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James D. Kennedy, Jr., and Dorothy H. Kennedy, Petitioners v. Commissioner of Internal Revenue, Respondent; Cherokee Warehouses, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentKennedy v. CommissionerDocket Nos. 9849-77, 9850-77August 7, 1979, Filed
United States Tax Court *79Decisions will be entered under Rule 155 .Cherokee, a closely held warehousing corporation, had paid its general manager, James, under an incentive compensation arrangement since its incorporation in 1951. James, a trust for his sister's benefit, and his father held all of Cherokee's stock in the respective portions of 8 percent, 7 percent, and 85 percent. From 1951 to 1964, James received approximately 26 percent of Cherokee's net profits. During the years after the only revision in the compensation arrangement in 1964, including the years in issue, James received approximately 34 percent of Cherokee's net profits. While Cherokee has grown as a successful corporation since 1951, the total number of executives and other employees has also grown from 2 to over 200.
Held , a reasonable allowance for compensation is determined.Held, further , the amounts paid in excess of the reasonable allowance for compensation are not earned income for purposes of the maximum tax provisions ofsection 1348, I.R.C. 1954 .Held, further , petitioners abandoned the issue of deducting the expense of supplying James an automobile for the years in issue.William L. Taylor, Jr ., andRobert G. Russell , *80 for the petitioners.Wesley J. Lynes Bruce,Judge .BRUCE*793 Respondent, in two statutory notices dated June 30, 1977, determined deficiencies in the Federal income taxes of the petitioners as follows:
Taxable Docket No. Petitioners year ending Deficiency 9849-77 James D. Kennedy, Jr., and Dorothy H. Kennedy 12/31/72 $ 9,239.91 12/31/73 14,822.30 9850-77 Cherokee Warehouses, Inc. 7/31/73 108,271.53 7/31/74 87,862.04 Due to concessions by both petitioners and respondent, 1*81 the *794 only issues remaining for our decision are (1) whether payments by petitioner Cherokee Warehouses, Inc. (hereinafter Cherokee), to petitioner James D. Kennedy, Jr. (hereinafter James), were unreasonable compensation in excess of respondent's determination and thus not deductible under
section 162(a)(1) 2 by Cherokee in either fiscal year ending (FYE) July 31, 1973, or FYE July 31, 1974; (2) whether such compensation, if found to be nondeductible as unreasonable, nevertheless qualifies undersection 1348 as earned income to James in 1973; and (3) whether the expense of supplying James an automobile is deductible by Cherokee in both FYE July 31, 1973, and FYE July 31, 1974.FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, and the exhibits attached thereto, are incorporated herein by this reference.
Petitioners James and Dorothy H. Kennedy resided at Lookout Mountain, Tenn., *82 during all times pertinent to this case. They timely filed joint Federal income tax returns for both 1972 and 1973 with the Internal Revenue Service Center, Memphis, Tenn. Dorothy is a party only by virtue of having filed the joint returns with James.
Petitioner Cherokee is a corporate continuation of a partnership composed of James' brother-in-law, Samuel R. Smartt (Sam) and James' father, James D. Kennedy, Sr. (J.D.), who founded the sole proprietorship from which the partnership evolved. Cherokee timely filed its corporate income tax returns for FYE July 31, 1973, and FYE July 31, 1974, on an accrual basis with the Internal Revenue Service Center, Memphis, Tenn. Located both then and now in Chattanooga, Tenn., Cherokee operates several warehouses in which it stores merchandise primarily for large distributors and manufacturers and acts as the local and southeastern United States distribution center of *795 these customers. Cherokee also derives a portion of its income from being an authorized dealer for the Allis-Chalmers Lift-Truck Division.
During the years in issue, stock in Cherokee was held as follows:
Percent J.D 85.56 James 7.84 James, as trustee for Mary K. Dunkerly, his sister 6.60 Total 100.00 J.D., *83 president of Cherokee since its formation, was in the manufacturing business until 1942. In that year, he sold the business but retained ownership in the related buildings, which he then rented to his successor. Using these same buildings, in 1947, J.D. and Sam entered a warehouse business partnership in which Sam would operate the business and J.D. would maintain the buildings. Income would be split evenly. However, losses sustained in 1950 were impairing the return J.D. received from his investment in the buildings.
