Petition — M & K Farms, Inc. v. United States

Office - Supreme Cours J 5

83-188] “FILED

APR=BEe2 4

No. May /,

ALEXANDER L. STEVAS.

—CUcERR

~ sant

In the Supreme Court of the United States

October Term, 1983

M & K Fars, Inc., A Montana Corporation, PETITIONER

v.

Unrtep States or AMERICA

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Stuart F. Lewry

P.O. Box 649

Boulder, Montana 59632

(406) 225-4272

Auan J. Lerner

P.O. Box 728

Bigfork, Montana 59911

(406) 837-5441

Attorneys for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 835-7427 Ext. 333

QUESTIONS PRESENTED FOR REVIEW

1. Does the Ninth Circuit’s Majority Opinion conflict

with and sanction a departure by the district court from

this Court’s requirement in Botany Worsted Mills v. Unit-

ed States, 278 U.S. 282 (1928) and pronouncement in Lucas

v. Ox Brush Fibre Co., 281 U.S. 115 (1930) that the fact-

finder make a specific determination of the amount of

salary which is reasonable for past and current services to

be deducted by corporations in any given tax year pursu-

ant to 28 U.S.C. §162(a) (1), where the principal share-

holders are the corporate employees (the ultimate ques-

tion of fact upon which the rights of the parties depend)

when that question has been consistently raised, preserved

and ignored during the administrative, judicial and ap-

pellate proceedings?

2. Does conflict exist in the federal judiciary regard-

ing the propriety of implying an automatic dividend, in

eases where the reasonableness of compensation to princi-

pal shareholder/employees is questioned, by the divergent

treatments of the question by the Ninth Circuit in Elliotts,

Inc. v. CI.R., 716 F.2d 1241 (9th Cir., 193) and the Court

of Claims in Charles McCandless Tile Service, Inc. v.

United States, 422 F.2d 1336 (Ct.Cl., 197U), creating con-

fusion in this area of tne law (as was demonstrated by the

Ninth Circuit Majority Opinion’s failure in this case to

follow its own rule) which should be clarified and resolved

by this Court?

at.

PARTIES TO LITIGATION

All parties to the litigation appear in the case title.

TABLE OF CONTENTS

Page

Questions Presented For Review 22cm i

Parties To Litigation 0. 7 ii

Table of Cases and Authorities 2. ccccccccescmuemnemnennennen iii

Official And Unofficial Reports Of Opinions Below... 1

Jurisdiction 2

Uy GU TN caisson 2

Statement of Case 3

Argument:

A. It Is Necessary For The Trier Of Fact To

Specifically Find And Determine The Amount

Of Compensation Which Is Reasonable For

A Corporation To Pay An Employee For

Current And For Prior Services When These

Questions Are Raised By The Taxpayer. In

The Absence Of Such A Finding Of Fact,

The Judgment Is Defective As A Matter Of

BA, .. scsensccnnsnninnsenisitnennileieaniastaaaiainddaae i aaeicdata 8

B. A Conflict Exists Between The Court Of

Claims And The Ninth Circuit Regarding

The Implication Of An Automatic Dividend

In Reasonable Compensation Cases Which

Has Confused This Area Of Law In The Fed-

eral Judiciary. This Court Should Resolve

The Question And Clarify The Rule. ... 12

II icicichienincitcnnatiacctasepacataniiceninpiahisSiciadiaadiaiiaaimacnaaant . 1

Appendix la

ili

TABLE OF CASES AND AUTHORITIES

TABLE oF CaSEs

Pages

Botany Worsted Mills v. United States, 278 US.

Rae A MORAL TY Paige MR, MEO eh ae ce 8, 10, 11

Charles McCandless Tile Service v. United States,

422 F.2d 1336 (Ct.Cl., 1970) 4, 12, 15

Elliotts, Inc. v. C.ULR., 716 F.2d 1241 (9th Cir..

PRE ark Spal Aen A lene sce eval ee rar cama 7, 13, 15

Lucas v. Ox Brush Fibre Co., 281 U.S. 115 (1930)... 11

M € K Farms v. U.S., 556 F.Supp. 50 (D.Mont., 1982) 1

TABLE OF STATUTES AND OTHER AUTHORITIES

Pages

LS a |) eee 2, 9, 13, 14, 15

RR | Ee ee NG

28 U.S.C. $$1340 amd 1346 (a) (1) nec ceneccccccccncmceseeeemeeneemene <=.

Treas.Reg. $1.-612-7(a) (1954) 2

Note, Close Corporation: McCandless, The Auto-

matic Dividend Rule, And The Dual Level Test,

ge, | aa ee . 14

iv

In the Supreme Court of the United States

October Term, 1983

No.

M & K Fars, Inc., A Montana Corporation, Petrrioner

v.

Unitep States oF AMERICA

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

OFFICIAL AND UNOFFICIAL REPORTS

OF OPINIONS BELOW

The opinion of the Court of Appeals is found at M @

K Farms, Inc. v. United States, CA No. 82-3588 (9th Cir.,

1984) (Unpublished per Ninth Circuit Rule 21) (See Ap-

pendix at 10a to 16a). The decision of the district court is

found at M @ K Farms v. U.S., 556 F.Supp. 50 (D.Mont.,

1982) (See Appendix at la to 9a).

(2)

JURISDICTION

a. The date the Opinion of the Ninth Cireuit in this

case was January 12, 1984.

b. The date of the Order denying the Petition for

Rehearing and the En Bane Suggestion was February 24,

1984,

e. The statutory provision believed to confer juris-

diction on this Court to review the judgment is 28 U.S.C,

§1254(1).

STATUTE AND REGULATIONS INVOLVED

IN THIS CASE

26 U.S.C. §162(a) (1):

‘*There shall be allowed as a deduction all

the ordinary and necessary expenses paid or in-

curred during the taxable year in carrying on any

trade or business, including—

**(1) A reasonable allowance for salaries

or other compensation for personal services ac-

tually rendered;

* . 7. o”

Treas.Reg. §1.-612-7(a) (1954) :

‘* * * The test of deductibility in the case

of compensation payments is whether they are (1)

reasonable and (2) are in fact payments purely

for services.’’

