on November 25, 1980, the same day it was signed by Mr. Eugene Rutter. It was also signed and dated on November 25, 1980, by Rene G. Daigre, the manager of the group of revenue agents to which Mr. McConnell was assigned in the New Orleans office of the Internal Revenue Service. Rutter Rex's appointed attorney-in-fact, Edward B. Benjamin, Jr., was not present when Mr. Eugene Rutter signed the Form 872. On October 15, 1980, Mr. Benjamin had sent a power of attorney, which appointed Mr. Benjamin as attorney-in-fact for Rutter Rex, to revenue agent McConnell. Mr. Benjamin had attended a meeting of representatives of Rutter Rex with Mr. McConnell on November 25, 1980, prior to the time when Mr. Eugene Rutter signed the Form 872 and had stated that his clients would not execute the Form 872 at that time and that execution of the form would be discussed further at a December 3, 1980, meeting. Mr. Benjamin left the November 25, 1980, meeting prior to the time when Mr. Eugene Rutter signed the consent form. No written request for return of the consent was submitted by Mr. Rutter, Mr. Eugene Rutter, or Mr. Benjamin. Respondent issued a deficiency notice to Rutter Rex on December 17, 1981 for taxable years ending December 31, 1976, December 31, 1977, and December 31, 1978.
Rutter Rex manufactures work pants and work shirts, jeans, casual pants and casual shirts, and other clothing. The company works only from orders specifying the manufacture of specific items and has no retail distribution facilities.
Amounts designated as salaries and bonuses to Mr. Rutter and Mr. Eugene Rutter and deducted by Rutter Rex in the years 1976 through 1979 are as follows:
James H. Rutter Eugene J. Rutter
---------------------------- ----------------------------
Year Salary Bonus Total Salary Bonus Total
1976 .............. $200,000 $225,000 $425,000 $125,000 $175,000 $300,000
1977 .............. 200,000 112,500 537,500 125,000 87,500 387,500
225,000 175,000
1978 .............. 200,000 337,500 537,500 125,000 262,500 387,500
1979 .............. 200,000 318,125 518,125 125,000 270,625 395,625
During the years in issue, Mr. Rutter determined his own and Mr. Eugene Rutter's salary and bonuses. During this time, the salaries and bonuses for all other management personnel of Rutter Rex were determined by Mr. Eugene Rutter but were subject to the approval of Mr. Rutter. Rutter Rex had officers and department heads for corporate functions including the following: John P. Douroux, Sr., vice president; John M. Drake, vice president; Anne Mae Kenney, secretary and assistant treasurer; and Frank A. Ulm, assistant secretary. Although both Messrs. Douroux and Drake had management responsibilities during the years in issue, all major corporate decisions were made by Mr. Rutter and Mr. Eugene Rutter, and neither Mr. Douroux nor Mr. Drake generated sales for Rutter Rex during those years. Rutter Rex's middle and lower level management personnel reported to Mr. Eugene Rutter and Mr. Eugene Rutter then reported to Mr. Rutter.
Mr. Douroux had the following responsibilities and duties: Confirming all details of the customer contracts; arranging the availability and pickup of piece goods and distributing the goods to plants for cutting; analyzing all incoming orders to determine marking by model, quantity and size of cuttings; making all cut sheets; controlling inventory and maintaining model stocks; distributing all finished goods to various warehouses and arranging for their transportation; completing the supervision of shipping departments for all the warehouses; contacting customers; making inquiries and following up with the customer; writing the customer weekly status reports; supervising all clerical personnel pertaining to the information necessary to complete the responsibilities mentioned above; and following through on all procedures instituted by Mr. Eugene Rutter.
Mr....
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