Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

general economic conditions, but must be attributed to the efforts of the employees * * *" in
particular its shareholders. Much of their success is due to their development and
implementation of the program to increase fleet sales. The court went on to state that "* * *
experts familiar with the automobile business in the area found the compensation paid to [its
shareholders] to be in line with the compensation paid to officers of other dealerships even
though those dealers were less successful than the petitioner."
City Chevrolet Company v. Commissioner, 228 F.2d 894 (4th Cir. 1956). The
redetermination of reasonable compensation paid to the two officer-shareholders of the
corporation was based upon the facts in the particular case. Although the large increase in
profits in 1946 upon which the bonuses were based was due partly to the efforts of the
shareholders, the general economic conditions at the time were also a contributing factor.
University Chevrolet Company, Inc. v. Commissioner, 16 T.C. 1452 (1951). The Court
determined that the compensation paid to the sole owner of the corporation under a
bonus-stock purchasing arrangement adopted by the manufacturer to obtain and establish
dealers is not determinative of reasonable compensation of the same officer after he becomes
owner of all of the stock. The Court stated that "* * * for a sole owner to pay himself a
bonus as an incentive to do his best in managing his own business is nonsense * * * any
contract between him and the corporation would not be a contract at arm’s length between
two persons with different interests, each dealing for his own best interest * * * the petitioner
benefits little, if any, from the incentive contract in meeting its burden of proof." In its
decision, the Court also considered other factors such as the relationship of his compensation
to net income, to capital, to compensation to others, and to other significant figures; the
dividend record of the corporations; evidence of salaries paid elsewhere; and salaries paid in
earlier years. Upon filing a claim with the U.S. District Court in Florida, the jury
redetermined the "reasonable" compensation.
Ernest Burwell, Inc. v. United States, 113 F.Supp. 26 (W.D. SC. 1953). The salary paid in
1941 to the president and general manager of an automobile sales corporation which was
owned by him and his wife was held to be reasonable. The gross sales, the net income, and
the new units sold for the taxable year were the highest during the 5-year period from
1938-1942. The increase in the volume of business in 1941 was due to the manager’s efforts,
since he, though on a special assignment in the Navy, was permitted and was able to actively
supervise and direct the business. The salary paid was considered reasonable in the trade.
Although no dividends were paid in 1941 or in the several preceding years, there was no
attempt to channel off corporate earnings as salary.
Mullen Chevrolet Co. v. Commissioner, T.C. Memo. 1950-682, CCH 18,469(M). During the
"war years" (1941-1944), the taxpayer had engaged in innovative methods of selling new and
used vehicles and increased its service department activities by initiating a following-up system
for servicing. The court stated that the taxpayer’s capital as well as services was an essential
income-producing factor in the business. Although dividends were actually decreased in what
was petitioner’s most profitable year, the court determined that the amount deducted as
compensation was reasonable.
19-11