Opinion
Docket No. 4187.
1946-05-14
JULIAN ROBERTSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. H. Holderness, Esq., for the petitioner. Elmer L. Corbin, Esq., for the respondent.
Pursuant to a five-year employment contract and a trust agreement, the first of five annual payments of $12,500 was made in 1941 by the employing corporations to a trustee to be invested in retirement income policies and securities for the benefit of petitioner-employee and his family. The agreements provided that if petitioner ceased to be an employee of his own volition or if he were discharged for proper cause prior to the expiration of the term of employment, the entire trust fund was to be transferred to other trusts for the benefit of other employees, the agreements to be terminated and the rights and interests of petitioner and his family to become null and void and of no effect. Held, the amount of $12,500 paid to the trustee was not income taxable to petitioner in 1941 under section 22(a), Internal Revenue Code. W. H. Holderness, Esq., for the petitioner. Elmer L. Corbin, Esq., for the respondent.
The Commissioner determined a deficiency of $8,052.93 in income tax for the year 1941. The petitioner assails the inclusion in his taxable income of $12,500 paid in 1941 to the American Trust Co., trustee, pursuant to the provisions of an employment contract and trust agreement dated November 13, 1941.
FINDINGS OF FACT.
The petitioner is a resident of Salisbury, North Carolina. He filed his 1941 Federal income tax return on the cash basis with the collector of the district of North Carolina at Greensboro.
In 1925 petitioner was employed as plant engineer by the North Carolina Finishing Co. and in 1935 he became vice president and general manager. In the same year he was made vice president and general manager of North Carolina Fabrics Corporation, a newly organized corporation. In 1938 he was made vice president of Alexander Manufacturing Co., which had been organized in the early twenties. In 1939 he became president and treasurer of Erlanger Mills, Inc., and of all three above named corporations, as well as executive vice president of the B. V. D. Corporation, a Delaware corporation, which owned the controlling stock interest in the above named four corporations, all of which were North Carolina corporations. He held the same positions in 1941 and was director of the B. V. D. Corporation, Erlanger Mills, Inc., and North Carolina Finishing Co. In general he was resident manager of all the textile interests in North Carolina of the B. V. D. Corporation.
The petitioner in 1941 owned less than 1 percent of the outstanding shares of the B. V. D. Corporation. His family owned about 3 percent of the outstanding stock of North Carolina Finishing Co., but petitioner did not own any stock of that company. He now owns about 3 percent of the outstanding shares of Erlanger Mills, Inc.
On November 13, 1941, an employment agreement was entered into between the B. V. D. Corporation, hereinafter referred to as the corporation, and petitioner, which agreement, after reciting, inter alia, that petitioner had capably served the corporation and its subsidiaries in various executive capacities since April 1925, that he was a most valued employee and a recognized leader in the textile industry, that the corporation was desirous of assuring itself and its subsidiaries of the continuation of his services, that in order to induce him to continue in its employment and that of its subsidiaries the corporation offered to execute the employment agreement and also a trust agreement containing various provisions and old age benefits for petitioner and his family, and that petitioner agreed to execute the employment agreement if the trust agreement was executed contemporaneously by the corporation, provided among other things, that petitioner should continue in the employment of the corporation and/or its subsidiary or allied corporation as he might be directed to serve by the corporation or its president for a period of five years beginning September 1, 1941; that petitioner should devote his entire time, energy, skill, and attention to his duties as resident director in charge of the southern operations and properties of the corporation and its subsidiaries; that, for such period of time as North Carolina Finishing Co. and Erlanger Mills, Inc., effectively remained under the control of the corporation and petitioner was actively employed by them, the corporation, North Carolina Finishing Co., and Erlanger Millis, Inc., each should pay to petitioner an annual salary and commission of an amount of salary and at a rate of commission not less than that in effect on September 1, 1941; that a trust agreement for the benefit of petitioner should be entered into contemporaneously by corporation, which agreement should provide that, so long as North Carolina Finishing Co. and Erlanger Mills, Inc., effectively remained under its control as its subsidiaries and petitioner was actively employed by such subsidiaries, North Carolina Finishing Co. and/or Erlanger Mills, Inc., might in their discretion, in addition to any other compensation received by petitioner, pay the aggregate sum of $12,500 in each year to the trustee named in the trust agreement, that if in any year such subsidiaries make no payments or payments of less than $12,500, then corporation should pay in such year to the trustee the difference between $12,500 and the combined