In 1950, Cherokee was incorporated under the laws of Tennessee. Initial capitalization was a contribution of $ 25,000 from J.D., with the 250 shares of $ 100 par stock distributed 248 to J.D. and 1 each to James and Sam. At the beginning, these same three individuals were the officers and the only full-time employees of Cherokee.
Key to the incorporation of Cherokee was the implementation of an incentive compensation plan which would promote J.D.'s financial investment in Cherokee while rewarding those individuals operating the business without burdening the new corporation with large fixed salaries. 3 Under the original agreement, James, with Cherokee for the first *84 time, and Sam were each to receive, in addition to a monthly salary of $ 400, 4 a monthly bonus *796 of 20 percent of the excess of gross receipts over 1 1/9 times the monthly operating expenses, 5*85 and an annual bonus of 10 percent of the excess of gross receipts over 1 1/9 times the annual operating expenses. The operating expenses included the salaries for determining the monthly bonuses and included the salaries and monthly bonuses for determining the annual bonus. The net effect of this compensation agreement was that Sam and James each would receive 26 percent of the net profits of Cherokee, while Cherokee received the remaining 48 percent.
After incorporation, Cherokee entered into a lease with J.D. for the use of the buildings which had been used in the partnership. Under this lease, Cherokee would pay J.D. $ 700 per month plus 10 percent of the gross storage and rental revenues and would pay all taxes, insurance, and maintenance for the buildings, as well. These buildings, many of which were built before 1920, were not particularly suited for the warehouse business and required major repairs during the first year of operation. A large part of Cherokee's initial capitalization was used for these repairs.
While J.D., whose interest was strictly financial, was not active in the daily operations of Cherokee, James and Sam worked long hours, 6 days per week at the start, performing all of the necessary tasks of the business. Much of their time was spent soliciting warehouse business. When business was slow, they would try to sell merchandise to make a profit for Cherokee.
From the time he learned he had lung cancer in the spring of 1963 until his death in June 1964, Sam curtailed his activities in the business. James assumed *86 the total responsibility for the operation of Cherokee during Sam's illness and was appointed general manager after Sam's death. To compensate James for the added responsibility, J.D. proposed a new incentive compensation plan, which James accepted. Instituted in August 1964, the new plan provided for James, in addition to a monthly salary of $ 1,000, 6 a monthly bonus of 25 percent of net operating income for the month exclusive of capital gains, charitable contributions and expenses such as interest, and an annual bonus of 12 1/2 percent of net operating income for the fiscal year, less *797 prior monthly bonuses and adjusted as the monthly bonus base figures were. The subsequent agreement increased James' receipts from 26 percent to 34.375 percent of earnings and Cherokee's share from 48 percent to 65.625 percent of earnings.
During the years in issue, James participated in many tasks at Cherokee, such as: solicitation of new accounts; maintenance of existing customer relationships; pricing and negotiation of rates; recruiting, hiring, and training of key employees; daily warehouse activity supervision; management of receivables, *87 payables, and major purchases; and formulation of corporate growth strategy. James' primary responsibility, however, was soliciting new business. Other areas, such as daily warehouse operations, building maintenance, bookkeeping and materials handling were controlled by five supervisors who reported directly to James. Some of the supervisors assisted James when he was soliciting business for their respective divisions of Cherokee. One supervisor also performed the duties of office manager and superintendent.
The principal thrust of Cherokee's business has been the servicing of large accounts. Although Cherokee has become a local leader in public warehousing, competition for the larger accounts has always been intense from both local and Atlanta businesses. Nevertheless, Cherokee has a number of large accounts, including those of Uniroyal and Pillsbury, which were secured during the years in issue through the solicitation efforts of James. The additional space needed to handle such large accounts has been provided throughout Cherokee's history by the construction of new space, for which James acted as general contractor to reduce building costs. One such addition was added in *88 FYE July 31, 1974. James has also enhanced the ability of Cherokee to acquire and maintain large accounts through his active support of the passage of a 1961 Tennessee statute which excludes merchandise in transit from State ad valorem taxes. This statute has made warehousing in Tennessee, especially in cities which are near State boundaries, such as Chattanooga, attractive to customers from other States or with a national product distribution.
