*237 Decision will be entered under Rule 50.
In the taxable year 1941 petitioner paid the sum of $ 575,206.43 upon its employees' retirement annuity policy and contributed the sum of $ 1,000,000 to an employees' trust as a part of its long established incentive system. Held, such payments, constituting ordinary and necessary business expenses, were reasonable in amount and are deductible under
*1601 This proceeding 1 involves the tax liability of petitioner for the year 1941 for income, declared value excess-profits, and excess profits taxes as follows:
| Income tax | $ 189,958.42 |
| Declared value excess profits tax | 103,455.92 |
| Excess profits tax | 923,587.91 |
*238 The proceeding is now before us under the mandate of the United States Court of Appeals for the Sixth Circuit, dated March 8, 1950, reversing this Court and remanding the action for further proceedings, and directing this Court --
* * * to consider the payments in question as ordinary and necessary expenses paid or incurred in carrying on a trade or business and, provided that the issue of their reasonableness in amount as such expenses has been properly raised and has not been waived and is open to the Commissioner to assert under the pleadings and procedure of the Tax Court, to allow them as such to the extent the Tax Court shall determine they are reasonable in amount, and to confine its consideration of such questions to the year 1941.
Petitioner on April 20, 1950, filed a motion to enter decision for petitioner. On August 8, 1950, a memorandum and order was entered denying the motion and restoring the proceeding to the calendar for hearing limited to the question of the reasonableness of the contested expenditures for 1941 as ordinary and necessary expenses of carrying on business. At the hearing herein, petitioner renewed such motion. Decision was reserved. Since petitioner*239 has presented no new or other grounds, the former decision and order will be adhered to.
The sole issue presented is whether the payments of $ 575,206.43 and $ 1,000,000 made by petitioner in 1941 for the purchase of a funded annuity contract for certain employees, and as a contribution to a profit-sharing trust, respectively, are reasonable in amount.
FINDINGS OF FACT.
Petitioner is an Ohio corporation organized in 1906 with its principal place of business at Cleveland, Ohio. During 1941, as well as prior thereto, it engaged in the manufacture and sale of electric *1602 motors, welders, electrodes, and supplies. Petitioner kept its books and filed its returns on a calendar year accrual basis. Its returns for the taxable year involved were filed with the collector of internal revenue for the eighteenth district of Ohio, at Cleveland, Ohio.
Petitioner's assets, capital stock, paid-in surplus, earned surplus and undivided profits, the dividends paid, the rate per share per books in the years 1936 to 1941, inclusive, are as follows:
| Capital | Paid-in | ||
| Year | Assets | stock | surplus |
| 1936 | $ 6,686,218.85 | $ 224,190 | $ 620,647.50 |
| 1937 | 8,195,281.40 | 227,722 | 859,275.50 |
| 1938 | 8,055,249.26 | 230,246 | 1,033,431.50 |
| 1939 | 9,884,225.09 | 232,104 | 1,161,633.50 |
| 1940 | 11,045,425.91 | 234,226 | 1,308,051.50 |
| 1941 | 12,657,341.73 | 234,226 | 1,308,051.50 |
| Earned surplus | |||
| and | Dividends | Rate per | |
| Year | undivided | paid | share |
| profits | |||
| 1936 | $ 3,531,927.33 | $ 1,347,869 | $ 6.00 |
| 1937 | 4,477,073.87 | 1,373,776 | 6.00 |
| 1938 | 4,659,150.83 | 1,152,072 | 5.00 |
| 1939 | 5,309,702.67 | 1,375,502 | 6.00 |
| 1940 | 6,017,085.50 | 1,483,680 | 6.50 |