(3)

STATEMENT OF CASE

This case is a tax refund suit seeking reimbursement

from the Internal Revenue Service of $108,029.61, statu-

tory interest and costs. Taxpayer paid an assessed defi-

ciency for corporate tax due as a result of the Internal

Revenue Service’s disallowance of a portion of the 1974

and 1975 salaries paid Keith and Melvin Good, principal

shareholder/employees of M & K Farms, Inc., Appendix

at 3a to 5a; Findings of Fact Nos. 9-14. The Internal Rev-

enue Service assessed the deficiency based on its opinion

that any amount of compensation over $30,000 per em-

ployee per annum for 1974 and 1975 was unreasonable.

Appendix at 5a; Findings of Fact No. 12. The district

court’s jurisdiction was invoked pursuant to 28 U.S.C.

§§1340 and 1346(a)(1). After trial, the district court con-

cluded the taxpayer had not established the opinion of the

Internal Revenue Service erroneous and inferred the sal-

ary payments were for something other than “services

actually rendered”. Appendix at 8a and 9a; Conclusion

of Law Nos. 9 and 11. The district court’s determination

was affirmed by the Majority Opinion of the Ninth Cir-

cuit Court of Appeals. Appendix at 10a et seq.; Majority

Opinion.

The district court failed to make u specific Finding of

Fact declaring what compensation would be reasonable for

personal services actually rendered to taxpayer by Keith

and Melvin Good from 1968 to 1975 and therefore failed

to decide the ultimate question of fact presented by tax-

payer. The Majority Opinion of the Ninth Cireuit Court

of Appeals upheld the district court’s judgment by allow.

ing the implication of a factual determination of unreason-

ableness from the district court’s holding. Appendix at

1la to 12a; Majority Opinion of the Ninth Circut. Judge

(4)

Boochever, dissenting from the Majority Opinion of the

Ninth Cireuit, found the district court’s conclusion to be

lacking support. Judge Boochever would have remanded

for specific factual determinations “as to whether all or

part of the amount in excess of the $30,000 per man al-

lowed by the district court in 1974 and 1975 constituted

compensation for services in prior years, and therefore

was reasonable compensation.” Appendix at 16a; Dis-

senting Opinion. Judge Boochever noted the question of

compensation for past services had been consistently raised

by taxpayer at all judicial levels. Appendix at 14a; Dis-

senting Opinion.

M & K Farms, Ine. is a Montana family farm corpora-

tion owned primarily by Keith and Melvin Good( herein-

after ‘‘the Goods’’) which began continuous existence in

1968.'. The principal employees of taxpayers were the

Goods. The Goods made all decisions for taxpayer; en-

1 All shares of the taxpayer are held by the Goods and

their family members or by trusts for their benefit. Melvin

Good’s and Keith Good’s percentage ownership of the cor-

porate stock was never equal even though salaries paid these

employees were identical. The corporation came into exist-

ence when both Goods consolidated their individual and part-

nership land and farming equipment. The Goods placed all

their farming and personal business assets under corporate

ownership in 1968 and received stock in exchange. The cor-

porate taxpayer was formed primarily as an estate vehicle for

passing corporate stock instead of directly passing and divid-

ing the family land after Melvin Good’s death. Melvin Good

had a previous unpleasant experience in his parents’ estate

because the land itself was divided (causing a serious family

feud). Melvin Good wished to avoid a similar dispute at his

death. At the time of trial, Melvin Good was 72 years old and

had been a farmer on his own land for over 50 years. Keith

Good, his son, began working for his father part time when

he was 9 years old and continued as his father’s partner after

his formal education was completed.

(9)

tended their personal credit for taxpayer’s benefit; and

were solely responsible for taxpayer’s extraordinary agri-

cultural success.’

At trial, unrebutted expert testimony established a

common farm business practice of adjusting salaries

which overcompensated in good years to make up for un-

dercompensation in poor years due to the cyclical nature

of agriculture business.’ The compensation paid the

2 From 1968 to 1975 taxpayer doubled its acreage;

doubled grain inventories; returned 19% on equity at book

value in 1974 and 27.5% in 1975 or increased net worth by

70.9% per year from 1968 to 1975 after payment of the con-

tested salaries; and, had yields which were 126% for winter

wheat and 133% for barley of the two county average for

marginal returns of farmers in their area. This success was

due to the Goods hard work, long hours and superior farming

methods. During the relevant period, corporate debt re-

mained constant. The Goods also obtained a marginally higher

grain price for the sale of taxpayer’s grain. In addition, the

efforts of the Goods allowed a dividend to be declared in

1974 of 6% of book value or $11,646 which was paid in 1975.

3 In today’s farming business environment, regardless

of the services and methods employed by farmers, there are

good years and bad ones due to important factors beyond the

operator’s control (i.e., weather, market price and current rate

of interest). Thus, a farmer will experience severe undercom-

pensation in the bad years which he attempts to correct by

adjusting his compensation upward in those years which al-

low a reimbursement for those undercompensated years of

work without jeopardizing the financial integrity of the farm-

ing unit. This adjustment takes place regardless of the busi-

ness form chosen by the farmer. Dr. Luft, an agricultural econ-

omist, analyzed the Goods’ 1974 and 1975 compensation in

comparison to a sharecropper/lessee (who owned no land or

equipment) and found that a sharecropper would receive net

income of $158,784 in 1974 and $164,661 in 1975 for only

farming without any of the risks of land ownership. Thus, had

the Goods been mere tenants (not having risked their per-

(Continued on following page)

(6)

Goods averaged approximately $30,000 per year per man

from 1968 to 1975 if the contested salary payments are in-

cluded in the computation.‘ Appendix at 2a and 4a; Find-

ings of Fact Nos. 4 and 9. The salaries paid the Goods in

the questioned years alone approximate what most farm-

ers would have earned for their personal services based

upon the production of M & K Farms.°

The district court inferred the payment of a dividend

to the Goods in 1974 and 1975 by concluding the reason for

the amounts received by the Goods over and above $30,-

000 per year per man was for something other than ‘‘serv-

ices rendered” taxpayer.°

(Continued from previous page)

sonal credit and ownership for the benefit of the corporation)

they would have received two-thirds of the gross crop or $79,-

392.37 apiece in 1974 and $82,330.79 apiece in 1975. The

same kind of adjustment a sharecropper experiences in good

years can only be experienced by the employees of a farm

corporation through a substantial increase of salary in good

years which takes into account undercompensation for the

work they performed in poor years. Judge Boochever recog-

nized, “(u)nrebutted expert testimony, however, established

that it is common practice in farming to make up for years

ot inadequate compensation by generous salary payments in

prosperous years.”” Appendix at 15a; Dissenting Opinion.

