Steiden Stores v. Glenn
| Decision Date | 02 August 1950 |
| Docket Number | Civ. A. No. 1456. |
| Citation | 94 F. Supp. 712 |
| Parties | STEIDEN STORES, Inc. v. GLENN. |
| Court | U.S. District Court — Western District of Kentucky |
Chas. I. Dawson, Bernard H. Barnett, Bullitt, Dawson & Tarrant, Louisville, Ky. for plaintiff.
Theron Lamar Caudle, Asst. Atty. Gen., Andrew D. Sharpe, Homer R. Miller, Sp. Assts. to the Atty. Gen., David C. Walls, U. S. Atty., Matthew O. Henchey, Asst. U. S. Atty., Louisville, Ky., for defendant.
In this action, plaintiff seeks to recover federal income taxes for the fiscal years ended June 30, 1942, June 30, 1943, and June 30, 1944, in the aggregate amount of $170,872.44, plus interest. The action was instituted under the provisions of Section 41(5), revised Section 1340, 28 U.S.C.A., and tried December 13, 1948.
The two questions involved are whether the Commissioner of Internal Revenue properly disallowed, as deductions under Section 23(a) (1) (A), Internal Revenue Code, 26 U.S.C.A. § 23(a) (1) (A), portions of the salaries and bonuses paid to taxpayer's officers and employees in the tax years involved, as not being reasonable allowances for personal services rendered by these officers and employees, and whether the taxpayer is estopped to deny the correctness of the Commissioner's findings with reference to the disallowed portions of the salaries and bonuses for the fiscal years ended June 30, 1942 and 1943.
The Court makes the following — Findings of Fact.
1. Plaintiff is now and was during the tax years involved and has been since the year 1931, a corporation duly and legally organized under the laws of Kentucky, with its principal office and place of business located at Louisville, Jefferson County, Kentucky.
2. Defendant was during the tax years involved and at all times subsequent thereto, the duly appointed, qualified and acting Collector of Internal Revenue in and for the District of Kentucky.
3. At all times material herein, plaintiff kept its books and filed its income tax returns on the basis of a fiscal year ended June 30th.
4. Plaintiff filed income tax returns for the fiscal years ended June 30, 1942, June 30, 1943, and June 30, 1944. In each of these returns, plaintiff claimed as deductions salaries and bonuses paid to its officers and key employees during said fiscal years, pursuant to the provisions of Section 23(a) (1) (A), Internal Revenue Code as ordinary and necessary expenses paid during the tax year in carrying on a trade or business, in the form of reasonable salaries or other compensation for personal services actually rendered. These returns were audited by agents of the Commissioner of Internal Revenue and as a result of said audit portions of the salaries and bonuses claimed as deductions were disallowed as deductions by the Commissioner.
The following table sets forth by tax years, the name of the officer or key employee, the salary and bonus paid to the particular officer or employee and the amount allowed as deductions by the Commissioner of Internal Revenue:
Fiscal year ended June 30, 1942
Name of Officer Amounts paid and Total salary and
or Employee claimed as deductions bonus allowed
Salary Bonus Total
L. W. Cole $10,000.00 $15,885.85 $25,885.85 $18,741.15
W. A. Steiden 10,000.00 15,885.85 25,885.85 18,741.15
L. C. Steiden 5,500.00 15,885.85 21,385.85 14,241.10
D. T. Petty 5,000.00 15,885.85 20,885.85 13,741.10
J. J. Murphy 5,000.00 15,885.85 20,885.85 13,741.10
R. B. Laufer 4,500.00 15,885.85 20,885 13,741.10
D. N. Duncan 4,000.00 15,885.85 19,885.85 12,741.10
L. D. Cole 2,044.00 15,885.85 17,929.85 7,835.00
Fiscal year ended June 20, 1943
L. W. Cole 10,000.00 32,849.84 42,849.84 28,697.91
W. A. Steiden 10,000.00 32,849.84 42,849.84 28,697.91
L. C. Steiden 5,500.00 32,849.84 38,349.84 24,197.91
D. T. Petty 5,000.00 32,849.84 37,849.84 23,697.91
J. J. Murphy 5,000.00 32,849.84 37,849.84 23,697.91
R. B. Laufer 2,626.00 32,849.83 35,475.83 11,254.80
D. N. Duncan 4,000.00 32,849.83 36,849.83 22,697.91
Fiscal Year ended June 30, 1944
L. W. Cole 10,000.00 27,834.56 37,834.56 28,697.91
W. A. Steiden 10,000.00 27,834.56 37,834.56 28,697.91
L. C. Steiden 5,500.00 27,834.56 33,334.56 24,197.91
D. T. Petty 5,000.00 27,834.56 32,834.56 23,697.91
J. J. Murphy 5,000.00 27,834.56 32,834.56 23,697.91
D. N. Duncan 4,000.00 27,834.56 31,834.56 22,697.91
5. As a result of the disallowance of portions of the salaries and bonuses, as above set out, the Commissioner made additional taxes of $120,000, plus interest against plaintiff for the fiscal years ended June 30, 1942, and June 30, 1943, and June 30, 1944. The Commissioner assessed additional taxes of $120,000, plus interest for the fiscal years ended June 30, 1942, and June 30, 1943. On June 27, 1945, the plaintiff paid to this defendant as Collector of Internal Revenue, the sum of $120,000 principal, plus $14,736.33 interest, total $134,736.33, which satisfied said assessment in full. For the fiscal year ended June 30, 1944, the Commissioner made an additional assessment against plaintiff. The amount of said assessment, attributable to the disallowance of bonuses and salaries was $50,872.44, plus interest. Plaintiff paid to defendant, as Collector of Internal Revenue, the full amount of said assessment in the amount of $50,872.44 principal, and $7,046 interest, total $57,918.44 the last installment of said payments being made on May 16, 1947. All of the additional assessments of income taxes, as set forth herein, were made as the result of the disallowance of the salaries and bonuses as above set forth.
