Thompson-Hayward Chem. Co. v. Comm'r of Internal Revenue
| Decision Date | 23 April 1958 |
| Docket Number | Docket No. 64268. |
| Citation | 30 T.C. 96 |
| Parties | THOMPSON-HAYWARD CHEMICAL COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Robert S. Eastin, Esq., for the petitioner.
Edward E. Pigg, Esq., for the respondent.
Held, that the deduction for officers' compensation by petitioner in the fiscal year ending January 31, 1947, constituted a class of deductions for that year which exceeded 115 per cent of the average amount of deductions of such class for the 4 previous taxable years and that petitioner, having met its burden of proof under section 433(b)(10)(C), is entitled to have such excess disallowed in computing its average base period net income. Held, further, that the adjustment provisions of section 452, which require an adjustment where a position is taken in the determination of excess profits credit which is inconsistent with prior income tax liability, are not applicable to the facts of this case. MULRONEY, Judge:
Respondent determined deficiencies in the petitioner's income tax for the fiscal years ended January 31, 1951 and 1952, in the amounts of $11,722.06 and $1,066.28, respectively. The issues are (1) whether an increase in officers' compensation in the fiscal year ending January 31, 1947, resulted in an abnormal deduction for that year within the meaning of section 433(b)(9) and (10) of the 1939 Internal Revenue Code which would require adjustments in the petitioner's excess profits tax credit used to determine petitioner's income and excess profits tax liability for fiscal years 1951 and 1952; and (2) whether the compensation paid to petitioner's president in fiscal year 1947 was unreasonable in amount, necessitating an adjustment within the meaning of section 452 of the 1939 Internal Revenue Code, in determining petitioner's tax for the fiscal years 1951 and 1952.
Some of the facts have been stipulated and they are so found.
Petitioner is a corporation organized in 1917 under the laws of the State of Missouri with its principal office in Kansas City, Missouri. Petitioner filed timely income and excess profits tax returns for the fiscal year ended January 31, 1951, with the then collector of internal revenue for the sixth district of Missouri, and for the fiscal year ended January 31, 1952, with the district director of internal revenue for the sixth district of Missouri at Kansas City, Missouri.
Petitioner's business is that of manufacturers' agent, importer and distributor of chemicals and allied products throughout the Midwest. Petitioner maintained a number of sales outlets in this territory with warehouse facilities. During the years 1940 through 1947, petitioner did not open any new branches and there was no change in its methods of operation. Since petitioner's organization in 1917, Charles T. Thompson has dominated its activities. In the years 1943 through 1947, Thompson, together with his wife and children, owned at least 2,122 shares of petitioner's stock out of a total of 3,500 shares outstanding.
The following schedule gives the compensation of petitioner's officers, its sales, gross profits, and net income for each of the years ending January 31, 1937 through 1953:
FN1 In year ended Jan. 31, 1946. Thompson held title of chairman of the board and Hayward held title of president.
All bonuses paid by petitioner to its employees were determined solely by Thompson. The increase in petitioner's sales for the fiscal year ending January 31, 1947, was due primarily to substantial price increases in petitioner's products immediately following World War II.
Petitioner's capital stock, surplus, and amounts of dividends paid during the fiscal years 1942 through 1950 were as follows:
+----------------------------------------------------------------+
¦Year ending January 31¦Capital stock¦Surplus ¦Dividends paid¦
+----------------------+-------------+------------+--------------¦
¦1942 ¦$350,000 ¦$602,765.72 ¦$105,000.00 ¦
+----------------------+-------------+------------+--------------¦
¦1943 ¦350,000 ¦721,154.42 ¦(1 ) ¦
+----------------------+-------------+------------+--------------¦
¦1944 ¦350,000 ¦794,407.35 ¦70,000.00 ¦
+----------------------+-------------+------------+--------------¦
¦1945 ¦350,000 ¦872,417.84 ¦35,000.00 ¦
+----------------------+-------------+------------+--------------¦
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