Opinion
Burr Tracy Ansell, Washington, D. C., George H. Klein, Ethan C. Prewitt, and Clark, Klein, Brucker & Waples, Detroit, Mich., were on the brief, for plaintiff.
Joseph H. Sheppard, Washington, D. C., with whom was Theron Lamar Caudle, Asst. Atty. Gen., Andrew D. Sharpe, Washington, D. C., was on the brief, for defendant.
This case having been heard by the Court of Claims, the court upon the evidence and the agreed statement of facts, makes the following special findings of fact:
1. The plaintiff is, and at all times material hereto has been, president, general manager and a director of Gargaro Company, Inc., a corporation organized, existing and doing business under and by virtue of the laws of the State of Michigan.
2. The stock of the Gargaro Company, Inc., is owned by the Gargaro family as follows:
Olive Gargaro-Mother........
797
shares
49.2%
Don Gargaro-Father..........
46
"
2.8%
Robert Gargaro-Minor son....
125
"
7.6%
Etor D. Gargaro-Son.........
163
"
10.0%
Eugene A. Gargaro-Son.......
125
"
7.6%
Attly J. Gargaro-Son........
125
"
7.6%
Ernest J. Gargaro-Son.......
125
"
7.6%
William J. Gargaro-Son......
125
"
7.6%
----
------
1631
100.0%
3. Plaintiff duly filed his individual in-come-tax return for the calendar year 1942 on March 15, 1943, and an amended return for that year on June 15, 1943, which showed a net income in the amount of $95,462.47 and a tax due thereon the the amount of $60,293.85. He duly filed his individual income and victory tax return for the calendar year 1943 on March 15, 1944, showing income tax net income of $67,979.54 and victory tax net income of $69,634.72-a total income and victory tax, computed under the Current Tax Payment Act of 1943, 26 U.S.C.A.Int.Rev.Acts, page 385 et seq., due thereon in the amount of $70,641.65. Each of these returns was filed with the Collector of Internal Revenue for the District of Michigan.
The income and victory tax for the calendar year 1943 was assessed and paid to the Collector of Internal Revenue in installments and by withholding as follows:
Date
Amount
April 1, 1943..............
$15,122.69
August 14, 1943............
15,024.24
October 1, 1943............
12,001.26
December 23, 1943..........
12,001.26
April 4, 1944..............
3,133.90
April 12, 1945.............
5,173.90
Year 1944 (withholding)....
8,184.40
----------
Total payments.........
$70,641.65
4. Plaintiff reported in both his original and amended income-tax returns for the calendar year 1942 the amount of $92,698.84 as income derived from salaries and other compensation for personal services. He included in that amount as compensation for services rendered as president and general manager of Gargaro Company, Inc., the sum of $65,074.80 representing a bonus paid to him by that company pursuant to a contract of employment which provided for a stipulated salary and, in addition, a bonus representing a percentage of net profits of the company for the calendar year. In the year 1942 the directors of the company fixed plaintiff's bonus for that year at 10 per cent of the net profits of the company. This action was taken by resolution of the directors of the company adopted on January 20, 1942, as disclosed by the following excerpt of the minutes of a meeting held on that date:
Upon motion duly made and seconded, it was unanimously resolved that Mr. Don Gargaro be appointed General Manager of the Company for the ensuing year, and that his salary be and is hereby affixed at $20,000.00 per annum, payable monthly, and that in addition thereto he shall receive and be paid 10% of the net profits of the Company for the year 1942.
Upon motion duly made and seconded, it was unanimously resolved that Mr. E. D. Gargaro, Eugene A. Gargaro, Ernest J. Gargaro, Attly J. Gargaro, and Wm. J. Gargaro, each shall receive and be paid by this Company in addition to their weekly salaries a bonus of 10% of the net profits of the Company, and at the discretion of Mr. Don Gargaro, General Manager. The net profits of the Company shall be determined by reference to the regular accounting methods engaged by the Company, and as determined by the Board of Directors.
