
    411 F.2d 1282
    JONES BROTHERS BAKERY, INC. v. THE UNITED STATES
    [No. 9-66.
    Decided June 20, 1969]
    
      
      William C. Gifford, Jr., for plaintiff. attorney of record. Ivins, Phillips <& Barker, of counsel.
    
      Norman J. Hoffman, Jr., with, whom was ney General Johnnie M. Walters, for defendant. Philip R. Miller, of counsel.
    Before Cowen, Chief Judge, Laramore, Durfee, Davis, Collins, Skelton, and Nichols, Judges.
    
   Per Curiam :

plaintiff is seeking in this case to recover refunds of income taxes previously paid for the fiscal years 1959,1960, and 1961.

It is our opinion that the plaintiff is a recovery for each of the years involved in the present 'action.

Introduotion

The plaintiff is a corporation, organized under the laws of the State of North Carolina. Since its incorporation in 1928, the plaintiff has been engaged in the baking business. It bakes bread and rolls, and sells them at wholesale, principally under the trade name “Holsum.” The plaintiff also sells cakes at wholesale. It does not bake the cakes, but purchases them elsewhere for resale.

The plaintiff’s sales are all on consignment, in that its bread, rolls, and cakes are initially sold to a retail outlet, such as a grocery store, where the products are put on the grocery store’s racks or shelves for sale to consumers. Each product is “coded” in relation to a date; and any product that is not sold by the retail outlet within the “code” period is picked up by the plaintiff’s salesman, and credit is given the grocery store for it. For example, the plaintiff allows bread to stay on a grocery store’s shelves no longer than 2 days. The “stales,” as the returned loaves are called, are disposed of at salvage prices through several retail outlets maintained by the plaintiff for that purpose. If the surplus stores are unable to sell them, the “stales” are sold to farmers for livestock feed at 2y2 to 3 cents a pound.

The plaintiff’s principal place of business is located in Greensboro, North Carolina. Its sales territory during the years in issue encompassed approximately 16 counties in the area around Greensboro.

The plaintiff was founded by O. C. Jones. He was the plaintiff’s principal shareholder and chairman of the plaintiff’s board of directors as long as he lived, and he was also the plaintiff’s president for more than 18 years.

For a number of years after the plaintiff’s incorporation in 1928, brothers of O. C. Jones were shareholders, officers, and directors of the plaintiff — hence, the corporate name, “Jones Brothers Bakery, Inc.” However, the brothers of O. C. Jones ceased their connection with the plaintiff long before the time that is involved in the present litigation. O. C. Jones himself died on August 8,1953, which was several years before the period in issue.

During the period with which we are concerned, the plaintiff’s shareholders and officers were Paul C. Jones, Miss Ora E. Jones, Mrs. Gladys J. Chappell (nee Gladys Jones), and Mrs. Claudia L. Jones. Mrs. Claudia L. Jones is the widow of O. C. Jones; and Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell are the children of O. C. Jones and Mrs. Claudia L. Jones.

During the years in issue, Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell each owned 44% shares (or 27.8 percent) of the plaintiff’s 160 outstanding shares of common stock, and Mrs. Claudia L. Jones owned 26shares (or 16.6 percent) of the plaintiff’s stock. Paul O. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell constituted the plaintiff’s board of directors.

Officers' Compensation

The principal problem in the present case is to determine whether the Internal Bevenue Service acted properly or improperly in disallowing portions of the amounts which the plaintiff paid to Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell as compensation for the fiscal years 1959, 1960, and 1961, and which the plaintiff claimed on its Federal income tax returns for those years as deductible business expenses.

For the fiscal year 1959, the plaintiff paid a total of $68,-778.08 to Paul C. Jones as compensation, it paid a total of $86,941.81 to Miss Ora E. Jones as compensation, and it paid a total of $21,986.21 to Mrs. Gladys J. Chappell as compensation; and the plaintiff claimed these several amounts as deductible business expenses on its Federal income tax return for 1959. Upon auditing the plaintiff’s income tax return for 1959, the Internal Revenue Service determined that $24,508.03 of the amount paid to Paul C. J ones, that $15,691.81 of the amount paid to Miss Ora E. J ones, and that $12,056.21 of the amount paid to Mrs. Gladys J. Chappell constituted unreasonable compensation. Thus, the IRS allowed the plaintiff to deduct only $39,270 as reasonable compensation to Paul C. Jones, $21,250 as reasonable compensation to Miss Ora E. Jones, and $9,930 as reasonable compensation to Mrs. Gladys J. Chappell.

For the fiscal year 1960, the plaintiff paid to Paul C. Jones as compensation the total amount of $58,627.08 (of which the Internal Revenue Service disallowed the sum of $28,350.68 and allowed the sum of $30,276.40 as reasonable compensation); the plaintiff paid to Miss Ora E. Jones as compensation the total amount of $33,851.25 (of which the Internal Revenue Service disallowed the sum of $17,419.25 and allowed the sum of $16,432 as reasonable compensation) ; and the plaintiff paid to Mrs. Gladys J. Chappell as compensation the total amount of $19,925.83 (of which the Internal Revenue Service disallowed the sum of $12,244.23 and allowed the sum of $7,681.60 as reasonable compensation).

For the fiscal year 1961, the plaintiff paid to Paul C. Jones as compensation the total amount of $48,370.93 (of which the Internal Revenue Service disallowed the sum of $17,136.93 and allowed the sum of $31,234 as reasonable compensation); the plaintiff paid to Miss Ora E. Jones as compensation the total amount of $27,697.56 (of which the Internal Revenue Service disallowed the sum of $10,752.56 and allowed the sum of $16,945 as reasonable compensation); and the plaintiff paid to Mrs. Gladys J. Chappell as compensation the total amount of $15,823.37 (of which the Internal Bevenue Service disallowed the sum of $7,902.37 and allowed the sum of $7,921 as reasonable compensation).

In determining whether the claimed deductions were or were not properly allowable as reasonable compensation, the court is dealing with a question of fact that must be decided in the light of all the facts and circumstances involved in the case. Bringwald, Inc. v. United States, 167 Ct. Cl. 341, 347, 334 F. 2d 639, 643 (1964); Boyd Construction Co. v. United States, 168 Ct. Cl. 579, 586, 339 F. 2d 620, 624 (1964). Accordingly, it is necessary to set out the pertinent facts in considerable detail.

Paul C. Jones was born on November 30,1921. As a young boy and while attending high school, he worked in the plaintiff’s bakery at various points along the production line on Saturdays and in the summertime.

Paul C. Jones received 2 years of junior college training at the Oak Bidge Military Institute, where he took a liberal arts course, including mathematics and science. He did not receive an academic degree.

In 1942, Paul C. Jones was commissioned a second lieutenant in the United States Army. After attending schools in the military service and receiving additional training, he served as an instructor in armored vehicles at Fort Knox, Kentucky. Thereafter, he transferred to the Army Air Corps and became a fighter pilot in 1945. He was released from the military service in the latter part of December 1945 as a captain. He became a full-time employee of the plaintiff upon his release from the military service, and he has worked full-time for the plaintiff ever since then.

Miss Ora E. Jones began working at the plaintiff’s bakery during her high school years on a part-time basis in the wrapping and retail departments. She graduated from Greensboro High School in 1935.

After graduating from high school, Miss Ora E. Jones attended Salem Academy in Winston-Salem, North Carolina, for a year, and then attended Greensboro College, from which she graduated magna mm laude in 1940, with a liberal arts major in mathematics and a minor in English.

In August 1940, Miss Ora E. Jones went to work for the plaintiff on a full-time basis, and she has continued to work full-time for the plaintiff ever since 1940. She started out as an assistant to the office manager. She held this position until January 30,1945, when she became the office manager.

While in high school, Mrs. Gladys J. Chappell — then Miss Gladys Jones — began working part-time at the plaintiff’s bakery on weekends, on holidays, and during the summer months.

After graduating from Greensboro High School, the then Miss Gladys Jones attended Greensboro College for 2 years, taking courses principally in home economics, and she attended Guilford College for % year. She did not graduate from college.

When Paul C. Jones returned to Greensboro from the military service in December 1945 and became a full-time employee of the plaintiff, O. C. Jones was a very sick man. He had suffered a heart attack and was not physically capable of any sustained activity. Because of this, O. C. J ones turned over the responsibility for managing the bakery to his children as soon as possible. On February 25, 1946, O. C. Jones’ brothers, who had been serving as members of the plaintiff’s board of directors, resigned as directors, and Paul C. Jones and Miss Ora E. Jones were elected to serve with their father as members of the board.

The then Miss Gladys Jones became a full-time employee of the plaintiff in May 1946, when she was 20 years old. She worked in the office.

On June 4,1946, Paul C. J ones became vice president and Miss Ora E. Jones became secretary-treasurer of the plaintiff.

The then Miss Gladys Jones continued to work full-time for the plaintiff until October 26,1946, when she was married to Wallace P. Chappell and moved to Creedmoor, North Carolina, which is located about 70 miles from Greensboro.

On December 16,1946, Paul C. Jones was elected as president of the plaintiff, O. C. Jones stepped down to a position as vice president, Mrs. Gladys J. Chappell was elected as a vice president of the plaintiff, and Miss Ora E. Jones was re-elected as secretary-treasurer of the plaintiff. On the same day, Mrs. Chappell was elected as a member of the plaintiff’s board of directors. Thereafter, until the death of O. C. Jones on August 8, 1953, the plaintiff’s board of directors consisted of O. C. Jones as chairman of the board and his children, Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell, as members of the board.

Perhaps it should be mentioned at this point that although Mrs. Gladys J. Chappell ceased to be a full-time employee of the plaintiff upon her marriage and removal from Greensboro to Creedmoor in October 1946, she continued to work for the plaintiff on a part-time basis for the next 7 years. She assisted in the office, principally as a replacement for office employees during their vacations. During this period, Mrs. Chappell commuted between Creedmoor and Greensboro, a distance of about 70 miles, two or three times a week; and, in addition, she spent one week out of every month in Greensboro. As children were added to her family (she has two children), Mrs. Chappell was accompanied by her children on her trips to Greensboro, and they would stay at the home of her parents. Mrs. Chappell resumed full-time work for the plaintiff in 1953, under circumstances to be related later.

Since the death of O. C. Jones on August 8,1953, the plaintiff’s board of directors has consisted of Paul C. Jones as chairman of the board and his sisters, Miss Ora E. Jones and Mrs. Gladys J. Chappell, as members of the board.

Effective August 24, 1953, following the death of O. C. Jones, the plaintiff’s officers consisted of Paul C. Jones as president and general manager, Miss Ora E. Jones as first vice president, secretary, and treasurer, and Mrs. Gladys J. Chappell as second vice president and assistant secretary. This line-up of officers continued until June 7, 1955. From that date until the present time, the officers of the plaintiff have consisted of Paul C. Jones as president and general manager, Miss Ora E. Jones as first vice president, secretary, and treasurer, Mrs. Gladys J. Chappell as second vice president and supervisor in charge of Durham operations (the Durham operations will be discussed subsequently), and Mrs. Claudia L. Jones as assistant secretary and assistant treasurer (Mrs. Claudia L. Jones has never taken an active part in the actual management of the plaintiff). During the period involved in the present litigation, therefore, the four persons mentioned in the preceding sentence were the officers and the sole stockholders of the plaintiff, and the first three persons constituted the plaintiff’s board of directors.

In 1946, when Paul 0. Jones, Miss Ora E. J ones, and Mrs. Gladys J. Chappell became officers and directors of the plaintiff, the plaintiff served a market area covering only Greensboro and the towns within 25 miles of Greensboro, including Reidsville to the north, Burlington to the east, Asheboro to the south, and High Point to the west. The net sales of bread, rolls, and cakes were slightly over $700,000 per year. The bread, rolls, and cakes were distributed by salesmen from the plaintiff’s bakery in Greensboro at wholesale to retail outlets, mostly small, independent “mom and pop” grocery stores, although there were a few A&P chain stores among the plaintiff’s customers. Cakes have always been purchased by the plaintiff for resale. Bread and rolls, however, were produced by the plaintiff through the conventional method of making bread, which was quite complicated and took roughly 12 hours. The bakery’s total capacity was approximately 1,800 pounds per hour at that time. The plaintiff’s production capacity was limited because the oven had to be utilized to bake the rolls first before the loaves of bread could be produced. The total number of employees was approximately 50-60.

By 1947, the plaintiff was operating 16 routes that served 880 customers. The plaintiff’s employees numbered 66.

By the time of O. C. J ones’ death in August 1958, the plaintiff had increased its sales to $1,067,000 in the fiscal year 1953. It was then operating 25 routes from its Greensboro bakery and serving 1,250 customers in 6 counties. The number of employees had increased to 93.

Prior to 1953, all of the plaintiff’s routes were operated out of its Greensboro bakery. In an effort to increase its sales and to facilitate the distribution of its products to its customers, the plaintiff established relay distribution points in several North Carolina cities, as follows: in Durham on July 29, 1953; in Asheboro on May 1, 1956; in Raleigh on November 30, 1956; in Sanford on September 15, 1958; and in Albe-marie on May 1, 1959. At each, relay distribution point, the plaintiff employed a route supervisor, who had the responsibility of seeing to it that the routes operating from the station were properly served by the route salesmen.

The number of routes operated by the plaintiff had expanded to 51, 61, and 57 in the fiscal years 1959, 1960, and 1961, respectively; and the customers served by these routes numbered 2,448 in 1959, 3,050 in 1960, and 2,793 in 1961. The plaintiff’s sales territory had expanded to 16 counties in the area around Greensboro by the 1959-1961 period; and the plaintiff’s net sales had increased to $2,276,075 in 1959, to $2,734,044 in 1960, and to $2,565,916 in 1961. The plaintiff’s net worth had increased from $213,428.36 at the end of the fiscal year 1953 to $430,151.80 at the end of the fiscal year 1959, to $479,893.72 by the end of the fiscal year 1960, and to $516,037.05 by the end of the fiscal year 1961. The plaintiff’s employees numbered 178 in 1959,160 in 1960, and 162 in 1961.

The large expansion in the plaintiff’s operations and business between 1946, when Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Ohappell became officers and directors of the plaintiff, and the 1959-1961 period that is involved in the present litigation was not accomplished in any easy fashion. The bread industry is a highly competitive industry. In particular, the environment in which the plaintiff operates has always been a low-price, highly competitive market area, with wholesale bakery prices well under the prices prevailing in the rest of the United States. This situation has been aggravated by the growth of chain supermarkets that bake their own bread and then sell it in their own stores at a lower price — and display it on their racks or shelves more advantageously — than the bread which they offer for sale from the production of other bakeries, such as the plaintiff.

Because of the pressure from the increasing number of chain supermarkets, the plaintiff has added routes in almost every year since 1949, only to find its sales per mile of travel decreasing, thus indicating that the plaintiff has been forced to travel farther and farther in order to keep its volume up and expand it.

