338 F2d 956 Savko Brothers Company v. Commissioner of Internal Revenue

338 F.2d 956

64-2 USTC P 9851

SAVKO BROTHERS COMPANY, an Ohio Corporation, Petitioner,

No. 15742.

United States Court of Appeals Sixth Circuit.

Nov. 17, 1964.

Argued by C. Stanley Taylor, Columbus, Ohio, Schwenker, Teaford, Brothers & Bernard, Columbus, Ohio, on the brief, Robert E. Teaford, Columbus, Ohio, of counsel, for petitioner.

Argued by Carolyn R. Just, Dept. of Justice, Washington, D.C., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz and Carolyn R. Just, Attys., Dept. of Justice, Washington, D.C., on the brief, for respondent.

Before EDWARDS, Circuit Judge, BOYD, District Judge, and PRETTYMAN, Senior Circuit Judge.1


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In this appeal the taxpayer (Savko Brothers Company) seeks to reverse a tax deficiency judgment of $4,096.79. The Commissioner had previously found (and had contended before the Tax Court for) a deficiency of $36,496.51. The dispute turns upon whether or not salaries and bonuses paid to the corporation's two principal officers and stockholders were or were not 'reasonable' within the meaning of Internal Revenue Code of 1954, 162(a)(1).2


Two brothers, Nick and Charley Savko, were recipients of the salaries and bonuses and paid personal income taxes thereon. They had organized the corporation late in 1955 to engage in the building, construction and excavating business in which both had considerable prior experience. It is undisputed that through their joint efforts in estimating jobs, in getting business, in laying out work and supervising it, they were personally responsible for the considerable success of the company.


The financial picture of the taxpayer company is shown in these figures:


 Year                                     Total
Ending                    Net Income   Compensation
June 30  Gross Receipts     (Loss)      to Savkos
-------  --------------  ------------  ------------
 1957       $461,666.10  $(11,273.85)       $62,500
 1958        555,672.88    26,205.24         49,000
 1959        775,916.01    38,683.27         52,000

The Commissioner's and the Tax Court's treatment of the Savkos' total compensation was as follows:


 		Commissioner               Tax Court
               ------------               ---------
 Ended   Compensation     Tax      Compensation     Tax
June 30    Allowed     Deficiency    Allowed     Deficiency
-------  ------------  ----------  ------------  ----------
 1957      $26,000.00  $ 6,873.11    $49,000.00  $ -0-
 1958       26,000.00   16,103.40     49,000.00   4,096.79
 1959       26,000.00   13,520.00     52,000.00    -0-

The Tax Court on this record held amounts paid each of the Savko brothers in 1957 'was unreasonable as compensation for services actually rendered * * * to the extent of $6,750 each.' It thus appears that the Tax Court allowed $24,500 as 'reasonable' compensation to each officer for the first year of operation of the company at a time when the company showed a loss. This was the same compensation which the company paid to each brother in the following year-- the first year when the company showed a profit.

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Under this record we cannot say that the Tax Court's determination was 'clearly erroneous.' Rule 52(a) Fed.R.Civ.P.; Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948).




Senior Circuit Judge E. Barrett Prettyman of the District of Columbia Circuit sitting by designation


162. Trade or business expenses

'(a) In General.-- 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; * * *' 26 U.S.C.1958 ed., Sec. 162(a)(1).