Opinion
Docket Nos. 21778 26761.
1954-09-23
SMOKY MOUNTAINS BEVERAGE COMPANY, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.
Geo. E. H. Goodner, Esq. , and Dewey R. Roark, Jr., Esq. , for the petitioner. Homer F. Benson, Esq. , for the respondent.
1. Held, salaries and bonuses which petitioner paid to two of its officers in the taxable years involved represented reasonable compensation for services actually rendered.
2. Petitioner reimbursed its president for expenses incurred in traveling to Nashville and Chicago to attend meetings of State and national beer association in connection with a bill before the Tennessee Legislature to increase the tax on beer, which bill the Department of Finance and Taxation of Tennessee had requested the association to check for inequalities. The association did not propose or oppose the legislation. Held, the expenses were ordinary and necessary, and no part of the expenses was incurred for the purpose of lobbying, the promotion or defeat of legislation, or the exploitation of propaganda. Geo. E. H. Goodner, Esq., and Dewey R. Roark, Jr., Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.
Respondent determined deficiencies in petitioner's income and excess profits tax as follows:
+------------------------------------------+ ¦ ¦Year ended¦Income ¦Excess ¦ +----------+----------+--------+-----------¦ ¦Docket No.¦October 31¦tax ¦profits tax¦ +----------+----------+--------+-----------¦ ¦21778 ¦1945 ¦ ¦$2,931.18 ¦ +----------+----------+--------+-----------¦ ¦26761 ¦1946 ¦$786.18 ¦612.59 ¦ +----------+----------+--------+-----------¦ ¦26761 ¦1947 ¦2,583.33¦ ¦ +------------------------------------------+
The proceedings were consolidated for hearing. Petitioner waived several of its allegations of error, and respondent concedes that he erred in disallowing the deduction of compensation paid to one of petitioner's officers, R. H. Simmonds. The issues for decision are whether salaries and bonuses paid to two of petitioner's officers represented reasonable compensation for personal services actually rendered, and whether petitioner incurred certain expenses for the purpose of lobbying, the promotion or defeat of legislation, or the exploitation of propaganda.
FINDINGS OF FACT.
The petitioner is a Tennessee corporation organized on September 7, 1944, with its principal office in Knoxville, Tennessee. It filed its income and excess profits tax returns for the years involved with the collector of internal revenue for the district of Tennessee.
The business of petitioner is the distribution of beer at wholesale in Knoxville, Tennessee, and 16 surrounding counties. During the years here involved petitioner was the distributor of Budweiser and Falls City beer for Anheuser-Busch, Inc., St. Louis, Missouri, and Falls City Brewing Company, Louisville, Kentucky, respectively. Beginning in the fiscal year ended on October 31, 1946, petitioner was distributor for Anheuser-Busch frozen food cabinets (home deep freezers) in east Tennessee and southwestern Virginia.
Petitioner was organized to take over the wholesale distribution of beer from the Royal Crown Bottling Company, which had been required to disassociate itself from the beer business. It began business on November 1, 1944, with a paid-in capital of $17,000 representing 170 shares of stock which were held as follows:
+-----------------------------+ ¦ ¦Number of ¦ +-----------------+-----------¦ ¦Stockholders ¦shares ¦ +-----------------+-----------¦ ¦Charles M. Brown ¦40 ¦ +-----------------+-----------¦ ¦Clyde B. Austin ¦40 ¦ +-----------------+-----------¦ ¦R. H. Simmonds ¦40 ¦ +-----------------+-----------¦ ¦Calvin Holmes ¦40 ¦ +-----------------+-----------¦ ¦J. M. Walker ¦10 ¦ +-----------------------------+
The above stockholders comprised petitioner's board of directors during the years involved. On December 30, 1944, Holmes transferred 10 shares to his wife and 20 shares to his daughter. In March 1945 petitioner issued 5 shares of stock at par to H. D. Paine and 5 shares to J. M. Walker. Petitioner purchased and canceled Simmonds' 40 shares on June 9, 1947.