The plaintiff has been able to overcome the competition from chain supermarkets by offering the public products of better quality than those produced by the supermarkets.

The plaintiff’s ability to produce high-quality products at competitive prices has been attributable in large part to a program that was inaugurated and accomplished under the leadership of Paul C. Jones for the modernization and improvement of the plaintiff’s plant and operations. When Paul C. Jones became a full-time employee of the plaintiff after being released from the military service in December 1945, he was assigned the task of studying the physical operations in the bakery and determining the plaintiff’s efficiency in terms of the number of pounds of production per man per hour. He talked to salesmen who visited the plaintiff’s plant for the purpose of selling supplies to the plaintiff, and sought their opinions as to where the most modern bakery in the country was located. He learned that everyone in the baking business was talking about the Fuchs Bakery in Miami, Florida, because it was able to produce 8,000 pounds of baked bread per day with six or eight men. Paul C. Jones went to Miami, became a good friend of the owner of the Fuchs Bakery, went through the plant there, and observed its operations. On the basis of this observation, he concluded that the plaintiff was far behind the Fuchs Bakery in operating efficiency.

Upon the basis of the report made by Paul C. Jones, it was decided by the plaintiff’s management that steps should be taken to improve and modernize the plaintiff’s production facilities. The plaintiff’s management had plans drawn up for the construction of a new plant, and then went to the Jefferson Life Insurance Company to find out whether the plaintiff could borrow the money that would be necessary in order to build the proposed new plant. The insurance company indicated that perhaps a loan to finance the construction of the new plant would be made if it were permitted to name a person to serve on the plaintiff’s board of directors. The suggestion made by the Jefferson Life Insurance Company that it be permitted to name a member of the plaintiff’s board of directors was unsatisfactory to the plaintiff’s management, so the plan to build a new plant was abandoned. Instead, the plaintiff’s management decided that the plaintiff would inaugurate and carry out a gradual improvement program.

A faster bread wrapper, a divider, and several faster slicing machines were purchased in 1947 and 1948 (Paul C. Jones having become president of the plaintiff on January 1,1947). A second rounder and a larger and faster proof box were purchased in 1949. A mixing machine, of twice the capacity theretofore available, was purchased in 1950, along with a larger proof box. Faster slicing machines and wrapping machines were purchased in 1951 and 1952, along with a new pan-o-mat for dividing rolls in order to speed up the roll production. Because the mixing and dividing had been speeded up, a larger oven was purchased in 1952. A pan-return conveyor system was installed in 1953.

Prior to and through the early 1950’s, one of the factors limiting the expansion of the plaintiff’s business was the inordinate amount of time, labor, and expense involved in procuring and utilizing bagged flour. In the early 1950’s, Paul C. Jones heard that an experiment with the bulk transfer and storage of flour was being conducted, so he went to Kansas City in order to discuss with major millers the possibility of working out a plan for the bulk transportation of flour to, and the bulk storage of flour in, Greensboro, so as to eliminate bags, freight on bags, and the handling of bags. International Mills, General Mills, and Pillsbury were interested in making bulk sales of flour, but they were not interested in assuming the responsibility for the transportation of such flour to Greensboro.

Paul C. Jones next went to Salina, Kansas, in 1953 or early in 1954 and conferred with John Yanier, president of The Weber Flour Mills in that city. The Weber Flour Mills had previously installed a bulk-flour facility at a local bakery in Salina, and Mr. Vanier took Mr. Jones to see that facility. At the time, it was the only bulk-flour facility that had been installed at a medium-sized bakery anywhere in the United States (although a large facility of this type had been installed in Toledo, Ohio).

Mr. Yanier was interested in the project suggested by Paul C. Jones. He went to Greensboro, looked over the situation there, and made arrangements for the establishment and maintenance of a bulk-flour terminal in a building the Southern Bailway. The plaintiff then constructed on its property a facility for the storage of flour in bulk. The Weber Flour Mills’ bulk-flour terminal in Greensboro and the plaintiff’s bulk-flour storage facility were established in 1955, and they were the first installations of this type in the Carolinas. Since 1955, every major baking plant in the Carolinas has shifted to the use of flour in bulk.

In 1956 and 1957, some additional machinery was installed by the plaintiff to speed up the roll production and bread cooling systems.

In 1959, Paul C. Jones heard of an experimental continuous-mix machine, called the Amflow, manufactured by the American Machine & Foundry Company. One of these machines had been installed at a bakery in Anna, Illinois, and Mr. Jones went to see this machine in 1959. It was not a completely workable machine at the time. Paul C. Jones made some good suggestions to the Bakery Equipment Division of the American Machine & Foundry Company for improving the Amflow continuous-mix machine, and he made arrangements with AMF to put one of its Amflow machines in the plaintiff’s plant at Greensboro. In conjunction with the plaintiff, AMF was able thereafter to perfect the Amflow continuous-mix machine so as to produce an acceptable, saleable loaf of bread. The Amflow continuous-mix machine cut the production in the plaintiff’s plant for a loaf of bread from 12 hours to approximately 5 y2 hours, and increased the plaintiff’s production capacity to approximately 5,000 pounds an hour, with the number of production workers cut by two-thirds.

In 1960, the plaintiff installed a new liquid-sugar tank, which again speeded up the production process by eliminating bagged granulated sugar.

Since becoming the plaintiff’s president on January 1,1917, Paul 0. Jones has had the sole responsibility for the purchasing of all equipment acquired by the plaintiff, and he has played the leading role in planning and carrying through to fruition the plaintiff’s modernization and improvement program.

The plaintiff’s management, in expanding the plaintiff’s business despite a difficult competitive situation, has not only devoted a great deal of time and effort to improving the plaintiff’s plant and operating efficiency, hut has also paid close attention to the control of costs. One of the important elements of cost control has consisted of diligent attention to purchasing. With the exception of flour and equipment (which are purchased by Paul C. Jones), Miss Ora E. Jones has had the sole responsibility for the plaintiff’s purchasing. This has required her to maintain accurate and up-to-the-minute records with respect to inventories, and to watch the markets continuously so as to be in a position to make the best purchases, in the proper quantities, and at advantageous times. Most of the supplies and articles purchased by Miss Jones fluctuate almost daily in price. By exceedingly careful and diligent attention to the details of the inventory, market prices, and quantities, Miss Jones has been highly successful in keeping the plaintiff’s purchasing costs to a minimum. Miss Jones is responsible for purchases ranging between $500,000 and $750,000 per year for materials and supplies. She deals with 29 or more major suppliers.

■In addition to purchasing, Miss Ora E. Jones reviews the voluminous cost control data each day, first, to check its accuracy and, second, to do something about reducing any costs that are out of line. Based on her experience with cost control data, Miss J ones is frequently able to spot a problem and correct it immediately.

Miss Ora E. Jones also exercises general supervision over all office work, is responsible for all reports, returns, and payrolls, and is in complete charge of operations at night and when Paul O. Jones is absent from Greensboro.

As indicated heretofore in this opinion, Paul 0. Jones and Miss Ora E. Jones were the top executives in charge of the plaintiff’s operations during the period that is involved in the present litigation. They were assisted in the performance of their functions by a sales manager, an assistant sales manager, a production manager, and an office manager at the plaintiff’s headquarters in Greensboro.

Mrs. Gladys J. Chappell is in a different category from her brother, Paul O. Jones, and her sister, Miss Ora E. Jones. As indicated previously in this opinion, she — at age and as Miss Gladys Jones — worked full-time for the plaintiff as an office employee during a portion of 1946. Upon her marriage and removal from Greensboro to Creedmoor in October 1946, she ceased to be a full-time employee of the plaintiff, although she continued to work for the plaintiff on a part-time basis for approximately 1 years after 1946. Mrs. Chappell resumed full-time work for the plaintiff in July 1953. This occurred in connection with the establishment by the plaintiff of a relay distribution point in Durham, North Carolina, which is fairly near Mrs. Chappell’s home in Creedmoor.

As a matter of fact, Mrs. Chappell was responsible for the plaintiff’s entry into the Durham market area. In 1953, another bakery that had been distributing bread in the Durham area under the “Holsum” trade name pulled out of the Durham area, making it possible for the plaintiff to enter that area with its “Holsum” products. Mrs. Chappell got in touch with various food dealers in the Durham area and persuaded them to allow the plaintiff to put its Holsum products into the grocery stores. She hired a supervisor for the Durham operations and introduced him to each of the grocerymen in the area. Mrs. Chappell found a temporary location for the relay distribution point on West Geer Street, and this was used by the plaintiff until Mrs. Chappell later found a permanent location at 500 Eigsby Avenue in Durham. The plaintiff’s operations in the Durham area started with one route in 1953. By 1954, there were five routes operating out of the Durham distribution point.

In November 1956, Mrs. Chappell spearheaded for the plaintiff the establishment of a relay distribution point in Ealeigh, North Carolina, for the distribution of the plaintiff’s products in the Ealeigh market area. She found a location on West Hargett Street in Ealeigh for the station. She met with food dealers, employed personnel, and set up routes for the Ealeigh area.

During the years in issue, Mrs. Gladys J. Chappell was the plaintiff’s manager in overall charge of the operations in the Durham and Ealeigh market areas. The plaintiff also maintained a sales manager in Durham, and maintained at the Durham and Baleigh relay distribution points supervisors performing functions similar to those performed by supervisors at other relay distribution points.

The plaintiff’s sales in the Durham and Baleigh areas totaled $454,334.57 in the fiscal year 1959, $507,594.92 in the fiscal year 1960, and $564,100.50 in the fiscal year 1961.

Mrs. Gladys J. Chappell was also a member of the plaintiff’s board of directors during the years in issue (and, indeed, at all times since December 16, 1946). As such, she participated in all the major policy decisions that were made for the plaintiff.

In addition, Mrs. Chappell had the title of second vice president of the plaintiff during the years in issue, but the record does not disclose the nature of the duties, if any, that she performed in this capacity.

Since Paul C. Jones is the key figure in the plaintiff’s management, consideration will first be given to the reasonableness of the amounts of $68,778.03, $58,627.08, and $48,370.93 which the plaintiff paid to him as compensation for the fiscal years 1959, 1960, and 1961, respectively.

As stated earlier in this opinion, the reasonableness of compensation in a tax case of this type is a question of fact. While there is no definite formula by which the question of the reasonableness, for income tax purposes, of compensation in any particular instance can be determined (Irby Construction Co. v. United, States, 154 Ct. Cl. 342, 346, 290 F. 2d 824, 826 (1961)), there are several factors which the courts regard as pertinent to such an inquiry.

Perhaps the most significant factor in passing upon the reasonableness of compensation in a tax case is a comparison between the compensation that is under consideration and the prevailing rates of compensation paid to the holders of comparable positions by comparable companies within the same industry. R. J. Reynolds Tobacco Co. v. United States, 138 Ct. Cl. 1, 14 (1957), cert. den., 355 U.S. 893 (1957) ; Patton v. Commissioner, 168 F. 2d 28, 31 (6th Cir. 1948). Unfortunately, as regards the reasonableness of the compensation which the plaintiff paid to Paul C. J ones, the record in the present case does not contain evidence in the field of comparability that is entirely satisfactory.

Tbe record does contain evidence, brought out by the defendant, to the effect that the chief executive officer of a bakery located in Wilson, North Carolina, who was the sole manager of the business and had complete responsibility for all its operations, including sales, production, purchasing, and finances, received $9,100 per year as compensation. However, the bakery in Wilson had annual sales of only $1,200,000, in comparison with the plaintiff’s annual sales of approximately twice that volume in the fiscal years 1959, 1960, and 1961.

The defendant also presented at the trial evidence to the effect that, according to the American Management Association’s Executive Compensation Survey concerning the compensation paid in 1960 to the executives of companies operating in the consumer products-food field, the total annual compensation paid to the chief executive officers of such companies having annual sales between $2,000,000 and $4,000,-000 (the plaintiff’s sales during the fiscal year 1960 amounted to $2,784,044) averaged $27,100 per year; and that, according to a similar survey for 1961, the total annual compensation paid to the chief executive officers of companies having annual sales between $2,000,000 and $3,000,000 (the plaintiff’s sales amounted to $2,565,916 in the fiscal year 1961) averaged $26,800. These average compensations of $27,100 per year for 1960 and $26,800 per year for 1961 contrast with Paul C. Jones’ compensation of $58,627.08 for 1960 and $48,370.93 for 1961. Of course, the showing of comparability is very weak. Also, the record demonstrates that Paul C. Jones’ competency and the value of his services to the plaintiff are far above average.

In addition, the defendant showed at the trial that the top executive officer of the Guilford Dairy Cooperative Association, Inc. — a dairy cooperative located in Greensboro and engaged in the business of processing milk and manufacturing other milk products for resale at both wholesale and retail — received a total compensation of $40,175 for 1959 (as contrasted with Paul C. Jones’ total cotmpensation of $68,-778.03 for the fiscal year 1959); that the chief executive of the dairy received a total compensation of $39,975 for 1960 (as contrasted with Paul C. Jones’ total compensation of $58,-627.08 for the fiscal year 1960); and that the chief executive of the dairy received a total compensation of $40,411 for 1961 (as contrasted with Paul C. Jones’ total compensation of $48,370.93 for the fiscal year 1961).

In this connection, the defendant presented a considerable amount of evidence concerning- the Guilford Dairy, and such information is summarized in findings 80-119. There are a number of similarities between the plaintiff and the Guilford Dairy: e.g., both are engaged in the manufacturing and processing of basic food products; both have their principal places of 'business in Greensboro and serve comparable geographical areas; both have gradually expanded their sales areas by the additions of sales branches in other nearby cities; both distribute their products through route salesmen ; both guarantee their sales on the wholesale level of commerce, and take back the products that are not sold by their customers within specified periods; both are engaged in very competitive businesses; both have substantial investments in their plants and equipment; both have gone through extensive programs for the modernization and improvement of their plants and equipment; both pay compensation to their top executives in the form of a fixed salary and a bonus; and both are headed by chief executives who are highly competent and experienced. On the other hand, the Guilford Dairy is different from the plaintiff in a number of important respects: e.g., it is an agricultural marketing cooperative association and is not organized to make a profit for itself, but to earn money for its members as milk producers; it does not have to buy its raw material on the open market at advantageous prices, but, instead, receives from its members a continuous supply of milk without having to compete for it; and a substantial percentage of its sales are at retail to households, such sales being final and not involving the possible return of “stales.”

As previously stated, the evidence in the record with respect to the matter of comparability is not entirely satisfactory. However, the court must decide cases on the basis of the data that the parties present to it; and the only evidence furnished to the court in the general area of comparability tends to show that the amounts which the plaintiff paid to Paul C. Jones as compensation years and 1961 were, to some extent, excessively high.

