Loesch & Green Constr. Co. v. Commissioner

The Loesch & Green Construction Co. v. Commissioner.

Loesch & Green Constr. Co. v. Commissioner

Docket Nos. 32661, 33750.

United States Tax Court

1952 Tax Ct. Memo LEXIS 13; 11 T.C.M. 1191; T.C.M. (RIA) 52351;

December 11, 1952

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">*13 Reasonable salaries for petitioner's officers, in the several taxable years, determined.

L. F. Loux, Esq., for the petitioner. John L. King, Esq., for the respondent.

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VAN FOSSAN

Memorandum Findings of Fact and Opinion

The following deficiencies were determined against the petitioner:

Year Ended	Docket
April 30th	Number	Tax	Deficiency
1946	32661	Income	$ 3,315.72
1947	32661	Income	13,506.63
1946	32661	Declared Value
		Excess Profits	181.71
1946	32661	Excess Profits	13,552.10
1948	33750	Income	16,530.97
1949	33750	Income	17,856.19

The sole question presented is whether amounts paid by the petitioner as compensation for the services of officers were reasonable.

Findings of Fact

The facts stipulated are so found.

The Loesch & Green Construction Co., the petitioner, is an Ohio corporation organized in 1925 with its principal place of business located in Cleveland, Ohio. The petitioner filed its tax returns for the fiscal years ending April 30, 1946, 1947, 1948, and 1949 with the collector of internal revenue for the 18th district of Ohio. The petitioner was organized in 1925 by George Loesch, Edward">*14 H. Green and Howard H. Green, the son of Edward H. Green. Irving R. Lewis, Edward H. Green's son-in-law, acquired the interest formerly held by George Loesch when the latter died in 1927. Ernest M. Green, Edward H. Green's son, became an officer of the petitioner in 1927. Edward H. Green died in 1945 and his shares were acquired by his two sons, Howard H. and Ernest M. Green, and by Irving R. Lewis. In 1947 Hansen E. Green, Howard H. Green's son, and M. F. McQuilkin, a tax consultant, were made officers of the petitioner corporation. Prior to the incorporation of the petitioner the business was carried on by a partnership consisting of George Loesch and Edward and Howard Green.

Until 1943 the petitioner's business consisted of driveway and road construction work. In that year Edward H., Howard H., and Ernest M. Green, and Irving R. Lewis organized two new corporations, - Brookpark Construction Company and Brookpark Factory Sites, Inc. Brookpark Construction Company took over the petitioner's smaller work. Brookpart Factory Sites, Inc. leased a tract of land to the petitioner and Brookpark Construction Company for office and storage space. The usable space available to the petitioner">*15 and Brookpark Construction Company, after the move to the new location, was increased greatly.

The officers of the petitioner and their tenure were as follows:

Name	Office Held	From	To
Edward H. Green	President	Apr. 1925	11/17/45
Edward H. Green	Chairman of Board	Apr. 1925	11/17/45
Howard H. Green	Secretary-Treasurer	Apr.1925	12/22/45
Howard H. Green	President	12/22/45	Present
Irving R. Lewis	Vice President	2/19/27	Present
Ernest M. Green	Assistant Sec.-Treas.	3/10/27	12/22/45
Ernest M. Green	Secretary-Treasurer	12/22/45	Present
Hansen E. Green	Assistant Treasurer	1/7/47	Present
M. F. McQuilkin	Assistant Secretary	1/7/47	Present

and the following named persons acted as directors of petitioner during the periods set opposite their names below:

Name	From	To
Edward H. Green	Prior to 1940	11/17/45
Howard H. Green	Prior to 1940	Present
Ernest M. Green	Prior to 1940	Present
Irving R. Lewis	Prior to 1940	Present
Allison M. Gibbons	Prior to 1940	1/7/47
Hansen E. Green	1/ 7/47	Present
M. F. McQuilkin	12/22/45	Present

During the fiscal years ended April 30, 1940, through April 30, 1949, inclusive, ">*16 petitioner's stock was held as follows:

	Edward	Ernest	Hansen	Howard	Irving	M.F.
Year	Green	Green	Green	Green	Lewis	McQuilkin	Other	Total
1940	35	1	0	35	35	0	1	107
1941	35	1	0	35	35	0	1	107
1942	80	31	0	90	90	0	1	292
1943	110	31	0	120	120	0	1	382
1944	110	31	0	120	120	0	1	382
1945	110	31	0	120	120	0	1	382
1946	110	31	0	120	120	1	1	383
1947	0	67	1	157	157	1	0	383
1948	0	240	35	560	560	15	20	1,430
1949	0	300	51	680	680	20	49	1,780

The officers' salaries claimed by petitioner on its tax return and those allowed by respondent in his determination for the fiscal years ended April 30, 1946 to April 30, 1949, inclusive, are as follows:

	Fiscal Year Ended 4/30/46
	Claimed on	Allowed by
Officer	Return	Respondent
Ernest M. Green	16,800	10,000
Irving R. Lewis	18,600	11,000
Edward Green	4,620	4,620
	Fiscal Year Ended 4/30/47
Howard M. Green	$24,600	$15,000
Ernest M. Green	20,400	14,000
Irving R. Lewis	22,200	12,000
Hansen E. Green	3,200	3,200
M. F. McQuilkin	1,600	1,600
	Fiscal Year Ended 4/30/48
Howard M. Green	$24,600	$15,000
Ernest M. Green	20,400	14,000
Irving R. Lewis	22,200	12,000
Hansen E. Green	9,600	3,200
M. F. McQuilkin	4,800	1,600
	Fiscal Year Ended 4/30/49
Howard M. Green	$24,600	$15,000
Ernest M. Green	20,400	14,000
Irving R. Lewis	22,200	12,000
Hansen E. Green	12,000	3,200
M. F. McQuilkin	4,800	1,600

">*17 In addition to the amounts paid to them by petitioner, Howard H. Green, Ernest M. Green, and Irving R. Lewis received salaries from Brookpark Construction Company and Brookpark Factory Sites, Inc. for their fiscal years ended April 30, 1946 to April 30, 1949, inclusive, as follows:

	Fiscal Year Ended 4/30/46
Company	Howard H. Green	Ernest M. Green	Irving R. Lewis
Brookpark Construction Co.	$ 7,200	$ 6,000	$ 6,000
Brookpark Factory Sites, Inc.	700	1,225	1,400
	Fiscal Year Ended 4/30/47
Brookpark Construction Co.	$ 8,700	$ 7,500	$ 7,500
Brookpark Factory Sites, Inc.	400	700	800
	Fiscal Year Ended 4/30/48
Brookpark Construction Co.	$15,900	$14,700	$14,700
Brookpark Factory Sites, Inc.	1,200	2,100	2,400
	Fiscal Year Ended 4/30/49
Brookpark Construction Co.	$16,100	$14,300	$15,650
Brookpark Factory Sites, Inc.	1,200	2,100	2,400

During the fiscal years 1940 through 1944, the petitioner paid no dividends. From 1944 to 1949, inclusive, dividends were paid as follows:

	Cash	Stock
Year	Dividend	Dividend
1944	$ 2,292	$ 0
1945	2,292	0
1946	3,830	0
1947	5,745	0
1948	0	60,000
1949	5,340	14,300

">*18 During the fiscal years ended April 30, 1940 to April 30, 1949, inclusive, the amounts claimed by petitioner as salary deductions for its officers, the salaries and wages paid to all other employees, and the average number of each, were as follows:

Calendar	Number of	Paid to	Paid to	Number of Employees
Year	Officers	Officers	All Others	Maximum	Minimum	Average
1940	4	$ 3,665	$ 61,511	56	14	37
1941	4	10,705	130,563	73	36	57
1942	4	32,506	136,340	76	43	63
1943	4	32,312	111,870	66	29	46
1944	4	32,592	238,070	119	40	79
1945	4	32,317	265,060	116	64	86
1946	4	61,020	326,030	128	75	108
1947	5	72,000	514,160	249	134	183
1948	5	81,600	697,090	271	142	200
1949	5	84,000	556,930	210	116	151

