Trinity Quarries, Inc. v. U.S., 81-7676

• Citation: 679 F.2d 205
• Decision Date: 21 June 1982
• Docket Number: No. 81-7676,81-7676
• Parties: 81-2 USTC P 9527, 82-2 USTC P 9436 TRINITY QUARRIES, INC., a corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. G. & W. ASPHALT CO., INC., a corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 205

679 F.2d 205

81-2 USTC P 9527, 82-2 USTC P 9436

TRINITY QUARRIES, INC., a corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

G. & W. ASPHALT CO., INC., a corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 81-7676.

United States Court of Appeals, Eleventh Circuit.

June 21, 1982.

John Gilmer Blackburn, Gay Blackburn Maloney, Decatur, Ala., for plaintiff-appellant.

Melvin E. Clark, Jr., Atty., Dept. of Justice, John F. Murray, Acting Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Sect., Glenn L. Archer, Jr., Gary R. Allen, Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellee.

Appeals from the United States District Court for the Northern District of Alabama.

Before VANCE, JOHNSON and HENDERSON, Circuit Judges.

PER CURIAM:

Affirmed on the basis of the district court's Findings of Fact and Conclusions of Law dated May 27, 1981, a copy of which is appended.

AFFIRMED.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

FINDINGS OF FACT

1. These two actions, which were consolidated for trial under the Pre-Trial Orders entered February 26, 1981, came on to be heard on April 28, 1981. One action was instituted by plaintiff G & W Asphalt Company, Inc., for the refund of income taxes paid by it for its fiscal year ended April 30, 1976, in the amount of $8,629.00, and for the fiscal year ended April 30, 1977, in the amount of $18,365.00, plus assessed interest paid thereon, together with statutory interest as provided by law. The other action 2. The sole question presented was whether payments of purported salary and bonus made by each of the plaintiff corporations to their three principal officers and shareholders, as well as purported salary and bonus paid by each of the plaintiff corporations to the Chairman of its Board of Directors, all of which were claimed as a deduction for compensation, represented a reasonable allowance for salaries or other compensation made only for personal services actually rendered. At the conclusion of the evidence on April 28, 1981, the Court dictated to the reporter certain ultimate findings of fact and its conclusion that the bonuses paid to the officers of each corporation were thinly disguised dividends. At the request of the Court, counsel for defendant submitted and served upon counsel for plaintiffs proposed Findings of Fact and Conclusions of Law. The Court has carefully considered the comments and suggestions of counsel for plaintiffs and proceeds to enter further Findings of Fact and Conclusions of Law.

was instituted by plaintiff Trinity Quarries, Inc., for the refund of income taxes paid by it for its fiscal year ended May 31, 1976, in the amount of $62,850.00, and for the fiscal year ended May 31, 1977, in the amount of $135,891.00, plus assessed interest paid thereon, together with statutory interest as provided by law.

3. Plaintiff G & W Asphalt Company, Inc. (hereinafter referred to as G & W) is intimately related to plaintiff Trinity Quarries, Inc. (hereinafter Trinity). Both corporations are owned by the same three shareholders in identical proportions, as set out in the table below; these three shareholders are also the executive officers of each of the corporations, as shown below:

                                      G & W
                                      -----
                                                      Percentage
                                                       Ownership
                     Name               Title          Interest
                     ----               -----         -----------
                R. V. Greenwell  President                40%
                R. L. Waters     Vice President           40%
                W. J. Crowe      Secretary Treasurer      20%
                                     TRINITY
                                     -------
                R. L. Waters     President                40%
                R. V. Greenwell  Vice President           40%
                W. J. Crowe      Secretary Treasurer      20%
                

4. During the years in question Trinity and G & W both belonged to a group consisting of themselves and four other related corporations. The other four corporations were Material Haulers, Inc., Waters Quarry, Inc., Trinity Stone Company, Inc., and E'Town Paving Company, Inc. Material Haulers and Trinity Stone were located in Decatur, Alabama, along with Trinity and G & W, while the other two corporations were based in Elizabethtown, Kentucky.

