Court Opinion

ID: 9461055
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:04:50.12405+00
Date Added: 2024-06-11T17:36:52.335632
License: Public Domain

TRASK, Circuit Judge
(dissenting):
As the majority correctly points out Internal Revenue Code of 1954, section 162(a) (l)1 requires that for compensation paid by a corporation to its officers to be deductible as expenses, the compensation must (1) be reasonable in amount and, (2) must be for personal services actually rendered.
Here the notice of deficiency told the taxpayer that:
“ . . . compensation paid your officers during the taxable year 1967 is excessive in the amount of $13,000.00. Such amount exceeds a reasonable allowance for salaries or other compensation for personal services actually rendered . . . .” (C.T. at 7.)
Reading that notice, the thrust of the charge of deficiency is clearly based upon the theory of excessiveness of sums paid. There is no suggestion that would notify a reasonable person that the real ground of the Commissioner’s attack would be based upon a theory that the monies paid constituted a distribution of dividends and not an excessive amount paid for services rendered.
The Commissioner could have relied upon a quantitative impropriety, i. e., that the amounts paid for the services rendered were excessive. He could alternatively have relied upon a qualitative impropriety, i. e., that the amounts paid were not for services rendered at all but were in the nature of a distribution of earnings and profits. When the notice of deficiency to the taxpayer was in terms of excessiveness and the decision was predicated upon distribution of dividends, the taxpayer did not simply receive inadequate notice. He has actually been deceived. Baird v. Commissioner, 438 F.2d 490, 493 (3d Cir. 1971). The Government points out that its counsel at the outset of the hearing announced that “ . . . the government’s position is based mainly on the fact that we will contend these distributions were, in effect, a distribution of earnings and profits.” (C.T. at 7) (Emphasis supplied). In view of the language of the deficiency notice this introduced an element of gamey uncertainty into the Government’s theory but still did not disavow or alter the formal issue tendered.2
I would require the Commissioner to adhere to the grounds announced to the *364taxpayer in its deficiency notice. To compound the problem, the Tax Court declined to permit the taxpayer an opportunity to reopen and submit relevant evidence to rebut the untendered issue upon which the Government tried its case. I would reverse and remand.

. “162. Trade or business expenses
“(a) . . . There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
“(1) a reasonable allowance for salaries or other compensation for personal services actually rendered; . . . ”

. On this issue the court stated :
“Petitioner has introduced persuasive evidence that the total compensation paid to its officers was reasonable in amount. Even the internal revenue agent who audited petitioner’s income tax returns evinced his belief that the total amounts were not unreasonable.” (C.T. at 31.)