Demands are placed on James' available time, in addition to his working hours, to share his knowledge of warehousing with professional and educational groups. Since 1964, he has been an active member of the Southeastern Warehousemen's and Movers' *798 Association, having been its treasurer, second vice president, first vice president and, in 1972-73, president and chairman of the board. Further, James has participated in seminars and conventions of the association, chairing committees and panels and writing articles for presentation to the membership. James has also been active in the American Warehouseman's Association, having served as chairman of the board in 1976-77. On several occasions, James has made speeches and presented papers before *89 the National Council of Physical Distribution Management, an organization of traffic managers for large manufacturers and distributors. James has also led seminars in distribution management at Ohio State University and Michigan State University and has published many articles in warehousing trade journals.
During the years in issue, demands were also placed on James' time by certain civic and social commitments. In 1973, he was chairman of the local American Red Cross chapter. During both 1973 and 1974, James was the Commissioner of Fire and Police in Lookout Mountain, Tenn.; was on the advisory committee of the Industrial Committee of One Hundred; was active in the Chattanooga Chamber of Commerce; was a member of the Board of Directors of the local United Fund; was a member of the Board of Directors of the American Cancer Society; and served on a committee of the local Rotary Club. Further, since 1974, James has been on the Board of Trustees of the Girls' Preparatory School of Chattanooga.
Nevertheless, Cherokee grew, as did the compensation it paid. Cherokee's growth is briefly outlined below:
*90FYE Gross Net Income Net Income Net July 31 receipts income tax after taxes 1 worth 1951 $ 58,567 $ 2,686 $ 618 $ 2,068 $ 26,686 1952 144,670 29,419 11,123 18,296 45,310 1953 408,752 78,042 41,325 36,717 76,461 1954 208,376 22,520 6,756 15,764 86,704 1955 233,388 26,422 8,240 18,182 108,807 1956 315,630 37,846 13,585 24,261 132,964 1957 346,784 52,303 21,698 30,605 163,181 1958 331,273 38,254 14,392 23,862 186,615 1959 279,653 21,558 6,467 15,091 201,238 1960 353,994 37,678 14,092 23,586 226,774 1961 $ 439,851 $ 50,154 $ 20,580 $ 29,574 $ 255,154 1962 410,017 27,773 8,206 19,567 274,255 1963 517,330 65,327 27,972 37,355 312,776 1964 542,978 58,298 22,342 35,956 376,103 1965 588,520 96,684 39,792 56,892 428,385 1966 802,850 128,137 53,337 74,800 502,949 1967 1,057,228 198,754 86,800 111,954 611,683 1968 1,042,158 175,969 81,508 94,461 703,367 1969 1,335,779 239,939 115,962 123,976 824,181 1970 1,960,445 353,754 174,196 179,558 1,000,756 1971 2,058,033 367,184 171,248 195,936 1,193,709 1972 2,615,051 559,866 253,311 306,554 1,496,549 1973 3,655,696 739,253 312,335 426,919 1,919,457 1974 4,208,633 631,428 279,844 351,584 2,267,030 *799 All figures in these tables are the result of rounding.
