Opinion
Docket Nos. 5210 5211.
1947-02-24
WANDA V. VAN DUSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.C. A. VAN DUSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Raymond M. Wansley, C.P.A., and John M. Cranston, Esq., for the petitioners. E. A. Tonjes, Esq., for the respondent.
Held, petitioner earned taxable income when, pursuant to an option given petitioner by the president of a corporation of which petitioner was an employee, petitioner purchased from the president personally, at less than market price, stock of the corporation, the difference in value of the stock from market value being compensation for services rendered or to be rendered. Raymond M. Wansley, C.P.A., and John M. Cranston, Esq., for the petitioners. E. A. Tonjes, Esq., for the respondent.
The respondent determined deficiencies in income tax of these petitioners as follows:
+----------------------------------+ ¦Petitioner ¦Year¦Deficiency¦ +------------------+----+----------¦ ¦Wanda V. Van Dusen¦1939¦$527.73 ¦ +------------------+----+----------¦ ¦ ¦1940¦1,251.02 ¦ +------------------+----+----------¦ ¦ ¦1941¦4,804.30 ¦ +------------------+----+----------¦ ¦C. A. Van Dusen ¦1938¦310.66 ¦ +------------------+----+----------¦ ¦ ¦1939¦528.22 ¦ +------------------+----+----------¦ ¦ ¦1940¦1,251.02 ¦ +------------------+----+----------¦ ¦ ¦1941¦4,863.30 ¦ +----------------------------------+
The question presented is whether petitioner C. A. Van Dusen earned income by the bargain purchase of certain stock from the president of a corporation personally, he being an employee of the corporation.
FINDINGS OF FACT.
Most of the facts were stipulated, the stipulation being in substantially the following form:
C. A. Van Dusen, hereinafter sometimes called petitioner, and Wanda V. Van Dusen were husband and wife, and were residents of the State of California throughout each of the years 1938, 1939, 1940, and 1941.
On December 10, 1934, the petitioner entered the employ of Consolidated Aircraft Corporation as factory manager at a salary of $9,000 per annum, pursuant to an oral agreement entered into on December 7, 1934.
The petitioner received salary from Consolidated Aircraft Corporation as follows:
+----------------+ ¦1938¦$15,205.04 ¦ +----+-----------¦ ¦1939¦16,020.08 ¦ +----+-----------¦ ¦1940¦22,442.50 ¦ +----+-----------¦ ¦1941¦31,255.00 ¦ +----------------+
$8,600.01 of his salary for 1938 was exempt from taxation because received for foreign service.
The petitioner and his wife filed separate income tax returns for the calendar years 1938, 1939, 1940, and 1941.
On December 7, 1934, R. H. Fleet, president of Consolidated Aircraft Corporation, gave to the petitioner an oral option for the purchase of stock of Consolidated Aircraft Corporation, which option was reduced to writing on December 10, 1934, and was terminated by written agreement on December 31, 1941, said written option and termination being in the following words and figures:
CONSOLIDATED AIRCRAFT CORPORATION BUFFALO, NEW YORK
December 10, 1934 (CONFIDENTIAL)
R. H. Fleet,
President.
Mr. Charles A. Van Dusen,
Dear Van:
In connection with your employment this day by our company, it gives me much pleasure to confirm my offer to sell you fifty (50) shares of my personal common stock in this corporation at the price of $5 net per share each and every month for the next ten years, (unless I die or cease to be an employee of CONSOLIDATED, in which event this is modified against me or my estate to five years from this date), this right to hold, however, only so long as you are retained in the company's employ.
You are under no obligation to purchase or to hold after purchase, any such stock under this offer; failing to purchase any month you forfeit nothing but the right to buy that month's quota of 50 shares.
So that you may get prompt delivery of any shares you purchase hereunder, I will leave sufficient of my shares, in street names, properly endorsed, with the Treasurer of the company to fulfill this agreement.
Until I further advise, would prefer that if you sell you do so only to or thru our brokers, Hammons & Company, 120 Broadway, New York City, (phone Rector 2-4400).
Cordially,
(Signed) R. H. FLEET
RHF-B
It is mutually agreed that the foregoing agreement is to terminate on December 31, 1941.
(Signed) R. H. FLEET CHARLES A. VAN DUSEN
Dated: San Diego, Cal.
December 15, 1941.
On December 7, 1934, the common stock of Consolidated Aircraft Corporation sold on the New York Curb Exchange for a high of 9 1/2 and a low of 8 7/8.
The price ranges of the common stock of Consolidated Aircraft Corporation on the New York Curb Exchange for the years 1932, 1933, and 1934 were as follows:
+------------------+ ¦Year¦High ¦Low ¦ +----+-------+-----¦ ¦1932¦4 3/4 ¦1 ¦ +----+-------+-----¦ ¦1933¦12 ¦1 ¦ +----+-------+-----¦ ¦1934¦12 7/8 ¦6 3/8¦ +------------------+
The common stock of Consolidated Aircraft Corporation had a par value of $1 per share, and a book value of $3.55 per share at December 7, 1934.
There were 574,400 shares of the common stock of Consolidated outstanding on December 7, 1934, and R. H. Fleet owned 261,481 shares of the common stock on that date.
