United States Court of Appeals for the Ninth Circuit
340 F.2d 861 (1965)
Raymond I. Smith (plaintiff) owned and operated an illegal gaming establishment in California that later moved to Nevada. The gaming establishment was established in Nevada as Harolds Club (Club). Smith’s two sons wholly owned the Club. In 1935, Smith agreed to manage the Club for a salary and bonus. In 1941, Smith and his sons decided to enter a fixed percentage arrangement. Smith suggested that he should receive 20 percent of the profits, since Smith was the “brains” of the organization. The sons agreed. From 1952–1956, Smith’s salary ranged from $350,000 to $560,000. The Club deducted this amount as a reasonable salary. The Commissioner (defendant) determined that the Club could not deduct the full value of Smith’s salary. At the Tax Court, competing gaming establishments testified that Smith’s salary was reasonable. The Tax Court ruled in favor of the Commissioner.
Rule of Law
Holding and Reasoning (Hamley, J.)
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