Harolds Club v. Commissioner
United States Court of Appeals for the Ninth Circuit
340 F.2d 861 (1965)
Raymond Smith (plaintiff), who founded and ran the Harolds Club casino wholly owned by his two sons, agreed in 1941 to be paid 20% of the Club's profits after suggesting to his sons that he deserved that share as the "brains" of the operation; his sons agreed. From 1952 to 1956 this arrangement paid Smith between $350,000 and $560,000 annually, which the Club deducted in full as a reasonable business salary, even though competing gaming establishments testified the amount was reasonable. The Commissioner (defendant) disallowed part of the deduction, and the Tax Court agreed with the Commissioner, prompting the Club's appeal.
Whether the entire amount paid under a contingent compensation agreement is deductible as a reasonable salary, even if greater than what would ordinarily be paid, when the agreement resulted from a free bargain.