Court Opinion

ID: 9469252
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:35:57.167753+00
Date Added: 2024-06-11T17:41:18.116092
License: Public Domain

VANCE, Circuit Judge,
concurring in part and dissenting in part:
While I agree that the district court properly determined that the comparative salary method was a proper test of deductibility in this case, I believe that the test was improperly applied to the facts of the case. I therefore dissent in part.
Initially, I agree that taxpayers’ contention that the salaries paid were part of a valid bonus incentive plan is without merit. “For the sole owner to pay himself a bonus as an incentive to do his best in managing his own business is nonsense.” University Chevrolet Co. v. Commissioner, 16 T.C. 1452 (1951), aff’d, 199 F.2d 629 (5th Cir. 1952). Accordingly, I think that the decision of the Internal Revenue Service (IRS) to apply a comparative salary method in this case was correct. See 4A J. Mertens, The Law of Federal Income Taxation § 25.64 (1979 rev.). I also believe that the IRS established that $401,600 was a reasonable salary figure to apply in this case and that any section 162 deduction over this amount by the relevant taxpayer should be disallowed. Finally, I agree with the district court’s conclusion that the two taxpayers in this appeal cannot be treated as separate corporate entities for the purpose of section 162. See Miller Box, Inc. v. United States, 488 F.2d 695, 702-03 (5th Cir.), cert. denied, 417 U.S. 945, 94 S.Ct. 3069, 41 L.Ed.2d 665 (1974).
*212Notwithstanding these conclusions, I cannot concur in the district court’s decision to aggregate the allowable salary deductions for the four Alabama corporations and two Kentucky corporations. While it may be reasonable to disregard the corporate shells of the Alabama corporations, where there is an identity of ownership, I see no reason whatever to accord the same treatment to the two Kentucky corporations. The Kentucky corporations are owned in substantial measure by persons completely unrelated to the Alabama corporations, and at least one of the owners of the Alabama group has no ownership interest at all in the Kentucky group. Additionally, the daily operations of the Kentucky corporations are not connected in any way with the Alabama corporations which, admittedly, are jointly run. Unlike the case of the unified Alabama corporations, where the salary arrangement and dividend history justifies the inference of disguised dividend payments, the nonidentity of ownership interests between the Alabama corporations and the Kentucky corporations ensures that the Kentucky corporations have entered into arms length bargaining with the executives in question, thus keeping their salary payments tied to economic reality.
The only possible reason for ignoring the disunity of interests between the Kentucky and Alabama corporations is an unwarranted concern for the amount of money the individual officers received as compensation for services rendered. But such a concern is completely irrelevant for purposes of determining a reasonable salary deduction for the corporations involved. Cf. Patterson v. McWane Cast Iron Pipe Co., 331 F.2d 921, 923 (5th Cir. 1964) (evidence of compensation paid by subsidiary is irrelevant to reasonableness of parent company’s salary deduction). The focus of inquiry in a section 162 salary case should be on the reasonableness of the corporate deductions, not the amount an individual earns by dint of his own efforts. The net result of the district court’s application of the comparative salary method to this case is to turn that method on its head. To the extent that it includes consideration of the salary payments by the Kentucky corporations I would reverse the decision of the district court and remand for a recalculation of excess salary deductions.