Where the reasonableness a tax case, the taxpayer has the burden of proof with respect to this factual issue. Duffin v. Lucas, 55 F. 2d 786, 796 (6th Cir. 1932) , cert. den., 287 U.S. 611 (1932); Miles-Conley Co. v. Commissioner, 173 F. 2d 958, 960 (4th Cir. 1949). Therefore, it is not inappropriate in the present instance that the plaintiff should be affected adversely by the lack of fully satisfaotoxy evidence in the record relative to the matter of comparability.

Another pertinent Paul C. Jones was a major shareholder, the chairman of the board of directors, and the president and general manager of the plaintiff (a family owned corporation) during the years in issue — is a comparison between the amounts which he received as compensation and the amounts which he received as dividends, since in such a situation as the present one close scrutiny is warranted in order to ascertain whether the purported compensation actually constituted compensation for services rendered or was really to some extent a distribution of profits under the guise of compensation. Gem Jewelry Co. v. Commissioner, 165 F. 2d 991, 992 (5th Cir. 1948), cert. den., 334 U.S. 846 (1948); Ecco High Frequency Corp. v. Commissioner, 167 F. 2d 583, 585 (2nd Cir. 1948), cert. den., 385 U.S. 825 (1948); Northlich, Stolley Inc. v. United States, 177 Ct. Cl. 435, 442-443, 368 F. 2d 272, 277-278 (1966).

It has previously been self (in effect) as compensation the sums of $68,778.03, $58,-627.08, and $48,370.93 for the fiscal years 1959,1960, and 1961, respectively. For the same fiscal years, he distributed to himself (in effect) as dividends only $444.80 per year. This justifies an inference that some of the purported compensation really represented a distribution of profits. On the other hand, it must be mentioned in this connection that although Paul C. Jones and his sisters, Miss Ora E. Jones and Mrs. Gladys J. Chappell, each owned the same amount of stock in the plaintiff (i.e., 44% shares), the amounts which they paid themselves as compensation varied widely. For example, in the fiscal year 1959, Paul C. Jones’ compensation amounted to $68,778.03, Miss Ora E. Jones’ compensation amounted to $36,941.81, and Mrs. Gladys J. Cbappell’s compensation amounted to $21,986.21. There were similar variations with respect to the fiscal years 1960 and 1961.

The qualifications of a person whose purported compensation is under consideration, the nature of the services performed, and the responsibilities involved should also be taken into account in determining the reasonableness of compensation. Mayson Mfg. Co. v. Commissioner, 178 F. 2d 115, 119 (6th Cir. 1949); Patton v. Commissioner, supra, 168 F. 2d at page 31. In this connection, it has been brought out previously that during the years in issue, Paul C. Jones served as chairman of the plaintiff’s board of directors and that he also served as the plaintiff’s president and general manager. He carried the overall responsibility for the plaintiff’s operations. In addition, he fulfilled certain more specific executive functions, such as: personnel director; purchaser of flour, bakery equipment, and rolling equipment; bakery engineer (although he is not an engineer by formal education); chief of marketing and sales, manufacturing, and industrial relations; advertising executive; and chief training executive. He was exceedingly well informed about the baking business, and he provided for the plaintiff a leadership that was aggressive, creative, hard-working, competent, and dedicated. Under his leadership and guidance, the plaintiff was kept in the forefront of every major development in the baking industry. By virtue of this, Paul C. Jones was entitled to receive ample compensation for his valuable services.

On the basis of the whole record, it appears that the amounts which the plaintiff paid to Paul C. Jones as purported compensation for the fiscal years 1959,1960, and 1961 were, to some extent, unreasonably high, but that the amounts which the Internal Eevenue Service determined to be reasonable were too low. It is extremely difficult to determine just what amounts represented reasonable compensation for those years. However, there is some comfort in the realization that the trier of this factual issue is not required to fix the amount of reasonable compensation for any year with mathematical precision. H. Levine & Bros. v. Commissioner, 101 F. 2d 391, 393 (7th Cir. 1939).

After considering all the pertinent appears — and it is so found — that of the respective amounts which the plaintiff paid to Paul C. Jones as purported compensation for the fiscal years 1959, 1960, and 1961, the sum of $45,000 each year — and only that figure — represented reasonable compensation for services rendered.

The evidence indicates that Paul G. Jones, Jones, and Mrs. Gladys J. Chappell, as the plaintiff’s board of directors, seemingly regarded Miss Ora E. Jones’ services as being approximately 56 percent as valuable to the plaintiff as the services of Paul G. Jones, and that they regarded the services of Mrs. Gladys J. Chappell as being approximately 33 percent as valuable to the plaintiff as the services of Paul 0. Jones. This evaluation seems generally compatible with the evidence in the record. Consequently, it is concluded that of the amounts which the plaintiff paid to Miss Ora E. Jones as purported compensation for the fiscal years 1959, 1960, and 1961, the sum of $25,200 — and only that figure— represented reasonable compensation each year for services rendered; and it is further concluded that of the amounts which the plaintiff paid to Mrs. Gladys J. Chappell as purported compensation for the fiscal years 1959,1960, and 1961, the sum of $14,850 — and only that figure — represented reasonable compensation each year for services rendered.

Accordingly, the plaintiff is a on the issue of officers’ compensation for each of the fiscal years 1959,1960, and 1961.

Depreciation on Delivery Equipment

The plaintiff uses light delivery trucks and heavy tractor-trailers in its business. The light delivery trucks — none of which has a gross weight of more than 9,000 pounds and the vast majority of which have gross weights of less than 9,000 pounds — are used by the plaintiff’s route salesmen in delivering the plaintiff’s products from the Greensboro bakery, or from the several relay distribution points, to retail outlets on the various routes established and maintained by the plaintiff. The heavy tractor-trailers are used by the plaintiff to transport its products from the Greensboro bakery to the several relay distribution points.

Up to and through, the period 1959-1961, the plaintiff computed depreciation on its original-use delivery equipment under the “declining balance method,” and assigned a useful life of 5 years to each piece of such equipment. Upon auditing the plaintiff’s income tax returns for the fiscal years 1959,

1960, and 1961, the Internal Revenue Service determined that the plaintiff’s original-use delivery equipment had a useful life of 8 years, instead of 5 years, and recomputed the amount of allowable depreciation on this basis. In the recomputation, the Internal Revenue Service utilized a rate under the “declining balance method” of depreciation as though the useful-life period of 8 years, as determined by the IRS, had been originally estimated by the plaintiff.

On the basis outlined in the preceding paragraph, the Internal Revenue Service disallowed depreciation on delivery equipment previously claimed by the plaintiff to the extent of $11,108.53 for 1959, $11,272.23 for 1960, and $4,690.62 for 1961.

It is necessary to consider, first, the matter of the useful life of the plaintiff’s delivery equipment.

The plaintiff had on hand 72 light delivery vehicles and 7 heavy tractor-trailers during the fiscal year 1959, it had on hand 92 light delivery vehicles and 8 heavy tractor-trailers during the fiscal year 1960, and it had on hand 90 light delivery vehicles and 8 heavy tractor-trailers during the fiscal year 1961.

During the fiscal years 1959, 1960, and 1961, the plaintiff had 51, 61, and 57 routes, respectively, on which its light delivery vehicles were driven — on the average — 471,461, and 480 miles per week during the respective fiscal years. Depending on the routes over which these vehicles were operated, they covered a mileage annually that ranged between 16,000 and 40,000 miles. The heavy tractor-trailers made longer runs than the light delivery vehicles, and it was not unusual for them to cover an annual mileage of from 40,000 to 60,000 miles.

It is essential to the plaintiff’s survival that its light delivery vehicles be capable of serving each customer on a precise schedule, since many customers have assigned specific times to bakeries, including the plaintiff, for deliveries. If the

plaintiff misses its assigned time at a it is not allowed to service the outlet on that day, and it may lose the customer permanently.

The plaintiff’s management, at the time litigation, displayed its customary efficiency and effectiveness in providing for the maintenance and repair of its delivery equipment on a basis that would enable such equipment to meet the demands upon it. The plaintiff had an experienced crew of mechanics, who maintained the operating efficiency of its vehicles. The mechanics changed the oil in the trucks when needed, they lubricated each truck every other week, and they performed such other preventive maintenance procedures as were required. In addition, the plaintiff had parts available, so that the mechanics could promptly make all the necessary repairs on its trucks.

Each salesman, route, reported to the mechanics any trouble that he was having with his truck. The mechanics usually had the truck repaired and available for the salesman’s use by the next morning. If the truck was not repaired by the next morning, or if a major repair (such as an engine overhaul) was needed, the salesman would be given one of the extra trucks on hand for his use until the mechanics completed the repairs.

The evidence in the record indicates that purchasing new delivery equipment, customarily retains and uses such equipment for at least 8 years.

Indeed, it is not unusual for the plaintiff to use its light delivery trucks for 10 years. When these trucks are no longer useful in its business, the plaintiff will sometimes retain a few such trucks (without obtaining licenses for them) in order to “cannibalize” them for parts. The plaintiff disposes of the other light delivery trucks that are no longer useful in its business by selling them for prices that range between $50 and $250.

Since the plaintiff’s actual experience with its delivery equipment demonstrated that such equipment could be — and that it actually was — usefully employed in the plaintiff’s business for 8 years or longer, the Internal Revenue Service did not commit any error in determining that a useful-life period of 8 years, rather than 5 years, should be used in computing the allowable depreciation on the plaintiff’s delivery equipment for income tax purposes.

The plaintiff argues that even if the Internal Revenue Service did not commit any error with respect to the adoption of the useful-life period of 8 years, the IRS nevertheless erred in recomputing the allowable depreciation for the 1959-1961 fiscal years as though the useful-life period of 8 years had been originally estimated by the plaintiff. The action of the IRS concerning this aspect of the depreciation controversy was taken in accordance with a regulation (26 C.F.R. § 1.167(b)-2) which provides in part as follows:

(c) Change in estimated useful life. In the declining balance method when a change is justified in the useful life estimated for an account, subsequent computations shall be made as though the revised useful life had been originally estimated. For example, assume that an account has an estimated useful life of ten years and that a declining balance rate of 20 percent is applicable. If, at the end of the sixth year, it is determined that the remaining useful life of the account is six years, computations shall be made as though the estimated useful life was originally determined as twelve years. Accordingly, the applicable depreciation rate will be 16% percent. This rate is thereafter applied to the unrecovered cost or other basis.

The plaintiff says, however, that this regulation is unreasonable and invalid because it treats a “declining balance method” taxpayer (such as the plaintiff) unfairly in relation to the treatment which is accorded a “straight line method” taxpayer or a “sum of the years-digits method” taxpayer in a situation where the Internal Revenue Service determines that, for purposes of depreciation, the useful-life period of an asset should be extended beyond the number of years claimed by a taxpayer.

Under the “straight line method” of computing depreciation, the estimated salvage value of an asset at the end of its estimated useful life is subtracted from basis) of the property, and the remainder is deductible in equal annual amounts over the period of the estimated useful life of the asset. If it is determined by the Internal Revenue Service, prior to the end of the period claimed by the taxpayer as the useful life of the asset, that the useful life of the property should be extended, the cost of the property, less its estimated salvage value and less the depreciation previously allowed (or allowable), is divided equally over the remaining years of the useful life of the property, as extended by the IRS. Thus, the administrative action in extending the useful life of the property does not affect the total amount of depreciation that is allowable to the taxpayer over the useful life of the property.

Under the “sum of the ye'ars-digits method” of computing depreciation, the allowable depreciation is computed by applying changing fractions to the cost (or other basis) of the property, less the estimated salvage value of the asset at the end of its estimated useful life. The fractions to be used in this computation are derived in the following manner: by adding the numbers representing the years of the useful life of the asset (e.g., if the useful life of the asset is 5 years, the numbers to be added would be 1 plus 2 plus 3 plus 4 plus 5, . and they would total 15); by using the sum thus obtained (e.g., 15) as a denominator; by using as the numerators of the fractions the same numbers taken in inverse order for each succeeding year of useful life; and by multiplying the total allowable depreciation (i.e., cost less salvage value) by such fractions in order to compute the amounts of depreciation allowable for the several years during the useful life of the asset. Thus, in the case of an asset having a useful life of 5 years, %5ths of the total allowable depreciation (i.e., cost less salvage value) would be deductible in the first year, %5ths would be deductible in the second year, etc.

In the case of a “sum of the years-digits method” taxpayer, if it is determined by the Internal Revenue Service, prior to the end of the period claimed by the taxpayer as the useful life of an asset, that the useful life of the property should be extended, the subsequent computations respecting depreciation are made as though the remaining useful life at the beginning of the taxable year of change were the useful life of a new asset acquired at such time, and with a basis equal to the unrecovered cost of the asset at that time. Here, again, the action of the IRS in extending the useful life of an asset does not affect the total amount of depreciation that is allowable to the taxpayer over the useful life of the property.

• Under the “declining balance method” of computing depreciation, there is no subtraction of an estimated salvage value from the cost (or other basis) of an asset. The useful life of the property is estimated, and a uniform rate (which cannot exceed twice the appropriate “straight line” rate computed without adjustment for salvage) is applied each year to the unrecovered cost of the property. In the case of an asset with a useful life of 5 years, for example, the taxpayer can deduct for depreciation in the first year 40 percent of the cost of the property; he can deduct for the second year 40 percent of what remains after subtracting the allowable depreciation for the first year from the cost of the property; he can deduct for the third year 40 percent of what remains after subtracting the allowable depreciation for the first and second years from the cost of the property; and so on. The unrecovered cost at the end of the useful life of the property is presumed to be the salvage value of the asset.

It has been previously noted that when, prior to the end of the period claimed by a “declining balance method” taxpayer as the useful life of an asset, the Internal Revenue Service determines that the useful life of the property -should be extended, the pertinent regulation provides that subsequent computations shall be made as though the revised useful life had been originally estimated by the taxpayer. With respect to the example used in the preceding paragraph, if the Internal Revenue Service determines that a useful-life period of 8 years — rather than 5 years, as claimed by the taxpayer— should be used in competing the depreciation on an asset, the maximum rate that can be used in computing depreciation over the remaining useful life of the asset, as extended by the IRS, is 25 percent, instead of the 40-percent rate originally used by the taxpayer. In this respect, the plaintiff points out that a “declining balance method” taxpayer is in a less favorable position than a “straight line method” taxpayer or a “sum of the years-digits method” taxpayer when life of an asset, as originally estimated by the taxpayer, is extended by the Internal Bevenue Service.