Petitioner's board of directors resolved on October 2, 1944, to pay to its president, Brown, 5 cents for each case of malt beverage handled, and to pay to each of its other officers, Holmes, vice president, Simmonds, treasurer, Walker, secretary, and Austin, assistant treasurer, $600 per annum. It also resolved to pay a bonus to every employee of the company at the end of the fiscal year in addition to his or her regular salary, and to pay to each director $25 for each directors' meeting attended. In the fiscal years ended on October 31, 1945 and 1946, each of the officers received the salary or other compensation specified in the above resolution, an annual bonus of $600, and directors' fees in the amount of $150 in the fiscal year ended in 1945, and $75 in the fiscal year ended in 1946.
The resolution of October 2, 1944, was modified at a meeting of the board of directors held on November 11, 1946, to provide that the officers of the company would receive the following salaries:
+-------------------------------------------------+ ¦ ¦Salary per ¦ +------------------------------------+------------¦ ¦Officer ¦annum ¦ +------------------------------------+------------¦ ¦Charles M. Brown, president ¦$1,200 ¦ +------------------------------------+------------¦ ¦Calvin Holmes, vice president ¦1,800 ¦ +------------------------------------+------------¦ ¦R. H. Simmonds, treasurer ¦1,800 ¦ +------------------------------------+------------¦ ¦Clyde B. Austin, assistant treasurer¦1,800 ¦ +------------------------------------+------------¦ ¦J. M. Walker, secretary ¦2,400 ¦ +------------------------------------+------------¦ ¦Mae Mashburn, assistant secretary ¦1,600 ¦ +-------------------------------------------------+ Brown was also to receive 5 cents per case as before, in addition to his salary.
On January 28, 1947, the board of directors added Lee D. Brown as assistant manager at a salary of $1,800 per year. Austin was elected vice president, Holmes, treasurer, and Simmonds, assistant treasurer. Simmonds' salary was reduced to $1,200 per year and all other salaries remained the same. In the year ended October 31, 1947, the officers received the above salaries, but no bonuses. Directors' fees paid to Holmes and Austin amounted to $150 and $100, respectively, in that year.
Respondent determined that the full amount of the salaries and bonuses received by Holmes and Austin in the years involved were excessive and disallowed their deduction on the ground they did not represent reasonable compensation for services rendered. He allowed the deduction of the fees received for attending directors' meetings.
Austin and Holmes were men of substantial financial means and considerable business experience. Austin is president of the Austin Company, Greeneville, Tennessee, the largest exporter of leaf tobacco in the United States with 17 tobacco plants in the South. He is also a trustee of the University of Tennessee and chairman of its finance committee; a member of the Federal Reserve bank, Nashville, Tennessee, district; and a director of a bank in Greeneville, Tennessee. Holmes was president of Holmes-Darst Coal Corporation for 20 to 30 years. He was also president of Harvey Coal Corporation, and was connected with the Benedict Coal Company and the Appalachian Coal Company. These companies had a number of branches throughout the South and Middle West. Holmes and Austin had had experience in the wholesale distribution of beer with the Royal Crown Bottling Company since 1933 and 1938, respectively.
Neither Austin nor Holmes maintained an office at petitioner's place of business, and neither aided in the routine operation of the business. Both acted primarily as advisors to Brown, petitioner's president and manager. Holmes' office was in Knoxville and Austin maintained his office in Greeneville, Tennessee. Brown discussed petitioner's business with Holmes, usually in the latter's office, approximately twice a week. Austin was in Knoxville and visited petitioner's offices nearly every week. He also had frequent telephone conversations with Brown and on occasion Brown would see him in Greeneville concerning petitioner's business. At times it was necessary for petitioner to borrow from the bank to pay for carloads of beer, and on such occasions Holmes and Austin would personally endorse petitioner's notes.
In addition to advising petitioner's president and endorsing petitioner's notes, both Holmes and Austin undertook a number of special assignments on petitioner's behalf. During the years involved there was a shortage of beer, and breweries placed their distributors on an allotment basis. Holmes increased petitioner's beer allotment by securing orders for, and by implementing the sale of, so-called ‘Army’ beer to Clinton Engineer Works. He also secured additional beer for petitioner by obtaining large quantities of No. 10 tin cans and shipping them to the breweries. The breweries used the cans to procure more bottle caps and were thereby able to bottle more beer. They shipped the additional beer to petitioner. Also, Holmes' business contacts furnished ‘leads' to petitioner's salesmen which resulted in the sale of frozen food lockers to concerns such as Southern Dairies Ice Cream Company and High's Ice Cream Company.