| 1941 | 7,041,122.75 | 1,835,094 | 8.00 |
Petitioner's sales, number of employees, profits before taxes, and sums paid in wages and salaries, bonuses, annuities, and trust benefits in the years 1934 to 1950, inclusive, are shown on the following schedule:
| Average | Profit before | ||
| Year | number of | Net sales | Federal taxes |
| employees | on income | ||
| 1934 | 404 | $ 4,064,820 | $ 1,636.543 |
| 1935 | 485 | 5,262,473 | 1,904,649 |
| 1936 | 535 | 8,290,876 | 2,414,049 |
| 1937 | 666 | 10,709,084 | 2,944,682 |
| 1938 | 650 | 6,791,433 | 1,604,524 |
| 1939 | 637 | 9,257,613 | 2,459,973 |
| 1940 | 740 | 13,570,320 | 3,239,754 |
| 1941 | 979 | 24,024,095 | 5,720,919 |
| 1942 | 1,222 | 33,515,444 | 9,007,512 |
| 1943 | 1,245 | 32,987,734 | 7,429,101 |
| 1944 | 1,115 | 28,190,452 | 5,063,686 |
| 1945 | 1,110 | 24,306,430 | 3,706,095 |
| 1946 | 1,167 | 23,717,156 | 4,013,706 |
| 1947 | 1,157 | 31,297,319 | 5,524,371 |
| 1948 | 1,099 | 31,162,119 | 4,906,781 |
| 1949 | 1,026 | 25,662,744 | 3,426,099 |
| 1950 | 1,005 | 31,895,054 | 4,920,451 |
| Year | Wages and | Bonus | Annuity | Trust |
| salaries | ||||
| 1934 | $ 752,243 | $ 131,785 | ||
| 1935 | 957,485 | 226,480 | ||
| 1936 | 1,180,917 | 436,375 | $ 486,389 | |
| 1937 | 1,455,986 | 672,845 | 359,803 | |
| 1938 | 1,104,688 | 206,431 | 99,930 | |
| 1939 | 1,360,687 | 495,721 | 132,251 | |
| 1940 | 1,756,235 | 980,670 | 400,008 | |
| 1941 | 2,669,269 | 2,071,315 | 575,206 | $ 1,000,000 |
| 1942 | 3,705,117 | 2,968,233 | 264,673 | |
| 1943 | 3,978,269 | 3,185,845 | 279,769 | |
| 1944 | 3,730,362 | 2,944,955 | 277,424 | |
| 1945 | 3,370,586 | 3,057,282 | ||
| 1946 | 3,359,522 | 2,891,627 | ||
| 1947 | 3,793,922 | 3,767,830 | ||
| 1948 | 4,142,762 | 3,824,810 | ||
| 1949 | 3,365,402 | 3,007,430 | ||
| 1950 | 3,795,862 | 3,679,383 | 264,407 |
Petitioner has no monopoly as to its manufactured articles, but sells its products in competition with a number of other manufacturers.
Since 1934 petitioner's operations have been successful and profitable. This has been due in a large measure to its policy of fair treatment of its employees implemented by its so called incentive system, which has resulted in the building up of a force of loyal and efficient workers. By its incentive system it has avoided work stoppages and other labor troubles. Another factor contributing to its success is the fact that using standard machines*242 and tools its employees, stimulated by the incentive system, have designed and developed many improvements *1603 for use therewith permitting their operation at increased speeds, resulting in increased production.
Eighty-five per cent of petitioner's employees in 1941 operated on a piecework rate scientifically ascertained. The rate is guaranteed and the employee is paid in accord with what he produces and without restriction in the amount of his production. The rates so fixed were in line with rates paid by other companies in the Cleveland area employing help requiring similar skill and training. The base pay of other employees whose duties were not susceptible of piecework treatment is the same or slightly higher than the prevailing hourly wage paid by manufacturing industries in the community for similar services. While a great number of petitioner's employees are also stockholders, no part of their wages, salaries, bonuses, annuities, or trust benefits was ever determined with reference to stockholdings, or bore any relation thereto.
Although petitioner's earnings consistently increased between 1934 and the end of 1941, the price at which it sold its products consistently*243 declined.
