The Bar Products Co., Inc. v. C.I.R., 032450 FEDTAX, 21633
| Opinion Judge | Harron, Judge: |
| Party Name | THE BAR PRODUCTS COMPANY, INC, Petitioner. v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Attorney | John A. Verhunce, Esq., for the petitioner. William R. Bagby, Esq., for the respondent. |
| Case Date | March 24, 1950 |
| Court | U.S. Tax Court |
Reasonable salaries of officer-stockholders determined from the evidence.-
Upon all of the evidence, a reasonable allowance for the compensation of two officer-employees of the petitioner for the year 1943 is determined.
MEMORANDUM FINDINGS OF FACT AND OPINION
The Commissioner has determined the following deficiencies in petitioner's taxes for the year 1943:
Income tax ..........................$ 288.14
Excess profits tax .................. 8,709.69
Declared value excess-profits tax.... 1,204.43
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Total ............................ $10,202.26
One issue is presented for decision-the amounts of the annual salaries of two officers of the petitioner for the purpose of deduction under section 23(a)(A) of the Internal Revenue Code. The petitioner paid $15,000 in 1943 to each of two officers, its president and its secretary-treasurer, as salaries. The respondent determined that a reasonable allowance for compensation of each officer for services rendered to petitioner amounts to $9,000, each, and, accordingly, he disallowed $6,000 of the deduction taken for the compensation of each officer, or a total of $12,000. Another small adjustment, made by the respondent, is not contested.
The question to be decided is the reasonable allowance for the salaries of two officers of petitioner. Petitioner contends that $15,000 salary for each officer, is deductible as a reasonable allowance, and claims a total deduction of $30,000 rather than the total deduction of $18,000, which the respondent has allowed.
The petitioner corporation was organized in January, 1943. The only taxable year involved, therefore, is 1943.
Petitioner filed its income and excess profits tax returns for 1943 with the collector for the eighteenth district of Ohio.
The record includes the testimony of several witnesses.
FINDINGS OF FACT
The petitioner is an Ohio corporation which was organized in the latter part of December, 1942, or on January 1, 1943. Its place of business is in Cleveland. Vincent A. Povse and Edward C. Lucic, who organized the petitioner, owned all of the stock of petitioner, in equal amounts, during 1943. The business of the petitioner is the manufacture of small screw machine products and the operation of a general machine shop. Petitioner keeps its books and makes its returns on the accrual basis.
During 1943, the officers of the petitioner were Vincent A. Povse, president, and Edward C. Lucic, secretary-treasurer. During 1943, the board of directors consisted of Lucic, Povse and his wife, and William Thronberens, an accountant.
The machinery and equipment of petitioner consisted of four screw machines, two bench lathes, six drill presses, and two milling machines. This depreciable equipment was carried on the books at a cost of $23,669.62, before depreciation, and constituted the chief asset of the petitioner. The chief expense of doing business was labor expense.
Povse and Lucic were young men, under 30 years of age, in 1943, but they were skilled in their trade. Both were skilled machinists in the setting up and operation of screw machines and in plant operation. Prior to 1942, Povse had been employed in several plants as a skilled machinist and ‘ set-up‘ man; and prior to 1941, Lucic had been engaged in the same type of work as an employee. In 1941, Lucic entered into a business venture with Dietrich, forming a partnership which conducted a screw machine products business under the name of Bar Products Company. In 1942, Povse came into the business by purchasing Dietrich's one-half interest. The business was in poor financial condition, having liabilities in excess of assets. Povse and Lucic carried on the business under corporate form, and 1943 was the first year of their operations.
Lucic continued in the business during part of 1944, until he went into the armed service. Later, he sold his interest to Povse who continued to carry on the business.
During 1943, the services performed by Povse for the petitioner were as follows: Povse solicited all of the business on a competitive bid basis. He also worked in the plant both as a foreman and as a machinist. Through his solicitation of business, the petitioner's gross sales in 1943 amounted to $102,224, before returns and allowances of $10,390, or a net gross amount of about $91,834. Subcontracts were obtained from about twelve concerns, including the Ford Products Company, Marquette Metal Company, and others in the Cleveland area. Petitioner needed capital, and Povse succeeded in borrowing about $15,000. He also invested his own savings in the business, and borrowed on his personal notes. During 1943, Povse's work in the business averaged from twelve to sixteen hours a day. All of his time was spent in the plant when he was not out soliciting business. Delivery was an important factor under the contracts upon which work was done throughout the year. Help was difficult to get and keep, and much of the work under...
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