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

Howard Sole, Inc. v. Commissioner, T.C. Memo. 1953-238, CCH 19,503(M). The
compensation paid to the officer was a reasonable allowance for personal services rendered.
In this case, the petitioner’s board of directors voted its principal officer a fixed salary plus a
bonus based on a percentage of corporate earnings. The board of directors was composed of
two directors, each representing families owning one-half of the issued stock. One of the
directors was the principal officer who received the salary; the other director was not related
to the principal officer and took no active part in the operation of the business. The inactive
director was in the automobile finance business and was familiar with salaries paid to
automobile distributors.
Lorenz Bros. Inc. v. Commissioner, T.C. Memo. 1946-567, CCH 15,277(M). The court held
that the bonuses that were paid by the taxpayer to its two shareholders did not appear to bear
a realistic relationship to the actual value of the services rendered where one was in charge of
the sales activities and one was in charge of servicing and repairs. On the contrary, the record
indicates that the income from sales were quite considerable in 1940 and 1941, but dropped
sharply in 1942 due to wartime restrictions. The case further states that by computing the
bonuses on percentages of net income in excess of 10 percent of the outstanding capital stock
indicates that the bonuses had no relation to reasonable compensation but were essentially a
means of distributing profits.
A.M. Chandler, Inc. v. Commissioner, T.C. Memo. 1950-380, CCH 17,624(M) states that in
determining whether salary is reasonable in any particular case no single factor is decisive, but
the situation should be considered as a whole. In this case, Chandler’s duties as the president
and general manager "* * * were burdensome and his services vital to the success of the
business during the period involved. He could not have been replaced by an employee at a
lesser salary and [he] was largely responsible for the entire income realized by the petitioner."
Therefore, the determination was made that the salary paid to Chandler during the taxable
years, by comparison with those paid officers of similar establishments in the locality during
the same years, was held to be reasonable.
Skyland Oldsmobile, Inc. v. Commissioner, T.C. Memo. 1972-17, CCH 31,220(M). Based
upon the "expert" testimony of the assistant zone manager for the Oldsmobile division of
General Motors, the owner-dealer has the ultimate responsibility for the departmental and
overall operation of the dealership. And in this case particularly, the petitioner provided
evidence that indicated that the shareholder worked long hours and was responsible for all
phases of the business: advertising, sales (new cars and old cars), financing, customer
relations, and promotions.
Lloyd Schumacher Chevrolet-Buick, Inc. v. United States, 80-2 U.S.T.C. (CCH) Paragraph
9576, (DC-IL 1980). "* * * The court determined that [the] amounts paid to an employee
solely responsible for the overall operations of the taxpayer[’s] automobile dealership during
the years in issue constituted a reasonable allowance for compensation paid for personal
services actually rendered and were deductible in full by the taxpayer business." As the
employee-owner, he was responsible for the direction of product line stock, the balancing of
inventories, for the direction, stimulation and encouragement of salesmen for new and used
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