In the taxable year 1941, petitioner paid upon its employees' retirement annuity policy the sum of $ 575,206.43 and contributed to its employees' profit-sharing trust the sum of $ 1,000,000. Such sums were paid pursuant to petitioner's long standing incentive system. As a result of such payments petitioner achieved stability in its labor relations, increased the productivity of its employees, increased its own earnings, and was enabled to make substantial reduction in its selling prices and to expand the market for its products.
The amount of $ 575,206.43 paid by petitioner upon its retirement annuity policy, and the amount of $ 1,000,000 contributed to its employees' trust, constitute ordinary and necessary expenses paid in the taxable year 1941, and are reasonable in amount.
OPINION.
In this further proceeding under the mandate of the Court of Appeals, the sole issue to be determined is the reasonableness of certain payments made by petitioner in the taxable year 1941, as ordinary and necessary expenses of carrying on its business.
Petitioner has properly assumed the burden of establishing the fact of reasonableness. Petitioner contends that the payments made upon its*244 retirement annuity program and its employees' trust are part of the long established and successful incentive system, and are a part of the costs of making that system operate. Petitioner argues that the results achieved establish that these expenditures were proper and prudent in amount. The record clearly establishes that petitioner's incentive system materially contributed to increased productivity, *1604 enhanced earnings, reduced selling prices, avoided labor strife and work stoppages, and developed and retained a cooperative, loyal, efficient and satisfied force of employees.
Petitioner has presented the testimony of its president and superintendent and other industrialists having incentive plans, as well as the testimony of qualified and outstanding economists, who have made an intimate study of the operation and the practical results achieved by petitioner's incentive system. These witnesses expressed the opinion that adjudged by the results achieved the contested payments in 1941 were reasonable in amount. The opinions of the economists were supported by many charts, graphs, and statistical data of petitioner and other industries for comparative purposes.
The respondent*245 presented no affirmative evidence, and cross-examined only a few of such witnesses and to a very limited extent. From the respondent's argument, on brief, it seems that his position is that the reasonableness of the contested payments as employee compensation may be determined. We think the issue of the reasonableness of the payments as employees' compensation is not now before us.
We are required by the mandate "to consider the payments in question as ordinary and necessary expenses paid or incurred in carrying on a trade or business" and "to allow them as such" to the extent we determine they are reasonable in amount.
The opinion evidence, when considered with all the other evidence contained in this record, establishes the fact that the contested payments were reasonable in amount and we have so found as an ultimate fact.
We, therefore, hold that petitioner, in the taxable year 1941, is entitled to deduct the sum of $ 575,206.43 paid upon the employees' retirement annuity policy, and the sum of $ 1,000,000 contributed to the employees' trust, as ordinary and necessary expenses of carrying*246 on its business, under
Decision will be entered under Rule 50.
Footnotes
1. This proceeding has been twice tried and reversed. Our first decision (
6 T.C. 37">6 T. C. 37 ) held the contested payments not deductible undersection 23 (a) (1) (A), I. R. C. The United States Court of Appeals for the Sixth Circuit reversed (162 F.2d 379">162 F. 2d 379 ) and held the payments to be ordinary and necessary business expenses under said section. After receipt of the mandate, respondent moved for a further hearing and the determination of the issue of reasonableness of the payments as compensation. On October 27, 1947, we entered a memorandum and order holding that we were without jurisdiction under the opinion and mandate of the Court of Appeals to consider further the reasonableness of the contested payments, and directing our former decision entered March 26, 1946, be vacated and set aside, and the case set for recomputation under Rule 50. On January 15, 1948, a decision was entered of no deficiencies for the years 1940 and 1941. Respondent appealed. The Court of Appeals again reversed (176 F. 2d 815↩ ), adhering to its earlier decision that the payments constituted ordinary and necessary business expenses and directing us to determine the fact of the reasonableness of the amount as such expenses. (See mandate March 8, 1950.)