Newport Beach-based James Glidewell Dental Ceramics Inc., better known as Glidewell Laboratories Inc., is facing off with the Internal Revenue Service in a tax dispute over pay to its founder and chief executive.
The IRS is seeking $3.23 million in added taxes from the company for 1997 to 1999. Glidewell has filed a petition asking U.S. Tax Court in Wash-
ington, D.C., to overturn the IRS ruling.
Glidewell, which makes dentures, crowns, bridges and other products for dentists, argued that the IRS erred when it ruled founder and Chief Executive James “Jim” Glidewell was overpaid by nearly $9.5 million during the period.
The IRS ruling resulted in an increase in the company’s taxable income for the years.
Glidewell tax attorney William H. Quealy Jr. of San Diego declined to comment, saying it was up to company officials to comment on the case.
Company representatives didn’t respond to a phone call or e-mailys seeking comment.
An IRS spokesman said the agency is barred by law from commenting on pending tax cases.
The IRS ruling found that the $9.5 million paid to Jim Glidewell “did not constitute an ordinary and necessary business expense” and called the compensation “unreasonable.”
The IRS notice of deficiency, as the ruling is known, said Jim Glidewell’s reasonable compensation should have been $858,091 in 1997, instead of $3.05 million.
In 1998, he should have been paid $884,630, rather than $4 million, according to the IRS.
In 1999, he should have been paid $1.05 million, instead of $5.2 million, according to the ruling.
The company refutes the ruling and stressed the role Jim Glidewell plays at the company he founded in 1970.
“During the years at issue, James Glidewell performed management, production planning, financing, marketing, research, product development, industry education and real estate advisory functions,” the company’s petition said.
Jim Glidewell, who started the company after attending a two-year dental technology program at Orange Coast College, is “widely recognized as a leader and innovator in the dental lab industry,” according to the company’s petition.
“James Glidewell has guided the (company) from its initial operation as a small dental lab serving a local market in Southern California to its current position as the single largest dental lab in the world,” the petition said.
The management, technical skills and marketing know-how of Jim Glidewell were cited as key factors behind the company’s 25% compound annual growth rate in yearly sales.
Glidewell counts estimated yearly sales of $20 million.
“The value of the shareholder’s interest in (the company) has increased during each of the years at issue on account of (the company’s) standing in the industry, its sustained high rate of internally generated growth, and the expansion of customer base,” the petition said.
The company followed a practice of determining the pay of Jim Glidewell and other officers based on “a percentage of gross sales,” a policy designed to spur incentive among them to grow sales, the petition said.
The IRS ruling said it determined the amount paid to Jim Glidewell “exceeds a reasonable allowance for salaries or other compensation for personal services pursuant to Internal Revenue Service Code 162.”
The notice was issued in August. The IRS has 60 days to file an answer to the company’s November petition.
If the IRS and the company fail to negotiate a settlement, the case could go to trial before a tax court judge.
Jim Glidewell, whose hobbies include flying, golfing and boating, also is a philanthropist and real estate investor.
In 2002, he paid $8 million for an Irvine industrial building on Von Karman Avenue that’s leased to FedEx Corp. as a drop-off and sorting center.
Moskal is a Washington, D.C.-area freelance writer covering U.S. Tax Court.