5. The Decatur-based corporations are intimately involved in related businesses. Trinity Quarries operates four limestone quarries, all close to Decatur, with two primary sites. The limestone is crushed and processed at each primary site and sold to the general public or used in the manufacture of asphalt at asphalt plants located adjacent to each quarry, under the control of G & W. G & W both sells this asphalt to the general public and uses it to do construction work such as street repairs. Material Haulers, Inc., has a fleet of trucks located at one of the quarry sites, and "ninety-nine percent" of that company's business consists of hauling asphalt, limestone, and other materials to and from the quarry sites. R. L. Waters, President of Trinity, supervises and manages the combined operations at one of the quarry sites, while Rhea Greenwell, his cousin, performs 6. R. L. Waters and Mr. Greenwell carry out identical duties for each plaintiff. W. J. Crowe, Secretary-Treasurer of both plaintiffs, is not responsible for either of the quarries as such, but he too in general carries out the same duties as Waters and Greenwell. Essentially, all three shareholders collectively manage every phase of the combined operations of the Alabama companies.

highly similar management activities for the combined operations at the other quarry site.

7. H. L. Waters is the father of R. L. Waters. He owns no stock in either plaintiff but was the sole shareholder of Trinity Stone, Inc., the predecessor to Trinity Quarries, Inc. He lives in Kentucky but is available to the Alabama corporations for consultation and advice.

8. R. L. Waters and W. J. Crowe are also shareholders and officers in some of the Kentucky-based corporations and received salaries from those corporations during the years in question.

9. R. L. Waters, Rhea Greenwell, W. J. Crowe, and H. L. Waters comprise the Board of Directors of both plaintiffs, and the Board of Material Haulers as well. Crowe and R. L. Waters are also members of the Board of Directors of the closely related Kentucky corporations.

10. The Board for each corporation determines the bonus to be paid to each officer, as a meeting held near the end of the fiscal year. All four board members admitted that, while each was paid a weekly salary, these bonuses were based on the profits of the company for the preceding eleven months.

11. No records were kept of the time expended by each director on behalf of either plaintiff or any of the other related corporations, and all Board members admitted that they could not determine how much time they spent or what services they rendered on behalf of either plaintiff.

12. The ratio between salaries paid by each plaintiff was very similar to the ratio of stock held by the three officers, as shown in the table below:

13. Upon audit, a delegate of the Commissioner of Internal Revenue determined that the salaries paid by both plaintiffs to the three officers, as well as to H. L. Waters (father of R. L. Waters and member of the Board of each plaintiff) were unreasonable 14. Deficiencies were assessed against plaintiffs based upon those determinations, for their respective fiscal years 1976 and 1977, in the amounts referred to in Finding of Fact 1, above. Plaintiffs paid those deficiencies, and filed timely claims for refund. Thereafter, those consolidated tax refund suits were properly instituted.

and disallowed as unreasonable the portion of the deductions taken by each plaintiff in the amount of those purported salaries as set forth in the table below:

15. No business operations comparable to those of the taxpayers existed in their geographic area.

16. Given the lack of records referred to in Finding of Fact 11 above, and the overlap and interrelationship between all six corporations, the Internal Revenue Service determined that the only practical method of determining a reasonable amount of compensation to be paid to each director would be to aggregate the salaries paid by all six corporations.

17. To determine what comparable enterprises would pay to employees with comparable duties, an authoritative accounting compendium, Executive Compensation, authored by Mruk and Giardina of Arthur Young and Company, was consulted. This publication is essentially a compilation of salaries paid by over 1,200 companies responding to questionnaires involving a total of more than 6,000 executives. Data is provided on the basis of specific industry classifications by regions, which is further broken down to show salaries paid by bonus versus non-bonus paying companies. Salaries are further categorized by sales volume. Data is provided for the Top Management Group, the Senior Financial Management Group, and the Middle Management Group. The Top Management Group is further subdivided into positions of Chief Executive Officer, Top Financial Officer, Controller, and Treasurer.

18. The average total compensation paid to the top management group in the Basic Materials Industry in 1976, as shown in Executive Compensation, for bonus paying companies with sales volume under $25,000,000, was $200,800 in the aggregate. Consideration was given to the fact that the plaintiffs' officers worked extremely long hours, had great experience and expertise, and performed many duties that normally would be carried out by subordinate management personnel. To compensate for these factors the aggregate executive management pay was actually doubled, and the resulting figure of $401,600.00 was treated as reasonable compensation for the management group as a whole. The salaries paid by two corporations, Material Haulers and Waters Quarry, were allowed...