The increase in compensation paid was as follows:
FYE Incentive portion July 31 -- J.D. Sam James 7 of James' income 1951 $ 4,800 $ 6,255 $ 6,255 $ 1,455 1952 4,800 18,433 18,433 13,633 1953 18,100 49,072 49,072 44,272 1954 9,000 19,260 19,260 10,260 1955 9,000 23,350 23,350 14,350 1956 9,000 29,139 29,139 20,139 1957 9,000 37,738 37,738 28,738 1958 9,000 33,258 33,258 24,258 1959 9,000 22,389 22,389 20,904 1960 9,000 41,782 41,782 32,782 1961 9,000 47,252 47,252 38,252 1962 9,000 34,877 34,877 25,877 1963 9,000 48,471 48,471 39,471 1964 9,000 44,382 44,382 35,382 1965 12,000 64,334 52,234 1966 12,000 82,392 70,392 1967 12,000 115,479 103,479 1968 12,000 102,581 90,581 1969 12,000 136,428 124,428 1970 12,000 189,831 177,831 1971 $ 12,000 $ 206,024 $ 194,024 1972 12,000 309,775 297,775 1973 12,000 332,366 320,366 1974 12,700 301,345 288,645 *800 These figures shown are the total income amounts paid in the respective years, for Cherokee had no pension plan nor any profit-sharing plan for any of its employees. As for James, *91 he did not have any agreement with J.D. relative to acquiring ownership of Cherokee in the future, nor did he hold any option from Cherokee to purchase additional Cherokee stock in the future. Further, since incorporation in 1950, Cherokee had paid only one cash dividend, which was in 1953. Meanwhile, for the 2 years in issue, the next two ranking officers of Cherokee, two vice presidents, were paid only $ 23,740 and $ 25,060 for FYE July 31, 1973, and $ 26,660 and $ 28,190 for FYE July 31, 1974.
During the years in issue, James, with his father, J.D., owned all of the stock in five other corporations as well, but James received no compensation from them. These businesses did not require any daily attention from James.
Based upon the above facts, 8*92 respondent has determined that the compensation paid James by Cherokee in excess of $ 108,000 and $ 120,000 for FYE July 31, 1973, and FYE July 31, 1974, respectively, is unreasonable and not deductible under
section 162(a)(1) . Further, respondent has determined that this excess is not earned income for maximum tax purposes within the meaning ofsection 1348 .To the contrary, petitioners argue that the compensation was paid James for valuable services, under a long-standing incentive arrangement which was valid and reasonable at the time of its creation after arm's-length negotiations. In the alternative, petitioners contend that the entire amount was paid to James for services rendered and, thus, qualifies as earned income within the meaning of
section 1348 , even if a portion of it is found unreasonable.*801 OPINION
1. Reasonable Compensation The deductibility of the compensation paid James depends upon the meaning of
section 162(a)(1) , which allows a deduction for compensation which was actually intended to be paid for the services actually rendered and which was reasonable for those services.Sec. 1.162-7, Income Tax Regs. ;Nor-Cal Adjusters v. Commissioner , 503 F.2d 359">503 F.2d 359Electric & Neon, Inc. v. Commissioner , 56 T.C. 1324">56 T.C. 1324496 F.2d 876">496 F.2d 876 (5th Cir. 1974);Klamath Medical Service Bureau v. Commissioner , 29 T.C. 339">29 T.C. 339261 F.2d 842">261 F.2d 842 (9th Cir. 1958), cert. denied359 U.S. 966">359 U.S. 966 (1959). Discerning the intent behind the compensation presents a question of fact, to be determined from all the facts and circumstances of the particular case.Paula Construction Co. v. Commissioner , 58 T.C. 1055">58 T.C. 1055474 F.2d 1345">474 F.2d 1345 (5th Cir. 1973);Electric & Neon, Inc. v. Commissioner, supra .Charles Schneider & Co. v. Commissioner , 500 F.2d 148">500 F.2d 148420 U.S. 908">420 U.S. 908 (1975);Pacific Grains, Inc. v. Commissioner , 399 F.2d 603">399 F.2d 603Levenson & Klein, Inc. v. Commissioner , 67 T.C. 694">67 T.C. 694Pepsi-Cola Bottling Co. of Salina v. Commissioner , 61 T.C. 564">61 T.C. 564528 F.2d 176">528 F.2d 176 (10th Cir. 1975);Boyle Fuel Co. v. Commissioner , 53 T.C. 162 (1969)
the employee's qualifications; the nature, extent and scope of the employee's *94 work; the size and complexities of the business; a comparison of salaries paid with the gross income and the net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; the salary policy of the taxpayer as to all employees; and in the case of small corporations with a limited number of officers the amount of compensation paid to the particular employee in previous years. * * * [Mayson Mfg. Co. v. Commissioner , 178 F.2d 115">178 F.2d 115Commercial Iron Works v. Commissioner , 166 F.2d 221">166 F.2d 221Pepsi-Cola Bottling Co. of Salina v. Commissioner, supra at 567-568Dahlem Foundation, Inc. v. Commissioner , 54 T.C. 1566">54 T.C. 1566Mayson Mfg. Co. v. Commissioner, supra .Botany Worsted Mills v. United States , 278 U.S. 282">278 U.S. 282Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioners' counsel points out that Cherokee's corporate return for FYE July 31, 1972, was audited by an agent of the Internal Revenue Service, in an earlier audit separate from that of the years in issue. Although the agent conducting the audit questioned the deduction for compensation paid James in that year, the return for FYE July 31, 1972, was accepted as filed. An argument of estoppel is not raised. However, petitioners' counsel does argue that the decision to accept Cherokee's return for FYE July 31, 1972, as filed, should be given at least the weight of an objective witness to the reasonableness of the compensation paid James for the years in issue. This we cannot do, for we would be inferring improperly that the decision to accept Cherokee's return for FYE July 31, 1972, as filed, was influenced more by the reasonableness of the compensation contract, than by any one of a myriad other equally possible reasons. It has long been settled that a contrary administrative determination in a prior year does not prevent respondent from determining a deficiency *96 in a later year for the same taxpayer in a similar situation.
