Elliotts, Inc. v. Commissioner

716 F.2d 1241 (1983)

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Elliotts, Inc. v. Commissioner

United States Court of Appeals for the Ninth Circuit
716 F.2d 1241 (1983)

Facts

Elliotts, Inc. (the company) (plaintiff) was in the business of selling and servicing agricultural equipment. Elliotts paid a fixed salary of $2,000 and a fixed bonus of 50 percent of net profits to its chief executive officer and sole shareholder, Edward Elliott. Elliott fulfilled the responsibilities of a general manager, sales manager, and credit manager—roles often filled by two or three people in comparable companies. Elliott worked about 80 hours per week in performing these functions. The company reported a return on equity of 21 percent in 1975 and 19 percent in 1976. In 1975 the company claimed a deduction of $181,074 for compensation paid to Elliott. In 1976 the company claimed a similar deduction of $191,663. The Commissioner of Internal Revenue (defendant) found these deductions excessive and issued a notice of deficiency. The company sought a redetermination in the United States Tax Court, which fixed Elliott’s reasonable compensation for deduction purposes at $120,000 for 1975 and $125,000 for 1976. The company appealed. The United States Court of Appeals for the Ninth Circuit granted certiorari.

Rule of Law

Issue

Holding and Reasoning (Hug, J.)

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