6. Within the time prescribed by law, plaintiff filed claims for refund for the amounts of taxes paid pursuant to the additional assessments described above, and for each of the tax years ended June 30, 1942, June 30, 1943, and June 30, 1944, the claims for refund being based on the ground that the Commissioner, in disallowing any portions of the salaries and bonuses claimed, was in error. The Commissioner rejected each of the claims for refund and mailed notices of the rejection to the plaintiff by registered mail. This suit was instituted within two years after the mailing of said notices.
7. In 1919, W. A. Steiden and W. L. Cole started in business in the operation of two chain grocery stores, which business was incorporated under the name of Piggly Valley Company. The business grew from these two stores to 107 stores located in Kentucky and Southern Indiana, together with a subsidiary in Cincinnati. During most of the periods of these operations, D. T. Petty, J. J. Murphy, R. B. Laufer, D. N. Duncan, L. C. Steiden and Louis D. Cole were associated with L. W. Cole and W. A. Steiden in this business in various capacities. L. C. Steiden was the son of W. A. Steiden and Louis D. Cole was the son of L. W. Cole. During the period of these operations this business was highly successful. In 1928, the owners of the business sold out to Kroger Grocery & Baking Company for $4,000,000. Between the date of the sale and until sometime in 1931, the men above mentioned worked for Kroger during most of the period.
In 1931, W. A. Steiden and L. W. Cole purchased from one Clarence Saunders (a pioneer in the chain grocery business) at a bankrupt sale, fifteen chain grocery stores located in Louisville, Kentucky, and plaintiff was organized to own and operate these stores. These stores were operated under the Steiden and Cole management until July 1, 1945, as of which date Winn & Lovett, a chain grocery organization, purchased all of the outstanding stock and thereby took over the control of plaintiff.
8. During the early years of their connection with Steiden Stores, the key personnel received the following salaries:
L. W. Cole $6,000.00
W. A. Steiden 6,000.00
L. C. Steiden 3,600.00
D. T. Petty 3,520.40
J. J. Murphy 3,520.40
R. B. Laufer 3,380.00
D. N. Duncan 3,120.00
9. During the fiscal years ended June 30, 1942, June 30, 1943, and June 30, 1944, all of the stock of plaintiff was owned by its officers, key employees or their families. In the fiscal years ended June 30, 1942, and June 30, 1943, plaintiff's outstanding stock consisted of 1,475 shares and during the fiscal year ended June 30, 1944, consisted of 1,465 shares. Of said outstanding stock plaintiff's officers and key employees owned 982 shares in the fiscal year ended June 30, 1942, 929 shares in the fiscal year ended June 30, 1943, and 1,013 shares in the fiscal year ended June 30, 1944.
10. During the fiscal years here involved, the respective duties and responsibilities of the officers and key employees whose salaries and bonuses are here involved, may be briefly summarized as follows:
L. W. Cole was chairman of plaintiff's board; in charge of finance matters and traveling and acted as personnel manager.
W. A. Steiden was plaintiff's general manager. He and L. W. Cole were the company's principal executive officers. Mr. & Mrs. L. W. Cole and W. A. Steiden and his son, L. C. Steiden, constituted and made up plaintiff's board of directors. These parties received no separate compensation for their services as directors and the evidence does not disclose how much time and responsibility was attributable to their services as directors separate and apart from their...
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