Robert R. Walker, Inc. v. Commissioner , 362 F.2d 140">362 F.2d 140Ward v. Commissioner , 240 F.2d 184">240 F.2d 18425 T.C. 815">25 T.C. 815 (1956);Caldwell v. Commissioner , 202 F.2d 112">202 F.2d 112Rose v. Commissioner , 55 T.C. 28">55 T.C. 28Meneguzzo v. Commissioner , 43 T.C. 824">43 T.C. 824Savage v. Commissioner , 31 B.T.A. 633 (1934)82 F.2d 92">82 F.2d 92 (3d Cir. 1936). Therefore, absent any related judicial or quasi-judicial action, the result, or even the existence, of a separate audit of a tax return for a year not in issue here is immaterial. 9*97 More *803 important is the relationship of Cherokee and James and its influence upon the amounts paid James during the years in issue.A close examination 10 of the relationship of James and Cherokee shows that the high percentage of the contingent compensation arrangement was not representative of James' worth to Cherokee during the years in issue. While James was knowledgeable and widely recognized in the warehousing business of the southeastern United States, Cherokee was not as dependent upon his services during the years in issue as it was during its more formative years. Early in Cherokee's existence, James and Sam, as the only full-time employees, participated in every activity of the business, from manual labor to corporate strategy formation. However, as Cherokee grew, additional employees were hired to share some of the activities and responsibilities. During the years in issue, Cherokee had approximately 200 full-time employees. Therefore, although Cherokee had developed into a successful, growing corporation, *98 its success during the years in issue was not attributable solely to James. In other words, James' share of the workload during those years did not reasonably command the excessive income distributed to him by the contingent compensation arrangement created 22 or 23 years ago. Cf.
Hammond Lead Products, Inc. v. Commissioner , 425 F.2d 31">425 F.2d 31Pepsi-Cola Bottling Co. of Salina, Inc. v. Commissioner, supra .Although
section 1.162-7(b)(3), Income Tax Regs. , states that *99 an existing contract for services is generally adjudged reasonable or not by the circumstances "existing at the date when the contract for services was made, not those existing at the date *804 when the contract is questioned," the situation presented here was not the general case. The changes in the circumstances surrounding the compensation arrangement were sufficiently extensive to label as unreasonable and, thus, nondeductible undersection 162(a)(1) , the excessive portions of the resulting payments to James.Even though Cherokee has evolved from a new corporation of 2 employees with a questionable future, to an established corporation of over 200 employees, the contingent compensation arrangement has remained substantially intact. In the beginning, James and Sam each received 26 percent of the increasing profits from 1951 to 1964. After Sam's death in 1964, the only revision of the arrangement increased James' share in the increasing profits to approximately 34 percent. This revised arrangement continued at the increased percentage during the years in issue even though executive responsibility was being shared with 5 other officers, and the operation of Cherokee was shared with *100 200 employees.