5. As the amount of the bonus to the officers for the year 1942 could not be accurately ascertained until an audit after the close of that year, it was agreed between the officers on December 24, 1942, that each should receive the sum of $75,000 subject to adjustment after the audit. The subsequent audit disclosed a net income for the year 1942 in the amount of $650,748 and on the basis thereof each of the above-named officers was entitled to receive and did receive as a bonus for the year 1942 the sum of $65,074.80, as more fully detailed hereinafter.
At the time the determination of net profits in the amount of $650,748 was made and the bonus of $65,074.80 was paid to the plaintiff, both the company and the plaintiff believed such determination and payment reflected actual net profits of the company for the year 1942 and that the bonus was correctly computed in accordance therewith.
6. The transactions between the Gargaro Company and the officers with respect to the payment of the bonus for the year 1942 were as follows:
On December 24, 1942, the company issued its check to Don Gargaro (plaintiff herein) for $75,000, which check was deposited to his personal account on the date of issuance, and was paid by the bank on that day. On December 26, 1942, Don Gargaro issued his personal check in the amount of $65,000 to the company as a loan.
On December 24, 1942, the company issued its check in the amount of $75,000 to Ernest J. Gargaro who deposited it to his personal account on the same day. The check was paid by the bank on December 26, 1942, and on that day he issued his personal check to the company in the amount of $65,000 as a loan.
On December 26, 1942, the company issued its check in the amount of $75,000 to E. D. Gargaro who deposited it to his personal account on December 29, 1942. The check was paid by the bank on December 30, 1942, and on that day he issued his personal check to the company in the amount of $65,000 as a loan.
On December 28, 1942, the company issued its check in the amount of $75,000 to E. A. Gargaro who deposited it to his personal account on the same day. The check was paid by the bank on December 29, 1942, and on that day he issued his personal check to the company in the amount of $65,000 as a loan.
On December 28, 1942, the company issued its check in the amount of $75,000 to A. J. Gargaro who deposited it to his personal account on December 30, 1942. The check was paid by the bank on December 31, 1942. On December 30, 1942, he issued his personal check to the company in the amount of $65,000 as a loan.
On December 28, 1942, the company issued its check in the amount of $75,000 to William J. Gargaro who deposited it to his personal account on the same day. The check was paid by the bank on December 29, 1942, and on the same day he issued his personal check to the company in the amount of $65,000 as a loan.
On December 31, 1942, the company repaid to each of the officers who had made the above loans the sum of $20,000.
After the completion of the audit the bonuses were adjusted to accord with the net profits of the company for the year 1942 as determined by the audit and non-interest-bearing, demand notes dated December 31, 1942, were issued by the company to each of the officers covering the balance of the loans. The following discloses the accounting entries covering the above transactions with respect to each officer:
Original bonus check......................
$75,000.00
Less adjustment to reduce bonus to properamount.............
$9,732.20
Adjustment for error incomputation..................
193.00
9,925.20
---------
----------
Corrected bonus for 1942..................
$65,074.80
Amount retained by each officer...........
30,000.00
----------
Note issued to each officer...............
$35,074.80
At the time of the foregoing adjustments the company held a note of Don Gargaro in the amount of $10,000 which was applied in partial payment of the company's note to him which reduced the note to the amount of $25,074.80.
7. On December 3, 1943, the Reconstruction Finance Corporation Price Adjustment Board initiated renegotiation proceedings against the Gargaro Company, Inc., and on March 3, 1945, the Board issued its determination, as expressed in an agreement between the Board and the company of that date. A copy of that agreement is attached to the agreed statement of facts as Exhibit A and is by reference made a part hereof.
8. In the renegotiation proceedings and as a result of the determination of the Price Adjustment Board the Gargaro Company was allowed an income tax credit of $227,526.03. This credit resulted in a net amount due the Price Adjustment Board of $12,473.97 which amount was paid to the Board on March 19, 1945, and also resulted in a reduction of the excess profits tax postwar credit of the company in the amount of $20,718.53. A letter from the Gargaro Company to the Price Adjustment Board with respect to the amount of excessive profits of the company for the year 1942, the tax credit allowed with respect to this determination, and the net amount to be remitted is attached to the agreed statement of facts as Exhibit B and by reference made a part hereof.
