of orders, the shipping, invoicing and even at times calls upon brokers, jobbers and drug supply houses that handle the products in the Pittsburgh area. She is a college graduate and was formerly a school teacher. While she had limited academic or special training in business administration, she had almost thirty years prior business experience in the management of this particular business prior to the beginning of this business as a corporate enterprise. While she had the assistance of a full time office worker who performed many of these services along with her, the final responsibility in all these matters was hers.
The product "Thum" was extensively advertised in national periodicals. "Thum" was the principal source of the corporation's income. It has had a continuous extensive sale over a number of years while other similar products have appeared and disappeared from the market. There has been a considerable variation in sales in the years in question, indicating the need for promotion. Mrs. Inez Frawley supervised a national advertising budget of approximately $35,000 placed through an advertising agency.
The Court heard and observed the two principals as witnesses and came to the conclusion that Mrs. Inez Frawley's duties and activities were equally as valuable and contributed to the growth and development of the business equally as that of her husband. In some respects her knowledge of its internal business affairs was greater than that of her husband.
This business was Mrs. Frawley's sole occupation. Dr. Frawley also practiced dentistry and for a period up to 1959 engaged in a business of owning and operating racing cars.
Every case of reasonable compensation must be determined on its facts. Each business is peculiar and requires special examination. No single factor is controlling. We have examined the evidence with respect to Mrs. Frawley in the light of the standards set by the cases collected in 4 Mertens, Law of Federal Income Taxation, § 25.69, "Factors to be Considered in Determining Reasonableness" et seq. While no one element is to be considered to the exclusion of others, and the entire situation must be considered as a whole, we find that Mrs. Frawley's compensation must be measured by a consideration of the type and extent of the services she rendered, which extended over a wide field, her prior qualifications and experience in this particular business, the contributions which she made to the business venture over the years of its development, the peculiar and individual character of the business, her knowledge of the secret formulae of its products, and her prior earnings as a partner in this enterprise.
We, therefore, find that the compensation paid Mrs. Inez Frawley of $25,000 in 1959 and $18,750 in 1961 are reasonable and a proper item of business deduction for the corporate taxpayer.
The government has disallowed the expense of operating and depreciation of two Cadillac automobiles and a truck owned by the corporation for the three years in question on the grounds that the two Cadillacs were used partly for business and partly for personal use, and that the taxpayer had not sustained by records a proper allocation at the trial. The taxpayer produced an allocation between the truck and the two Cadillacs. However, the testimony of Mrs. Frawley and the office secretary was uncontradicted that the automobile assigned to her was used entirely for business use and that it was regularly and constantly so used. While it may seem unusual that a Cadillac sedan was used daily to deliver parcels to the Post Office for mailing, and for picking up employees for work, the fact that this somewhat expensive vehicle has seen ten years of service may indicate that its initial purchase was a prudent business judgment.
Dr. Frawley also had a Cadillac sedan for his use. He travelled extensively on the company's business. He also had his own private automobile for his own use. On cross-examination he did admit that there was some possibility of his using the company car for personal use, but he insisted that it was minimal. His accountant had charged him with receipt of income from other sources in the amount of $500 for the personal use of the corporation automobile in one year on his personal income tax return. Any non-business use established here is minimal.
We, therefore, find that the use of both Cadillac automobiles and the truck were ordinary and necessary expenditures in the operation of the business.
The parties, by stipulation, have agreed that the treatment of the dynamometer used in the racing car business of Dr. Frawley should be properly disposed of by treating this as an abnormal retirement from a single asset account, resulting in a loss down to its salvage value in 1959, and a denial of depreciation claimed by taxpayer in 1959 and 1960, and a gain on the sale in 1961.
This opinion shall constitute the required findings of fact and conclusions of law of the Court in this case heard by the Court without jury.
AND NOW, May 26, 1966, the Court finds that the compensation paid Mrs. Inez Frawley in 1959 and 1961 was reasonable and a proper item of deduction as a business expense by corporation plaintiff. The Court further finds that the deductions for expenses and depreciation of automobiles and a truck was a reasonable and necessary business expense for corporation plaintiff. The Court further approves the stipulation of settlement on the issue of the dynamometer.
Counsel are directed to compute the liability of taxpayers in accordance with the findings of this opinion and present an order in accordance therewith to the Court for the entry of judgment.
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