Pacific Grains, Inc. v. Commissioner, supra ; Perlmutter v. Commissioner , 44 T.C. 382">44 T.C. 382373 F.2d 45">373 F.2d 45 (10th Cir. 1967). As a result, James received over 5 times the total income received by the next three ranking executives of Cherokee for FYE July 31, 1973, and over 4 1/2 times that sum for FYE July 31, 1974, despite the fact that he was sharing operational responsibility with these same individuals. Cf.Lydia E. Pinkham Medicine Co. v. Commissioner , 128 F.2d 986 (1st Cir. 1942)317 U.S. 675">317 U.S. 675 (1942);Sohmer & Co. v. United States , 86 F. Supp. 670">86 F. Supp. 670The disparity between James' salary and the salaries of the *101 other executives cannot be explained by the fact that James was the "guiding genius" of Cherokee, nor by the fact that he spent all of his time with Cherokee. 13 While James' guidance was a material factor in the early years, it was not as material during the years in issue, and James was not the cornerstone of Cherokee's existence. Further, James' time was not spent solely with Cherokee. In addition to his normal work hours, James was *805 involved in many commendable civic activities and participated in the seminars of various professional groups and educational institutions. We do not regard these impressive activities as hindrances to James' performance for Cherokee, nor do we regard them to be of such benefit to Cherokee as to warrant the excessive amounts paid James as general manager.
Petitioners appear to stress accomplishments of James in years prior to those in issue in an implicit argument that he was being paid for those prior acts. On the contrary, James had already been rewarded for his earlier accomplishments. He received over one-fourth of the net profits of Cherokee from *102 1951 to 1964, and has received over one-third of the net profits since 1964. In fact, since the third year of Cherokee's existence, 1953, the aggregate of these payments has been greater than Cherokee's total net worth for each respective year. By 1972, Cherokee's net worth was almost $ 1.5 million while James' aggregate receipts were over $ 1.6 million. Further reward was not necessary.
However, this is not to say that James was not a valuable asset to Cherokee. He was the chief executive of a prosperous, growing business and, from time to time, would obtain new accounts for Cherokee. Therefore, we find that reasonable compensation for his services was $ 190,000 for FYE July 31, 1973, and $ 220,000 for FYE July 31, 1974.
2. Maximum Tax on Earned Income A maximum tax on earned income is provided by
section 1348 .Section 1348 (b)(1)(A) , in pertinent part, defines "earned income" as "any income which earned income within the meaning of * * *section 911(b) ." In turn,section 911(b) defines "earned income" as:wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived *103 by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
Compensation which qualifies as a "reasonable allowance * * * for personal services actually rendered" under
section 162(a)(1) would also qualify as earned income for purposes ofsection 1348 . However, the definition insection 911(b) , explicitly excepts from *806 earned income distributions of earnings or profits which are unreasonable in amount for the services actually rendered, even if ostensibly paid to the taxpayer for those services. Therefore, the fact that the payments to James were for services rendered would not automatically cause the unreasonable portion of those payments to be earned income.To determine the appropriate tax treatment of the excess payments in the hands of the recipient, James, we must determine the nature of those payments under the facts presented.
Sec. 1.162-8, Income Tax Regs. ;Garrison v. Commissioner , 52 T.C. 281 (1969)Garrison v. Commissioner, supra at 286Kennington Realty Co. v. Commissioner , 8 B.T.A. 1030">8 B.T.A. 1030section 1348 , for it would allow a corporation to distribute its earnings disproportionately as salaries to its stockholders, whose tax liability would be limited by the maximum tax provisions ofsection 1348 . Meanwhile, the corporation, which otherwise would have paid nondeductible dividends, would be none the worse. In fact, the corporation would benefit if any of those "salaries" were deductible without challenge. The opportunity for such an abuse of the provisions ofsection 1348 will not be created here.The portion of compensation paid to James and found to be unreasonable is not earned income within the meaning of
section 911(b) and is not qualified to receive *105 maximum tax treatment undersection 1348 . But cf.Gay Gibson, Inc. v. United States , 35 AFTR 2d 75-1483, 75-1207 Ct. Cl. 946">207 Ct. Cl. 946 (1975).3. Automobile Expense Cherokee bears the burden of proving that the expenses of supplying James an automobile for FYE July 31, 1973, and July *807 31, 1974, are deductible.