However, a taxpayer has freedom of choice in determining whether he will utilize the “declining balance method” or the “straight line method” or the “sum of the years-digits method” in computing the depreciation on assets used in the taxpayer’s business. For a particular taxpayer — or perhaps for taxpayers in general — each method may have some advantages and some disadvantages in relation to the other methods. For example, the comparatively large amounts that are deductible as depreciation during the earlier years of the useful life of an asset under the “declining balance method” undoubtedly appeal to many taxpayers as being very advantageous. Consequently, the circumstance that the “declining balance method” may be less favorable to a taxpayer than other methods in certain situations — such as, for example, if the Internal Bevenue Service, prior to the end of the period claimed by the taxpayer as the useful life of an asset, determines that the useful life should be extended — does not make this aspect of the “declining balance method” unreasonable or invalid. It is merely a factor that should be weighed by a taxpayer in deciding whether he will adopt the “declining balance method” in preference to the other methods of computing depreciation. Moreover, a taxpayer should select a useful-life period in relation to the taxpayer’s actual experience in using depreciable assets, thus avoiding corrective administrative action.

It must be concluded, therefore, that the plaintiff in the present case has failed to establish a right to recover on the depreciation issue.

Demolition of Building

In its Federal income tax return for the fiscal year 1961, the plaintiff claimed a demolition loss in the amount of $3,838.28 on account of the demolition of a building located at 715 South Elm Street in Greensboro. Upon auditing the plaintiff’s return for 1961, the Internal Bevenue Service disallowed a portion of this deduction to the extent of $1,530.87, on the ground that the basis claimed by the plaintiff for the building at the time of the demolition was incorrect.

At all times material to this litigation, the plaintiff’s bakery was located at 104-108 East Lee Street, in Greensboro. Its East Lee Street property was bordered on the west by South Elm Street.

In 1947, the plaintiff purchased the lot known as 719 South Elm Street, which forms the rear boundary of the plaintiff’s bakery and which, after its purchase by the plaintiff, was used as a driveway for the plaintiff’s trucks into the bakery.

In August 1957, the plaintiff purchased the improved real property known as 715 South Elm Street for a total consideration of $7,500. This property consisted of a lot 59 feet wide and 100 feet deep, together with a house on the lot. The lot abutted the southwest comer of the plaintiff’s bakery, and it also abutted the plaintiff’s driveway at 719 South Elm Street.

The house on the lot at 715 South Elm Street was a frame house, with brick underpinning. It was about 50 years old in 1957, but it had been well maintained. The house was not insulated and it did not have adequate heating facilities, although it did have a fireplace, with lintels and a chimney.

At the time when the plaintiff purchased the property at 715 South Elm Street, the plaintiff’s board of directors allocated $2,500 of the purchase price to the land and $5,000 to the house.

The property at 715 South Elm Street was purchased by the plaintiff primarily in order to expand its storage facilities. The house on the lot was used by the plaintiff from August 1957 until December 1960 for the storage of flammable materials, bread pans, brooms, janitorial supplies, and insecticides.

The house at 715 South Elm Street was demolished in December 1960, primarily to make room for a garage and off-street parking. As previously stated in this opinion, the plaintiff claimed for the fiscal year 1961 a demolition loss in the amount of $3,333.28 on account of this demolition; and the Internal Revenue Service disallowed the deduction to the extent of $1,530.87, on the ground that the basis claimed by the plaintiff for the building at the time of the demolition was incorrect.

Unfortunately, tbe record does not contain adequate dence on which a finding can be made concerning the value of the building at 715 South Elm Street, either at the time of the purchase of the house and lot by the plaintiff in August 1957 or at the time of the demolition of the building in December 1960. Accordingly, the value determined by the Internal [Revenue Service is controlling, since the administrative determination is presumptively correct. Welch v. Helvering, 290 U.S. 111, 115 (1933).

Since a taxpayer suing for a tax refund has the burden of presenting to the court facts sufficient to prove a right to recover (United States v. Anderson, 269 U.S. 422, 443 (1926); Meyers v. United States, 133 Ct. Cl. 123, 127, 134 F. Supp. 520, 522 (1955)), and since the plaintiff in the present case has not met this burden with respect to the demolition issue, it necessarily follows that the plaintiff has not established its right to recover on this issue.

Conclusion

For the reasons stated in the preceding parts of this opinion, the plaintiff is entitled to recover on the claim relating to officers’ compensation, and is not entitled to recover on the other claims set out in the petition. The amount of the partial recovery can be determined in subsequent proceedings under Buie 47 (c).

Nichols, Judge,

concurring in part, dissenting in part :

I agree that the Commissioner of Internal Bevenue could have disallowed a part of plaintiff’s executive compensation. I differ both with him and with the court as to how the dis-allowance should be computed.

There is nothing illegal or immoral per se in a closely held corporation compensating its officers in part by a percentage of net profits, even when they are also stockholders. Should a reasonable plan be adopted prospectively and on a permanent basis, the tax laws would allow it considerable effect even during years when unusual prosperity might occasion executive compensation entirely out of line with that normal in similar companies paying a flat salary only. Should the additional compensation or bonus for a fiscal year be voted only after the year was closed and the results known, the permissible leeway would be a great deal less. When, as here, a plan for each year was adopted after that year has begun but before its close, there is an intermediate situation. But in none of these cases do the Tax Commissioner, our commissioner, or we judges, have any right to substitute our judgment for that of management as to whether officers should receive percentage or incentive compensation or be on a flat salary.

I think, since plaintiff was not committed to the plan for any year until voting it after the start of that year, its directors could not assume the plan was permanent, as plaintiff’s brief asserts, but should have reconsidered it each year in light of the situation then existing. Had they done this, they would have seen that the assignment of 20% of the net profits before income taxes to Paul C. Jones, 12% to Ora E. Jones, and 8% to Gladys J. Chappell, 40% in all, however reasonable at the outset, had become less and less so as time went on. As a company grows by plowing back its earnings, instead of paying them out in dividends, the relative contributions of capital, and management undergo a change. In general, as net worth, capital, sales, assets, and plant, all grow, the contribution of management also grows, but at a lesser rate, and stated as a percentage of other indicators it declines. Therefore, if 20% was reasonable for Mr. Jones in 1955, some lesser percentage or percentages would be reasonable in 1959-60-61. How much lesser, I need not, as a minority of one, pause to determine. The proper sequence of steps would have been to find what percentage or percentages would have been reasonable, prospectively applied in each year, and to compute the disallowances from them.

As a protection to the Federal Revenue, I do not know whether my technique or the court’s is more effective, but I am sure that mine allows the directors of small companies a smidgen more of freedom to make their own decisions, free of second guessing by the superior wisdom of Washington.

If, however, it is proper to do as the court does, determining an allowable fixed salary for each year, regardless of operating results, I think the court should not have altered the figures recommended by our commissioner. These were: $40,000 for $13,200 for Gladys J. Chappell. They are fact findings. Newport News Shipbuilding and Dry Dock Co. v. United States, 179 Ct. Cl. 97, 374 F. 2d 516 (1967). Thus by Buie 66 they are presumed correct. I do not see how or where the presumption has been overcome.

Collins, Judge, joins in the foregoing opinion concurring in part and dissenting in part.

FINDINGS oe Fact

The court, having considered the evidence, the report of Trial Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff is a corporation. It was organized on May 18,1928, under the laws of the State of North Carolina.

2. Since its incorporation, the plaintiff has been engaged in the baking business. It bakes and sells bread and other baked goods at wholesale, principally under the trade name “Holsum.” During recent years, the plaintiff has distributed its products under the trade name “Golden Crust” in the Charlotte, North Carolina, area, where another baker has the exclusive right to use the trade name “Holsum.”

3. The plaintiff’s principal place of business is located in Greensboro, North Carolina.

4. The plaintiff’s sales territory during the years in issue (i.e., the fiscal years that ended on April 30, 1959, on April 30, 1960, and on April 30, 1961) encompassed approximately 16 counties in the area around Greensboro, North Carolina.

5. The plaintiff files its Federal income tax returns on a fiscal-year basis (year ending April 30 of each year), and employs the accrual method of accounting.

6. The plaintiff was started in 1925 as a sole proprietorship by O. C. Jones. The production process at that time was primarily by hand at a location in Greensboro, North Carolina, about two blocks away from the present location of the plaintiff’s plant.

7. Later, the plaintiff was incorporated in 1928.0. C. Jones’ brothers, W. F. Jones, F. T. Jones, and P. A. Jones, became shareholders, officers, and directors of the plaintiff.

8. Sometime prior to November 20,1945, O. C. Jones purchased bis brothers’ shares of stock in the plaintiff.

9. Mrs. Claudia L. Jones was the wife (and is now the widow) of O. C. Jones. Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell (nee Gladys Jones) are the children of O. C. Jones and Mrs. Claudia L. Jones.

10. Since February 25, 1946, there have been 160 shares of the plaintiff’s common stock continuously issued and outstanding. On that date, O. C. Jones owned 106 shares and Paid C. Jones, Miss Ora E. Jones, and Miss Gladys Jones (later Mrs. Gladys J. Chappell) owned 18 shares each. These holdings remained the same until July 28,1955, when, following O. C. Jones’ death on August 8, 1953, his shares were transferred to his heirs, Paul C. Jones, Miss Ora E. Jones, Mrs. Gladys J. Chappell, and Mrs. Claudia L. Jones, each receiving 2614 shares. From July 28,1955 to date, the stock-holdings have remained the same, as follows:

Paul C. Jones_44% shares (or 27.8%)

Miss Ora E. Jones_44% shares (or 27.8%)

Mrs. Gladys J. Chappell_44% shares (or 27.8%)

Mrs. Claudia L. Jones-26% shares (or 16.6%)

11. (a) As of June 6,1944, the plaintiff’s board of directors consisted of O. C. Jones, chairman of the board, and his brothers, W. F. Jones, P. A. Jones, and F. T. Jones.

(b) F. T. Jones resigned as a member of the plaintiff’s board of directors on April 30,1945. Thereafter, until February 25, 1946, the plaintiff’s board of directors consisted of O. C. Jones, as chairman, W. F. Jones, and P. A. Jones.

(c) On February 25, 1946, P. A. Jones and W. F. Jones resigned as members of the plaintiff’s board of directors, and Paul C. Jones and Miss Ora E. Jones, son and daughter of O. C. Jones, were elected as members of the board.

(d) On December 16, 1946, Mrs. Gladys J. Chappell, daughter of O. C. J ones, was elected as a member of the plaintiff’s board of directors. Thereafter, until the death of O. C. Jones on August 8, 1953, the plaintiff’s board of directors consisted of O. C. Jones as chairman of the board, and his children, Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell, as members of the board.

(0) From and after August 24,1953, the plaintiff’s board of directors has consisted of Paul C. Jones as chairman of the board, and Ms sisters, Miss Ora E. Jones and Mrs. Gladys J. Chappell, as members of the board.

12. (a) The officers of the plaintiff as of June 6,1944 consisted of O. C. Jones as president and treasurer, W. F. Jones as vice president, F. T. Jones as second vice president, and P. A. Jones as secretary.

(b) F. T. Jones resigned as second vice president of the plaintiff on April 30,1945.

(c) As of June 4,1946, the officers of the plaintiff consisted of O. C. Jones as president, W. F. Jones as vice president, P. A. Jones as vice president, Paul C. Jones as vice president, and Miss Ora E. Jones as secretary-treasurer.

(d) On December 16, 1946, the following officers of the plaintiff were elected, the election to be effective on January 1,1947: Paul C. Jones as president, O. 0. Jones as vice president, W. F. Jones as vice president, P. A. Jones as vice president, Mrs. Gladys J. Chappell as vice president, and Miss Ora E. Jones as secretary-treasurer.

(e) The persons referred to in paragraph (d) of this finding continued to serve in the respective positions indicated until June 6, 1950, when the following persons were elected to serve as officers of ¡the plaintiff: Paul C. Jones as president and general manager, O. C. Jones as first vice president, Mrs. Gladys J. Chappell as second vice president, and Miss Ora E. Jones as secretary-treasurer.

(f) Effective August 24,1953, following the death of O. C. Jones on August 8,1953, the officers of the plaintiff consisted of Paul C. Jones as president and general manager, Miss Ora E. J ones as first vice president, secretary, and treasurer, and Mrs. Gladys J. Chappell as second vice president and assistant secretary.

(g) Effective June 7,1955 and until the present time, the officers of the plaintiff have consisted of Paul C. Jones as president and general manager, Miss Ora E. Jones as first vice president, secretary, and treasurer, Mrs. Gladys J. Chap-pell as second vice president and supervisor in charge of Durham operations, and Mrs. Claudia L. Jones as assistant secretary and assistant treasurer.

13. (a) Paul C. Jones is married and has three children. He was born on November 30,1921.

(b) He attended Oak Ridge Military Institute for 4 years, of which 2 years were high school and 2 years were junior college. He took a liberal arts course, including mathematics and science. He did not receive an academic degree.

(c) In 1942, he was commissioned a second lieutenant in the United States Army. After attending schools in the military service and receiving additional training, he served as an instructor in armored vehicles at Fort Knox, Kentucky. Thereafter, he transferred to the Army Air Corps and became a fighter pilot in 1945. He left the military service in the latter part of December 1945 as a captain. He became a full-time employee of the plaintiff upon his release from the military service.

14. (a) When Paul C. Jones returned from the military service in December 1945, O. C. Jones was a very sick man. He had suffered a heart attack and was not physically capable of any sustained activity. Because of this, he turned over the responsibility for managing the bakery to his children as soon as possible.

(b) Effective January 1,1947, Paul C. Jones was elected president of the plaintiff, O. C. Jones was elected a vice president, Mrs. Gladys J. Chappell was elected a vice president, and Miss Ora E. Jones was elected secretary and treasurer.

(c) Thereafter, O. C. J ones was relatively inactive in the management of the bakery. O. C. Jones died on August 8, 1953.

15. (a) During the years involved in the present litigation, the corporate officers of the plaintiff, and their respective titles, were as follows:

Name Title

Paul C. Jones_President and general manager.

Miss Ora E. Jones_First vice president, secretary, and treasurer.

Mrs. Gladys J. Chappell_Second vice president and supervisor in charge of Durham operations.

Mrs. Claudia L. Jones-Assistant secretary and assistant treasurer.

(b) All the outstanding shares of the plaintiff’s stock were owned by its officers during the years involved in the present litigation, as follows:

Paul C. Jones_ 44% shares (or 27.8%)

Miss Ora E. Jones- 44% shares (or 27.8%)

Mrs. Gladys J. Chappell- 44% shares (or 27.8%)

Mrs. Claudia L. Jones- 26% shares (or 16.6%)

(c) During the years involved in the present litigation, the plaintiff’s board of directors consisted of three members, as follows: Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell. Paul C. Jones was chairman of the board.