Austin traveled in a number of States surrounding petitioner's territory and informed petitioner of the activities of other beer distributors handling petitioner's brands. He discovered that these distributors were getting large quantities of beer. When the breweries were informed of this fact, petitioner was able to obtain larger allotments. Austin made frequent trips to Washington in connection with his other business interests, and while there conferred with O.P.A. officials and others on matters pertaining to petitioner's business. He also conferred with officials of the State of Tennessee in Nashville relative to ending the black market in beer harmful to petitioner's business. One of petitioner's obligations under its distributorship contract for Anheuser-Busch frozen food cabinets was to establish dealers in smaller towns in its territory. Through his knowledge of the people in the area, Austin secured reliable dealers for petitioner in several of these towns.
Petitioner's sales and net profits, after salaries, during the years involved, were as follows:
+---------------------------------------+ ¦Fiscal year ¦Sales ¦Net profits ¦ +-------------+-----------+-------------¦ ¦1945 ¦$580,007.75¦$14,827.60 ¦ +-------------+-----------+-------------¦ ¦1946 ¦535,923.35 ¦17,643.49 ¦ +-------------+-----------+-------------¦ ¦1947 ¦670,999.46 ¦25,512.29 ¦ +---------------------------------------+
Petitioner's net worth and the book value of its stock on October 31, 1945, 1946, and 1947, were as follows:
+-----------------------------------------------------+ ¦ ¦1945 ¦1946 ¦1947 ¦ +--------------------+----------+----------+----------¦ ¦Common stock ¦$18,000.00¦$18,000.00¦$14,000.00¦ +--------------------+----------+----------+----------¦ ¦Surplus—Earned ¦8,612.90 ¦20,154.09 ¦35,810.89 ¦ +--------------------+----------+----------+----------¦ ¦Net worth ¦$26,612.90¦$38,154.09¦$49,810.89¦ +--------------------+----------+----------+----------¦ ¦Book value per share¦$147.85 ¦$211.97 ¦$355.79 ¦ +-----------------------------------------------------+
During the years involved petitioner paid semiannual dividends of $3 per share, or dividends of 6 per cent per annum.
The full amount of the salaries and bonuses received by Holmes and Austin in the years here involved represented reasonable compensation for personal services actually rendered.
In February 1947 Brown, petitioner's president, made two trips to Nashville, Tennessee, to attend meetings of the Tennessee Beer Distributor's Association. The purpose of the meetings was to check a bill before the Tennessee Legislature to increase the State tax on beer. The Department of Finance and Taxation of Tennessee had requested the association to check the bill to make sure that the tax would fall equally on all beer distributors in accordance with the various sizes of the different beer containers. The association did not appear before the legislature and was not fighting the bill. Brown also made a trip to Chicago and conferred with officers of the National Beer Wholesalers' Association for the purpose of comparing the bill with those of other States. Brown incurred expenses of approximately $356.97 on these trips to Nashville and Chicago. Brown also incurred expenses of approximately $90.30 in February 1947 traveling throughout petitioner's territory checking on advertising, securing new advertising sign locations, and calling on customers. Petitioner paid Brown $447.27 to reimburse him for the above expenditures and deducted that amount as a business expense for the fiscal year ended in 1947. Respondent disallowed the deduction to the extent of $447.26.
The full amount of the above travel expenses represented ordinary and necessary business expenses paid or incurred by petitioner during the taxable year ended in 1947. No part of these expenses was incurred for the purpose of lobbying, the promotion or defeat of legislation, or the exploitation of propaganda.
OPINION.
BRUCE, Judge:
Petitioner contests respondent's determination disallowing the deduction of salaries and bonuses paid to two of petitioner's officers, Holmes and Austin. It contends, and respondent denies, that the deductions represented ‘a reasonable allowance for salaries or other compensation for personal services actually rendered’ within the purview of section 23(a)(1)(A)
of the Internal Revenue Code of 1939. The question is one of fact ( Miller Mfg. Co. v. Commissioner, (C. A. 4) 149 F. 2d 421) and our finding sustaining petitioner's contention is dispositive of the matter.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) EXPENSES.—(1) TRADE OR BUSINESS EXPENSES.—(A) In General.—All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *
It is a courageous and extremely difficult task to place a price tag on business advice and guidance. But as the primary service rendered by Holmes and Austin falls within this category, we are called upon to make just such a decision. Considering the business experience and proven ability of the officers involved, the need for sound business and financial advice of a new and rapidly expanding corporation operating at the end of a war period at a time when there was a shortage of its product, the frequency with which these officers conferred with petitioner's president and manager, and the success of the business under their guidance, we think there is no doubt that their advice was of considerable value. In addition to rendering advice, these officers performed a number of other important services for petitioner. We think their advice and services were well worth the modest compensation received. Neither Holmes nor Austin, it is true, devoted a great amount of time to the business. But a part-time officer, having exceptional ability, wide contacts, and a reputation for financial responsibility, might well be worth more to a corporation than a full-time officer lacking these desired qualities. Cf. Miller Mfg. Co. v. Commissioner, supra.