9. On June 28, 1945, the Board of Directors of Gargaro Company, Inc., held a meeting and adopted a resolution with respect to the bonuses paid to the company's officers for the year 1942. The proceedings at that meeting as disclosed by the minutes were as follows:
'The president stated that at a meeting of the Board of Directors, held on the 20th day of January 1942, a resolution was adopted fixing the compensation of various officers and employees of the company, together with bonuses to be paid to them from the net profits of the Company for the year 1942. He stated that the resolution with respect to the General Manager provided for the payment of a salary of $20,000.00 per annum, together with 10% of the net profits of the Company and that as to the other officers and employees it was provided in a separate resolution that E. D. Gargaro, Ernest J. Gargaro, Eugene A. Gargaro, Attly J. Gargaro, and Wm. J. Gargaro, should each receive in addition to their weekly salaries a bonus of 10% of the net profits of the Company, the net profits to be determined by reference to the regular accounting methods engaged by the Company and as determined by the Board of Directors.'
He stated that on the 28th of December 1942, $75,000.00 was paid to each of the aforenamed officers and employees pursuant to the resolution of January 20, 1942, based on estimated net profits for the year, which bonuses were reduced to $65,074.80 to each, after the close of the year 1942 when the books had been audited by Peat, Marwick, Mitchell and Company and a statement of net profits of the company exhibited to the Board of Directors.
He further stated that subsequently as a result of renegotiation the company had been compelled to reduce the price on the contracts completed in 1942 in the amount of $240,000.00 and to refund to the government the net amount resulting from such adjustment of its 1942 income. He stated that he had conferred with Peat, Marwick, Mitchell and Company, the company's auditors, and with the Company's counsel, who advised him that this renegotiation had the effect of reducing the billings to the government and therefore affected the net profits of the company for the year 1942, on which the bonuses of the officers had been computed. That, accordingly, each of the officers had been overpaid to the extent of 10% of such amount, or $24,000.00 each, and that counsel had advised him that such officers and employees were liable to refund such overpayments to the company. The matter was then thoroughly discussed and it was the consensus of all present that they should recognize their liability to refund the amounts so mistakenly paid them. Thereupon the following resolution was presented and its adoption moved:
'Resolved: That upon repayment by each of the officers and employees of the Company who received bonuses for the year 1942, of the aggregate amount of $24,000.00 each, the Company give to each such officer and employee a release and acquittance covering amounts heretofore paid to them as bonuses on the erroneous computation of profits. Be It Further Resolved, That in the case of those officers and employees holding notes of the Company, such notes be accepted for surrender and cancellation at face value in pro tanto discharge of such obligation, and in the event of any notes held for an amount in excess of $24,000.00 that a new note or notes be given for the difference between the amount of the note and the sum of $24,000.00.'
This resolution was seconded and upon a vote being taken was carried unanimously.
10. On April 21, 1943, Gargaro Company, Inc., issued its checks in payment of certain United States bond purchases by its officers as follows:
Don Gargaro...........
--
Etor D. Gargaro.......
$750.00
Eugene A. Gargaro.....
750.00
Ernest J. Gargaro.....
--
Attly J. Gargaro......
750.00
William J. Gargaro....
750.00
On June 11, 1943, the company issued checks to its officers in payment or partial payment of the notes referred to in paragraph VI as shown below:
Don Gargaro...........
$25,074.80
Etor D. Gargaro.......
12,000.00
Eugene A. Gargaro.....
12,000.00
Ernest J. Gargaro.....
--
Attly J. Gargaro......
12,000.00
William J. Gargaro....
12,000.00
After the above transactions the balances due the officers on the notes of the company were as follows:
Don Gargaro...........
--
Etor D. Gargaro.......
$22,324.80
Eugene A. Gargaro.....