16. (a) At the time when Paul C. Jones, Miss Ora E. J ones, and Mrs. Gladys J. Chappell became officers and directors of the plaintiff, the plaintiff’s plant was located at 104 East Lee Street, Greensboro, North Carolina, its present location, and it served a market area covering only Greensboro and the immediately adjacent towns within 25 miles of Greensboro, including Beidsville to the north, Burlington to the east, Asheboro to the south, and High Point to the west. The net sales of bread, cakes, and rolls were slightly over $700,000 per year. Cake has always been purchased by the bakery for resale. Bread and rolls, however, were produced by the plaintiff by the then conventional method of making bread, which was quite complicated and took roughly 12 hours. Tire bakery’s total capacity was roughly 1,800 pounds per hour at that time. The total number of employees was approximately 50-60. Production capacity was limited because the oven had to be utilized to bake the rolls first before the loaves of bread could be produced.

(b) The bread, rolls, and cakes were distributed by salesmen from the plaintiff’s bakery in Greensboro at wholesale to retail outlets, mostly small independent “mom and pop” grocery stores, although there were a few A&P chain stores among the plaintiff’s customers. By 1947, the plaintiff was operating 16 routes that served 880 customers.

17. The plaintiff has always sold at wholesale. Its sales are all on consignment, in that its bread, rolls, and cakes are initially sold to a retail outlet, such (as 'a grocery store, where the products are put on the grocery store’s racks or shelves for sale to consumers. Each product is “coded” in relation to a future date; and any product not sold by the retail outlet within the “code” period is picked up by the plaintiff’s salesman «and credit is given the grocery store for it. For example, the plaintiff allows bread to stay on a grocery store’s shelves no as returned loaves are called, are disposed of at salvage prices through several retail outlets maintained 'by the plaintiff for that purpose. If the surplus stores are unable to sell them, the “stales” are sol'd to farmers for livestock feed at 2y2 to 3 cents a pound. Losses from “stales” are one of the terrific areas of losses in the industry. The plaintiff attempts to keep its “stale” losses under 5 percent.

18. (a) The bread industry is a highly competitive industry. This situation has been aggravated by the growth of chain supermarkets which bake their own bread and sell it at a lower price, and display it more advantageously, than the bread which they offer for sale from the production of other independent and chain bakeries. The plaintiff has been able to overcome this competition by offering the public a better quality product than chain supermarkets.

(b) Because of the pressure from the increasing number of supermarkets, the plaintiff in almost every year since 1949 has added routes, only to find its sales per mile of travel decreased, indicating that the plaintiff has been forced to travel farther and farther to keep its volume up and to expand it.

(c) Due to competitive market conditions, neither the plaintiff nor the other bakeries with which the plaintiff was in competition increased the wholesale selling price of bread during the period 1956-1964. The plaintiff relied upon increased volume and cost reductions to sustain its profits.

(d) The plaintiff’s competition in the sale of bread in 1946 consisted of one other independent bakery and three bakeries owned by large baking chains, American Bakeries, Southern Bakeries, and Ward Baking Company; and, in addition, A&P had its own bakery to produce bread sold through its chain stores.

19. By the time of the death of O. C. Jones in August 1953, the plaintiff had increased its sales from $714,900 in the fiscal year 1948 to $1,067,000 in the fiscal year 1953. It was then operating 25 routes from its Greensboro bakery and serving 1,250 customers in 6 counties. By 1953, the plaintiff’s total number of employees had increased to 93.

20. (a) The number of routes expanded from 16 in 1947 to 51, 61, and 57 in the fiscal years 1959,1960, and 1961, respectively. The plaintiff’s sales area expanded from portions of four counties in 1947 to six counties in 1953, to counties by 1956, to 16 counties by 1960, and to approximately 30 counties by 1967.

(b) Prior to 1953, all of the plaintiff’s routes were being-operated out of its Greensboro bakery. In an effort to increase its sales and to facilitate distribution of its products to its customers, the plaintiff established relay distribution points on the dates and in the North Carolina cities shown, as follows:

Durham_July 29,1953

Asheboro-May 1,1956

Raleigh_November 30,1956

Sanford_September 15,1958

Albemarle-May 1,1959

(c) Aside from the Albemarle distribution point, which was established by the purchase of existing routes from another bakery serving that area, all the other relay distribution points operated by the plaintiff were established by company personnel.

(d) At each relay distribution point, the plaintiff employed a route supervisor, who had the responsibility of seeing to it that the routes operating from his distribution point were properly served by the route salesmen. It was also the responsibility of the. supervisor to fill out the various forms used by the plaintiff in its operations.

21. The following table shows the number of supervisory personnel at each of the plaintiff’s relay points, their wages, and the number of routes over which they were responsible: supervisory personnel

22.The following table shows the number of routes operated by the plaintiff and customers per route during each of the fiscal years 1953 through 1961:

23. In May of 1954, the plaintiff set up a branch bakery at 500 Rigsby Avenue in Durham for the production of bread and rolls. The bread production was an experimental operation, using a new continuous-mix liquid sponge method which was in the first stages of development at that time. This Durham experiment was one of the first in the country. The loaf bread proved unsatisfactory, and so the bread production at the Durham bakery was shifted to roll production in January 1955, using the conventional mix process, which proved entirely satisfactory. The Durham bakery then manufactured all of the rolls used by the plaintiff and, in addition, sold rolls to a Holsum Bakery located at Winston-Salem and operated by an uncle of Paul C. Jones and his sisters. The roll production was approximately 70,000 pounds a month, with an annual dollar sales value of around $728,000. Production continued until May of 1956, when the roll production was shifted back to Greensboro because of the installation of some new roll-making equipment there which made it more economical to produce all of the plaintiff’s rolls at Greensboro. At that time, production ceased at Durham, but the baking equipment was still kept intact.

24. (a) When Paul C. Jones became a full-time employee of the plaintiff 'after being released from the military service in December 1945, he was assigned the task of studying the plaintiff’s physical operations in the bakery and determining the plaintiff’s efficiency in terms of the number of pounds of production per man per hour. He talked to salesmen who visited the plaintiff’s plant for the purpose of selling supplies to the plaintiff, and sought as most modern bakery in the country was located. He learned that everyone in the baking business was talking about the Fuchs Bakery in Miami, Florida, because it was able to produce 8,000 pounds of baked bread per day with 6 or 8 men. Paul C. Jones went to Miami, became a good friend of the head of the Fuchs Bakery, went through the plant there, and observed its operations. Upon the basis of this observation, he concluded that the plaintiff was far behind the Fuchs Bakery in operating efficiency.

(b) Upon the basis of the report made by it was decided that steps should be taken to improve and modernize the plaintiff’s production facilities. The plaintiff’s management had plans drawn up for the construction of a new plant, and then went to the Jefferson Life Insurance Company to find out whether the plaintiff could borrow the money that would be necessary in order to build the proposed new plant. The insurance company indicated that perhaps a loan to finance the construction of the new plant would be made if it were permitted to name a person to serve on the plaintiff’s board of directors. The suggestion made by the Jefferson Life Insurance Company that it be permitted to name a member of the plaintiff’s board of directors was unsatisfactory to the plaintiff’s management, so the plan to build a new plant was abandoned.

(c) After the abandonment of the plan to construct a new plant, it was decided by the plaintiff’s management that the plaintiff would carry out a gradual improvement program.

(d) A faster bread wrapper, a divider, and several faster slicing machines were purchased in 1941 and 1948.

(e) A second rounder and a larger and faster proof bos were purchased in 1949.

(f) A mixing machine, of twice the capacity theretofore available, was purchased in 1950, along with a larger proof box.

(g) Faster slicing machines and wrapping machines were purchased in 1951 and 1952, along with a new pan-o-mat for dividing rolls in order to speed up the roll production. Because the mixing and dividing had been speeded up, a larger oven was purchased in 1952.

(h) A pan-return conveyor system was installed in 1953.

25. (a) Prior to and through the early 1950’s, one of the factors limiting the expansion of the plaintiff’s business was the inordinate amount of labor, time, and expense involved in procuring and utilizing bagged flour. In the early 1950’s, Paul C. Jones heard that an experiment with the bulk transfer and storage of flour was being conducted, and he went to Kansas City in order to discuss with major millers the possibility of working out a plan for the bulk transportation of flour to, and the bulk storage of flour in, Greensboro, so as to eliminate bags, freight on bags, and the handling of bags. International Mills, General Mills, and Pillsbury were interested in making bulk sales of flour, but they were not interested in assuming the responsibility for the transportation of such flour to Greensboro.

(b) Paul C. Jones next went to Salina, Kansas, in 1953 or early in 1954, and conferred with John Vanier, president of The Weber Flour Mills in that city. The Weber Flour Mills had previously installed a bulk-flour facility at a local bakery in Salina, and Mr. Vanier took Mr. Jones to see that facility. At the time, it was the only bulk-flour facility that had been installed at a medium-size bakery anywhere in the United States (although a large facility of this type had been installed in Toledo, Ohio). There were no bulk-flour installations in the east at the time, and people both from the east and west had been going to Salina for the purpose of inspecting the bulk-flour facility there.

(c) Mr. Vanier was interested in the project suggested by Paul C. Jones. He went to Greensboro, looked over the situation there, and made arrangements for the establishment and maintenance of a bulk-flour terminal in a building owned by the Southern Railway there. The plaintiff then constructed on its property a facility for the storage of flour in bulk. The Weber Flour Mills’ bulk-flour terminal in Greensboro and the plaintiff’s bulk-flour storage facility were established in 1955, and they were the first installations of this type in the Carolinas. Since 1955, every major baking plant in the Carolinas has shifted to the use of flour in bulk.

26. In 1956 and 1957, some additional machinery was installed to speed up the roll production and bread cooling systems.

27. (a) In 1959, Paul C. Jones heard of a continuous-mix machine which was manufactured by Wallace & Tiernan and which, had been on the market years. heard of an experimental continuous-mix machine, called the Amflow, manufactured by the American Machine & Foundry Company. In 1958, an Amflow machine had been installed at Asbury Park, New Jersey, and, in 1959, another Amflow was installed at Anna, Illinois. The Asbury Park machine did not manufacture a saleable loaf of bread. Paul O. Jones went to see the machine at Anna, Illinois, in 1959. It was not a completely workable machine at the time. Mr. Jones made some good suggestions to the Bakery Equipment Division of the American Machine & Foundry Company for improving the machine, and he made arrangements with AMF to put one of its Amflow machines in the plaintiff’s plant at Greensboro. In conjunction with the plaintiff, AMF was able thereafter to perfect the Amflow continuous-mix machine so as to produce an acceptable, saleable loaf of bread. The Amflow continuous-mix machine cut the production time in the plaintiff’s plant for a loaf of bread from 12 hours to approximately 5Yz hours, and increased the plaintiff’s production capacity to approximately 5,000 pounds an hour, with the number of production workers cut by two-thirds.

(b) Specific suggestions made by Paul C. Jones to improve the Amflow continuous-mix machine were to utilize a flour hopper above the blending tank, to have a separate blending tank for yeast, to shift from a radio control system to a variable speed drive on the divider and feed pumps, to utilize bearings on the impellers mixing the dough so as to reduce vibration and metal fatigue, and to utilize an extra shaft in the divider box to prevent vibration there. Each of these suggestions was adopted by the American Machine & Foundry Company and has since been incorporated in all of their Amflow machines.

(c) It is not feasible economically for a bakery to use an Amflow machine unless the bakery is producing at least 48,000 pounds of bread per day.

28. In 1960, the plaintiff installed a new liquid sugar tank, which again speeded up the production process by eliminating bagged granulated sugar.

29. Since becoming president of the plaintiff, Paul C. Jones has had the sole responsibility for the purchasing of all equipment acquired by the plaintiff, and he has played the leading role in planning and carrying through to fruition the plaintiff’s modernization program. Mr. Jones is not an engineer, however, and he is not a member of any engineering societies.

30. (a) Since 1935, the plaintiff has been affiliated with the W. E. Long Company, which was incorporated in June 1956 as the Independent Bakers Cooperative, Inc. This cooperative is a specialized and highly successful bakery management organization that renders bakery management and purchasing services to member bakeries. All member bakeries sign a patronage agreement which provides that in return for a fee, determined on the pounds of bread produced, each bakery is entitled to a specified number of work-days by the W. E. Long Company personnel. The number of such work-days was formerly 20, but it is now 32 and is divided among the following managerial areas:

Products control_12

Engineering_ 3

Office_ 1

Cost Control_ 3

Sales Management_12

Purchasing Service_ 1

Total Service days_32

(b) The members of the cooperative numbered approximately 78 to 80 during the period 1959 through 1961. The members’ aggregate sales amounted to approximately $240 million in 1959.

(c) During the period 1959 through 1961, approximately 70 out of the total of 78 members of the cooperative submitted cost and sales data on a regular cost report form to the W. E. Long Company for its analysis and the issuance to members of a comparative cost report on a monthly basis. The plaintiff regularly furnished such information to the cooperative, and received the cooperative’s monthly reports. The purpose of the comparative cost report was to analyze regular, detailed, reliable information from the membership with respect to costs and other financial details in over 212 categories, and to establish averages, so as to have reliable standards against which each member could compare its own operating results. This service was rendered by the cooperative in addition to furnishing the work-days mentioned in paragraph (a) of this finding.

(d) The bonuses which the plaintiff paid to its officers were not included in the cost information which the plaintiff furnished to the cooperative.

(e) For the fiscal years 1959,1960, and 1961, the plaintiff paid the following standard fees to the cooperative:

1959 $6,824

1960 6,921

1961 7,550

31. The number of employees employed by the plaintiff as of December 31 of each year from 1947 through 1966 were as follows:

1947 __ 66 1957 148

1948 64 1958 149

1949 — 79 1959 178

1950 __ 83 1960 160

1951 __ 93 1961 162

1952 __ 97 1962 159

1953 __ 90 1963 158

1954 __ 112 1964 161

1955 __ 119 1965 152

1956 — 130 1966 213

32. The following table summarizes the plaintiff’s annual net sales, after discounts and allowances, for each of the fiscal years 1948 through 1967, and the net book profits, after officers’ compensation but before Federal income tax, for each of the fiscal years 1953 through 1966:

33.By selling its products to a greater number of retail outlets in an expanded market area, the plaintiff was able to increase its total sales during the period 1953-1962 as follows:

34.The following table sets forth the plaintiff’s net worth at the end of each of the fiscal years 1953 thro.ugh 1961:

Fiscal yéar Amount

1953 _ $213,428. 36

1954 _ 237, 381. 53

1955 _ 256, 653. 75

1956 _ 284, 870. 78

1957 _ 325,214.75

1958 _ 373,444.50

1959 _ 430,151. 80

1960 _ 479, 893.72

1961_ 516,037. 05

35. These results were not obtained in any easy fashion. The environment in which the plaintiff competes has always been a low-price, highly competitive market area, with wholesale bakery prices well under the prices prevailing in the rest of the United States. For example, while the price prevailing in the southeast was approximately 16 cents per pound of bread, the price elsewhere in the country was 18 to 18.3 cents per pound of bread.

36. (a) For the fiscal years that ended April 30,1946 and April 30, 1947, the plaintiff declared and paid dividends of $8,000 and $9,600, respectively. The plaintiff did not declare or pay dividends for any of the fiscal years 1948-1955.

