Savoy Brass Mfg. Co. v. Commissioner , 9 T.C.M. 378 ( 1950 )

Savoy Brass Mfg. Co., Inc. v. Commissioner.

Savoy Brass Mfg. Co. v. Commissioner

Docket No. 20176.

United States Tax Court

1950 Tax Ct. Memo LEXIS 214; 9 T.C.M. (CCH) 378; T.C.M. (RIA) 50110;

April 21, 1950

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Amount of reasonable salary determined under section 23(a)(1)(A) of the Internal Revenue Code.

Bernard Weiss, Esq., 136 E. 57th St., New York 22, N. Y., for the petitioner. Pershing W. Burgard, Esq., for the respondent.

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VAN FOSSAN

Memorandum Findings of Fact and Opinion

The respondent determined a deficiency of $2,781.23 in the petitioner's income tax liability for the year 1944. The sole issue is whether or not the compensation paid by the petitioner to its president for the year 1944 was reasonable under the provisions of section 23(a)(1)(A) of the Internal Revenue Code.

Certain minor adjustments made by the respondent in the petitioner's tax liability were not contested and are therefore not considered.

The case was submited on oral and testamentary evidence presented at the hearing.

Findings of Fact

Petitioner is a corporation organized in 1935 under the laws of the State of New York. Its principal place of business is located in Long Island City, Queens, New York, New York. The petitioner filed its income tax return for 1944 with the collector of internal revenue for the first district of New York.

The petitioner's president, Abraham Kadish, was born in 1879. He began working in the brass manufacturing business when he was 11 years old. At 19 he became a foreman. In 1912 he bought a brass manufacturing business which he conducted as a proprietorship until the organization of the petitioner corporation in 1935. The stock in this corporation was held within the Kadish family. At first the business had but six employees. This number grew to about 100 by 1941.

Abraham Kadish has been the petitioner's president since its incorporation. He devoted long hours to the business - as much as 14 hours per day. Kadish actively managed all phases of the operation of the business. He bought the raw materials, supervised the manufacturing process, personnel and financial affairs. The success and good reputation of the business were due to the efforts of the petitioner's president.

In about 1923 the business began specializing in the manufacture of brass plumbing fixtures such as faucets, shower heads, drains, supports and shower curtain rails. Some of the more complicated articles consisted of as many as 20 to 30 parts. The manufacture of these articles continued through the year 1941 in which year the petitioner's net sales were $650,359.32. In 1942 the availability of raw materials was restricted because of the war and the net sales fell off to $366, 332.77. The petitioner's attempts to manufacture war products then in demand were largely unsuccessful due to the high degree of precision required in such products and Kadish felt unable to direct such manufacture, particularly with the type of machinery which the business previously used. It was accordingly determined that the petitioner would lease its assets to a partnership consisting of the two sons of Abraham Kadish, his daughter and son-in-law. This lease was executed on March 1, 1943. The partnership agreed to pay the petitioner $750 per month for the use of its assets during the remainder of 1943 and $2,500 per month thereafter. In addition the partnership agreed to assume $10,000 of the petitioner's annual rental obligation on the premises. The partnership used the premises from March 1, 1943, through 1944. Much of petitioner's machinery was stored. The petitioner reoccupied the premises in 1945 and resumed production.

Although the petitioner had leased its premises to the partnership, Kadish, petitioner's president, visited the plant almost every working day in 1944. He inspected the stored equipment to see that it was properly maintained. He made sketches for new products, had blue prints drawn and machined these pilot models himself. In 1944 Kadish worked on the designs of nine or ten new fixtures which were added to the list of articles manufactured when the petitioner started full scale production again in 1946.

The salaries paid to the petitioner's officers were determined at the beginning of each year at a conference of the directors. No dividends were ever paid by the petitioner.

The net sales, gross profits, compensation of all officers, salary to Abraham Kadish, and net income of the petitioner for the calendar years 1939 through 1946 were as follows:

		Sales	Compensa-
	Net	Gross	tion of all	Salary to	Net
Year	Sales	Profit	Officers	A. Kadish	Income
1939	$ 553,549	$138,187	$19,870	$12,750	$12,434
1940	538,874	138,391	20,200	13,000	11,693
1941	650,359	156,478	21,750	13,000	20,600
1942	366,332	152,376	21,850	13,250	25,907
1943	109,487	76,559	13,000	13,000	23,805
1944	653	453	13,000	13,000	2,017
1945	59,497	24,009	13,250	13,250	20,997
1946	1,044,872	213,578	57,226	16,500	51,985

The petitioner's gross income in 1944 was $32,693.78 of which $30,000 was rent received from the partnership for rental of the premises.

The respondent disallowed the compensation paid Kadish for the year 1944 in excess of $3,000. The respondent arrived at the figure of $3,000 arbitrarily by multiplying the rent of $30,000 by 10 per cent.

The amount of $6,000 is reasonable compensation for the services rendered the petitioner in 1944 by Abraham Kadish.

Opinion

VAN FOSSAN, Judge: The only matter in dispute is the amount to be allowed as a deduction for salary of petitioner's president during the year 1944. Petitioner paid its president and claimed as a deduction the sum of $13,000, the same amount he had received for several preceding years while petitioner was in active operation. Respondent allowed $3,000, taking cognizance of the fact that petitioner had leased its plant to the partnership and so far as active operation was concerned was in the state of suspended animation.

We agree with respondent that under the facts the salary of $13,000 was excessive and unreasonable. However, we agree with petitioner that the amount of $3,000 was unduly small. We have found as a fact that the sum of $6,000 is a reasonable amount. The deficiency will be recomputed accordingly.

Decision will be entered under Rule 50.