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

cars and trucks, setting objectives and sales rules, purchasing and planning a two acre addition
to the business facility, negotiating with the business’s suppliers and negotiating with
Chevrolet for a heavy-duty truck franchise. He also had the responsibility for warranty
problems and banking, including maintenance of proper cash flow, working capital and
various other administrative matters.
S & R Chevrolet Co., Inc. v. Birmingham, 93 F.Supp. 950 (N.D.IA1950). The Commissioner
determined that the compensation paid to the shareholders and their sons was excessive and
unreasonable. The finding of the Court was that the taxpayer had not sustained the burden of
proof otherwise. Their decision was based on these factors: deductions for compensation to
the officers of the corporation and their sons which included a percentage of profits as well as
straight salary; the taxpayer realized a return of 6 percent on its invested capital, an inadequate
return of capital considering the general business conditions prevailing in the automotive
industry for the year in question; and the fact that the taxpayer did not pay dividends to its
stockholders from 1941 to 1946, inclusive.
Castle Ford, Inc. v. Commissioner, T.C. Memo. 1978-157, CCH 35,117(M). The court
redetermined the amount of salary payments deductible as reasonable compensation that were
paid to its officer-shareholder. The "* * * petitioner [had] failed to introduce any evidence
(other than unsupported assertions * * *) as to [the] compensation paid by comparable
business[es] to executives with responsibilities comparable to * * *" the petitioner’s. The fact
that there was "* * * agreement between [the] petitioner and [the shareholder that]
contemplated the possibility that a portion of the salary might be disallowed as unreasonable
* * *" was an element that had some bearing on the decision made by the court.
Van’s Chevrolet, Inc. v. Commissioner, T.C. Memo. 1967-172, CCH 28,583(M). The
amount of reasonable compensation of the principal officer-owner of an automobile dealership
was redetermined. In determining the amount that was reasonable, the court used its best
judgment in comparing the amounts being paid in prior years for the services being rendered.
Superior Motors, Inc. v. Commissioner, T.C. Memo. 1974-187, CCH 32,689(M). The Tax
Court found that the auto agency’s success was due largely to the officer’s efforts and that it
was the general practice in the car sales business to compensate the dealer-owner by both
salary and a bonus based on a percentage of the net profits after salary and before taxes.
However, the Court reduced the amount of reasonable compensation deductible by a
corporation for an officer who was the sole owner of an auto agency who set his own salary.
Osborne Motors, Inc. v. Commissioner, T.C. Memo. 1976-153, CCH 33,826(M) stated the
compensation, in the combination of salary and bonuses, paid to officer-stockholders based
upon a percentage of net profits were reasonable and deductible as business expenses.
Childers & Venters Motors Inc. v. United States, 62-2 U.S.T.C. (CCH) Paragraph 9825
(DC-KY 1962). The jury redetermined the amount of reasonable compensation to each of the
top four officials of an automobile agency. The fixed reasonable compensation amounts
ranged from $7,000 to $13,500.
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