payments, if any, made by such subsidiaries to the trustee, that the first annual $12,500 payment should be due and payable November 14, 1941, and that such annual payments should continue for five additional consecutive years, except as provided in the employment agreement and in the trust agreement; that the death of petitioner prior to the expiration of the agreement should forthwith terminate the agreement and corporation and subsidiaries would not be required to make any further payments to petitioner, his heirs, executors, and administrators, and to the trustee; that any physical incapacity of petitioner resulting in the cessation of his employment prior to the expiration of the agreement should forthwith terminate the agreement, except that there should be paid to the trustee only such amounts as might be due on or before November 14 of the year in which petitioner's employment so ceased; that in the event of loss of effective control of corporation by other Milton S. and Sidney C. Erlanger by death or otherwise prior to the expiration of the employment agreement, and in the further event that corporation or its subsidiaries refused to continue to employ petitioner in his then executive capacities and authority and to pay him by way of compensation not less than that which he received at the time of such loss of effective control, then petitioner might elect, upon written notice to the corporation, to terminate the agreement, and it should forthwith terminate and no further payments should be required of corporation or its subsidiaries under the terms of the trust agreement; and that if petitioner of his own volition ceased to be an employee of corporation prior to the expiration of the agreement for any reason or cause other than his death, or physical incapacity, or loss of effective control of corporation by both Milton S. and Sidney C. Erlanger, or if for proper cause or reason he should be discharged by corporation prior to the expiration of the agreement, then the agreement should forthwith terminate and petitioner's and his family's rights and interest under the trust agreement should be null and void and of no effect.
On the same date a trust agreement was executed by the corporation, the petitioner, and the American Trust Co., as trustee, which provided for the annual payment beginning November 14, 1941, of $12,500 to the trustee, subject to all the exceptions set forth in the employment agreement. The trust agreement also provided, inter alia, that the corporation should appoint a ‘Pension Committee‘ to represent the corporation's interest in the trust agreement; that the payments made to the trustee for the old age benefit of petitioner should be invested by the trustee in retirement income contracts issued by a legal reserve life insurance company or companies selected by and in the amounts designated by the pension committee, in which contracts the trustee should be nominated as the beneficiary of all rights, subject to the terms and provisions of the trust agreement, that the moneys received by the trustee should be employed first in the payment of premiums on the contracts so purchased and any moneys remaining should be used as advance premiums, or to purchase additional retirement income contracts, or United States Government bonds, or other legal investments permitted by the laws of North Carolina; that upon petitioner's reaching the age of sixty years the trustee should begin paying him monthly payments, or in the event of his death either prior to or after attaining the age of sixty years the trustee should divide the trust estate into as many equal shares as would provide one such share for petitioner's wife if she survived and one share for each of the surviving children of petitioner, and one such equal share for the collective issue of any deceased child, and should pay the income thereof to each beneficiary as set forth in considerable detail in the trust agreement; that if corporation ceased to employ petitioner before the expiration of the employment agreement without proper cause or reason, then corporation should remain liable for any payments due or to become due to the trustee; that if petitioner ceased to be an employee of corporation prior to the expiration of the employment agreement for any reason or cause other than his death, or his physical incapacity, or severance or loss of effective control of corporation by both Milton S. and Sidney C. Erlanger, or if for proper cause or reason he be discharged by corporation prior to the expiration of the employment agreement, then the trust agreement should forthwith terminate as to petitioner and the other beneficiaries and their rights and interest under the trust agreement should be null and void and of no effect and he and they should be entitled to no benefits whatsoever under the trust; that the trustee should thereupon convert the retirement income contracts and all other investments into cash and deliver the cash to the trustee under such other trust or trusts, as were created for the benefit of other employees of corporation or its subsidiaries; that the amount so converted should be distributed for the benefit of such of the employees as the pension committee of corporation might direct; and that under no circumstances or conditions whatsoever should any contribution made by the corporation and its subsidiaries to the trust ever revert or inure to the benefit of the corporation or its subsidiaries.