4 The Internal Revenue Service’s opinion was that $30,-

000.00 per year per man was a reasonable salary for both years

1974 and 1975 without adjustment for inflation or change in

farm production and prices. This is almost exactly the aver-

age amount which taxpayer paid each of the Goods as com-

pensation from 1968 until 1975.

5 See footnote 3 above.

6 Since this is a corporation, any payment to the Goods

must necessarily be either salary for services or a dividend on

their investment based on their ownership of stock. Thus, as

a syllogistic necessity, the district court's conclusion that any

payment over and above $30,000 per year per man was for

“factors other than ‘reasonableness’ and for compensation for

services actually rendered” taxpayer (Appendix at 8a; Con-

clusions of Law No. 9) necessarily demonstrates that the dis-

trict court presumed an automatic dividend as to the excess.

(7)

In 1970, the Court of Claims established a rule of law

which required the automatic presumption of a dividend

(regardless of the reasonableness of the compensation

paid) based upon the absence of dividends declared and

paid. Charles McCandless Tile Service v. United States,

422 F.2d 1336 (Ct.Cl., 1970). The Ninth Circuit has recent-

ly rejected this rule and instead has legally concluded that

26 U.S.C. $162 (a)(1) requires the lower courts only to

determine the reasonableness of the compensation itself as

the sole test of deductibility. Elliotts, Inc. v. C.I.R., 716

F.2d 1241 (9th Cir., 1983). In this case, the Majority

Opinion of the Ninth Circuit allowed the district court’s

use of an inference of an automatic dividend to stand with-

out determining the reasonableness of the compensation

paid the Goods over the relevant period therefore not fol-

lowing their own decision in Elliotts, Inc., supra.’

7 The Majority Opinion in the Ninth Circuit failed to

recognize the district court’s :nference (see footnote 6 above)

necessarily implies a dividend to the Goods for amounts paid

in excess = $30,000 per year per man. Appendix 12a et seq.;

Majority Opinion. While it follows as a syllogistic necessity

from the district court’s inference that the excess payments

were for reasons other than services rendered by the Goods

that the district court implied the excess payments to be divi-

dends, it does not necessarily follow that the district court

implied a finding of fact that the salaries actually paid were

“unreasonable” over the period. In fact, the district court nev-

er reached that question but stopped it’s inquiry short by

implying an automatic dividend. Therefore, the Opin-

sanctioned application of the McCandless automatic

dividend doctrine in ion of the rule in the Ninth Cir-

cuit under Elliotts, Inc. is point demonstrates the absolute

confusion of the federal judiciary in this troubling area de-

cause two different rules of law are being applied without a

definitive statement of the correct test for deductibility under

26 U.S.C. § 162(a)(1).

(8)

ARGUMENT

A. It Is Necessary For The Trier Of Fact To Spe-

cifically Find And Determine The Amount Of

Compensation Which Is Reasonable For A Cor-

poration To Pay An Employee For Current And

For Prior Services When These Questions Are

Raised By The Taxpayer. In The Absence Of

Such A Specific Finding, The Judgment Is De-

fective As A Matter Of Law.

This Court ruled in Botany Worsted Mills v. United

States, 278 U.S. 281, 289-290 (1928) that a finding on the

ultimate fact was necessary to support a decision where

the ultimate fact does not follow as a necessary inference

from the record. In Botany Worsted Mills, this Court re-

versed the Court of Claims’ judgment that the Mills was

entitled to a deduction for salaries paid to directors be-

cause the Court of Claims failed to make a specific finding

that the Mills proved the dissallowed compensation an or-

dinary and necessary business expense. This Court re-

versed the Court of Claims’ judgment outright because

the Mills failed to request a remand for additional factual

findings on the ultimate question of the reasonableness of

the compensation for services rendered (Jd. at 289, foot-

note 7) and because the Court of Claims record did not

contain sufficient facts for the taxpayer to have met it’s

burden to prove the compensation paid was reasonable.

Id. at 292-293. In the absence of findings which supported

a conclusion that the disallowed compensation was reason-

able for services rendered, this Court found the Court of

Claims’ judgment defective as a matter of law.

The holding of Botany Worsted Mulls therefore re-

quires the trier of fact to make a specific determination

(9)

of what is reasonable compensation where salaries are de-

ducted by corporate taxpayers as ‘‘ordinary end neces-

sary’’ business expenses under 26 U.S.C. §162(a) (1). In

the case now under consideration, the district court never

specifically made a determination of the salaries’ reason-

ableness despite substantial evidence elicited at trial which

would allow such a determination and despite taxpayer’s

repeated requests for such a determination.’ The district

§ Nowhere in the district court’s Findings of Fact is the

reasonableness of the salaries determined. In the district

court’s Conclusions of Law the trier of fact determines, as a

matter of law, that the taxpayer has not proved the Internal

Revenue Service’s opinion of reasonable salaries erroneous.

The district court's conclusion is based on using only those

factors which support the Internal Revenue Service’s opinion

of reasonable compensation and ignoring the rest of a sub-

stantial body of evidence. See Appendix 9a; Conclusion of

Law No. 11. By requiring the taxpayer to first prove the In-

ternal Revenue Service erred in it’s opinion of reasonableness

without actually and specifically determining what is reason-

able compensation for current and past services, the district

court has placed an impossible burden on taxpayer. The first

question which the district court is obligated to affirmative-

4 consider is the reasonableness of the compensation over

the period. It is only with this affirmative determination that

the district court can logically examine the soundness of the

Internal Revenue Service’s opinion and therefore determine

if taxpayer has met its burden to prove the Internal Revenue

Service’s opinion erroneous.

The Majority Opinion of the Ninth Circuit found an im-

plied finding of unreasonableness from the district court’s con-

clusions. The Majority Opinion assumes the district court has

made a factual determination of the amount of salaries which

were reasonable to pay the Goods. However, such an impli-

cation of a finding of unreasonableness does not logically fol-

low from the Findings of Fact which were present. (See foot-

notes 6 and 7). The Ninth Circuit Majority Opinion concludes

that the district court must have “found” that the salaries paid

were unreasonable because the district court noted that the

extra compensation in a closely held farm corporation was

(Continued on following page)

(10)

court therefore failed to decide the ultimate question in

this case and since the ultimate fact upon which the rights

of the parties are dependent cannot be necessarily inferred

from the findings which a.e present, the district court’s

judgment is defective as a matter of law. The district

court’s decision conflicts with Botany Worsted Mills v.

