Patton v. Commissioner

In July 1940, James Patton (Patton) and Vincent Patton (Vincent) (plaintiffs) formed a partnership for their firm, called the Patton Company (the company). Shortly thereafter, the company’s affairs were turned over to Vincent. William Kirk was hired by the company as an employee in 1937 to complete office tasks. In January 1941, Patton and Vincent entered into a contract with Kirk, under which Kirk was to receive a $2,400 base salary until 22.5 percent of net profits exceeded $2,400. If 22.5 percent of net profits exceeded $2,400, Kirk was to receive 10 percent of net sales as long as the percentage, plus base salary, did not exceed 22.5 percent of net profits. Kirk was not a partner of the company. At this time, Kirk handled the financials, including billing, kept Social Security records, kept Vincent informed of bank balances, and called agents for approval of wage increases. In 1943 the company earned $460,494.06 in gross sales. Subsequently, the company claimed deductions in 1943 for the compensation paid to Kirk in the amount of $46,049.41. However, the commissioner of internal revenue (defendant) determined that $13,000 was reasonable compensation for Kirk and limited deductions to that amount. The United States Tax Court found in favor of the commissioner and determined that $13,000 was reasonable. Patton did not introduce into evidence any books or verified entries, which would have detailed the nature and volume of Kirk’s work and capabilities to perform it. Patton did not introduce any evidence showing compensation paid to similar employees in similar industries.