In Uncategorized on 03/02/2022 at 16:42

Clary Hood, founder of his eponymous grading and excavation company, is an American success story. Starting out of high school as a Cat skinner (that’s driving a Caterpillar excavating rig) in his father’s business, he went out on his own with “…only two employees and a hodgepodge of used equipment valued at no more than $60,000 before growing into a 150-person company with nearly $70 million in revenue by the end of [the second of the two years at issue]. ” Clary Hood, Inc., T. C. Memo. 2022-15, filed 3/2/22, at p. 4.

And it was no sleighride; Clary rode out two (count ’em, two) recessions, cutting his own pay to zero and his employees’ to as low as he could, walking away from Walmart when they tried to squeeze him, selling excess equipment, personally guaranteeing loans and completion bonds, and working 80-hour weeks.

And unlike some hard-driving entrepreneurs, he hired a first class team of executives who worked as hard as he did.

So when they had two (count ’em, two) great years back-to-back, and Clary was beginning to think of ““a changing of the guard”,” T. C. Memo. 2022-15, at p. 47, his executives thought Clary had been undercompensated for all the years he had kept the company going, and had their CPAs do a heavy-duty calculation for Year One (but not Year Two). And the Board of Directors (Clary and Mrs. Clary) voted Clary a very healthy bonus in each year. And Clary and Mrs. Clary never declared a dividend.

IRS claims excessive compensation, and whangs Clary with hefty deficiencies and five-and-ten understatement chops.

Judge Travis A (“Tag”) Greaves clearly appreciates Clary, the kind of man who made this country great. But rendering nondeductible disguised dividends deductible as salary and wages is a no go.

Now reasonable compensation is often in the eye of the beholder, beheld through multifactored lenses. While Clary’s attorneys try independent investor as the sole test, only one CCA bought that, and 4 Cir, whence Clary is Golsenized, never bought it.

Now for the reason for the headline first written at the head hereof, as my already-on-their-second-Grey-Goose-Gibson colleagues would say. Read from page 34 to page 39; those are Clary’s experts. Then read from page 39 to 42; that’s IRS’ expert, who allowed Clary more than IRS did in the SNOD. In a big-ticket case like this, where technical issues abound, one can’t just take an expert’s report and put it in evidence. One needs to do a thorough cross-examination in advance. While it’s easy to play Monday-morning quarterback, it sure looks like somebody missed a block or two here.

I won’t mention letting Clary testify about income tax considerations and the changing of the guard.

While I’m no pitchman for CLE programs, I suggest someone should run one on “Win Your Case by Woodshedding Your Experts.”

Worse, while his trusty CPAs did a great job providing good faith cover for Clary for the chops on the Year One deficiency, no evidence was proffered as to Year Two. However thin the rationale might be for Year Two, ya gotta try it.

As an old Army engineer, I agree the Cat skinners do a better job than the paperers.


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