# Opposition Brief — Glenshaw Glass Co. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_1496%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1948 - **Citation:** 333 U.S. 842 ## Text Page NIE BOOT... 220 ceencnccewcecoursestbasedineecasias 1 PIN 6 iin ina conwik imdnnnswemeaet chkneteebcatune 1 Question presented....................-....---2.2se-e ee eee 2 Statute and regulations involved-_-_-_..............-.-.---.-. 2 ca ae ryt in hi Sap td ts Sa spew clk sss ta ean ah se 2 BE nn onc nwanensesencswedbcccccceasscceuccncesens 6 The Tax Court found (R. 158a, 162a), and it is not dis- puted, that the Meyer family owned 3.432 of the 6,000 out- standing shares of taxpayer; that a voting trust of which the Meyer brothers were voting trustees held 51% of the shares; and that three of the seven directors were the Meyer brothers themselves, while two of the other directors (Mur- phy and Heinl) were employees who had deposited their stock in the voting trust and shared in a bonus awarded at the same time that the additional compensation to the Meyer brothers was awarded. a 9 offered by taxpayer to afford a comparison of the compensation it paid the Meyer brothers with that paid ‘‘for like services by like enterprises under like cireumstances’”’. Section 19.23 (a)-6 (3) of Treasury Regulations 103 (Appendix, infra) ; Clinton Co. v. Commissioner, supra. As the Tax Court observed (R. 162a), taxpayer’s so- called expert witnesses were not qualified to ex- press an expert opinion; and even assuming they qualified, the Tax Court would not have been bound by their opinion. In re Rae’s Estate, 147 F. 2d 204 (C. C. A. 3d); L. & C. Mayers Co. v. Commissioner, 131 F. 2d 309 (C. C. A. 2d), certiorari denied, 318 U. S. 773. Under the circumstances the Tax Court was fully justified in concluding that taxpayer failed to meet its burden of proving that the amount of $127,479.85 it deducted for 1942 represented rea- sonable compensation. Indeed, the Tax Court was more than liberal in overruling the Commis- sioner’s determination that $37,000 was reason- able, and in allowing $67,000 instead. Under familiar rules governing the scope of judicial re- view of the Tax Court’s factual determinations, affirmance of its decision by the court below was clearly correct. 2. Taxpayer’s elaborate discussion (Pet. 4-25) of the scope of appellate review of Tax Court decisions is academic. For even assuming, ar- guendo, that the Administrative Procedure Act, c. 324, 60 Stat. 237, applies to the Tax Court —_ aa 10 and also that it ‘‘enlarges’’ the scope of review of its decisions,‘ affirmance of the Tax Ccurt’s decision by the court below was correct. Tax- payer’s argument reduces itself, in terms of this ease, simply to the contention (Pet. 3, 20-24) that the court below was precluded from affirm- ing the Tax Court’s decision because ‘‘no find- ing’? was made as to the reasonableness of the claimed salary deduction for 1942. To so con- tend, however, is to disregard the plain tenor of the Tax Court’s findings and opinion.’ The * The standards prescribed in Section 10 of the Administra- tive Procedure Act for review of administrative agency ac- tions are essentially the same as those prescribed in Section 1141 (c) of the Internal Revenue Code for review of Tax Court decisions. The so-called “substantial evidence” rule embodied in Section 10 (e) (B) (5) of that Act has long been applied upon review of Tax Court decisions. See, e. g., /Ze/- vering V. Rankin, 295 U.S. 123, 131; Wilmington Co. v. Hel- vering, 316 U.S. 164, 168; Dobson v. Commissioner, 320 U.S. 489. Besides, the legislative history of the Act indicates that it was not intended to alter existing rules governing the review of factual determinations by administrative agencies. The original draft of Section 10, prepared by the American Bar Association Committee on Administrative Law, carried the comment that its provisions were not intended to expand the scope of judicial review. 30 A. B. A.J. 46. See also, to the same effect, the statements by Senator McCarran, Chairman of the Senate Judiciary Committee, explaining the bill on the floor of the Senate. 92 Cong. Record, Part 2, pp. 2157- 2159 (S. Doc. No. 248, 79th Cong., 2d Sess., pp. 321-322). And see Representative Hobbs’ extension of remarks, 92 Cong. Record, p. A2987 (S. Doc. No. 248, supra, p. 415). ° At the outset of its opinion (R. 157a) the Tax Court stated that “The only issue submitted is the reasonableness of the compensation paid” for the two taxable years in- ll basic and only issue before the Tax Court was whether the $127,479.85 claimed by taxpayer, or the $37,000 allowed by the Commissioner, or some in-between figure, represented a ‘‘reasonable” allowance; it properly addressed itself to that issue and found that $67,000 was reasonable. And the only question before the court below was whether that finding of ultimate fact was sup- ported by substantial evidence. The evidentiary facts dispositive of this case are undisputed and, we submit, they support the Tax Court’s decision “under any theory of judicial review”. Ander- volved. After reviewing the evidence, it found (R. 16la, 163a—164a) that $67,000 was “reasonable” for each year. Tax- payer’s insistence (Pet. 21, 23) that the Tax Court made no finding that $67,000 was reasonable for 1942 because it did not preface that figure with the word “only” is sheer quib- bling. Indeed, taxpayer acquiesced in the Commissioner’s proposed computation of the 1942 deficiency based on the Tax Court’s allowance of $67,000. (R. 165a.) Equally untenable is taxpayer's assertion (Pet. 3, 19, 20) that the Tax Court predicated its decision solely on the ground that the payment in excess of $67,000 represented a dividend distribution rather than compensation. True, in answer to taxpayer’s contention below that it was not a divi- dend, the Tax Court in the concluding portion of its opin- ion (R. 164a) stated that taxpayer had not sustained the burden of proving that contention; but this was patently a cumulative ground for its decision. Nor is there any basis for taxpayer's corollary supposition (Pet. 19) that a distri- bution of corporate earnings which represents “compensa- tion” rather than a dividend must be deemed a deductible business expense; to qualify for deduction under Section 23 (a) (1) (A) and the pertinent Regulations the “compen- sation” must be “reasonable.” See Long Island Drug Co. v. Commissioner, supra, pp. 594-595. a 12 son v. Commissioner (C. CO. A. Tth), decided De- cember 17, 1947 (1948 C. C. H., par. 9109); Credit Bureau of Greater N. Y. v. Commissioner, 162. F. 2d 7, 9 (C. C. A. 2d); Dawson v. Com- missioner, 163 F. 2d 664, 667 (C. C. A. 6th). 3. Taxpayer does not and cannot allege conflict with any other decision. Its assertion (Pet. 20) of ‘‘probable conflict’’ with Securities Comm’n v. Chenery Corp., 332 U. 8. 194, and like decisions, rests entirely upon its gratuitous assumption that the Tax Court made ‘‘no findings’’ respecting the reasonableness of the claimed salary deduction. Far from precluding affirmance of the Tax Court’s decision, the Chenery case demands it. This Court there held (p. 207) that upon review of an administrative agency action the appellate court’s ‘‘duty is at an end’’ if the administrative action is ‘‘based upon substantial evidence’’ and does not lack a ‘‘rational and statutory founda- tion’. Certainly its duty upon review of Tax Court decisions is no greater, for ‘‘every reason ever advanced in support of administrative fi- nality applies to the Tax Court’’. Dobson v. Commissioner, 320 U. S. 489, 498. 13 CONCLUSION There is no occasion for further review. This case presents a pure question of fact. Neither an important question nor a conflict is involved. The petition should therefore be denied. Respectfully submitted. / Purr B. PERLMAN, Solicitor General. / THERON LAMAR CAUDLE, Assistant Attorney General. / SEWALL Key, ~——————_ GgorcE A. STINSON, / Harry Baum, Special Assistants to the Attorney General. FEBRUARY 1948. APPENDIX Internal Revenue Code: Sec. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) [As amended by Section 121 of the Revenue Act of 1942, c. 619, 56 Stat. 798] 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 allow- ance for salaries or other compensation for personal services actually rendered; * * * (26 U.S. C. 1940 ed., Sec. 23.) Treasury Reguiations 103, promulgated under the Internal Revenue Code: Sec. 19.23 (a)-6. Compensation for per- sonal services——Among the ordinary and necessary expenses paid or incurred in car- rying on any trade or business may be in- cluded a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deducti- bility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of compensation, but not in fact as the pur- chase price of services, is not deductible. (a) An ostensible salary paid by a corpora- tion may be a distribution of a dividend (14) — 15 on stock. This is li to occur in the ease of a corporation having few share- holders, ly all of whom draw sal- aries, If in such a case the salaries are in excess of those ordinarily paid for simi- lar services, and the excessive payments correspond or bear a close relationship to the stock holdings of the officers or em- ployees, it would seem likely that the sala- ries are not paid wholly for services ren- dered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible sa may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corpora- tion, In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business. (2) The form or method of fixing com- tion is not decisive as to deductibility. ile any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that app! ing to com- pensation at a flat rate. as, speak- ing, if contingent compensation is paid pur- suant to a free bargain between the em- ployer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the indi- vidual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than 1§ the amount which would ordinarily be paid. (3) In any event the allowance for the compensation ar ye may not exceed what is er reasonable under all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circum- stances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. am * * * * Sec. 19.23 (a)-8. Bonuses to employees.— Bonuses to employees will constitute allow- able deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, pro- vided such payments, when added to the stipulated salavies, do not exceed a reason- able compensation for the services rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for serv- ices, are not deductible from gross income. U S. GOVERNMENT PRINTING OFFICE: 1948 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_1496%3A3. Public record. Not legal advice.