Sommerfeld Mach. Co. v. Comm'r of Internal Revenue, Docket No. 16040.
| Citation | 15 T.C. 453 |
| Decision Date | 10 October 1950 |
| Docket Number | Docket No. 16040. |
| Parties | SOMMERFELD MACHINE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner's receipt of income from manufacture and sale of lathes developed in prior years over a period in excess of 12 months held to entitle petitioner to special relief from excess profits tax under Internal Revenue Code, section 721(a)(2)(C), with adjustments for expenses deductible in computing net abnormal income, and after application of business improvement factor. W. B. Knight Machinery Co., 6 T.C. 519, followed.
2. Deductions for compensation to petitioner's officer-stockholders, held partly excessive.
3. Deductions for traveling expenses and sales commissions held to be justified by evidence submitted. R. J. Cleary, Esq., for the petitioner.
Albert J. O'Connor, Esq., for the respondent.
By this proceeding petitioner seeks a redetermination of deficiencies in income and declared value excess profits and excess profits tax as follows:
+----------------------------------------------------------------+
¦Year¦Income tax¦Declared value ¦Excess profits tax¦Totals ¦
+----+----------+------------------+------------------+----------¦
¦ ¦ ¦excess profits tax¦ ¦ ¦
+----+----------+------------------+------------------+----------¦
¦1941¦$10,223.64¦$6,326.16 ¦$34,333.63 ¦$50,883.43¦
+----+----------+------------------+------------------+----------¦
¦1942¦ ¦716.99 ¦78,922.56 ¦79,639.55 ¦
+----+----------+------------------+------------------+----------¦
¦1943¦ ¦1,508.23 ¦73,466.43 ¦74,974.66 ¦
+----+----------+------------------+------------------+----------¦
¦1944¦ ¦ ¦24,614.14 ¦24,614.14 ¦
+----------------------------------------------------------------+
The deficiencies result in part from respondent's action in reducing its deductions for salaries and ‘miscellaneous‘ expenses. Other adjustments are not contested.
Petitioner's claim for a refund of excess profits tax in the years 1941 to 1943, inclusive, under Internal Revenue Code section 721(a)(2)(C), is also in issue.
The case was heard on a stipulation of facts and other evidence.
The stipulated facts are hereby found accordingly.
Petitioner, a Pennsylvania corporation, filed its returns on an accrual basis for the years in question with the collector of internal revenue at Pittsburgh, Pennsylvania.
Karl and Frank Sommerfeld, brothers, were 55 and 52 years of age, respectively, at the time of the hearing herein. They attended public school and Carnegie Tech night school at Pittsburgh, Pennsylvania, where they studied mechanical engineering but did not graduate. In 1913 both began working in the machine shop of Sommerfeld Machine & Manufacturing Co., owned by their father. Frank worked for the company from 1913 until 1917, when he joined the Army, and returned in 1918 to become office manager. He became secretary and treasurer in 1922.
In 1924, when their father died, the brothers began operating the business, then located at 216 Second Avenue, Pittsburgh. In 1928 they borrowed money from a bank and bought the stock of older stockholders. The company failed and the brothers moved to Braddock, Pennsylvania, where they acquired a run-down building and engaged in general machine shop work.
Petitioner, originally called Sommerfeld Co., situated in Braddock, was incorporated under Pennsylvania law on January 5, 1933, with an authorized capital of $5,000 represented by 100 shares of $50 par value stock. The stock was represented by certificates dated January 10, 1933, and issued to the following persons:
+-----------------------------+
¦Stockholder ¦Shares ¦
+--------------------+--------¦
¦John N. Piatt ¦95 ¦
+--------------------+--------¦
¦Frank H. Sommerfeld ¦3 ¦
+--------------------+--------¦
¦Agnes W. Sommerfeld ¦1 ¦
+--------------------+--------¦
¦Karl E. Sommerfeld ¦1 ¦
+--------------------+--------¦
¦Total ¦100 ¦
+-----------------------------+
Agnes was Karl and Frank's mother. On February 23, 1933, Piatt transferred his 95 shares, 38 to Agnes, 33 to Karl, and 24 to Frank.