(b) The following table shows the plaintiff’s net income after taxes, dividends paid (both in dollar amount and as a percent of net income after taxes), and its accumulated earnings for the fiscal years 1953-1961:

37. (a) The wholesale price of bread, per pound, manufactured and sold by the plaintiff from J anuary 1947 through J anuary 1967 is shown by the following table:

WHOLESALE PRICE OF HOLSUM BREAD- PER POUND

January 1947-$0.11

January 1948_ . 12

January 1949_ .12

January 1950_ .12

January 1951_ . 14

January 1952- .14

January 1958_ . 14

January 1954_ . 15

January 1955_ . 15

January 1956_ . 16

January 1957_ . 16

January 1958_ . 16

January 1959___$0.16

January 1960_ .16

January 1961_ . 16

January 1962_ . 16

January 1963_ .16

January 1964_ . 16

January 1965_ .17

January 1966_ . 185 Raleigh._$0.21

January 1967__185 Charlotte.. . 175

(b) It can be noted that due to economic conditions, primarily the opening of supermarkets, the plaintiff did not have a price increase in the wholesale price of its bread from January 1956 through December 1964.

(c) The plaintiff’s competitors in the bakery field that distributed their products through route men received the same price for bread that was received by the plaintiff, as indicated in paragraph (a) of this finding.

38. (a) Every time a chain supermarket opens in the plaintiff’s area, it costs the plaintiff approximately $1,000 per week in sales. Most of the chain supermarkets have their own bakeries and they sell their own bread at lower retail prices than the price at which they offer the plaintiff’s bread to the consumers. Their own bread is also displayed on the most favorable shelf space and the plaintiff’s bread is placed in the less desirable locations.

(b) By producing merchandise of superior quality, the plaintiff has been able to overcome the competition referred to in paragraph (a) of this finding.

39. The trend in the plaintiff’s area, since 1947 and particularly since 1955, has been increasingly away from the “mom and pop” independent grocery stores and more and more toward chain supermarkets. This trend was bad in the fiscal years 1959 through 1961, and has since become worse. However, as indicated in previous findings, the plaintiff’s operations have been successful despite this trend.

40. While in high school and as a young boy, Paul C. Jones worked at various points along the production line of the bakery in the summertime and on Saturdays. Upon his discharge from the military service in December 1945 at the age of 24, Paul C. Jones began working for the bakery on a full-time basis. Within 3 months thereafter, on February 25, 1946, he became a director; and 4 months later, on June 4, 1946, he became a vice president. On December 16, 1946, approximately 1 year after his return from the military service, Paul C. Jones was elected president of the bakery at the age of 25. He assumed the duties of the office on January 1, 1947.

41. Paul C. Jones serves as chairman of the plaintiff’s board of directors, and as president and general manager of the plaintiff, and, as such, he carries the overall responsibility for the plaintiff’s operations. In addition, he also fulfills certain more specific executive functions, such as personne director, purchaser of flour, bakery equipment, and rolling equipment, bakery engineer (although he is not an engineer by formal education), chief of marketing and sales, manufacturing, and industrial relations, advertising executive, and chief training executive.

42. Paul C. Jones has served as president Bakers’ Association, and has served on the board of directors of the Southern Bakers’ Association.

43. Since 1953, Paul C. Jones has served on the board of directors of the First Union National Bank in Greensboro, North Carolina.

44. Miss Ora E. Jones graduated from a business course at Greensboro High School in 1935, and from a post-graduate course at Salem Academy in Winston-Salem in 1936. In 1940, she graduated magna cum laude from Greensboro College, with a liberal arts major in mathematics and a minor in English. Miss Jones began working at the bakery during her high school years on a part-time basis in the wrapping and retail departments. In August 1940, she went to work for the bakery on a permanent basis as assistant to the office manager, a position which she held until January 30, 1945, when she became the office manager. She has also done all the purchasing, except machinery and flour, for the bakery from 1941 to date. She has continuously worked on a full-time basis for the bakery since August 1940. She became a director in February 1946 and was elected a vice president in December 1946.

45. While Paul C. Jones was away in the service during World War II, O. C. Jones and Miss Ora E. Jones managed the bakery with limited help from O. C. Jones’ three brothers. For a 6-week period in 1945, Miss Ora E. Jones managed the business entirely herself.

46. (a) One of the important elements of cost control consists of diligent attention to purchasing. With the exception of flour and equipment, Miss Ora E. Jones has had sole responsibility for the plaintiff’s purchasing since 1941. This has required her to maintain accurate and up-to-the-minute records with respect to inventories, and to watch the markets constantly so as to be in a position to make the best purchases, in the proper quantities, at advantageous times. Most of the supplies and articles purchased by Miss Jones fluctuate almost daily in price. By exceedingly careful and diligent attention to details of inventory, market prices, and quantities, Miss Jones has been highly successful in keeping the plaintiff’s purchasing costs to a minimum.

(b) In her successful efforts to minimize the plaintiff’s purchasing costs, Miss Ora E. Jones has made substantial use of the facilities provided by the W. E. Long Company for the benefit of members of its cooperative (see finding 30), the plaintiff being a member of the cooperative.

)(c) Miss Ora E. Jones is responsible for purchases ranging from $500,000 to $750,000 per year for materials and supplies. She deals with 29 or more major suppliers. As indicated in paragraph (b) of this finding, Miss Jones makes substantial use of the facilities of the W. E. Long Company in connection with her purchasing activities.

47. (a) In addition to the purchasing, Miss Ora E. Jones reviews the voluminous cost control data each day, first, to check its accuracy and, second, to do something about reducing any costs that are out of line. Based on years of experience with cost control data, Miss Jones is frequently able to spot a problem and correct it immediately.

(b) Since Miss Ora E. Jones is in full charge of the plant during the night hours when Paul C. Jones is not present, she goes over the operation with the production foreman, the maintenance men, and other supervisors to correct any error or to make any adjustment that she finds necessary.

48. Miss Ora E. Jones also exercises general supervision over all office work, is responsible for all reports, returns, and payrolls, and is in complete charge of operations at night and when Paul C. J ones is out of the city.

49. In addition to Paul O. Jones and Miss Ora E. Jones, the plaintiff’s supervisory personnel at its headquarters in Greensboro during the period involved here included a sales manager, an assistant sales manager, a production manager, and an office manager.

50. (a) Mrs. Gladys J. Chappell attended Salem Academy in Winston-Salem, North Carolina, for one year, and then graduated from Greensboro High School. She attended Greensboro College for 2 years, taking courses principally in home economics, and Guilford College for y2 year. She did not graduate from college.

(b) Mrs. Chappell began working at the plaintiff’s bakery on a part-time basis when she was in high school. During that period, she worked on weekends, on holidays, the summer months.

(c) After leaving college, Mrs. Chappell went to work for .a ladies’ clothing store, called Montaldo’s, in Greensboro. She worked in the office at Montaldo’s, as a sales clerk, and as a model.

(d) Mrs. Chappell began working at the plaintiff’s bakery as a full-time employee in May 1946, when she was 20 years old. She worked in the office. She continued to work full-time for the plaintiff until October 26,1946, when she was married to Wallace P. Chappell.

(e) Upon her marriage, Mrs. Chappell moved to Creed-moor, North Carolina, where her husband was in business.

(f) From the time of her marriage in 1946 until 1953, Mrs. Chappell continued to work for the plaintiff on a part-time basis. She assisted in the office, principally as a replacement for office employees during their vacations. During this period, Mrs. Chappell commuted between Creedmoor and Greensboro, a distance of 70 miles, two or three times a week; and, in addition, she spent one week out of every month in Greensboro. As children were added to her family (she has two children), Mrs. Chappell was accompanied by her children on the trips to Greensboro, and they would stay at the home of her parents.

(g) Mrs. Chappell was elected to the plaintiff’s board of directors on December 16,1946. She became a vice president of the plaintiff on January 1,1947.

(h) Mrs. Chappell has worked for the plaintiff from May 1946 to date, either on a part-time or a full-time basis.

51. (a) On July 29, 1953, the plaintiff established a relay distribution point in Durham, North Carolina (see finding 20(b)). Mrs. Gladys J. Chappell’s home town of Creedmoor is near Durham, and Mrs. Chappell was responsible for the plaintiff’s entry into the Durham market area. At about the time mentioned, another bakery that had been distributing bread in the Durham area under the “Holsum” trade name pulled out of the Durham area, making it possible for the plaintiff to enter that market area with its “Holsum” products. Mrs. Chappell got in touch with various food dealers in the Durham area and persuaded them to allow the plaintiff to put its Holsum products into the grocery stores. She hired a supervisor for the Durham operations and introduced him to each of the grocerymen in the area. Mrs. Chappell found a temporary location for the relay distribution point on West Geer Street, and this was used by the plaintiff until Mrs. Chappell later found a permanent location at 500 Rigsby Avenue in Durham. The plaintiff’s operations in the Durham area started with one route in 1953, and by 1954 there were five routes operating out of the Durham relay distribution point.

(b) From May of 1954 until May of 1956, the plaintiff’s activities in the Durham area included the operation, under Mrs. Chappell’s management, of a branch bakery, where the plaintiff produced bread and rolls until January 1955 and continued to produce rolls until May 1956 (see finding 23).

(c) After the plaintiff’s production activities in Durham were closed down, the plaintiff has continued to use the location at 500 Rigsby Avenue as a relay point for the distribution of baked goods throughout the Durham area.

(d) In November 1956, Mrs. Gladys J. Chappell spearheaded for the plaintiff the establishment of a relay distribution point in Raleigh, North Carolina, for the distribution of the plaintiff’s products in the Raleigh market area. She found a location on West Hargett Street in Raleigh for the station. She met with food dealers, employed personnel, and set up routes for the Raleigh area.

52. During the years in issue, Mrs. Gladys J. Chappell was the plaintiff’s manager in overall charge of the operations in the Durham and Raleigh market areas. However, the plaintiff also maintained a sales manager in Durham, and maintained at the Durham and Raleigh relay distribution points supervisors performing functions similar to those performed by supervisors at other relay distribution points.

53. Separate records with respect to sales in the Raleigh-Durham areas were kept in order to give Mrs. Gladys J. Chappell ready information as to what her area of specific responsibility was contributing to the company.

54. The following table shows the dollar amount of sales in the Dunham and Ralleigh distribution areas under Mrs. Gladys J. Chappell’s responsibility years 1955 through 1966:

55. (a) The plaintiff operates 364 days during the year— every day except Christmas.

(b) Paul C. Jones works on the average of 100 hours per week.

(c) Miss Ora E. Jones works from 12 to 14 hours a day, normally 6y2 days a week. During the years in issue, she normally worked from 3 p.m. to 3 or 4 a.m. the next morning. She would then spend some of the daylight hours at home checking prices and dealing with suppliers.

(d) Mrs. Gladys J. Chappell normally works 9 hours a day, 5% days a week.

56. The plaintiff’s top management at the times material to this litigation consisted of persons who were exceedingly well informed about the baking business, who were aggressive, creative, hardworking, competent, and dedicated, and who kept the plaintiff in the forefront of every major development in the baking industry.

57. The plaintiff has experienced considerable difficulty in employing management personnel. This is due, in part, to the unwillingness of such personnel to devote the energy and time to the business which the Jones family expects.

58. The plaintiff has never had a qualified pension or profit-sharing plan. There were no deferred compensation contracts for the officers. There were no other retirement arrangements for them. There was a small group health, and accident insurance policy covering all employees, including officers. This was a contributory insurance program, where the company paid a part and the employees paid a part. The limit of death benefits was $10,000 and dismemberment $5,000, in addition to the hospital and doctor coverage. There were no other forms of compensation or fringe benefits for the officers.

59. (a) While there was a vacation plan for employees other than officers, there was no vacation plan for officers. The vacation schedule for employees other than officers was 1 week after 1 year’s service, 2 weeks after 5 years’ service, and 3 weeks after 10 years’ service.

(b) Paul C. Jones has rarely taken a vacation, and then only 3 or 4 days at any one time.

(c) Miss Ora E. Jones also has rarely taken vacations, and then only for perhaps 6 days out of a year to visit New York to see some plays. Even when she was away on vacation, she kept in constant contact with the bakery at Greensboro.

(d) Mrs. Gladys J. Chappell has taken no more than 1 week a year away from the business.

60. A comparison of data for the plaintiff and comparable data reported by 73 members of the W. E. Long, Inc.-Independent Bakers’ Cooperative with respect to production value, five broad categories of controllable costs covering over 95 percent of all costs, and operating profits shows that tire plaintiff far o^it-performed the average of the W. E. Long group for 1961. This was also true of each of the other two years in issue, and particularly 1959, which was a very good year for the plaintiff but a relatively poor year for the rest of the industry. The data for 1961, on a 100-pound basis, are as follows:

61. In their capacity as the three members of the board of directors, Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell determined the amounts that would be paid to them as compensation for their services as officers of the corporation for the years that are involved in the present litigation.

62. Until the fiscal year that ended April 30, 1954, the plaintiff’s officers were paid on the basis of fixed amounts of salary, except that a small bonus in addition to salary was paid to Mrs. Gladys J. Chappell for the fiscal year that ended April 30,1951 and small bonuses in addition to salaries were paid to Paul C. Jones, Miss Ora E. Jones, and Mrs. Chap-pell for the fiscal year that ended April 30,1952.

63. The total compensation paid by the plaintiff to Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell during the fiscal years 1948-1953 was as follows:

64.(a) Following the death of O. C. Jones on August 8, 1953, the plaintiff’s board of directors, consisting of Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell, held a special meeting on August 24, 1953 for various corporate purposes, including changes in officers’ compensation 'and duties as a result of the death of O. C. Jones. Also attending the meeting were Kobert F. Mosely, attorney for the plaintiff, and J. J. Lindsay, of Lindsay & Everett, accountants for the plaintiff.

(b) The minutes of the August 24, 1953 meeting of the plaintiff’s board of directors stated in part as follows: dent and as assistant secretary have been increased by reason of the fact that she is to assist in developing the Durham area as a market for the company’s products. The members of the board of directors were of the opinion, therefore, that the compensation of the officers of the company should be increased.

The members of the board of directors were of the opinion that, as the result of the death of Mr. O. C. Jones, much greater responsibilities have devolved upon the officers of the Company and more work will be required of them. In addition thereto it was reported by the president that the duties of Mrs. Chappell as vice presi-

Upon motion made, seconded, and duly adopted, the compensation of the officers of the company was fixed as follows:

FIRST. The salaries of the officers of the company, effective September 1,1953, and until the end of the fiscal year, were fixed on an annual basis as follows:

Annual 2fame Office salary Mr. Paul C. Jones-President and general $19,000.00 manager. Miss Ora E. Jones-First vice president, sec- 10,000.00 retary, and treasurer. Mrs. Gladys J. Chappell. Second vice president and 3,000.00 assistant secretary.