22,324.80
Ernest J. Gargaro.....
35,074.80
Attly J. Gargaro......
22,324.80
William J. Gargaro....
22,324.80
11. After the adoption on June 28, 1945, of the resolution referred to in paragraph IX, the company cancelled the notes of Etor D. Gargaro, Eugene A. Gargaro, Attly J. gargaro, and William J. Gargaro on each of which notes a balance in the amount of $22,324.80 was due and each of those officers issued his personal check to the company on or about June 28, 1945, in the amount of $1,675.20. The note of Ernest J. Gargaro in the amount of $35,074.80 was cancelled and a new note of the company was issued to him on June 28, 1945, in the amount of $11,074.80. On June 29, 1945, Don Gargaro issued his personal check to the company in the amount of $24,000. On June 20, 1946, the company paid to Ernest J. Gargaro the sum of $5,000, and on August 19, 1946, it paid the sum of $6,074.80 which payments aggregated the amount of the note issued to that officer on June 28, 1945.
12. On or about August 22, 1945, the plaintiff filed with the Collector of Internal Revenue for the District of Michigan a claim for refund on Treasury Department Form 843 in the amount of $18,985.28, asserting as ground therefor that his net income for the year 1942 had been overstated by the amount of $24,000 with the result that his income and victory tax for the year 1943 had been overpaid. At or about the same time the plaintiff filed his second amended income tax return for the calendar year 1942 with the Collector of Internal Revenue for the District of Michigan, showing thereon net income in the amount of $71,462.47.
The plaintiff's claim for refund was rejected on April 28, 1947, by the Commissioner of Internal Revenue and due notice of the rejection was given the plaintiff on that date.
13. If the $24,000 representing that part of the plaintiff's bonus for the year 1942 which was refunded to the Gargaro Company in the year 1945 was not income for the year 1942, the plaintiff overpaid his taxes in the amount of $19,187.79.
Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.
MADDEN, Judge.
This case was before us on the Government's demurrer to the plaintiff's petition. We overruled the demurrer, deciding that the petition stated facts which, assuming them to be true, entitled the plaintiff to recover. Gargaro v. United States, 73 F.Supp. 973, 109 C. Cl. 528, 529. The parties thereupon agreed upon a statement of facts, which we have adopted as our findings. These facts are the same, in all essential respects except one, which will be discussed herein, as those recited in the plaintiff's petition, hence the principal legal problem before us now is the same as the one which the Government's demurrer presented. The Government has urged us to reconsider the position which we took in that decision, and we have done so, but we have again come to the same conclusion.
See comments in 61 Harvard Law Review 710; 96 University of Pennsylvania Law Review 574; 27 Nebraska Law Review 598; 17 Cincinnati Law Review 313; 13 Missouri Law Review 334.
The Government raises one question which was not dealt with in our former decision. It appears from our finding 8 that, in the renegotiation which reduced the profits of the plaintiff's employer by $240,000, the employer's income taxes were, pursuant to Section 3806 of the Internal Revenue Code, 26 U.S.C.A. § 3806, reduced by $227,526.03, so that, in fact, the employer refunded to the Government only $12,473.97. The Government says that the plaintiff's repayment to his employer should have been only 10% of that amount, or $1,247.39, and his refund of income tax paid should be computed on the basis of an overstatement of income of only $1,247.39 instead of $24,000.
The agreed statement of facts, upon which our findings are based show that in fact the plaintiff refunded $24,000 to his employer. That, of course, is the strongest possible evidence that the agreement of the parties as to the 10% bonus was unrelated to the question of the amount of the employer's taxes. Since there is no evidence to the contrary, we conclude that the conduct of the parties was in accordance with their legal obligations.
The plaintiff is entitled to a judgment for $19,187.79, with interest as provided by law.
It is ordered.
JONES, Chief Judge, and HOWELL and LITTLETON, Judges, concur.
WHITAKER, Judge.
I dissent for the reasons stated when the case was before us on demurrer (73 F.Supp. 973, 109 C. Cl. 528, 533).