On August 16, 1935, Agnes transferred 19 shares to Karl's wife, Pauline A. Sommerfeld, and 19 shares to Frank's wife, Helen P. Sommerfeld. At the same time Karl transferred 33 shares to Pauline, and Frank transferred 24 shares to Helen. As of August 16, 1935, the stock was held of record as follows:
+-----------------------+
¦Stockholder ¦Shares ¦
+--------------+--------¦
¦Pauline ¦52 ¦
+--------------+--------¦
¦Helen ¦43 ¦
+--------------+--------¦
¦Frank ¦3 ¦
+--------------+--------¦
¦Karl ¦1 ¦
+--------------+--------¦
¦Agnes ¦1 ¦
+--------------+--------¦
¦Total ¦100 ¦
+-----------------------+
In 1936 petitioner's name was changed from Sommerfeld Co. to Sommerfeld Machine Co. In 1937 the authorized capital stock was increased from $5,000 to $50,000. On December 1, 1937, certificates were issued for the following no par value shares to replace the $50 par value shares then outstanding:
+-----------------------+
¦Stockholder ¦Shares ¦
+--------------+--------¦
¦Pauline ¦52 ¦
+--------------+--------¦
¦Helen ¦43 ¦
+--------------+--------¦
¦Frank ¦4 ¦
+--------------+--------¦
¦Karl ¦1 ¦
+--------------+--------¦
¦Total ¦100 ¦
+-----------------------+
On December 20, 1937, petitioner issued additional no par value shares as stock dividends to the stockholders: 51 to Pauline, 42 to Helen, 4 to Frank, and 1 to Karl. During the years in question, petitioner's stock was held of record as follows:
+-----------------------+
¦Stockholder ¦Shares ¦
+--------------+--------¦
¦Pauline ¦103 ¦
+--------------+--------¦
¦Helen ¦85 ¦
+--------------+--------¦
¦Frank ¦8 ¦
+--------------+--------¦
¦Karl ¦2 ¦
+--------------+--------¦
¦Total ¦198 ¦
+-----------------------+
Both brothers devoted full time to petitioner's business during the tax years. Karl's only vacation consisted of 10 days during one of the years, and Frank was not absent from work more than two days. Karl has been president since 1933 and general manager since 1935. He attended to the hiring of personnel until 1938 or 1939, when that work was transferred to the shop foreman. Karl was in call 24 hours a day, 7 days a week, and frequently was required to come to the plant at night in the case of emergencies. The general machine shop business was highly competitive. All of petitioner's products, including lathes, competed with products of other companies.
In addition to his supervisory duties during the tax years, Karl installed a second hand heating system, a toilet and wash room, and a light plant at substantially lower costs than the price of new equipment. He also rebuilt all of petitioner's cranes.
Frank has been secretary and treasurer of petitioner since its creation, and during the years in question was in charge of purchasing. He had to obtain priorities from Washington and travel all over the country to find needed materials. In addition, Frank was thoroughly familiar with the production work, and was on call 24 hours a day. He and Karl cooperated to petitioner's benefit in supervising all phases of its operations.
Under date of February 8, 1940, petitioner entered into a contract with J. W. Hemmerle under which he was appointed distributor of lathes at 10 per cent commission. Karl went out with Hemmerle and helped close at least 90 per cent of the sales. The contract was discontinued and no commissions were paid in 1944. On some sales during the tax years petitioner also paid commissions to other persons. The total commissions paid were as follows:
+----------------------------------------------------------+
¦ ¦1941 ¦1942 ¦1943 ¦
+----------------------+---------+----------+--------------¦
¦Hemmerle ¦20,419.86¦$70,634.84¦$41,247.90 ¦
+----------------------+---------+----------+--------------¦
¦J. Haetten ¦ ¦5,959.00 ¦900.00 ¦
+----------------------+---------+----------+--------------¦
¦Industrial Plants Corp¦7,682.00 ¦31,909.00 ¦9,357.00 ¦
+----------------------+---------+----------+--------------¦
¦George V. Murphy ¦15,785.16¦14,280.84 ¦* (3,006.50)¦
+----------------------+---------+----------+--------------¦
¦R. G. Sommerfeld ¦3,808.60 ¦ ¦ ¦
+----------------------+---------+----------+--------------¦
¦Total ¦47,695.62¦122,783.68¦48,498.40 ¦
+----------------------------------------------------------+
FN* Deduction for refund of commission.
In its returns for each of the years 1941, 1942, and 1943, petitioner deducted the total commissions paid during that year.
The number of persons employed by petitioner increased from 20 in 1939 to 42 in 1940; 76 in 1941; 95 in 1942 and 1943; and dropped to 75 in 1944. Business slacked during 1944 because of the decreased demand for petitioner's products, and in at least part of that year petitioner operated on two shifts instead of three.
During the years in question the aggregate amounts paid to the brothers as ‘salaries‘ and ‘bonuses‘ were as follows:
+-------------------------------------------+
¦Year¦Officer¦Salary ¦Bonus ¦Total ¦
+----+-------+---------+---------+----------¦
¦1940¦Karl ¦$7,500.00¦$9,700.00¦$17,200.00¦
+----+-------+---------+---------+----------¦
¦1940¦Frank ¦6,000.00 ¦9,300.00 ¦15,300.00 ¦
+----+-------+---------+---------+----------¦
¦ ¦Total ¦13,500.00¦19,000.00¦32,500.00 ¦
+----+-------+---------+---------+----------¦
¦1941¦Karl...To continue reading
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