United States, supra and the Ninth Cireuit Court of Ap-

peals Majority Opinion sanctioned this departure from

precedent of this Court.

(Continued from previous page)

“suspect” and therefore a disguised dividend was present. The

Majority Opinion’s implication of a finding of “unreasonable-

ness” by the district court was based upon the lack of a writ-

ten consistently applied bonus program and written corporate

minutes requiring a monthly payment of $2,000 per man with-

out a written statement in the minutes that bonuses were paid

to compensate the Goods for undercompensated prior years.

However, it does not necessarily follow from these factors

alone that the salaries paid the Goods were unreasonable. The

body of the uncontradicted evidence showed a meeting was

held at year end and it was decided to pay the Goods for

their undercompensated services in prior years by paying a

substantial bonus above the monthly minimum compensation.

This action of the Board of Directors’ in making this decision

to fairly compensate the Goods for their years of undercom-

pensated hard work was approved in the minutes at the end

of the year as all informal actions of the Board of Directors’

for this family farm corporation were approved. The district

court’s err and the Majority Opinion of the Ninth Circuit's

fallacy was a failure to recognize the threshold question—

an independent review and determination of the reasonable-

ness of the compensation by the trier of fact of initial impres-

sion is required. Such an independent review of this matter

was not conducted or considered by the district court since it

misunderstood the taxpayer’s true burden of proof to first

establish that the compensation paid was reasonable. The

record supports that the taxpayer met this burden and was

not refuted because the Internal Revenue Service and the dis-

trict court failed to consider the prior years of undercompen-

sation in their opinion of reasonableness but rather took the

years 1974 and 1975 standing alone.

(11)

This Court ruled in Lucas v. Ox Brush Fibre Co., 281

U.S. 115 (1930) that a corporation could deduct compensa-

tion for past undercompensated services in the year that

such additional compensation was actually paid. In so

ruling, this Court firmly established that compensation

paid by a corporation in a particular year may include

compensation for years where an employee’s services have

not been adequately compensated. Jd. at 119. Thus,

where a claim of past undercompensation is made by the

corporate taxpayer, the factfinder is required to determine

the reasonableness of the compensation received by the

employee over the entire period claimed to be compensated

by the disputed salary.

In this case, the district court failed to specifically

determine the amount of compensation in the disputed

payment which compensated the Goods for past services

despite the issue having been consistently raised at all

levels and the taxpayer’s presentation of substantial evi-

dence on this question. See Appendix at 14a; Dissenting

Opinion. Such a failure conflicts with this Court’s decision

in Lucas v. Ox Brush Fibre Co., supra and this conflict

was sanctioned by the Majority Opinion of the Ninth Cir-

cuit.

Thus, a reading of Botany Worsted Mills v. United

States, supra and Lucas v. Ox Brush Fibre Co., supra

establishes a rule requiring the factfinder to make a spe-

cific determination regarding the reasonableness of the

salary paid by a corporate taxpayer over the entire period

where a claim of partial compensation for past services is

made. Since the district court failed to make such a fac-

tual determination and this failure was sanctioned by the

Ninth Circuit, the case should be remanded. In the alter-

(12)

native, this Court can reverse this case outright in favor

of the taxpayer by determining on the record that the com-

pensation paid over the period was reasonable in that it

averages approximately what the Internal Revenue Serv-

ice said would be reasonable compensation for the two

years the district court did consider.’

B. A Conflict Exists Between The Court Of Claims

And The Ninth Circuit Regarding The Implica-

tion Of An Automatie Dividend In Reasonable

Compensation Cases Which Has Confused This

Area Of Law In The Federal Judiciary. This

Court Should Resolve The Question And Clarify

The Rule.

In McCandless Tile Service v. United States, 422 F.2d

1336 (Ct.Cl., 1970) the Court of Claims held a dividend

must be implied when no return on investinent is paid

shareholder/employees regardless of whether the con-

9 The evidence of the taxpayer that the salaries for 1968

to 1973 were undercompensation was noted by the Dissenting

Opinion of Judge Boochever who specifically found the In-

ternal Revenue Services’ opinion of $30,000 per year per man

as reasonable bolstered the taxpayer’s argument that the sal-

aries paid were reasonable over the period. Appendix at 15a;

Dissenting Opinion at footnote 1. The Majority Opinion re-

jected this position simply because the directors of M & K

Farms failed to formally earmark a ~_ of the sum for past

services rendered by the Goods and formally failed to show

what percentage of the compensation was attributable to each

of the years involved. Such a view places form over substance

and ignores the reality of the actual operation of a Montana

family farm corporation such as the taxpayer in this case. The

Goods did show what they were paid in the past; what was

aid in the contested — that these amounts were approved

y a meeting of the Board of Directors as compensation for

past services; and, that the average yearly compensation over

the period (1968 to 1975) was what the Internal Revenue

Service considered reasonable for each of the two years in

it’s analysis. See also footnote 4.

(13)

tested compensation is reasonable or unreasonable. The

Ninth Circuit has recently rejected this rule in Elliotts,

Inc. v. CLLR., 716 F.2d 1241 (9th Cir., 1983) holding that

the true inquiry in 26 U.S.C. §162(a)(1) deductibility is

the ‘‘reasonableness” of the contested compensation and

that no dividends may be automatically implied. Since

payments to shareholder/employees must necessarily eith-

er be dividends (a return on invested capital to share-

holder/employee) or salaries paid them for services ac-

tually rendered, the above conflict in the law among the

federal judiciary has created confusion which this Court

should clarify.'®

10 The district court and Ninth Circuit Majority Opin-

ion in fact implied a dividend payment in this case. The Ninth

Circuit Majority Opinion therefore failed to follow its own

rule in Elliotts, Inc. demonstrating the utter confusion in this

area of the law created by this conflict in the federal judiciary.

The inquiry under Elliotts, Inc. is the reasonableness of the

compensation paid over the period without requiring a divi-

dend to be presumed to be paid to the shareholder/employees

on their equity investment since the Ninth Circuit in Elliotts,

Inc. determined that investors in a corporation could be log-

ically satisfied with an increase in value of their investment

without necessarily receiving a cash dividend as a return on

their investment. (in particular, farming corporations require

vast capital concentrations and investors would typically prefer

their return reinvested to expand corporate land and equip-

ment holdings.)