The petitioner has no interest in or connection with the American Trust Co.
The petitioner entered the Army August 11, 1942, and was discharged October 17, 1945. Prior to his entry into the Army he was granted a leave of absence and was paid a part of his compensation. The employment contract and the trust agreement of November 13, 1941, were suspended during the time the petitioner was in the armed services, so that his term of employment now expires September 1, 1949, instead of September 1, 1946. He resumed his duties with the various companies September 1, 1945, being then on terminal leave from the Army.
The petitioner's compensation received from all of the five companies in 1941 was approximately $60,000. In addition there was paid to the American Trust Co., as trustee under the trust agreement of November 13, 1941, the amount of $12,500, no part of which was paid in 1941 by the trustee to or for the benefit of petitioner or his family. During the first year the trustee purchased five or six annuity or retirement income contracts and during the second year additional payments were made on two of such contracts and one or two new contracts purchased. The beneficiary named in each contract was the trustee.
OPINION.
HILL, Judge:
The Commissioner, in determining the deficiency herein, included in taxable income the amount of $12,500 designated as ‘Bonus‘ and determined that such amount represented taxable income to petitioner for the year 1941. On brief, he relies on Richard R. Deupree, 1 T.C. 113; Renton K. Brodie, 1 T.C. 275; D. D. Hubbell, 3 T.C. 626; affd., 150 Fed.(2d) 516; and David Watson Anderson, 5 T.C. 1217.
The petitioner does not rely upon section 165 of the Internal Revenue Code, but contends that the amount of $12,500 paid to the trustee is not taxable to petitioner because he did not actually or constructively receive that amount in 1941.
The question is, was ‘any economic or financial benefit conferred on the employee (petitioner) as compensation‘ in the taxable year 1941? Commissioner v. Smith, 324 U.S. 177. The employment contract provided that petitioner should receive ‘as compensation for his services, an annual salary and commission at a rate of commission not less than that in effect on September 1, 1941,‘ and ‘in addition to any other compensation‘ received by him, ‘the aggregate sum of $12,500 in each year‘ was to be paid to the American Trust Co., trustee under the trust agreement of November 13, 1941. Undoubtedly the $12,500 was intended and was paid to the trustee as compensation for services rendered by petitioner. Hence, were it not for other provisions in the employment and trust agreements, the principle of the cases cited by the respondent would be applicable and controlling. The employment contract contained the following provision:
(d) If Robertson of his own volition ceases to be an employee of Corporation prior to the expiration of this Agreement for any reason or cause other than (a) his death, or (b) his physical incapacity, or (c) the severance or loss of effective control of Corporation by both Milton S. Erlanger and Sidney C. Erlanger as (a), (b) and (c) have been hereinbefore defined, or if for proper cause or reason he be discharged by corporation prior to the expiration of this Agreement, then this Agreement shall forthwith terminate and Robertson's and his family's rights and interests under said Trust Agreement shall be null and void and of no effect as provided in said Trust Agreement.
The trust agreement contained a similar clause, to which was added:
* * * Trustee shall thereupon convert the retirement income contracts and all other investments into cash and deliver such cash to the Trustee under such other trust, or trusts, as shall be hereafter created for the benefit of other employees of Corporation and/or its subsidiary and/or its allied corporations. The amount so converted shall be distributed for the benefit of such of the employees as the Pension Committee of Corporation may direct.
