Case Name: PATTON et al. v. COMMISSIONER OF INTERNAL REVENUE
Court: United States Court of Appeals for the Sixth Circuit
Jurisdiction: United States
Decision Date: 1948-04-19
Citations: 168 F.2d 28
Docket Number: No. 10534
Parties: PATTON et al. v. COMMISSIONER OF INTERNAL REVENUE.
Judges: Before HICKS, McALLISTER and MILLER, Circuit Judges.
Reporter: Federal Reporter 2d Series
Volume: 168
Pages: 28–33

Head Matter:
PATTON et al. v. COMMISSIONER OF INTERNAL REVENUE.
No. 10534.
Circuit Court of Appeals, Sixth Circuit.
April 19, 1948.
L. F. Loux, of Cleveland, Ohio (L. F. Loux, of Cleveland, Ohio, on the brief), for petitioners.
S. Dee Hanson, of Washington, D. C. (Theron L. Caudle, Sewall Key, A. F. Prescott and S’. Dee Hanson, all of Washington, D. C., on the brief), for respondent.
Before HICKS, McALLISTER and MILLER, Circuit Judges.

Opinion:
HICKS, Circuit Judge.
Respondent found a deficiency in the income and victory taxes for 1943 of petitioner, James F. Patton, in the sum of $16,561.12, and of petitioner, Vincent Patton, in the sum of $16,361.80. The cases were consolidated for hearing before the Tax Court and here. The Tax Court confirmed the deficiency assessments and we are asked to review its decision.
The cases arose under Sec. 23, Internal Revenue Code, 26 U.S.C.AJnt.Rev.Code, § 23, which in so far as is applicable, is printed in the margin.
During the calendar year 1943 petitioners were partners doing a general jobbing business under the firm name of "Patton Company, Cleveland, Ohio," and one William Kirk was an employee of the firm. The partnership claimed deductions for 1943 for compensation of $46,049.41 paid to Kirk. The Commissioner determined that $13,000.00 constituted reasonable compensation for him for that year and disallowed the deductions claimed above that amount. The Tax Court sustained the Commissioner.
Kirk kept the books and records of the partnership and rendered such other clerical and routine services as the office work required. He generally worked without assistants. Petitioners complain that the Tax Court erred in finding that Kirk kept the books on a cash basis, that his duties as a bookkeeper entailed little effort; that petitioners' production was practically supervised by Government inspectors; that Kirk was paid 10% of the net sales of the partnership, that the payments to him formed a basis for tax reduction; that he was to receive 10% of net sales so long as 10% commission, plus the $2,400.00 minimum, did not exceed 22%% of net profits.
They also complain that the Tax Court erred in failing to make findings that the petitioners and Kirk were unrelated and had no common business interests other than that created by the contract; that Kirk devoted long hours to the business; that the contract was of the "profit-sharing" type and formed a measuring rod by which Kirk's earnings were to be determined; that the court failed to make findings of the educational background of petitioners and give effect thereto. They complain further, that it erred in inquiring into the manner in which Kirk handled his own funds; and in permitting its decision to be controlled by passion and prejudice.
We have examined the findings in connection with the evidence and conclude that in some particulars su'ch criticisms are unjustified. This is especially true with reference to the complaint that the Tax Court was controlled by passion and prejudice. In so far as they are justified they appear to involve matters of minor importance.
Petitioners, however, made no application to the Tax Court, either by rehearing or otherwise, to correct its findings, and we do not think it necessary to remand the case to prevent a miscarriage of justice. Hormel v. Helvering, 312 U.S. 552, 556, 61 S.Ct. 719, 85 L.Ed. 1037; Helvering v. Tex-Penn Co., 300 U.S. 481, 498, 57 S.Ct. 569, 81 L.Ed. 755; Athens Roller Mills v. Comm'r, 6 Cir., 136 F.2d 125, 127; Lumaghi Coal Co. v. Helvering, 8 Cir., 124 F.2d 645, 648.
At this late date it is an elementary proposition, needing no citation of authorities to support it, that this court is without power to make findings of fact. Its function [Title 26 U.S.C.A.IntRev. Code, § 1141(c)] is to determine whether the decision of the Tax Court is "in accordance with law." If it is, an affirmance is in order; otherwise the court may modify or reverse the decision. And in determining this question, the cou'rt is limited to ascertaining whether there was evidence to support the findings and decision of the Tax Court. We may not make an independent determination of the issues before the Tax Court nor pass upon the weight of the evidence or consider conflicting evidence nor choose between possible inferences that may arise.