As one of its factors in determining whether compen-

sation was reasonable, Elliotts, Inc. suggested that the trier

of fact should determine whether an independent investor

would be satisfied with the return on his investment even if

he did not receive dividends in light of the salaries paid. The

Ninth Circuit in f/liotts, Inc. required the trier of fact to deter-

mine the reasone.bleness of salary paid and not to skirt the

issue by automaiically implying the contested compensation

was a dividend. In our case, the district court made such an

implication by concluding the disparity of salaries in prior

(Continued on following page)

(14)

Taxpayer’s position is that this Court should require

the federal judiciary to determine the reasonableness of

the contested compensation without allowing the implica-

tion of an automatic dividend. The inconsistency of treat-

ments received because of the confusion created by this

conflict is amply demonstrated by taxpayer’s treatment as

opposed to the treatment received by Elliotts, Inc.'!

(Continued from previous page)

years to the contested years raised an inference that the con-

tested compensation paid the Goods was for factors other

than services rendered. Since a payment to persons such as

the Goods can only be a dividend or salary in the context of

reasonable compensation, the implication of a dividend pre-

cluded the district court from determining the reasonableness

of the compensation paid for seivices rendered by the Goods.

This Court should clarify the law by requiring the adoption

of a test which either demands the payment of dividends as

a return on equity as an automatic consideration or looks

solely to the reasonableness of the compensation for deduc-

tion purposes pursuant to 26 U.S.C. § 162(a) (1). See also

footnote 7. Further see a/so Note, Close Corporation: Mc-

Candless, The Automatic Dividend Rule, And The Dual Level

Test, 26 Stan.L.Rev. 441 (1974).

11 The district court in this case found that the increase

in profitability of M & K Farms was largely due to increased

grain prices brought on by the Russian Wheat Sale during the

contested years. Appendix at 3a; feirsee of Fact No. 7. El-

liotts, Inc. was a farm implement dealership which depended

on agricultural trade for its profitability. The contested period

examined ré the Ninth Circuit in Elliotts, Inc. was for the same

period as the compensation period examined in the instant

case. Both cases involve agricultural concerns, the profitabil-

ity of which was substantially increased in the questioned

_— because of extra capital available to farmers from the

ussian Wheat Sale. This extra capital allowed farmers to make

long-delayed a of erg such as was sold by

Elliotts, Inc. The taxpayer in Elliotts, Inc. was allowed to pay

salary as reasonable compensation based on a bonus arrange-

ment which tied salary strictly to the net profitability of the

corporation but which in fact compensated for previous years’

(Continued on following page)

(15)

This Court should remand this case for specific fac-

tual findings and an affirmative determination of what

constitutes the Goods’ reasonable compensation for the

period if it strikes down the McCandless automatic divi-

dend rule and rules the Elliotts, Inc. formulation of the

lower courts’ inquiry into reasonable compensation which

may be deducted pursuant to 26 U.S.C. §162(1) (a) is the

correct inqury.

CONCLUSION

For the foregoing reasons, it is requested that this

Court issue a Writ of Certiorari and summarily reverse

this case outright by entering judgment in favor of tax-

payer or remand this case to the lower courts for a speci-

fic factual determination of the amount of salary which

would be reasonable compensation for the Goods for serv-

ices performed for taxpayer from 1968 to 1975 without

briefing. In the alternative to such summary action, it is

requested that this Court issue a Writ of Certiorari and,

upon further appropriate briefing and oral argument or

by summary action after further briefing, reverse this de-

cision outright by entering judgment in favor of taxpayer

or remand this case to the lower courts for a factual find-

(Continued from previous page)

undercompensated services necessitated by the poor agricul-

tural economy. The Goods, who made the same determination

at year end after paying expenses and helding back reserves

for future operations, have not been allowed to be compen-

sated for their prior years’ undercompensated services to tax-

payer. Thus, the disparity in treatment received by taxpayer

in this case with that received by Elliotts, Inc. is a result of the

confusion in this area.

(16)

ing of the amount of salary which would be reasonable

compensation for the Goods for services performed for

taxpayer from 1968 to 1975.

Respectfully submitted this 16th day of May, 1984.

Respectfully submitted,

/s/ Srvuart F, Lewin

P.O. Box 649

Boulder, Montana 59632

(406) 225-4272

/s/ Avan J. LERNER

P.O. Box 728

Bigfork, Montana 59911

(406) 837-5441

Attorneys for Petitioner

la

APPENDIX

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MONTANA

GREAT FALLS DIVISION

No, CV-80-35-GF

M & K FARMS, INC., a Montana corporation,

Plaintiff,

vs.

UNITED STATES OF AMERICA,

Defendant.

FINDINGS OF FACT,

CONCLUSIONS OF LAW AND ORDER

(Filed September 22, 1982)

This matter came on for trial before the court without

a jury on March 18, 1982. Thereafter, the court prepared

proposed findings of fact and conclusions of law, and

ordered both parties to file with the court and serve upon

opposing counsel objections to those findings and conclu-

sions. Both parties were then given an opportunity to file

answers to the objections raised by the opposing party.

Having received the evidence presented at trial, and hav-

ing reviewed each party’s objections and answers, the

court now enters the following

FINDINGS OF FACT

1. This is a civil action for recovery of 1974 and

1975 corporate interni.] revenue taxes said to have been

wrongfully assessed and collected by the defendant.

2a

2. Plaintiff, M & K Farms, Ine., is a Montana cor-

poration having its principal place of business at Flow-

eree, Montana. Plaintiff operates farmlands devoted to

the growing of grain in Cascade and Chouteau Counties,

near Floweree.

3. Plaintiff is a family corporation with the stock

being held either by members of the family or by certain

trusts for the benefit of family members. The principal

stockholders and managers of the corporation are Melvin

Good and his son, Keith Good,

4. From 1968 to 1973, the plaintiff paid Melvin and

Keith Good the following compensation for personal serv-

ices rendered on the farm:

YEAR MELVIN GOOD KEITH GOOD

1968 $ 7,000 $ 7,500

1969 9,800 9,800

1970 9,000 8,400

1971 9,000 8,900

1972 12,032 12,032

1973 15,590 16,090

5. In a consent document dated December 8, 1973,

and filed in lieu of an annual meeting, the Board of Di-

rectors of the plaintiff corporation passed a resolution

setting the monthly salary for the corporate president,

Melvin Good, and vice-president, Keith Good. That res-

olution stated in pertinent part:

RESOLVED, that commencing with January 1,

1974, and until changed by Resolution of the Board

of Directors of the Corporation, the salaries of the

officers of this Corporation, payable in monthly in-

stallments, shall be as follows:

3a

President $2,000 per month

Vice-President $2,000 per month

The $2,000 monthly salary was exclusive of the cor-

porate pension and profit sharing plans, which provided

an additional amount in deferred compensation.