SECOND. In addition thereto, Mr. Paul C. Jemes is to receive ten per cent (10%), and Miss Ora E. Jones is to receive eight per cent (8%), of the net profits of the company, before income taxes, for the fiscal year ending April 30,1954.

(c) Mrs. Gladys J. Chappell was not voted a bonus at that time for her services, including the assistance in the development of the Durham market.

65. On June 1, 1954, the directors adopted a resolution fixing their compensation as officers of the company for the fiscal year ending April 30,1955 on the same basis as had been adopted for the preceding year.

66. (a) The compensation paid by the plaintiff to the indicated officers for the fiscal years that ended April 30, 1954 and April 30,1955, pursuant to the resolution then in effect, was as follows:

■(b) Mrs. Gladys the fiscal years that ended April 30,1954, and April 30,1955.

67. (a) On June 7,1955, the plaintiff’s consisting of Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell, took actions relative to their compensation for the fiscal year that ended April 30,1956. As a result, their fixed salaries were increased to figures higher than their total compensation in previous years, the shares of the profits to be received by Paul C. Jones and Miss Ora E. Jones as bonuses were increased, and Mrs. Gladys J. Chappell was included in the profit-sharing plan for the first time. In addition, Mrs. Claudia L. Jones, the mother of the three directors, was appointed an officer of the plaintiff and awarded a salary for the first time. Mrs. Jones has never been active in the management of the plaintiff.

(b) The minutes of the June 7,1955 tiff’s board of directors stated in part as follows

Upon motion made, seconded, and duly adopted, the compensation of the officers of the company was fixed as follows:
FIRST. The salaries of company the current [year] were therefore fixed as follows :
SECOND. In addition thereto, Mr. Paul C. Jones is to receive twenty per cent (20%), Miss Ora E. Jones is to receive twelve per cent (12%), and Mrs. Gladys J. Chap-pell is to receive eight per cent (8%) of the net profits of the company, before income taxes, for the fiscal year ending April 30,1956.
tures for equipment, other unusual items of expense, and the expense of developing the business in the Durham area during the fiscal year ending April 30,1955, no dividend should be declared at this time on the company’s stock.
The directors also agreed that on account of such heavy expenditures and other expense during the last fiscal year, no bonus for officers of the company other than the share of profits for the year ending April 30,1955 should be declared or paid at this time, but that further consideration might be given to that matter at such time as the directors might deem proper.

68. On June 5, 195;6, the plaintiff’s board of directors adopted a resolution fixing their compensation as officers of the company for the fiscal year ending April 30,1957 on the same basis as had been adopted for the preceding year.

69. On June 4, 1957, the plaintiff’s board1 of directors adopted a resolution fixing their compensation as officers of the company for the fiscal year ending April 30,1958 on the same basis as had been adopted for the preceding year.

70. Under the plan in effect for each of the fiscal years that ended April 30,1956, April 30,1957, and April 30,1958, the indicated officers received the following amounts as compensation:

71.On June 3, 1958, the plaintiff’s directors fixed their compensation as officers of the plaintiff for the fiscal year that ended April 30,1959. The minutes of the June 3,1958 meeting stated in part as follows:

Upon motion made, seconded, and duly adopted, the compensation of the officers of the company was fixed as follows:
FIRST. The salaries of the officers of the company for the current [year] were therefore fixed as follows:
SECOND. In addition thereto, Mr. Paul C. Jones is to receive twenty per cent (20%), Miss Ora E. Jones is to receive twelve per cent (12%), and Mrs. Gladys J. Chap-pell is to receive eight per cent (8%) of the net profits of the company before income taxes for the fiscal year ending April 30,1959.
The directors agreed that no clared at this time on the company’s stock.
The directors no the company other than the share of profits for the year ending April 30,1958 should be declared or paid at this time, but that further consideration might be given to that matter at such time as the directors might deem proper.

72. On June 2, 1959, June 7, 1960, and June 7, 1961, respectively, the directors adopted a resolution fixing their compensation as officers of the company for the fiscal years that ended April 30,1960, April 30,1961, and April 30,1962, respectively, on the same basis as had been adopted in each of the preceding years.

73. The amounts paid to the indicated officers as compensation for each of the fiscal years 1959-1962, pursuant to their resolution as directors then in effect, were as follows:

74. The following table shows the percentage of the plaintiff’s net profit, before education of Federal income taxes and officers’ compensation, distributed to the officers as compensation in the years indicated:

75. In each of the years in issue, the Commissioner of Internal Revenue disallowed, as a deduction from the plaintiff’s gross income, a portion of the amounts paid by it to each of its corporate officers, with the exception of Mrs. Claudia L. Jones. The following table sets forth the amounts paid as compensation by the plaintiff to each of its officers and the portions thereof disallowed by the Commissioner as being unreasonable :

76.The following table shows the plaintiff’s officers’ compensation, and net profit before Federal income taxes for the years 1962 through 1966:

77.The following table shows the amounts of fixed and contingent compensation paid for the years indicated to Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell, and the total fixed and contingent compensation paid for each year to all officers (including O. C. Jones for 1948-1953 and Mrs. Claudia L. Jones from 1956 to date):

78.(a) The use of incentive bonuses by the plaintiff has not been confined solely to officers of the company. The plaintiff has for a number of years followed the policy of paying bonuses to employees, other than officers, twice a year. In June of each year, Paul C. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell review the contribution that each employee has made to the company, and they award bonuses to employees on this basis. No specific formula is utilized for this purpose. At Christmas time, a bonus is paid to each employee according to his or her length of service.

(b) The following table shows the total amounts of the bonuses paid to employees, other than officers, during June and December for each of the calendar years 1958, 1959, and 1960:

(c) The bonuses paid by the plaintiff to its employees, other than officers, averaged $149.25 in June 1958, $59.25 in December 1958, $162.65 in June 1959, $58.99 in December 1959, $67.58 in June 1960, and $60.78 in December 1960.

79. (a) The American Management Association’s Executive Compensation Survey concerning the compensation paid in 1960 to executives of companies operating in the consumer products-food field indicated that the total annual compensation paid to the chief executive officers of companies having annual sales between $2,000,000 and $4,000,000 averaged $27,100 per year, and that the total annual compensation received by the second-highest-paid officers of such companies averaged $21,100. The plaintiff’s sales during the fiscal year 1960 amounted to $2,734,044.

(b) The American Management Association’s Executive Compensation Survey concerning the compensation paid in 1961 to executives of companies operating in the consumer products-food field indicated that the total annual compensation paid to the chief executive officers of companies having annual sales between $2,000,000 and $3,000,000 averaged $26,800, and that the total annual compensation received by the second-highest-paid officers of such compames averaged $14,900. The plaintiff’s sales during its fiscal year 1961 amounted to $2,565,916.

80. The Guilford Dairy Cooperative Association, Inc., is a dairy cooperative located in Greensboro, North Carolina. It is engaged in the business of processing milk and manuf actur- mg other milk products for resale at both the wholesale and retail levels of commerce.

81. The capital structure of the Guilford Dairy is typical of a cooperative. Ownership is represented by both common and preferred shares of stock, which are owned by member dairy farmers. There are no voting rights attached to these shares, but, rather, each member farmer has one vote in the Guilford Dairy regardless of the number of common or preferred shares owned.

82. The membership of the Guilford Dairy elects eight members of the board! of directors and a ninth member, a director at large, is appointed 'by the Director of Extension of North Carolina State University in accordance with the North Carolina cooperative statute. The board of directors elects the corporate officers, consisting of a president, vice president, secretary-treasurer, and assistant secretary-treasurer. The corporate officers, as such, are not active in the operation of the dairy, but serve only as members of the board and members of the executive committee. During all years pertinent herein, the overall responsibility for the operation of the Guilford Dairy was vested in three individuals. Mose Kiser, who was appointed by the Guilford Dairy’s board of directors and was accountable to the board, was the general manager and chief executive officer. Maxwell Hovis served as the assistant general manager; and William Hemphill, C.P.A., served as comptroller and chief financial officer. Mr. Kiser is responsible directly to the board of directors, and Mr. Hovis and Mr. Hemphill report directly to him. All three meet with the directors once a month and render reports on the operation of the dairy.

83. During the years 1958 through 1961, the dairy’s annual sales by major product classes were as follows:

84.The dairy sells its products at both the wholesale and retail levels of commerce. In both oases, the routeman orders what he anticipates he will distribute, and, after picking his order up at the dock, transports it directly to his customers in a refrigerated truck. On the retail level, deliveries are made directly to households; and, on the wholesale level, the route-man sells to supermarkets, grocery stores, restaurants, and similar customers. The routemen are paid a commission on their sales.

85. During the period 1958 through 1961, half of the dairy’s annual sales of milk came from wholesale routes and half came from retail routes. Ice cream, other than sales through dairy hars, was sold by the dairy only on wholesale routes.

86. The dairy operates “dairy bars,” which are retail sales establishments from which it sells milk, ice cream, and other dairy products to the ultimate consumer. Dairy bar sales accounted for approximately 18 or 14 percent of the dairy’s total sales during the period from 1958 through 1961.

87. The dairy is concerned with the freshness of its products land, accordingly, code-dates products and rotates them on the Shelf. All wholesale sales are guaranteed sales, and unsold merchandise is taken back by the dairy. On the retail level, in an effort to retain the customer, if the customer complains about the product, the dairy will take it back.

88. Competition is very keen in the milk business, and the dairy is in direct competition not only with national chains, such as Borden, Pet, and Sealtest, but also with various independently owned dairies and other dairy cooperatives. The dairy, due to the competitive state of the market, is unable to gain an advantage over its competitors by lowering its prices but, rather, must rely on offering a better product and better service to achieve sales gains. The dairy is concerned with satisfying its customers so that they will continue to buy its products. The dairy did not increase the selling price of its milk during the period 1958 through 1961, but did raise its selling price of milk one cent in both 1962 and 1966.

89. The market area served by the dairy during the years 1958 through 1961 encompassed the city of Greensboro, North Carolina, as well as the surrounding counties and cities.

90. (a) During the period 1958 through 1961, the dairy distributed milk and other dairy products on both wholesale and retail routes from four sales branches in cities than Greensboro, North Carolina.

(b) Guilford Dairy established sales branches following cities in the years indicated:

Asheboro 1951 ReidsviUe 1957

Thomasville 1958 High Point 1964

Burlington 1958 Leakaville 1967

91. The organization of a sales branch consists of a branch manager, an office assistant, route supervisors, routemen, a dock man, and a janitor. There is a dairy bar at each of the branches, and there may be other dairy bars within the sales branch town. A dairy bar has a manager, an assistant manager, and a sales clerk.

92. The sales branch manager is the chief company representative in the area where the branch is located, and has overall responsibility for all the operations of the dairy in his area. He is in charge of hiring and firing all branch personnel, such as routemen, and has charge of the approximately 50 routes operating from his branch, as well as the “dairy bar” operations. During the years 1958 through 1961, the compensation of a branch manager ranged from $6,500 to $8,000 per year. The manager of the dairy’s largest branch, located in Asheboro, which had sales of $900,000 a year, was paid $10,000.

93. The Guilford Dairy receives milk from farms seven days a week and operates its plants six days a week. Its route salesmen operate six days a week.

94. Under the terms of the contract between the Guilford Daily and its member dairy farmers, the dairy is required to purchase all the raw milk produced at the farms of the members, process it, manufacture it, and market it. The following table sets forth the milk purchases from member farmers by the Guilford Dairy during the years indicated:

95. The following table sets forth operating statistics of the Guilford Dairy, including total sales, other income, executive compensation, net margin, and total number of employees:

86. The processing and manufacturing facilities of the dairy are located in Greensboro, North Carolina, and consist of a milt plant and an ice cream plant. The dairy also has eight dairy bars in Greensboro, North Carolina.

97. The milk plant operations constitute a continuous processing operation. The dairy now picks up the raw milk at members’ farms and transports it to its bulk raw milk storage. From that point, it enters the manufacturing process, which includes pasteurization, homogenization, addition of flavors, and the addition of vitamins. The next step would be the packaging operation, which is either glass or paper bottle filling in the case of fluid products. In the case of other products, such as cottage cheese, sour cream, or dips, there is a manufacturing process, followed by a filling operation. All products are then placed into refrigerated storage before being distributed on routes.

98. Both the milk and ice cream plants were automated by the dairy during the period 1958 through 1961, in an effort to increase the efficiency aaid productive capacity of its -facilities. This automation was designed to produce savings, as well as to turn out a superior product.

99. The dairy first occupied its present milk plant in 1948. Since that time, aside from making interim improvements, it made major changes in both 1959 and 1966.

100. By 1959, the dairy had changed to the bulk handling of raw milk, which required the installation of bulk storage facilities on the farms of members, the purchase of refrigerated tanker trucks, and the installation of automatic receiving equipment at the plant. The cleaning of the tanker trucks was completely automated. Also in 1959, the dairy moved from glass filling into the very efficient cemac filling operation. It also installed floor conveyors to eliminate the necessity of employees pushing cases of milk on rollers. The dairy’s 1959-1960 program also included substantial additions to refrigerated storage and included a new type of shipping dock.

101. Prior to the installation of equipment for the bulk handling of raw milk, raw milk was delivered to the Guil-ford Dairy by member farmers at their own expense in 10-gallon cans. In 1958, when the Guilford Dairy converted to bulk handling of milk, it went to the farms of members, picked up their milk, and brought it to the dairy. The Guil-ford Dairy charged each member farmer for this service.

102. In its ice cream plant, during the 1959-1960 period, the dairy moved into automation of stick novelties. This change enabled three people with automatic equipment to do what eight or nine people had previously done.

103. The management of the dairy planned the type of equipment it needed and also determined the basic layout for the improved facilities.

104. Mose Kiser, Maxwell Hovis, and William Hemphill are the only employees of the Guilford Dairy who have responsibility throughout all its departments.

105. Mr. Kiser graduated in 1923 from North Carolina State College with a bachelor of science degree in animal husbandry. Upon graduation from college, he worked for the Pine State Creamery in Raleigh, North Carolina, where he served as assistant manager, having responsibilities for both manufacturing and sales. In 1932 he resigned that position and became employed as general manager of Guilford Dairy.

106. As general manager of Guilford Dairy, Mr. Kiser is its chief executive officer and president, and he is responsible for the overall operation of the dairy. In addition to receiving reports from other members of the management team, Mr. Kiser is responsible for the hiring of all key employees of the dairy, including various department heads. He also handles all the dairy’s advertising and special sales promotions. He has overall responsibility for labor relations, providing salesmen with incentives, and control of production costs. Mr. Kiser is accountable directly to the board of directors, with whom he meets monthly.

