Whitaker, Judge,
delivered the opinion of tbe court:
The question presented in this case is, whether or not the Commissioner of Internal Revenue was justified in disallowing as a deduction the salaries paid plaintiff's president and secretary-treasurer, and deducted by plaintiff in computing its Federal income taxes for the years 1954 and 1955, and allowing, instead, a salary for plaintiff's president of considerably less than one-half of the salary paid, and a lesser amount than that paid for plaintiff's secretary-treasurer.
For five of the last six years plaintiff had paid its president a salary of $18,000 per year, and, at the end of the year, a bonus of $32,000, including the year 1954, one of the tax years involved. In 1955, another year involved, it gave him a bonus of $22,000. The total paid him was $50,000, except for 1955, when it was $40,000.
The secretary-treasurer was paid a salary of $4,800 for each of the years in issue and, in addition, a bonus for 1954 of $1,000, and for 1955, of $2,000.
The Commissioner of Internal Revenue allowed a deduction of only $18,000 for plaintiff's president, and $4,800 for the secretary-treasurer.
We concur in the action of the Commissioner of Internal Revenue with respect to the salary of plaintiff's secretary-treasurer, but not with respect to that paid its president.
In view of all the circumstances in this particular case, we do not think the Commissioner of Internal Revenue was justified in disallowing the salary plaintiff paid its president for either of the two years 1954 and 1955.
The law allows a taxpayer to deduct a "reasonable allowance for salaries or other compensation for services actually rendered." The Commissioner of Internal Revenue was required to allow what plaintiff had deducted unless it was clear that the salaries were unreasonable. In the ordinary business the people connected with it are in the best position of anyone to know what salary was reasonable and what was not; and the Commissioner of Internal Revenue is not justified in setting aside their judgment unless he is convinced it is without foundation.
Too often revenue agents do not credit a taxpayer with a purpose to deal justly with the government. No one likes to pay taxes and no one means to pay more than he justly owes, but we are among those who believe that the great majority of our citizens pay what they think they are due to pay. We think the American people as a whole are honest and decent. We indulge the presumption that they are. So, we indulge the presumption that the salaries paid by plaintiff were reasonable, even though the official to whom the salary was paid and his wife owned all of plaintiff's stock.
This record reveals Mr. Gordy, plaintiff's president, as quite a remarkable man, trusted by those who knew him; there is not one thing that reflects on his integrity. He has said that he thinks the salary paid him was fair, and he is in the best position of anyone to know what was fair. Even in the case of a wholly-owned corporation, the Commissioner of Internal Eevenue is not justified in setting aside the salaries paid unless he is convinced they are unreasonable.
The salary the Commissioner of Internal Eevenue allowed in this case is far more unreasonable than the salaries paid and deducted. He allowed $18,000 to the president of a company that over the last five years had done a business of from $3,000,000+ to $4,000,000+, and that had realized net profits before taxes, after deduction of the salaries claimed, of $230,000+, $49,000+, $37,000+, $46,000+, and $77,000 + .
After deduction of the $50,000 salary in 1954 and the $40,000 in 1955, and after taxes, this company had net earnings of $24,907 in 1954, and $40,171 in 1955. This was a return on its invested capital of 5.8% in 1954, and 8.8% in 1955. This compares favorably with the average rate of return of 125 retail tire companies in the United States, which was around 5%.
The $18,000 salary allowed plaintiff's president was $6,000 less than the commissions earned by plaintiff's leading salesman. And, yet, the success of the business was almost wholly due to Mr. Gordy's foresightedness and business acumen. The excellent opinion of the trial commissioner of this court tells in succinct fashion the remarkable story of this man's success against great odds, of the growth of this business from nothing in 1982 to a $4,000,000 business in 1955, with accumulated net earnings over these years of nearly $400,000. We quote the following from pages 8 to 10 of the trial commissioner's opinion :
The business of the plaintiff had its beginning in 1932, when Mr. Gordy, who was then about 24 years old and without capital of his. own, leased a filling station site in Atlanta and began to operate the filling station with the assistance of one employee. A few tires were sold from this site on a retail basis. By 1941, Mr. Gordy had moved to larger quarters, had further expanded his facilities by renting nearby storage spaces, had increased his retail tire business, and had entered the wholesale tire field on an extensive scale.