6. Plaintiff declared its first dividend in 1974. The

dividend, equal to six percent (6%) of the par value of

each shareholder’s stock, or $11,664, was paid out in 1975

to the shareholders of record.

7. External conditions, specifically the Russian wheat

sale, resulted in a high market price for grain during part

of the period at issue.

8. During the years 1974 and 1975, the plaintiff used

the cash method of accounting and filed its federal cor-

poration income tax returns on a calendar year basis re-

flectiig the following income, taxable income, income tax

liability, and tax due;

YEAR GROSS INCOME TAXABLE INCOME TAX LIABILITY TAX DUE

1974 $373,832.61 $19,742.36 $1,384.73 $1,056.73

1975 398,593.78 36,883.74 3,852.49 3,524.49

9, On its 1974 and 1975 federal corporation income

tax returns, the plaintiff deducted as “ordinary and nec-

essary expenses” the compensation paid to Melvin and

Keith Good in the following amounts:

MELVIN GOOD 1974 1975

Salary $80,000 $ 60,000

Pension Plan 8,000 6,750

Profit-Sharing Plan 12,000 10,125

$100,000 $ 76,875

4a

KEITH GOOD

Salary $ 80,000 $ 60,000

Pension Plan 8,000 6,750

Profit-Sharing Plan 12,000 10,125

$100,000 $ 76,875

10. On September 28, 1978, the plaintiff received

from the Commissioner of Internal Revenue a notice of

deficiency of income tax for the calendar years 1974 and

1975. The tax deficiencies complained of were in the fol-

lowing amounts:

Year Deficiency

1974 $ 66,036.05

1975 41,993.56

$108,029.61

ns

11. The Commissioner of the Internal Revenue de-

termined that only part of the deductions taken for com-

pensation in calendar years 1974 and 1975 constituted

“ordinary and necessary expenses.” Accordingly, the

Commissioner disallowed a portion of the 1974 and 1975

deductions claimed against the plaintiff’s gross income,

as follows:

Total Deduction

Total Compensation Deduction Deduction Allowed by IRS to

Paid Both Goods and Allowed by Allowed by M & K Farms for

Deducted by M & K__ IRS as to IRS as to Compensation Paid to

Year Farms, Inc. Melvin Good Keith Good Melvin & Keith Good

1974 $200,000 $30,000 $30,000 $60,000

1975 $153,750 $30,000 $30,600 $60,000

5a

12. From the above finding of fact, and finding of

fact 5, supra, it follows that for calendar years 1974 and

1975, the Commissioner allowed the paintiff to deduct as

reasonable compensation $30,000 per year for salary and

deferred compensation paid to Melvin Good, and $30,000

per year for salary and deferred compensation paid to

Keith Good, as follows:

Salary $24,000

Deferred compensation 6,000

TOTAL $30,000

13. The income tax deficiency of $108,029.61, set

forth in finding of fact 10, supra, was paid in full by the

plaintiff. Following payment, the plaintiff filed its claims

for refund with the Internal Revenue Service. These

claims were disal!owed by the defendant on January 11,

1980.

14. The pending suit was commenced on February

29, 1980. Plaintiff seeks a refund of the $108,029.61 in-

come tax deficiency, which it paid in full. Plaintiff also

seeks statutory interest and costs.

CONCLUSIONS OF LAW

1. This action arises under 28 U.S.C. $1340 and 28

U.S.C. §1346(a)(1). Jurisdiction vests in this court by

virtue of these provisions.

2. In a tax refund suit, such as the one now before

the court, the assessment made by the Commissioner of

Internal Revenue is presumed correct, and the plaintiff

must prove that the assessment was erroneous. See, Lew-

6a

is v. Reynolds, 284 U.S. 281 (1932). Wickwire v. Reinecke,

275 U.S. 101 (1975). See also, United States v. Janis, 428

U.S. 433 (1976).

In cases involving the deductibility of compensation

as an “ordinary and necessary expense”, the plaintiff must

also prove that the compensation paid was reasonable and

was therefore a deductible business expense. See, Nor-

Cal Adjusters v. C.I.R., 503 F.2d 359, 361 (9th Cir. 1974) ;

Perlmutter v. C.I.R., 373 F.2d 45, 47-48 (10th Cir. 1967).

3. Plaintiff, M & K Farms, Inc., deducted from its

1974 and 1975 corporate taxable income certain compen-

sation payments which it made to Melvin and Keith Good.

26 U.S.C. $162(a) sets forth the applicable legal

standard for this case:

There shall be allowed as a deduction all the ordi-

nary and necessary expenses paid or incurred during

the taxable year in carrying on any trade or business,

ineluding—

(1) a reasonable allowance for salaries or other

compensation for personal services actually ren-

dered.

4. The test set forth in 26 U.S.C. §162(a)(1) is two-

prong. The compensation payments may be deducted if

they are (1) reasonable, and (2) are for personal services

actually rendered. 26 C.F.R. §1.162-7(a) (1981) is equal-

ly specific in its requirement that compensation payments

are deductible under 26 U.S.C. §$162(a)(1) only if they

are “reasonable and are in fact payments purely for

services.”

Therefore, the burden of proof of deductibility lies

with the plaintiff to show that the compensation paid to

ia

Melvin and Keith Good was reasor.able within the purview

of the statute and regulations, ani was for personal serv-

ices actually rendered. Only then may the compensation

qualify as an allowable deduction. Nor-Cal Adjusters v.

C.LLR., supra, 503 F.2d at 362.

5. This case involves two types of compensation: (1)

non-deferred compensation; and (2) deferred compensa-

tion.

The deductibility of non-deferred compensation, such

as salary, is governed by 26 U.S.C. §162(a)(1). The

deductibility of deferred compensation, such as pension

and profit-sharing plans, is governed by 26 U.S.C. §404.

The allowable deduction at the corporate level for both

forms of compensation is limited to the amount which con-

stitutes “a reasonable allowance for compensation for the

services actually rendered.” 26 C.F.R. $1.404(a)-1(b).

