Weise-Winckler Bindery, Inc. v. C.I.R., 122867 FEDTAX, 3304-66

Docket Nº:3304-66.
Opinion Judge:TIETJENS, Judge:
Party Name:WEISE-WINCKLER BINDERY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Kenneth R. Hughes, for the petitioner. Robert A. Roberts, for the respondent.
Case Date:December 28, 1967
Court:United States Tax Court
 
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26 T.C.M. (CCH) 1336 (1967)

T.C. Memo. 1967-259

WEISE-WINCKLER BINDERY, INC., Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 3304-66.

United States Tax Court.

December 28, 1967

Kenneth R. Hughes, for the petitioner.

Robert A. Roberts, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

TIETJENS, Judge:

Respondent determined deficiencies in income tax for the taxable years 1960 through 1963 as follows:

Taxable
Year Deficiency
1960 $5,100.00
1961 7,352.58
1962 9,800.47
1963 8,517.30

The two issues for our determination are: (1) Whether the amounts paid to an employee were reasonable compensation and therefore deductible as an ordinary and necessary trade or business expense under section 162.[1] (2) Whether the certain salary deductions were barred by the operation of section 267. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Weise-Winckler (hereinafter referred to as petitioner) is a corporation organized under the laws of the State of Ohio in 1945. At the time the petition to this Court was filed, petitioner was located at Cincinnati, Ohio, its principal place of business. Petitioner prepared its tax returns employing an accrual method of accounting and filed these returns for the calendar years 1960 through 1963, inclusive, with the district director of internal revenue, Cincinnati, Ohio. From the date of its incorporation through the present time, petitioner's principle activity has been binding new and used books. Edwin D. Allen (herein called Allen) began to organize the petitioner in 1945. He had been in the bookbinding business since 1923 and other than petitioner, Allen had founded and operated other bookbinderies in Chicago, Illinois, Cleveland, Ohio, Dallas, Texas, and Waco, Texas. Allen purchased the business of Weise Bindery in Cincinnati, Ohio, and shortly thereafter incorporated it as Weise Binding Company, Inc. In 1948 Weise Binding Company, Inc., merged with the Winckler Company and became Weise-Winckler Bindery, Inc., the petitioner. During the same period, Allen transferred some of the customers of his Chicago bookbinding business to petitioner. Allen had been active in the design and perfection of machines used in the bookbinding industry. He allowed petitioner to use several of his machines in its operation which had proven to be profitable innovations in Allen's other business. At the time of the organization of petitioner, Allen worked hard in order to bring about an efficient organization. He was instrumental in the merger of the Weise Binding Company, Inc., and the Winckler Company, and Allen attracted John H. West, Jr., into becoming an employee of petitioner. Since that time Allen has supervised the training of West, who has become an able administrator so that Allen could be freed to operate his other business interests. Some of Allen's other non-bookbinding activities consisted of the following:

(1) In 1953, he organized an artificial foliage business in Chicago. Two years later he moved this business to Waco, Texas, and in 1960 from Waco, Texas to Ft. Lauderdale, Florida, its present location. (2) In 1956, Allen had a plastics business in Cleveland, Ohio, known as Lady Carol Company. This business was shortly moved to Ft. Lauderdale, Florida, and was later incorporated into Carol Artificial Foliage, Inc. (hereinafter referred to as Carol). By 1960 Carol had established a large factory operation in Ft. Lauderdale.

During the period 1960 through 1963 Allen kept in contact with petitioner by telephone and through the mails, as daily reports of the company were sent to him. He visited the company offices approximately four to six times a year, during which he stayed for a period of one to two weeks. Besides making the policy decisions of the organization, Allen's other duties were the negotiation of leases and loans. Petitioner habitually borrowed from $30,000 to $50,000 annually during the spring in order to provide enough working capital for the company during the busy summer months. During the period 1960 through 1963, petitioner employed three salesmen, one of whom Allen personally hired. These salesmen, whose annual salaries averaged approximately $8,000 a year, were employed on a full-time basis and were expected to travel each week. Petitioner's method of acquiring its larger accounts is through the use of bids. The smaller customers are gained through direct mail or through petitioner's salesmen. The reported net profit and loss, cash dividends, and salary deductions for John West and Edwin Allen for the years 1948 through 1963 are as follows:

Net Profit Cash Salary
Year (Loss) Dividend John West Edwin Allen [1]
1948 $ 2,863.83 $ 560.00 $ 4,200.00 $ 5,115.00
1949 2,216.33 5,300.00 2,200.00
1950 902.88 300.00 6,507.52 3,542.75
1951 1,426.74 462.00 7.010.00 4,207.60
1952 819.06 1,308.00 7,830.00 3,967.67
1953 2,158.18 1,448.00 8,350.00 3,500.00
1954 (911.51) 1,596.00 8,485.00 4,766.66
1955 4,098.84 9,400.00 4,075.00
1956 4,509.64 1,034.00 12,500.00 6,100.00
1957 4,038.46 1,928.00 14,346.00 7,372.21
1958 5,910.25 2,410.00 18,204.90 11,911.11
1959 8,728.56 2,337.00 22,885.00 7,408.32
1960 7,826.17 2,337.00 23,557.78 21,000.00
1961 10,059.98 2,337.00 27,749.90 24,000.00
1962 15,129.96 2,337.00 31,815.39 26,800.00
1963 18,505.61 3,895.00 36,192.34 27,127.04
Petitioner claimed deductions for the taxable years 1960, 1961, and 1962 for salary of West which includes payments of $4,000, $4,500, and $4,000, respectively, that were made more than 2-1/2 months after the close of the respective taxable year. The balance sheets for petitioner as of December 31 for the years 1959 through 1963 are set out below:

[Note: The following table/form is too wide to be printed on a single page. For meaningful review of its contents the table must be assembled with part numbers in ascending order from left to right. Row numbers, which are not part of the original data, have been added in the margins and can be used to align rows across the parts.] *********************************************************************** ************** This is piece: 1 ***********************************************************************
1 COMPARATIVE BALANCE SHEET OF WEISE-WINCKLER BINDERY, INC., AS OF:
2 LIABILITIES
3 ASSETS 12-31-59 12-31-60 12-31-61 12-31-62 [1] 12-31-63 AND CAPITAL 12-31-59 12-31-60 12-31-61
4 Cash $ 9,343.99 $ 5,238.33 $ 15,827.16 $ 17,533.72 $ 20,501.96 Accounts payable $ 7,695.96 $ 7,075.25 9,877.16
5 Notes & accounts 46,726.34 43,643.79 47,733.67 40,894.00 44,870.47 Mortgages, notes
6 receivable and bonds payable
7 Inventories 9,179.58 19,941.30 12,852.37 13,881.62 13,819.25 in less than 1 yr. 15,627.10 19,355.42 12,776.00
8 Prepaid expenses 432.74 664.48 1,108.55 3,299.34 1,441.71 Other current liabilities
9 Buildings & other 16,743.71 19,084.95 27,439.77
10 fixed depreciable Mortgages, notes
11 assets 62,833.94 72,255.38 87,144.26 93,780.58 109,059.18 and bonds payable
12 Accumulated amortization in 1 yr. or more 1,875.00 810.00 4,594.00
13 and depreciation Capital stock 38,950.00 38,950.00 38,950.00
14 (33,272.21) (41,523.06) (52,160.09) (54,536.08) (70,190.68) Paid-in or capital
15 Cash surrender surplus 4,180.60 4,180.60 4,180.60
16 value of life Earned surplus and
17 insurance 4,262.77 5,564.68 6,518.33 8,104.62 9,396.27 undivided profits 14,434.78 17,207.28 21,206.72
18 Deposits on purchases
19 of equipment
20 878.40 2,500.00
21 Deposits, Workmen's
22 compensation insurance
23 400.00 650.00
24 __________ ___________ ___________ ___________ ___________ __________ ___________ ___________
25 Totals $99,507.15 $106,663.50 $119,024.25 $123,357.80 $132,048.16 Totals $99,507.15 $106,663.50 $119,024.25
26 __________ ___________ ___________ ___________ ___________ __________ ___________ ___________
27 __________ ___________ ___________ ___________ ___________ __________ ___________ ___________
*********************************************************************** ************** This is piece: 2 ***********************************************************************
1
2
3 12-31-62 12-31-63
4 $ 8,833.61 $ 19,642.33
5
6
7 9,061.45 5,310.52
8
9 25,544.14 24,050.69
10
11
12 7,397.89 1,808.03
13 38,950.00 38,950.00
14
15 4,180.60 4,180.60
16
17 29,390.11 38,105.99
18
19
20
21
22
23
24 ___________ ___________
25 $123,357.80 $132,048.16
26 ___________ ___________
27 ___________ ___________
[Note: The following table/form is too wide to be printed on a single page. For meaningful review of its contents the table must be assembled with part numbers in ascending order from left to right. Row numbers, which are not part of the original data, have been added in the margins and can be used to align rows across the parts.] *********************************************************************** ************** This is piece: 1 ***********************************************************************
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