Welch v. Helvering , 290 U.S. 111">290 U.S. 111Rule 142(a), Tax Court Rules of Practice and Procedure. While Cherokee alleged in its petition that the automobile was used for business purposes, no further mention of the deduction was made by petitioner in its brief, save for an objection to respondent's requested finding of fact that the car was used personally. This alone will not suffice. No other statements or arguments were made, nor evidence presented at trial by petitioner to support the deduction. Therefore, we must regard this issue as abandoned by petitioner.Bussabarger v. Commissioner , 52 T.C. 819">52 T.C. 819Walker-Scott Corp. v. Commissioner , 35 T.C. 34">35 T.C. 34To reflect the foregoing,
Decisions will be entered under Rule 155 .Footnotes
1. In docket No. 9849-77, petitioners James D. Kennedy, Jr., and Dorothy H. Kennedy have conceded the entire $ 9,239.91 deficiency for their 1972 taxable year as determined by respondent, while respondent has agreed to a decrease in petitioners' taxable income for their 1973 taxable year of $ 6,720.32 relative to a deduction for certain drilling costs by partnerships from which petitioners received income. Therefore, a computation under Rule 155 will be necessary in docket No. 9849-77.
In docket No. 9850-77, petitioner Cherokee Warehouses, Inc., has conceded a $ 500 increase in taxable income for its taxable year ending July 31, 1974, due to a reduction of depreciation allowable as a deduction as determined by respondent. Thus, if the other issues in docket No. 9850-77 are decided for petitioner, a computation under Rule 155 will be necessary.↩
2. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in question, unless otherwise noted.↩
3. Although a strong belief in incentive compensation was professed by petitioners, only one other employee, the manager of the Material Handling Division, received income under a contingent arrangement. He received 20 percent of the net profits of the division which handled sales of Allis-Chalmers Lift-Trucks.↩
4. J.D. also received this salary, but none of the incentive bonus. The salary was increased to $ 750 per month beginning in FYE July 31, 1954.↩
5. The use of the fraction, to provide a reserve against losses, was abandoned after March 1951 for both monthly and annual bonuses, since the corporation had begun profitable operation by then.
6. The salary was increased to $ 1,100 per month on Aug. 1, 1973.↩
1. Net worth is computed at capital stock plus unappropriated retained earnings.↩
7. The difference between James' income and James' incentive bonus is the salary received during the year. However, the discrepancy for 1959 is unexplained.↩
8. Respondent offered evidence of another Tennessee corporation partially engaged in warehousing. However, since we do not regard that corporation as comparable to Cherokee, we have omitted any findings of fact concerning it.
9. Contrary to the argument of the petitioners, the holding in
Seven Canal Place Corp. v. Commissioner , 332 F.2d 899">332 F.2d 89910. Because Cherokee was closely held, detailed study of the relevant facts is necessary.
Mennuto v. Commissioner , 56 T.C. 910">56 T.C. 910Dielectric Materials Co. v. Commissioner , 587">57 T.C. 587↩11. See also
Reppel Steel & Supply Co. v. Commissioner , 35 T.C.M. 368↩, 4512. See also
Saia Electric, Inc. v. Commissioner , 33 T.C.M. (CCH) 1357">33 T.C.M. 1357429 U.S. 979">429 U.S. 979↩ (1976). James was one of only two employees on a contingent compensation arrangement. The other employee received 20 percent of the net profits of only the Material Handling Division of Cherokee, which he managed, while James received, in total, approximately 34 percent of all net profits of Cherokee.13. Contra,
Albert Van Luit Co. v. Commissioner , 34 T.C.M. (CCH) 321">34 T.C.M. 321↩14. See also
Bone v. United States , 46 F.2d 1010">46 F.2d 101015. Whether the value of the automobiles supplied was additional income to James for the years in issue is not before us.
Document Info
Docket Number： Docket Nos. 9849-77, 9850-77
Judges： Bruce
Filed Date： 8/7/1979
Precedential Status： Precedential
Modified Date： 10/19/2024