6. The issue of what constitutes “reasonable compen-

sation” for a taxpayer to pay depends upon the circum-

stances of each case and the issue is one of fact which

must be decided in light of all the evidence. Pacific Grains,

Inc. v. CI.R., 399 F.2d 603, 605 (9th Cir. 1968), citing

Hoffman Radio Corp. v. C.I.R., 177 F.2d 264 (9th Cir.

1949). See also Pepsi-Cola Bottling Co. of Salina, Inc.

v. CI.R., 528 F.2d 176, 179 (10th Cir. 1976).

7. In the case of a closely held corporation, where

the stockholders are also the officers and employees of

the corporation, the issue of reasonableners of compensa-

tion is related to the issue of whether deductible salary

expenses are, in fact, a distribution of nen-deduetible eor-

porate profits. See Pepsi-Cola Bottling Co. of Salina,

Inc. v. CIR., supra, 528 F.2d at 182-83. Therefore, when

8a

determining the reasonableness of compensation, a court

should give special scrutiny to compensation paid by a

closely held corporation, such as a family farm corpora-

tion. Jd. at 179. See also Perlmutter v. C.I.R., supra,

373 F.2d at 49; Stonebrook v. C.1.R., 80,522 P-H Memo

T C (1980).

8. Plaintiff, by way of its own corporate resolutions,

expressed its intent regarding the salaries for Melvin and

Keith Good. See Klamath Medical Services Bureau v.

C.I.R., 261 F.2d 842 (1958). The Board of Directors of

the plaintiff corporation resolved that the monthly salary

for Melvin and Keith Good would be $2,000, or $24,000 per

year. This amount was exclusive of any deferred com-

pensation.

9. The total compensation paid to Melvin and Keith

Good increased to $100,000 per man in 1974 and $76,875

per man in 1975. The sharp rise in total compensation

paid to Melvin and Keith Good in 1974 and 1975 raises the

inference that these payments were based on factors other

than ‘‘reasonableness” and as compensation ‘‘for services

actually rendered.’’ See Nor-Cal Adjusters v. C.I.R.,

supra, 503 F.2d at 362-43. It appears that grain prices

were unusually high during 1974 and 1975 as a result of

unusual conditions in the wheat market.

10. The Commissioner allowed the plaintiff to deduct

for the calendar years 1974 and 1975 $30,000 per year for

Melvin Good and $30,000 per year for Keith Good. The

$30,000 yearly amount includes (1) $24,000 in salary,

which is what the Board of Directors of the plaintiff cor-

poration resolved to pay Melvin and Keith Good; and (2)

an additional $6,000 in deferred compensation.

9a

11. Having considered the lack of an arm’s length

relationship between the plaintiff and Melvin and Keith

Good, together with the sharp increase in their 1974 and

1975 compensation and the expressed corporate intent re-

garding their salary for 1974 and 1975, the court concludes

that the plaintiff has not established that the determina-

tion of the Commissioner was erroneous. Therefore, the

Commissioner’s determination is upheld.

NOW, THEREFORE, IT IS HEREBY ORDERED

that judgment be entered in accordance with these findings

of fact and conclusions of law.

DATED this 22 day of September, 1982.

/s/ Paul G. Hatfield

United States District Judge

10a

IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 82-3588

D.C. # CV 80-35-GF

M & K FARMS, INC., a Montana Corporation,

Appellant,

vs.

UNITED STATES OF AMERICA,

Appellee.

Appeal from the United States District Court

for the District of Montana

District Judge Paul G. Hatfield, Presiding

{Argued and Submitted November 9, 1983]

MEMORANDUM®*

(Filed January 12, 1984)

Before: WRIGHT, KILKENNY, and BOOCHEVER,

Cireuit Judges.

M & K Farms, Ine. brought this refund suit to recover

a deficiency assessed by the Commissioner for the tax

years 1974 and 1975. The deficiency was assessed for the

alleged payment of excessive salaries to the sole stock-

*Per Ninth Circuit Rule 21, this disposition is not intended for

publication and may not be cited as precedent in this circuit.

lla

holders and officers of the corporation, Melvin and Keith

Good.

The district court affirmed the Commissioner’s de-

ficiency determination. Taxpayer alleges: (1) that the

court imposed an improper dual burden of proof; (2) that

it improperly relied on a presumption that the Commis-

sioner’s assessment was correct; and (3) that the court’s

judgment was clearly erroneous and not supported by

substantial evidence.

We find that each contention lacks merit and affirm.

(1) The district court held that the taxpayer had to

show that the Commissioner’s assessment was erroneous

and that the compensation paid to the employees was rea-

sonable. This holding was correct. See United States v.

Janis, 428 U.S. 433, 440 (1976); Roybark v. United States,

218 F.2d 164, 166 (9th Cir. 1954). In a suit for a refund

of taxes, [t]he taxpayer has the burden of proving both

that an overpayment of taxes was made and the amount

of the overpayment.’’ King v. United States, 641 F.2d 253

(Sth Cir. 1981).

Contrary to taxpayer’s assertion, these twin burdens

do not create an insurmountable obstacle to recovery. In

fact, if the taxpayer meets the second hurdle by showing

that the compensation paid to the employees was reason-

able, it necessarily follows that the Commissioner’s assess-

ment was erroneous.

Taxpayer contends that the district court erred in con-

cluding that the Commissioner’s assessment was reason-

able without specifically finding that the compensation

paid was unreasonable. While the court did not specifical-

ly find that the payments were unreasonable, it considered

12a

ull the evidence relevant to the question and that finding

implicitly underlay its holding.

(2) Taxpayer confuses the presumption of correct-

ness of the Commissioner’s assessment with the burden of

persuasion that it must bear in a refund suit. Taxpayer,

ina suit for the refund of taxes paid, bears the burden of

proving by a preponderance of the evidence that the tax

paid was excessive. See, e.g., Roybark v. United States,

218 F.2d 164, 166 (9th Cir. 1954). This ineludes both the

burden of production and the burden of persuasion. Rock-

well v. Commisstoner, 512 F.2d 882, 885 (9th Cir.) cert.

denied, 423 U.S. 1015 (1975).

Taxpayer’s avguinent that the court erred in assign-

ing a presumption of correctness to the Commissioner’s

assessment depends upon a gross misreading of United

States v. Janis, 428 U.S. 483 (1976), and Helvering v. Tay-

lor, 293 U.S. 507 (1935). More fundamentally, however, it

ignores the burden of persuasion that it must bear in a tax

refund action and mischaracterizes the district court’s de-

cision.

