Wright-Bernet v. Commissioner of Internal Revenue
| Decision Date | 04 February 1949 |
| Docket Number | No. 10701.,10701. |
| Citation | 172 F.2d 343 |
| Parties | WRIGHT-BERNET, Inc., v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Robert S. Marx, of Cincinnati, Ohio (Frank E. Wood, Robert S. Marx and John J. Luhrman, of Nichols, Wood, Marx & Ginter, all of Cincinnati, Ohio, on the brief), for petitioner.
Louise Foster, of Washington, D. C., (Theron L. Caudle, George A. Stinson, Ellis N. Slack and Fred E. Youngman, all of Washington, D. C., on the brief), for respondent.
Before ALLEN, MARTIN, and MILLER, Circuit Judges.
This is a petition to review a decision of the Tax Court which established deficiencies against the petitioner in the declared value excess profits tax for the calendar year 1942 in the amount of $507.74; a deficiency in excess profits tax for the calendar year 1942 in the amount of $2,943.65; and a deficiency in the excess profits tax for the calendar year 1943 in the amount of $12,405.25. The deficiencies, with interest, were paid under protest.
The deficiencies determined by the Commissioner were materially reduced by the Tax Court. As prsented here, they are based upon disallowance by the Tax Court of a part of the compensation paid by petitioner in the taxable years to Frank Bernet, its president; J. Warren Beahn, its vice president; Hubert A. Bernet, its secretary; and Carl Bernet, its treasurer. The salaries paid by the petitioner, the amounts allowed by the Commissioner, and the amounts allowed by the Tax Court, are the following:
Amount Amount
Allowed Allowed
Officer Amount by by Tax
1942 Deducted Commissioner Court
Frank W. Bernet $16,180.00 $11,000.00 $16,040.00
Carl F. Bernet 15,140.00 10,000.00 15,000.00
Hubert A. Bernet 15,140.00 10,000.00 15,000.00
J. W. Beahn 15,140.00 10,000.00 15,000.00
__________ __________ __________
$61,600.00 $41,000.00 $61,040.00
1943
Frank W. Bernet $19,240.00 $11,000.00 $16,040.00
Carl F. Bernet 18,200.00 10,000.00 15,000.00
Hubert A. Bernet 18,200.00 10,000.00 15,000.00
J. W. Beahn 18,200.00 10,000.00 15,000.00
__________ __________ __________
$73,840.00 $41,000.00 $61,040.00
The facts are not controverted, and are as follows:
Petitioner is an Ohio corporation, having its principal place of business in Hamilton, Ohio, and is engaged in the manufacture of brushes, which is a highly technical business. It makes over 400 different kinds of standard brushes, and in addition manufactures brushes for different types of work upon special order. In 1934 the employees named, together with William A. Wright, all of whom had been engaged in the brush business for many years, formed the petitioner corporation and invested their savings in it, and 130 shares of common stock of the par value of $100 a share were issued, and later preferred stock was issued and the amount of common stock was increased. During the taxable years Beahn owned 65 shares of the common and 10 shares of preferred stock, and each of the three Bernets owned 40 shares of the common and 10 shares of preferred. Thus altogether the Bernet brothers and Beahn owned approximately 75% of the outstanding common stock, and 32% of the outstanding preferred stock.
Up to the time of his death in July, 1940, William A. Wright, the president, was in charge of all production problems, including purchasing, employment, and supervision of personnel; while the three Bernets and Beahn handled all sales. In the early years of the petitioner's existence only a nominal compensation was given Wright and the Bernets and Beahn for their services. For each of them this amounted in 1935 to $905; in 1936 to $1,387.50; in 1937 to $1,601.25; in 1938 to $2,565; and in 1939 to $2,270. After Wright's death it was decided that the four survivors should take over his management duties, in addition to continuing to sell the entire output of the corporation. Since then, and during the taxable years, each of the employees in question has taken his turn in the office in supervising production, purchasing, employment, and personnel. No purchasing agent, employment manager, credit manager, or advertising agency has been employed by the corporation, and also it has employed no engineers to design, build, and repair special machinery. Improvements and special attachments on the corporation's machinery have been designed and constructed by these four employees.
In the first year of the corporation's business it had net sales of $80,000, which increased to $757,000 in 1942. Sales in 1943 were reduced to $570,000 because of difficulties in getting material for shipments, and other war restrictions, but a large amount of orders were unfilled on the corporation's books. Of the $757,000 net sales in 1942, less than one-seventh represented war contracts, the remainder of the net sales being sales to petitioner's regular customers.
The success of the business is shown by the record to be due mainly to the work of the four employees whose salaries are in question. They took no vacations, and each worked approximately 60 to 75 hours a week. The salaries for which the deduction was claimed were established by resolution of the board of directors in 1942, and are still...
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