The tax returns filed by petitioner for the fiscal years 1940 to 1949, inclusive, show officers' salary deductions as follows:

Fiscal	Edward	Ernest	Howard	Irving	Hansen	M.F.
Year	Green	Green	Green	Lewis	Green	McQuilkin
1940	$1,000	$ 2,665	$ 0	$ 0	$ 0	$ 0
1941	3,805	1,900	2,500	2,500	0	0
1942	7,818	5,235	9,725	9,727	0	0
1943	7,750	5,275	9,655	9,632	0	0
1944	7,800	5,355	9,730	9,707	0	0
1945	7,750	5,280	9,655	9,632	0	0
1946	4,620	16,800	21,000	18,600	0	0
1947	0	20,400	24,600	22,200	3,200	1,600
1948	0	20,400	24,600	22,200	9,600	4,800
1949	0	20,400	24,600	22,200	12,000	4,800

">*19 For the fiscal years ended 1940 to 1949, inclusive, the petitioner reported net taxable income as follows:

	As Reported
Year	on Returns
1940	($ 390)
1941	660
1942	5,900
1943	8,040
1944	15,900
1945	17,600
1946	19,690
1947	41,330
1948	36,640
1949	27,590

The depreciated values of capital assets used in the petitioner's business during the fiscal years ended 1940 to 1949, inclusive, were as follows:

	Depreciated
Year	Value
1940	$ 17,600
1941	22,510
1942	39,550
1943	37,890
1944	45,110
1945	41,250
1946	81,230
1947	120,710
1948	149,920
1949	218,480

The petitioner's gross receipts, amounts paid to officers and net income before deduction of officers' salaries are as follows:

			Net In-
			come Before
Fiscal	Gross	Paid to	Deduction of
Year	Receipts	Officers	Off. Salaries
1940	$ 212,938	$ 3,665	$ 3,640
1941	205,929	10,705	12,684
1942	363,342	32,506	39,412
1943	294,090	32,312	40,872
1944	697,650	32,592	48,822
1945	722,540	32,317	50,833
1946	901,059	61,020	80,711
1947	$1,134,443	$72,000	$113,332
1948	1,426,404	81,600	118,240
1949	1,243,359	84,000	111,592

">*20 The net working capital for the years 1940 through 1949 is as follows:

	Current	Current	Net Working
Year	Assets	Liabilities	Capital
4/30/40	$ 24,922.81	$ 46,656.38	($ 21,733.57)
4/30/41	29,128.56	54,513.18	(25,384.61)
4/30/42	52,195.12	70,535.49	(18,340.37)
4/30/43	44,561.47	48,849.86	(4,288.39)
4/30/44	42,157.57	48,523.83	(6,366.26)
4/30/45	84,372.93	78,884.98	5,487.95
4/30/46	140,778.45	162,190.69	(21,412.24)
4/30/47	148,342.78	187,426.40	(39,083.62)
4/30/48	167,068.60	161,654.25	5,414.35
4/30/49	174,108.08	198,670.67	(24,562.59)
Totals	$907,636.37	$1,057,905.72	($150,269.35)
Average	$ 90,763.64	$ 105,790.57	($ 15,026.94)

The summer was usually the petitioner's busy season. During the years in question, the petitioner was engaged in excavating, paving driveways, furnishing equipment to other contractors along with operators and fuel, compressor and sewer work, dynamiting and wrecking. Following the formation of Brookpark Construction Company in 1943, the petitioner engaged less in asphalt and cement paving for small homes. The petitioner did not permanently employ graduate engineers, but such persons">*21 were hired for certain work. The firm's engineering work was done principally by its officers. One salesman was employed on a commission basis of 10 per cent which at times would be increased to 15 per cent. Personal contacts by the petitioner's officers resulted in some of its business as did public works contracts. Some work was done during the taxable years on a cost-plus-fixed-fee basis.