Whether or not petitioner or his family will ever receive or be entitled to the economic benefits conferred by the employment and trust agreements depends, except in the event of his death, physical incapacity, discharge without proper cause, or severance or loss of effective control by the Erlangers of the corporation, upon petitioner's continuation in his employment until the expiration of the extended term of employment, September 1, 1949. It is clear that the motivating reason for the execution of the employment and trust agreements was to induce petitioner to remain in his employment with the companies. If he ceased to be an employee of his own volition of the corporation or if he was discharged for proper cause or reason prior to the expiration of the designated term of employment, he and his family would lose all rights or interests in the trust estate.
In Cecil Q. Adams, 20 B.T.A. 243; affd., 54 Fed.(2d) 228, it was stated that ‘in general, income should not be construed to have been received prior to the date of actual receipt except where a taxpayer turns his back upon income or does not choose to receive income which he could have if he chose,‘ and in C. E. Gullett, 31 B.T.A. 1067:
* * * that amounts due from a corporation but unpaid, are not to be included in the income of an individual reporting his income on a cash receipts basis unless it appears that the money was available to him, that the corporation was able and ready to pay him, that his right to receive was not restricted, and that his failure to receive resulted from exercise of his own choice. * * *
See also, Adolph Zukor, 33 B.T.A. 324; K. R. Kingsbury, 31 B.T.A. 1126. Cf. A. P. Giannini, 42 B.T.A. 546; affd., 129 Fed.(2d) 638; J. H. McEwen, 6 T.C. 1018.
The respondent argues that the conditions which would nullify the agreements are at petitioner's own volition or his own conduct in the discharge of his duties; in other words, ‘he may take it or leave it.‘ A similar argument was made in Schaefer v. Bowers, 50 Fed.(2d) 689; certiorari denied, 284 U.S. 668, wherein the Circuit Court of Appeals for the Second Circuit stated:
Moreover, even if it can be thought that any discharge is voluntary, still his rights changed upon distribution. Until then, his interest was charged with the obligation to remain; that is as true a condition as though his employment did not rest in his pleasure. Practically it might prove onerous; he might find it much to his advantage to go elsewhere, but his decision to do so was clogged by the fact that he would lose his shares. Certainly he had not that untrammelled dominion over property so limited which he has over property in general. An executory limitation is none the less a condition because performance rests with the grantee. * * *
The agreements clearly indicate the intent of the corporation that any benefits which petitioner or his family could derive from the agreements should be dependent upon petitioner's continuation in his employment. Petitioner's right to receive the agreed economic benefits was restricted. His interest was ‘charged with the obligation to remain‘ in the employment during the designated term.
The doctrine enunciated in North American Oil Consolidated v. Burnet, 286 U.S. 417, as follows:
* * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, * * * even though he may still be adjudged liable to restore its equivalent. * * *
is not applicable, as claimed by respondent. In that case, among properties operated by taxpayer in 1916 was a section of oil land, title to which stood in the name of the United States. The Government, claiming beneficial ownership also, brought suit to oust taxpayer from possession. A receiver was appointed in February 1916. After entry of the final decree in 1917 by the District Court dismissing the bill, the receiver paid over the 1916 net profits from such section of oil land to the taxpayer. The Government took an appeal to the Circuit Court of Appeals, which affirmed the decree of the District Court in 1920. A further appeal was dismissed by stipulation in 1922. The Supreme Court held that the 1916 earnings were taxable income to the taxpayer in 1917, as determined by the Commissioner, and not in 1916 or in 1922, as contended by taxpayer. Herein the petitioner did not actually and unconditionally receive the $12,500 in 1941. Distribution to him or his family by the trustee was restricted and depended upon a condition, which if not complied with, would nullify any rights or interests which he or his family might have had in the trust fund.
It is our conclusion that the amount of $12,500 paid to the trustee in 1941 was not taxable income to the petitioner in that year under section 22(a).
Since in determining the deficiency another adjustment was made by the Commissioner, which is not in controversy,
Decision will be entered under Rule 50.