Respondent contends that the services performed by Holmes and Austin were either in connection with their duties as directors, for which fees were allowed, or were rendered gratuitously for the benefit of Brown. Respondent bases his contention upon the fact that the services performed by these two men were not necessarily a part of the duties of the offices whose titles they bore. But section 23(a)(1)(A) provides for the deduction of compensation paid for personal services actually rendered. It contains no requirement that the services performed coincide with the general understanding of the duties of the office held. Nor does it require that the officer compensated must have specified duties or perform some routine chore. Holmes and Austin rendered certain services and were paid certain compensation. We think it fair to assume that the compensation was paid for the services rendered, and we find no merit in respondent's contention that petitioner distributed earnings in the guise of compensation to officers who performed their services gratuitously. The compensation paid bore no relationship to stockholdings. Cf. Roth Office Equipment Co. v. Gallager, (C. A. 6) 172 F. 2d 452. And an annual dividend of 6 per cent was paid although the corporation was new and in the process of expansion. Cf. Marble & Shattuck Chair Co. v. Commissioner, (C. A. 6) 39 F. 2d 393.
Respondent argues that petitioner offered no evidence as to the compensation paid by similar businesses for like services. While such evidence may be indicative of the reasonableness of the compensation paid, no inferences can be drawn from the absence of such evidence where, as here, the services performed and the relationship between the corporation and the officers involved are somewhat unique. Miller Mfg. Co. v. Commissioner, supra.
The next issue for decision involves the deductibility under section 23(a)(1)(A) of certain travel expenses in the amount of $447.26 incurred by petitioner's president. Part of the expenses were incurred traveling throughout petitioner's territory checking advertising, securing new advertising sign locations, and visiting customers. These expenditures seem clearly deductible as an ordinary and necessary business expense, and respondent has made no argument to the contrary.
Petitioner's president expended $356.97 on two trips to Nashville and one trip to Chicago in connection with a bill in the Tennessee Legislature raising the tax on beer. Respondent disallowed the deduction of these expenses on the ground that they were incurred for the primary purpose of influencing legislation. Respondent's Regulations 111, section 29.23(q)–1, provide:
Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses are not deductible from gross income.
The validity of the above provision, the language of which is identical with that of article 262 of Regulations 74, was upheld in Textile Mills Securities Corporation v. Commissioner, 314 U. S. 326, and it has been held that no expenditure coming within its terms may be permitted as a deduction even under section 23(a). McClintock-Trunkey Co., 19 T. C. 297, 304 (appeal pending, C. A. 9); Mary E. Bellingrath, 46 B. T. A. 89; American Hardware & Equipment Co. v. Commissioner, 202 F. 2d 126, certiorari denied 346 U. S. 814. The sole question presented, therefore, is whether or not the expenditures involved in the instant case come within the ambit of the above regulations. We think they do not. The undisputed testimony of Brown refutes respondent's contention that the expenses were incurred in opposing a proposed increase in the tax on beer. The meetings attended in Nashville were held for the purpose of checking the bill at the request of the Department of Finance and Taxation of Tennessee to see that the tax fell ratably on all distributors of beer regardless of the size of the containers used. The Chicago trip was made to compare the bill with similar bills in other States. These activities do not constitute lobbying and, unlike those in Mary E. Bellingrath, supra; McClintock-Trunkey Co., supra; and American Hardware & Equipment Co. v. Commissioner, supra, did not have for their purpose either the promotion or defeat of legislation. They come within neither the letter nor the spirit of the above provision, and accordingly are not to be denied the benefit of section 23(a)(1)(A).
Decisions will be entered under Rule 50.