The salaries of petitioner's officers were set at the annual meeting of the board of directors. The petitioner did not seek permission from the Government to raise salaries in the years 1942 to 1945. At times the petitioner's officers gave personal guarantees in obtaining bonds which were required of contractors for public construction and for some private work. Howard H. and Ernest M. Green, and Irving R. Lewis, made loans to the petitioner corporation at various times which were evidenced by 6 per cent notes.

The stock of Brookpark Construction Company was owned by Ernest M. and Howard H. Green, Irving R. Lewis and one Clark. The officers made themselves available to this corporation when their services were needed. The stock of Brookpark Factory Sites, Inc. was owned by Howard H. and Ernest">*22 M. Green and Irving R. Lewis.

Ernest M. Green's duties as an officer and director of the petitioner consisted of supervision of office operation, preparation and tabulation of bids, computation of costs and detailed accounting, supervising work to be let, contacting customers, receiving necessary Government approvals, entering bids, and, in general, acting as the petitioner's financial director. He possessed the right to hire and fire employees. He had no set working hours but worked whenever the circumstances required. He traveled in Ohio and other States. He had some training in accounting derived from a correspondence course and prior employment in a bank.

Howard H. Green was president of the petitioner corporation and was in charge of all equipment and its scheduling. He supervised the personnel, sought new business and advised on bids. He could hire and fire employees and acted as executive manager of outside operations. In 1947 and later years, some of his duties were shared with his son, Hansen E. Green.

Irving R. Lewis was vice president of the petitioner and supervised the craft trades, such as iron, steel and carpenter work. He was primarily concerned with the petitioner's">*23 bridge building and paving operations. He possessed the right to hire and fire employees.

Hansen E. Green began working for the petitioner as a youth. He was inducted into the armed services in 1943 and left the service in August, 1946. Thereupon he returned to the petitioner's employment and was given charge of special equipment, trucks and assignment of men and equipment. He had the right to hire and fire personnel. He supervised construction and paving operations.

M. F. McQuilkin was a certified public accountant. He was elected an officer of the petitioner in January, 1947, and acted as an actuary and accountant. He prepared financial reports, consulted on financial policies and prepared tax returns. He did not work solely for the petitioner but was employed by other clients.

The following amounts represent reasonable salaries for the several officers in the several years:

Officer	1946	1947	1948	1949
Howard H. Green	$16,000	$17,500	$17,500	$17,500
Irving R. Lewis	13,000	15,000	15,000	15,000
Ernest M. Green	13,000	15,500	15,500	15,500
Hansen E. Green			6,000	6,500
M. F. McQuilkin			4,800	4,800

Opinion

VAN FOSSAN, Judge: ">*24 When we are confronted with a question of the reasonableness of officers' salaries, unless a clear case for revision has been made or the evidence fails to sustain the petitioner's burden of proof, we hesitate to substitute our judgment for that of the company officials who fixed the salaries.

Frequently, however, we are satisfied that there is merit on both sides of the equation, i.e., the company has been unduly generous with its officers and the Commissioner has been unduly critical of the amounts fixed. We conceive the present case to be one of the latter type. The company was unduly generous but the Commissioner was unduly critical. Accordingly, we have found and set out in our findings of fact the amounts which the evidence, in our best judgment, justifies. These amounts are fixed after giving due weight to the duties and performance of the several officers, the financial policies and experience of the company, testimony of witnesses called in support of petitioner's case and all other facts presented to us. To enumerate these facts or to discuss critically the testimony would be of little benefit. A conclusion of fact, or a determination based on conflicting evidence or inferences">*25 therefrom, is largely the result of a mental process often not susceptible to specification. In such a case the evidence leads you to say to yourself, - the correct amount is such and such a figure. The accuracy of the figures so found depends in a large part on the breadth of experience, the methods of approach and the fidelity to logic and reason of the one charged with the duty of determination.

In the present case we have employed such factors faithfully. The amounts found are the result. These results were not fixed by an arbitrary splitting of the difference between the parties. They represent our judgment, buttressed by experience and based on all the evidence in the record. They are the amounts which we believe we would have fixed had we in the several years been charged with the duty of fixing reasonable salaries for the officers in question.

Decisions will be entered under Rule 50.