The Tax Court found the following facts: Prior to July 1, 1940, petitioner, James F. Patton, operated the machine shop as an individual, during which time his business was small. At times he had no employees and did all the work himself. At other times the work required additional help. At times his son, Vincent, assisted him, although Vincent had full time employment elsewhere. About 1937 James F. Patton employed Kirk to do his office work. Kirk had a grammar school education and a two years' commercial course in high school. From 1893 to 1919 he engaged in clerical work and following that, he operated a small trucking business until 1929. From then, until his employment by James F. Patton he had no regular employment. From 1919 to 1941 his earnings were not sufficient to require the filing of tax returns. From 1937 to 1940 Kirk's compensation was approximately as follows: For 1937, $939.00; for 1938, $1,230.-00; for 1939, $1,385.00; for 1940, $1,-855.00.
On July 1, 1940, James F. Patton and his son Vincent formed a partnership and shortly thereafter James F. turned over the affairs of the partnership to Vincent. Up to December 17, 1940, the partnership, called The Patton Company, did job work for general customers, but on that date The General Motors Corporation began sending work to the Company in such volume that its productive capacity was absorbed by the new customer.
On January 2, 1941, petitioners contracted in writing with Kirk whereby he was to receive a minimum salary of $2,400.00 a year until such time as 22%% of the net profits exceeded $2,400.00. In such event the contract provided that Kirk was to receive 10% of the net sales for as long as that percentage, plus the $2,400.00 basic salary, did not exceed 22%% of the net profits.
The gross sales from 1941 to 1943 were, for 1941, $179,050.00; for 1942, $365,609.-53; for 1943 [the year involved here] $460,494.06. Kirk kept the books on a cash basis in a simple way. He recorded in a cash book all receipts and disbursements and at the end of each month prepared two summary sheets, one showing total receipts and disbursements of each class and the other showing materials purchased. At the end of each year the summary sheets showing totals for each month and year were used by an accountant who translated them to an accrual basis in preparing income tax returns. Kirk kept a ledger and did the billing, which required little effort because substantially all of the Company's work was for General Motors. He prepared the payrolls, kept social security records and made quarterly social security reports. He kept petitioner Vincent Patton informed of the bank balances and transmitted to shop foremen information from General Motofs as to the orders it desired to be finished first. He spoke to insurance salesmen before purchases of insurance were approved by Vincent. About five times in 1942-3 he called upon the ap propriate agents for approval for wage increases for employees. Kirk was not a partner in the Patton Company nor related to either of the partners.
The case strips to one question: whether, as determined by the Commissioner, $13,000.00 was reasonable compensation to Kirk for 1943. We are dealing with a pure question of fact. Wilmington Co. v. Helvering, 316 U.S. 164, 62 S.Ct. 984, 986, 86 L.Ed. 1352. In the Wilmington case, supra, the court said: "It is the function of the Board, not the Circuit Court of Appeals, to weigh the evidence, to draw inferences from the facts, and to choose between conflicting inferences. The court may not substitute its view of the facts for. that of the Board. Where the findings of the Board are supported by substantial evidence they are conclusive."
In the proceedings before the Tax Court the presumption is that the Commissioner was right and petitioners have the bu'rden of proving that his determination was wrong. We think that the findings of the Tax Court are supported by substantial evidence and an affirmance must result. There is no hard and fast rule by which reasonableness of compensation may be determined by the Tax Court. Every case must stand or fall upon its own peculiar facts and circumstances. Among other factors to be considered by that Court are: The nature of the services to be performed, the responsibilities they entail, the time required of the employee in the discharge of his duties, his capabilities and training, and the amount of compensation paid in proportion to net profits. An exclusive function of the Tax Court is the determination of the weight and credibility to be given to the witnesses.
We think that petitioners have failed to carry the burden, which the law imposes upon them, to make out their case by clear and convincing evidence. Atlas Plaster & Fuel Co. v. Comm'r, 6 Cir., 55 F.2d 802, 803; Tracy v. Comm'r, 6 Cir., 53 F.2d 575, 579; and Guarantee Bond & Mortgage Co. v. Comm'r, 6 Cir., 44 F.2d 297, 298. Probably one of the most important factors in determining the reasonableness of compensation is the amount paid to similar employees by similar concerns engaged in similar industries. The petitioners introduced no evidence upon this subject. Moreover, it occurs to us that the books of the partnership kept by Kirk would have disclosed to a great extent the nature and volume of his work and his capabilities to perform it, but neither the books nor any verified entries therefrom were introduced by petitioners. There is of course a presumption that as between the parties to the contract the compensation agreed to be paid was reasonable. But, as between petitioners and the Commissioner, such a presumption is not controlling in a controversy of this nature before the Tax Court. Botany Worsted Mills v. United States, 278 U.S. 282, 292, 49 S.Ct. 129, 73 L.Ed. 379.
Affirmed.
"Sec. 23. Deductions from gross income.
"In computing net income there shall be allowed as deductions:
"(a) [As amended by Section 121 of the Revenue Act of 1942, c. 619, 56 Stat. 798.] Expenses,—
"(1) Trade or business expenses.—
"(A) In General.- — All tlie ordinary and necessary expenses paid or incurred during tlie taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; ." (Italics ours.)