The court did not hold that it was deciding for the

Commissioner because of the presumption of correctness.

It ruled, instead, that the ‘‘plaintiff has not established

that the determination uf the Commissioner was errone-

ous:” Le, that the taxpayer did not meet its burden of

persuasion,

(3) The district court's conclusion that the compen-

sation paid to the corporate oificers was unreasonable

was a factual determination which must be upheld unless

clearly erroneous. Elliotts, Ine. v. CUR. 716 F.2d 1241,

1245 (9th Cir. 1983); Pacific Grains, Inc. v. CI.R., 399 F.2d

603, 605 (9th Cir. 1968). There was sufficient evidence to

13a

support the court’s conclusion that the payments to the

Goods were not reasonable compensation ‘‘for services ac-

tually rendered.”

The compensation was more than six times the

amounts previously paid for similar or identical services.

It greatly exceeded the $24,000 per year designated as pro-

jected compensation by taxpayer itself prior to 1974.

Bonus payments to owner-employees that are not

‘‘awarded under a structured, formal, consistently applied

program generally are suspect.” Elliotts, Inc., 716 F.2d at

1247.

Finally, the court was not required to accept the tax-

payer’s post hoc rationalization that the increased com-

pensation was designed to compensate the employees for

inadequate salaries in prior years. Pacific Grains, Ine. v.

C.I.R., 399 F.2d 603, 606 (9th Cir. 1968).

That the commissioner found $30,000 reasonable com-

pensation for services rendered in 1974 and 1975 does not

mean that it necessarily was reasonable compensation for

previous years’ work. The board of directors did not ear-

mark the salaries paid as being in part compensation for

past services. See id. There was no showing what per-

centage of the compensation was attributable to each of

the years involved. See id.

The taxpayer has the burden of proving that the high

amounts paid were intended to compensate for services

rendered in the past. Jd. On these facts, we cannot find

that the district court’s conclusion that the amounts paid

were not reasonable compensation for services actually

rendered was clearly erroneous.

AFFIRMED.

l4a

M € K Farms v, United States

BOOCHEVER, Circuit Judge, dissenting.

(Filed January 12, 1984)

The taxpayer asserts that the compensation paid the

Goods in 1974 and 1975 was reasonable because it was in-

tended, in part, to make up for inadequate compensation

paid to the Goods from 1968 to 1973, the first six years of

the corporation’s existence. This assertion, which was

clearly raised in both trial and appellate courts, was not

addressed by the district court. I believe remand is war-

ranted.

It is well established that a corporation can compen-

sate for services rendered in prior years and claim a de-

duction for the tax year in which payment is made. See

Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 119 (1930). In

determining deductibility of compensation paid to share-

holder-employees, the primary focus of our inquiry is upon

reasonableness of the payments, not compensatory intent.

Elliotts, Inc. v. C.I.R., No. 81-7173, Slip op. at 4682 (9th

Cir. Sept. 26, 1983). The taxjayer, however, has the bur-

den of showing that salary was intended to compensate for

prior periods. Pacific Grains, Inc. v. C.I.R., 399 F.2d 603,

606 (9th Cir, 1968).

Fro the creation of the corporation until 1975 the

Goods w « paid the following compensation for their

services :

YEAR MELVIN GOOD KEITH GOOD

1968 $ 7,000 $ 7,500

1969 9,800 9,800

1970 9,000 8,400

1971 9,000 8,900

1972 12,032 12,082

1973 15,590 16,090

1974 100,000 100,000

1975 76,875 76,875

15a

There was a conflict in the testimony as to whether the

compensation paid the Goods prior to 1974 was adequate

given the nature of their services. Unrebutted expert tes-

timony, however, established that it is common practice in

farming to make up for years of inadequate compensation

by generous salary payments in prosperous years, This

testimony distinguishes the ease from Pacifie Grains, Inc.,

where the taxpayer’s theory of compensation for prior

years appeared merely as ‘tan afterthought developed at

a time when the reasonableness of compensation was al-

ready under attack.’’ 899 F.2d at 606,

The Commissioner maintains that $30,000 per year,

per man constitutes reasonable compensation to the Goods

for their services in 1974 and 1975.' $30,000 per year

closely approximates the average compensation actually

paid to the Goods from 1968 to 1975. The amount actually

paid potentially constitutes a reasonable level of average

compensation given the extremely long hours worked by

the Goods and the unusual productivity achieved by the

corporation through their expertise. We need not decide,

however, whether $30,000 would have been reasonable

compensation for each of those years, The question

which was not resolved by the trial court is whether the

Goods were inadequately compensated during the 1968-

1973 period, and, if so, whether any portion of the amount

paid in 1974 and 1975 was paid as reasonable compensa-

tion for the earlier years. Accordingly, I would remand

1! The Commissioner asserts that $30,000 is reasonable

compensation despite the fact it exceeds the taxpayer's projec-

tions of compensation for these years. Melvin Good testified

that the taxpayer’s projection of $24,000 per man was intended

as a minimum salary figure. The Commissioner's position adds

credence to this testimony.

l6a

for specific findings by the district court as to whether all

or part of the amount in excess of the $30,000 per man

allowed by the district court in 1974 and 1975 constituted

compensation for services in prior years, and therefore

was reasonable compensation.

Moreover, the district court did not have the advant-

age of this court’s comprehensive treatment in Elliotts,

Inc. of the various factors to be analyzed in determining

whether payment made to shareholder-employees are non-

deductible dividend distributions. The parties presented

conflicting arguments to us concerning the various consid-

erations. Significantly, in light of Elliotts, Inc., Slip Op. at

4685, whether the corporate profits represented a reason-

able return on the shareholders’ equity remains unre-

solved. A remand is appropriate to permit further con-

sideration by the trial court in view of the teachings of

Elliotts, Ine.

l7a

IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

NO, 82-3588

DC# CV 80-350GF

M & K FARMS, INC., a Montana corporation,

Plaintiff-Appellant,

Vs.

UNITED STATES OF AMERICA,

Defendant-A ppellee.

ORDER

(Filed February 24, 1984)

Before: WRIGHT, KILKENNY, and BOOCHEVER,

Circuit Judges.

The Petition for Rehearing and the En Banc Sugges-

tion are denied. They have been circulated to all active

judges of the court and none has requested a vote. Fed.

R. App. P. 35(b). Judge Boochever would grant rehear-

ing.

(Received February 27, 1984)