Court Opinion

ID: 9448261
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:28:39.087302+00
Date Added: 2024-06-11T17:31:20.916661
License: Public Domain

JONES, Chief Judge
(dissenting).
I would approve the findings and conclusion of the trial commissioner who heard the evidence.
The law is clear. The single issue is what was a reasonable salary for the president of the company during the period in question. This is largely a factual question.
I admire and pay tribute to any American who can build a succeessful business in a highly competitive field. He earns and should receive substantial compensation.
But after all the plaintiff has a local business. There are tens of thousands of successful businessmen in hundreds of lines of activity in this broad, big country. That is the glory of this land and the anchor of our safety.
Here we are setting aside the judgment of the trial officer who saw the witnesses face to face, and substituting the judgment of men who, however able they may be, have not had the privilege of listening to any of the witnesses. It is exceedingly difficult for a judicial officer to look at the cold record and accurately determine the credibility of witnesses. It is far easier for one who sees the demeanor of witnesses and who studies the record with great care to correctly gauge and properly measure the facts in issue.
The majority opinion quotes certain parts of the trial commissioner’s opinion, largely those parts that are favorable to the conclusion which the majority has reached. However, when the entire opinion is read a different picture is presented.
We quote further from the trial commissioner’s opinion as follows:
“In connection with the weight to be given to the opinion testimony offered by the plaintiff in the present case, it is pertinent to observe that the witnesses who gave such testimony were, in addition to Mr. Gordy, Mrs. Gordy, and the plaintiff’s auditor, officials of organizations which had long maintained, and were still maintaining, business relationships —presumably of a profitable nature —with the plaintiff. [Tr. Comm. Op. p. 4.]
“It is also pertinent to inquire in this type of case whether the purported compensation to the owners of a corporation was fixed in advance or retroactively, after the financial situation of the corporation for a particular year had been determined. If the facts show that an amount purportedly representing compensation was fixed at the close of a year, when earnings could be ascertained, the retroactive action tends to characterize such an amount as a dividend rather than as compensation. [Tr. Comm. Op. p. 6.].
“A further point considered by the courts is whether the purported compensation had a reasonable relationship to the corporation’s gross profit and net profit on sales. Mayson Mfg. Co. v. Commissioner, supra [6 Cir., 178 F.2d 115], at p. 119; Patton v. Commissioner, supra [6 Cir., 168 F.2d 28], at p. 31. In connection with this standard, the evidence in the record indicates that companies engaged in the tire distribution business paid their executives, on the average, approximately 9.4 percent of gross profits on sales for the years 1954 and 1955, and that such companies still made an average net profit of about 3 percent on sales. The plaintiff’s payments to its executives for the fiscal year 1954 represented 8.14 percent of the plaintiff’s gross profit on sales, and the plaintiff’s payments to its executives for the fiscal year 1955 represented 6.37 percent of the gross profit on sales, so that the plaintiff’s payments to its executives were well within one phase of the standard now under consideration. On the other hand, the plaintiff in 1954 had a net profit on sales of only 0.8 percent, and in 1955 *481its net profit on sales was only 1 percent. [Tr. Comm.Op. pp. 7-8.]”
When the entire opinion is read and the transcript is reviewed, it becomes manifest that the salary paid to Mr. Gordy for the last 4 years, including 1954 and 1955, amounted to more than the average net income remaining during those 4 years after deducting the salaries claimed. It is also undisputed that the bonuses paid were larger than the remaining part of the salary and the only witness on the subject testified that the bonus was not arranged for in advance but was declared at the end of the year; thus it apparently partook more of the quality of a dividend than of a salary. As a dividend it, of course, would not be deductible as a business expense.
It is also apparent that all of the witnesses who testified as to the reasonableness in salary had a financial relationship or dealings with plaintiff, including the banker who had solicited and obtained his business from a competing bank, the manager of a rubber company which sold him $250,000 worth of rubber per year and others who had a business relationship with him. This does not reflect on them, but in measuring the weight of testimony the courts always take such facts into consideration.
No one in so far as we are able to glean from the record has reflected upon the integrity of Mr. Gordy. He was a successful businessman. As indicated in the majority opinion, his business had grown from practically nothing in 1932 to an accumulation of some $400,000. But this is the story of thousands of men and concerns who started near the end of the greatest depression in our history and built their organizations into successful concerns, some of them much more rapidly and extensively than the Gordy Tire Company.
There is no blame whatever attached to any income taxpayer who reduces his taxes in every practical way, but the deductions should bear some relationship to salaries in similar lines of activity and should bear some relation to the earnings of the company during the period involved. In 1954 the plaintiff company had a net profit of only 0.8 percent and in 1955 a net profit of only 1 percent. This is below the national average of people-engaged in the tire business during' those 2 years.
Then, too, a decision of this kind adds materially to the problems of those enforcement officers who are clothed with responsibility of setting a pattern. These problems are already difficult. For us as a court sitting in chambers to raise the finding of an experienced trial commissioner 50 percent and to almost triple the finding of the Commissioner of Internal Revenue as to what is reasonable compensation, in the words of the operator of the old-time traction engine, is to apply enough steam pressure to “bulge the crown sheet.”
Conceding that the Commissioner of Internal Revenue may have used too much of a general pattern; that he may not have made sufficient allowance for the unusual accomplishments of the plaintiff’s president and thus to some degree may have in a legal sense abused his discretion, we should be careful not to abuse it at the other extreme. If we are to allow $50,000 as a deduction for one officer who was head of a concern which occupies one field of commercial activity in a single city, what should be allowed as deduction for a salary to an official of business concerns that operate on a nationwide scale and especially when they cover multiple fields?
The trial commissioner has nearly doubled the salary allowance made by the Commissioner by raising it to $35,000 per year. In the light of this record that seems adequate — even generous. But in deference to the judgment of the trial officer, who perhaps more than anyone else has studied the background of this case, I would approve his finding. But to raise that another 50 percent is, it seems to me, indefensible. The record is silent as to whether any other businessman in Atlanta received a salary of $50,000 per annum.
I would adopt the trial commissioner’s findings of fact and opinion.