## Facts

- Two related U.S. corporations operated a bag-closing machine business and paid salaries to Dave Fischbein, chairman of both corporations.
- A Belgian subsidiary, Compagnie Fischbein, S.A. (CFSA), was a controlled foreign corporation (CFC), and the U.S. parent was a United States shareholder for Subpart F purposes.
- CFSA bought bag-closing machine components from a related U.S. affiliate, assembled the components in Belgium into finished portable bag-closing machines, and sold the machines worldwide.
- The Commissioner asserted deficiencies for multiple years, challenging (1) the reasonableness of the chairman’s compensation deductions and (2) current inclusion of CFSA’s sales income as foreign base company sales income (FBCSI) under Subpart F.

## Issues

1. Whether the salaries paid to the chairman were reasonable compensation for services actually rendered and therefore deductible under I.R.C. § 162(a)(1).
2. Whether CFSA’s income from selling assembled bag-closing machines constituted foreign base company sales income under I.R.C. § 954(d), requiring current inclusion by the U.S. shareholder under I.R.C. § 951.

## Decision

- The Tax Court held the salaries paid to Dave Fischbein were reasonable in amount and reflected the value of his services; the compensation deductions were allowed.
- The Tax Court held CFSA’s assembly operations constituted manufacturing when purchased components became part of the property sold.
- Because CFSA was treated as manufacturing the product, its sales income was not FBCSI and was not currently includible in the U.S. shareholder’s income under Subpart F.
- The Commissioner’s principal deficiency adjustments on both issues were rejected.

## Legal Principles

- Compensation is deductible under I.R.C. § 162(a)(1) only to the extent it is reasonable and paid for services actually rendered; reasonableness is determined from the totality of the facts concerning the officer’s services and the business context.
- For Subpart F, classification of a CFC’s sales income under I.R.C. § 954(d) depends on whether the CFC is merely purchasing and reselling property or is engaged in manufacturing activity connected to the property sold.
- Substantial assembly of purchased components into a finished product may constitute manufacturing for Subpart F purposes, removing the resulting sales income from FBCSI when consistent with the statutory scheme, regulations, and legislative history.

## Conclusion

The Tax Court upheld full deductions for the chairman’s compensation as reasonable and held that a Belgian CFC’s assembly of related-party components into finished bag-closing machines qualified as manufacturing, so the CFC’s sales income was not foreign base company sales income subject to current Subpart F inclusion.


Dave Fischbein Mfg. Co. v. Comm’r, 59 T.C. 338 (1972)