107. In 1932, when Mr. Kiser first became general manager of Guilford Dairy, the dairy was operating five sales routes and its annual sales were $127,000. Under his guidance, the dairy has continually grown. By 1941, its sales had increased to $400,000, and by 1948 its sales were $1,200,000. The dairy’s sales continued to increase steadily, exceeding 6 million in 1958 and 7% million in 1961. During the years in issue, it operated 130 sales routes.

108. Mr. Hovis graduated from college in 1941 with a bachelor of science degree. After graduation and until 1947, he served in the United States Navy (attaining the rank upon discharge of lieutenant commander), where his duties were personnel management. In 1947, he was employed by the Guilford Dairy, and for a period of two years served in a progression of various plant duties and also as a special sales representative. In 1949, he became assistant manager of the dairy and assisted Mr. Kiser in the operation of all departments of the dairy. Mr. Hovis in 1959 or 1960 completed the executive program at the University of North Carolina and took courses at North Carolina State College.

109. As assistant manager, Mr. Hovis serves as an executive vice president of the corporation and has primary duties in the areas of sales, marketing, and purchasing. In addition, he assists the manager in the operation of all the departments of the dairy. He assists Mr. Kiser in planning the dairy’s advertising programs, special sales promotions, determining incentives for route salesmen, and in other such special projects. Mr. Hovis has primary responsibility for the operation of the dairy’s sales branches, and the branch managers report directly to him. He is also responsible for the purchasing of all supplies and materials for the Guilford Dairy. During the years 1958 through 1961, Mr. Hovis was responsible for the dairy’s purchases of materials and supplies in the following amounts:

110. Mr. Hemphill is a certified public accountant. He graduated from college with a bachelor of science degree in accounting. He served in the United States Airny Air Corps, attaining the rank of captain. In 1948, he joined a certified public accounting firm, and when he left the firm to join Guilford Dairy in 1958, he was a partner in the firm. Mr. Hemphill is a member of various professional societies, and has held office in the Financial Executives Institute and in the National Association of Accountants. Prior to being employed by the dairy, he had worked on the financial audit of the dairy conducted by his accounting firm.

111. As comptroller and chief financial officer of Guilford Dairy, Mr. Hemphill’s authority extends to all departments of the dairy. In addition to his financial duties, he also has overall responsibility for the office staff of the dairy.

112. The executives of the Guilford Dairy usually work 5% days, or approximately 55 hours, per week at the dairy, as well as any additional time required properly to manage the dairy.

•113. During the years 1955 through 1966, the total compensation paid by the Guilford Dairy to its management team was as follows:

114. The following table shows the total executive compensation paid by Guilford Dairy as a percentage of its net margin before deduction of officers’ compensation:

115.The following table shows the total executive compensation paid by the Guilford Dairy as a percentage of net annual sales:

116. (a) The amount of compensation paid by the Gnilford Dairy is determined by its board of directors.

(b) The board of directors of Gnilford Dairy has adopted an incentive bonus plan. The formula in effect for all years pertinent herein called for an incentive bonus to be paid to its three executives, based on the sales gain over the sales in a selected base period. The sales of the dairy for a particular year were compared, with the historical base period sales, and each executive was paid an incentive bonus on a percentage of the difference between the two.

117. During the period 1958 through 1961, the Guilford Dairy employed a superintendent of production, who supervised production activities in both the ice cream plant and the milk plant. At that time, his total annual compensation was approximately $10,000. The dairy also employed a superintendent of maintenance whose compensation was approximately $9,000, a dairy bar supervisor whose compensation was approximately $7,500, and an office manager whose compensation was approximately $7,500. Each of these individuals participated in the dairy’s employee incentive program and received an incentive bonus from the Guilford Dairy, computed on the basis of a percentage of the sales gain over a 'base year.

118. The Guilford Dairy has a group insurance program for all its employees, in which the executives participate. During the years 1958 through 1961, the limit on death coverage was $5,000 or $7,000.

119. During the years 1958 through 1961, Guilford Dairy did not have a profit-sharing plan. Effective in March 1962, the Guilford Dairy instituted a company-wide profit-sharing plan, in which approximately 200 of its employees participated. The amounts payable to its executives annually under this plan during the years 1962 through 1966 were approximately $1,000 for Mr. Kiser, $600 for Mr. Hovis, and $500 for Mr. Hemphill.

120. The chief executive officer of a bakery located in Wilson, North Carolina, which had annual sales of $1,200,000, who was the sole manager of the business and had complete responsibility for all its operations, including sales, production, purchasing, and finances, was paid $175 per week, or $9,100 per year.

121. (a) The plaintiff had on hand 72 light delivery vehicles and 7 heavy tractor-trailers during the fiscal year 1959, 92 light delivery vehicles and 8 heavy tractor-trailers during the fiscal year 1960, and 90 light delivery vehicles and 8 heavy tractor-trailers during the fiscal year 1961.

(b) All of the delivery vehicles utilized by the plaintiff during the fiscal years 1959 through 1961 weighed less than 9,000 pounds gross weight, except that three of them had gross weights of 9,000 pounds each.

(c) The large tractor-trailers were used for hauling bread to the relay distribution points.

122. In tbe summer of 1961, ones, an Internal Revenue Agent, surveyed tbe delivery vehicles then on band. There were 7 such vehicles on hand for which no license had been obtained because the plaintiff had concluded that they were unserviceable, and there were 12 other vehicles which the plaintiff had concluded could not be used on regular routes.

123. It is essential to the vehicles be capable of serving each customer on a precise schedule, since many have assigned specific times to the bakeries for deliveries. If the plaintiff misses its assigned time, it is not allowed to service the outlet and may lose the customer permanently.

124. During the fiscal years 1959,1960, and 1961, the plaintiff had 51, 61, and 57 routes, respectively, on which its light delivery vehicles, on the average, drove 471, 461, and 480 miles per week, respectively.

125. (a) In a 5-year period, the delivery vehicles in question run a minimum of 80,000 miles, and may run up to a maximum of 150,000 to 200,000 miles, depending upon the routes on which the vehicles are operated.

(b) The heavier tractor-trailers make longer runs per day than light delivery vehicles, and it is not unusual for them to run up mileage of 200,000 to 300,000 miles.

126. (a) Each salesman would report any trouble he was having with his truck to the mechanics when he returned to the bakery from his route. They would usually have the truck repaired and available for the salesman’s use iby the next morning. If the truck was not repaired by the next morning, or if a major repair (such as an engine overhaul) was needed, the salesman would be given one of the extra trucks on hand for his use until the mechanics completed the repairs.

(b) The plaintiff normally overhauls the engines in its light delivery trucks when they have had 90,000-100,000 miles of service.

127. The plaintiff has at all times pertinent herein had an experienced crew of mechanics who maintained the operating efficiency of its vehicles. The plaintiff’s mechanics would change the oil in the trucks when needed and lubricate each' truck every other week, as well as perform such other preventive maintenance procedures as were required. In addition, the plaintiff had parts available, so that its mechanics could promptly make all necessary repairs on its trucks.

128.(a) The plaintiff computed its depreciation on its original-use delivery equipment under the double declining balance method, and assigned a useful life of 5 years to each piece of its light delivery equipment and its tractor-trailers. Upon audit, the Commissioner of Internal Eevenue recomputed the amount of depreciation allowable on this equipment, based on a revised useful life of 8 years instead of 5 years. The Commissioner also determined a useful life of 6 years, instead of 4 years, under a straight-line method of depreciation for three used tractor-trailers.

(b) In recomputing the allowable depreciation on the basis outlined in paragraph (a) of this finding, the Commissioner of Internal Eevenue utilized the rate under the double declining balance method as though the useful-life period of 8 years, as determined by the Commissioner, had been originally estimated by the plaintiff.

(c) The amounts of depreciation thus disallowed by the Commissioner of Internal Eevenue for the years in issue were as follows:

Fiscal

year Amount

1959_$11,108.53

1960_ 11, 272. 23

1961_ 4, 690.62

129. The Internal Eevenue Service’s Bulletin F, for a great number of years, recommended a 4-year useful life for delivery vehicles weighing less than 13,000 pounds. Eevenue Procedure 62-21 now recommends a useful life of 4 years for such light vehicles.

130. The following schedule reflects the unrecovered cost basis for a typical light delivery vehicle costing $3,600 with a salvage value of $100 over various useful lives, using the double declining balance method as compared with the straight line method:

131. (a) After purchasing new delivery equipment, the plaintiff customarily retains and uses such equipment for at least 8 years.

(b)It is not unusual for the plaintiff to use its light delivery trucks for 10 years. When the plaintiff’s light delivery trucks are no longer useful in its business, the plaintiff will sometimes retain a few such trucks (without obtaining licenses for them) in order to “cannibalize” them for parts. The plaintiff disposes of the other trucks that are no longer useful in its business by selling them for prices that range between $50 and $250.

132. (a) At all material times, the plaintiff’s bakery was located at 104-108 East Lee Street in Greensboro. Its East Lee Street property was bordered on the west by South Elm Street and on the east by Arlington Street.

(b) The plaintiff in 1956 purchased two pieces of improved real property known as 504 and 506 Arlington Street, which houses and lots abutted its bakery on the east. The house at 504 Arlington Street was torn down in 1958, when the plaintiff expanded its facilities. The house at 506 Arlington Street has never been torn down.

(c) In 1947, the plaintiff purchased the lot known as 719 S. Elm Street, which forms the rear boundary of its bakery and which was used as a driveway for all its trucks into the bakery.

(d) Prior to August 1957, the plaintiff did not own the lots-known as 701-703, 707-709, 711, and 715 S. Elm Street, which lots bounded its bakery on the west, from the corner of South Elm and East Lee and extending south to its driveway at 719 S. Elm Street.

133. (a) Shortly after August 5, 1957, the plaintiff purchased the improved real property known as 715 S. Elm Street, Greensboro, North Carolina, for a total consideration of $7,500. This property consisted of a lot 59 feet wide and 100 feet deep. The lot abutted the southwest comer of the plaintiff’s bakery, and it also abutted the plantiff’s driveway at 719 S. Elm Street.

(b)1 There was a house on the lot at 715 S. Elm Street in 1957. It was a frame house with brick underpinning. The house was about 50 years old, but it had been well maintained. The house was not insulated and it did not have adequate heating facilities, although it did have a fireplace with lintels and a chimney.

134. The property referred to in finding 133 was purchased by the plaintiff primarily in order to expand its storage facilities. Until 1960, the plaintiff stored in the house at 715 S. Ehn Street flammable materials, bread pans, brooms, janitorial supplies, and insectides.

135. At the time when the plaintiff purchased the property at 715 S. Elm Street, its directors allocated $2,500 of the purchase price to the land and $5,000 to the house.

136. The house at 715, S. Elm Street was demolished in December 1960, primarily to make room for a garage and off-street parking.

137. (a) In August of 1958, Paul O. Jones, Miss Ora E. Jones, and Mrs. Gladys J. Chappell formed Jones Enterprises, Inc. That corporation purchased the property between 715 S. Elm Street and the comer of South Elm and East Lee Streets, known as 711,707-709,701-703 S. Elm Street, as soon as it was available for purchase. There were houses on both the 707-709 and 711 properties, which were rented by Jones Enterprises, Inc., to other persons. Part of the corner building on 701-703 S. Elm Street was rented to the plaintiff for use as a retail store and' stock room.

(b)' Jones Enterprises, Inc., razed the houses on 707-709 and 711-713 S. Elm Street ih'1961; and then leased the vacant land to the plaintiff for use as additional parking facilities.

138. On its Federal income tax return, the plaintiff claimed a demolition loss for the fiscal year 1961 in the amount of $3,333.28 on account of the demolition of the building at 715 South Elm Street. Upon audit, the Commissioner of Internal Eevenue disallowed a portion of the demolition loss deduction. to the extent of $1,530.87, on the ground that the original allocation, of the purchase price between the land and ¡building at 715 South Elm Street was incorrect and, therefore, the basis for the building at the time of demolition was incorrect.

139. The evidence in the record does not establish the value of the building at 715 South Elm Street, either at the time of the purchase of the 715 South Elm Street property by the plaintiff or at the time of the demolition of the 'building.

140.As a result of the disallowed deductions, the Commissioner of Internal Bevenue assessed deficiencies against the plaintiff for each of the 3 years in issue in the following amounts:

Fiscal year Amount

1959 _— $32,949.58

1960 _ 36,028.92

1961_ 21,826.94

141. The plaintiff paid these assessments, plus interest, to the District Director of Internal Bevenue, Greensboro, North Carolina, on August 28,1964.

142. On December >7,1964, the plaintiff timely filed claims for refund of Federal income taxes, plus interest, for each of the 3 years in issue, the refund claims being based on the same grounds as set forth in the plaintiff’s action in this court.

143. On October 21, 1965, the Commissioner of Internal Bevenue disallowed the claims for refund.

144. The plaintiff timely commenced this action on January 7,1966.

145. In 1957, the Internal Bevenue Service audited the plaintiff’s Federal income tax return for the fiscal year 1955, approved the compensation paid the plaintiff’s officers pursuant to the formula then in effect, and also approved the depreciation useful lives for the plaintiff’s vehicles.

146. (a) Of the respective amounts which the plaintiff paid to Paul C. Jones as purported compensation for the fiscal years 1959, 1960, and 1961, the sum of $45,000 each year — and only that figure — represented reasonable compensation for services rendered.

(b) Of the respective amounts which the plaintiff paid to Miss Ora E. Jones as purported compensation for the fiscal years 1959, 1960, and 1961, the sum of $25,200 each year— and only that figure — represented reasonable compensation for services rendered.

(e) Of the respective amounts which the defendant paid to Mrs. Gladys J. Chappell as purported compensation for the fiscal years 1959,1960, and 1961, the sum of $14,850 each year — and only that figure — represented reasonable compensation for services rendered.

Conclusion of Law

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, together with interest as provided by law, on the claim relating to officers’ compensation, and judgment is entered to that effect. The amount of the recovery will be determined in subsequent proceedings under Rule 47 (c). The court further concludes as a matter of law that the plaintiff is not entitled to recover on the other claims set out in the petition, and the petition is dismissed as to such claims. 
      
       This opinion incorporates tire opinion of Trial Commissioner Mastín G. White, -with minor changes so as to increase the amounts allowed as reasonable compensation for services rendered by the officers of the taxpayer corporation for each of the years 1959, 1960, and 1961.
     
      
       The plaintiff operates on the basis of a fiscal year that ends on of each calendar year.
     
      
       The Internal Revenue Service also determined that a useful-life period of 6 years — instead of 4 years, as claimed by the plaintiff — should be used under the “straight line method” in computing the depreciation on three second-hand tractor-trailers owned by the plaintiff. In the absence of evidence showing the actual useful life of these tractor-trailers, the determination of the IRS must be accepted as being presumptively correct. Welch v. Helvering, 290 U.S. 111. 115 (1933).
     