In the early days of World War II, Mr. Gordy was advised by his suppliers that he should get out of the tire business, because the suppliers believed that an independent dealer would not be able to survive in view of the wartime shortage of tires. Contrary to this advice, Mr. Gordy moved again to still larger quarters, and he added tire recapping operations to his business. While others in the tire industry were cutting down, he maintained and enlarged his sales staff by hiring salesmen who were being discharged by tire manufacturers and by other tire distributors. It was not necessary to have a sales force in order to sell tires during the war, but Mr. Gordy was looking ahead. These decisions by Mr. Gordy proved to be highly advantageous in the years following the war, putting him well ahead of his competition.
The plaintiff was incorporated on June 1, 1946, with Mr. Gordy as president and directing head of the corporation.
In October 1952, the plaintiff moved from downtown Atlanta into a very large building which Mr. Gordy had constructed for the plaintiff at a location that was then within a residential area on the outskirts of Atlanta. The plaintiff's suppliers endeavored to discourage Mr. Gordy in connection with the projected move of the plaintiff from downtown Atlanta to what was then a noncommercial area that appeared to be out in the country. However, the location was near the site of a proposed expressway that was soon to be built, and Mr. Gordy believed that it was potentially a valuable location for a business enterprise. With the building of the expressway and the subsequent development that occurred in the area of the plaintiff's new building, that location turned out to be a very valuable one for the plaintiff's operations, and it gave the plaintiff a decided advantage over its competitors.
Throughout the history of the plaintiff and its predecessor enterprise, with the exception of a year around 1948 or 1949, there has been a steady growth under the leadership ox Mr. Gordy. The plaintiff has gained a nationwide reputation as being a very aggressive and farsighted company and one of the leaders in the tire distribution industry. In size, the plaintiff has become one of the largest, if not the largest, among the independent tire dealers in the country.
Mr. Gordy's management has been largely responsible for the plaintiff's growth and for its high standing in the tire distribution field. This is a highly competitive business, in which there are many failures. In his capacity as president and directing head of the plaintiff, Mr. Gordy has been a competent, aggressive operator, and he has established a reputation as a man ox character and integrity. It is this reputation which enabled the plaintiff to obtain the credit that was necessary for its virtually constant program of expansion.
It must be said that the trial commissioner concluded, notwithstanding the foregoing, that a salary of $35,000 was in his opinion a reasonable one.
A salary of $18,000 a year for such a man is absurd. Such a finding of the Commissioner of Internal Revenue is not presumptively correct, and we must consider the matter independently of it.
Can we say that $40,000 and $50,000 are unreasonable? It would not seem to be when there was left a considerably higher return on invested capital than the average company earned, as we set out above. Every year for the last six years the plaintiff had paid Gordy a bonus of $32,000, in addition to his salary of $18,000, except in 1955, when it was $22,000, and, yet during those years the company's accumulative earnings had increased from $114,000+ to $393,000+.
The president of the Trust Company of Georgia testified that if he were appointed receiver of this tire company, with instructions to operate it, he would be glad to get such a man as Gordy to manage it at a salary of $50,000. The Manager of Credits and Collections of the United States Rubber Company, and the Sales Manager, Gillette Tire Division of the United States Bubber Company, testified the salary paid Mr. Gordy was in line with that paid by comparable companies. These men were friendly witnesses, but we must credit their testimony unless we believe they were speaking falsely. We have no reason to think so. Cross-examination did not discredit them. Even people with an interest in the nature of their testimony are expected to tell the truth, and must 'be presumed to have done so, unless the contrary appears.
Defendant offered no contrary testimony.
We are by no means convinced the president's salary was unreasonable. If not, the Commissioner of Internal Eeve-nue should have allowed it to stand. Certainly what he did was wholly unreasonable, and, being unreasonable, it is not presumed to be correct. Since there is no presumption in favor of the action of the Commissioner of Internal Beve-nue, or, rather, since this presumption has been clearly rebutted, we should not disturb what the taxpayer himself has done, unless we ourselves think it unreasonable. We do not think it is.
Judgment will be entered in plaintiff's favor, with the amount to be computed under Buie 38 (c).
It is so ordered.
Daee, Senior District Judge, sitting by designation; Dtjeeee, Judge; and LaeamoRe, Judge, concur.