The total shares of common and preferred stock outstanding on January 1, 1938, December 31, 1938, December 1, 1939, December 1, 1940, and December 31, 1941, were as follows:
+---------------------------------------------+ ¦ ¦Shares ¦Shares ¦ +-------------------------+---------+---------¦ ¦Capital stock outstanding¦preferred¦common ¦ +-------------------------+---------+---------¦ ¦Jan. 1, 1938 ¦23,708 ¦574,760 ¦ +-------------------------+---------+---------¦ ¦Dec. 31, 1938 ¦23,820 ¦574,760 ¦ +-------------------------+---------+---------¦ ¦Dec. 31, 1939 ¦23,820 ¦576,160 ¦ +-------------------------+---------+---------¦ ¦Dec. 31, 1940 ¦23,820 ¦578,605 ¦ +-------------------------+---------+---------¦ ¦Dec. 31, 1941 ¦None ¦1,284,244¦ +---------------------------------------------+
During the year 1941, 514 shares of preferred stock were retired at $55 per share and 23,306 shares were converted into common at rate of two shares common for each share of preferred.
The highest number of shares owned by R. H. Fleet was as follows:
+-----------------------+ ¦Year¦Preferred ¦Common ¦ +----+----------+-------¦ ¦1938¦6,000 ¦164,841¦ +----+----------+-------¦ ¦1939¦6,010 ¦164,241¦ +----+----------+-------¦ ¦1940¦6,010 ¦162,791¦ +----+----------+-------¦ ¦1941¦6,010 ¦348,822¦ +-----------------------+
The petitioner purchased common stock of Consolidated from R. H. Fleet, under the terms of the agreement set forth above, as follows:
+--------------------------------+ ¦ ¦ ¦Market value ¦ ¦ +----+------+-------------+------¦ ¦Year¦Shares¦when ¦Cost ¦ +----+------+-------------+------¦ ¦ ¦ ¦purchased ¦ ¦ +----+------+-------------+------¦ ¦1938¦600 ¦$10,653.75 ¦$3,000¦ +----+------+-------------+------¦ ¦1939¦750 ¦14,484.38 ¦3,750 ¦ +----+------+-------------+------¦ ¦1940¦400 ¦9,875.00 ¦2,000 ¦ +----+------+-------------+------¦ ¦1941¦600 ¦18,000.00 ¦3,000 ¦ +--------------------------------+
At all times from December 7, 1934, to December 31, 1941, the petitioner was an employee of Consolidated Aircraft Corporation.
R. H. Fleet claimed no deductions from gross income in his returns for the calendar years 1938, 1939, 1940, and 1941 for the difference between the fair market value of the common stock of Consolidated and the sale price of the common stock to petitioner, but reported as income in his returns for said years the difference between the basis of the stock to him and the sum of $5 per share received on the sales to petitioner.
Consolidated Aircraft Corporation claimed on its returns as deductions from gross income for the years 1938, 1939, 1940, and 1941 only the salary paid by it to the petitioner for those years and did not claim any deduction with regard to the sales of its stock by R. H. Fleet to the petitioner during those years.
From the testimony in the case we find as follows:
The option was given to petitioner by Fleet as an inducement to secure his services for Consolidated. The termination clause was inserted because a termination of employment would terminate petitioner's usefulness to Consolidated and to Fleet. The difference between the amount paid for the stock and its fair market value at the several dates of purchase was in the nature of compensation for services rendered or to be rendered by petitioner.
The Commissioner added to the income of each petitioner for the several taxable years certain amounts called ‘compensation for services,‘ with the following explanation:
This represents your community half of income within the meaning of section 22(a) of the Internal Revenue Code, received as compensation for services as a result of the purchase of Consolidated Aircraft Corporation stock from Mr. R. H. Fleet at less than its fair market value.
OPINION.
VAN FOSSAN, Judge:
The question here posed is whether petitioner received income under the scope of section 22(a), Internal Revenue Code, when, pursuant to the option contract set out in the facts, he purchased stock of Consolidated from Fleet, its president.
The definition of income contained in section 22(a) is extremely broad. In fact, it would be difficult to contrive a definition broader in scope or more all-embracing in concept. Income may be in the form of cash or of property.
The Commissioner has promulgated Regulations 103, section 19.22(a)-1 in interpretation of section 22(a) of the code. In any case where the requirements laid down by the regulations are satisfied, it may properly be said that income is earned. But our question is not limited to determining whether the excess value was income under the regulations. Section 22(a) of the Internal Revenue Code is the touchstone by which income is gauged. Of section 22(a), the Supreme Court, speaking through the Chief Justice, in Commissioner v. Smith, 324 U.S. 177, said: ‘Section 22(a) of the Revenue Act is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effect.‘
Our concern centers first on the facts giving rise to the option agreement which was entered into December 7, 1934, at the same time petitioner was employed to work for Consolidated. The testimony of Fleet as to the employment and the nature of the option is illuminative of his attitude toward the same. The following are excerpts:
Q Do you recall the salary that was to be paid?
A I think it was $10,000 a year. That is '34. Let's see. I think it was $10,000.00 a year and he to take down 50 shares of my stock a month for $5.00 a share for the next ten years, or for ten years immediately following, conditioned upon his remaining in the employ of Consolidated Aircraft Corporation.
Q Do you recall whether or not the matter of giving Mr. Van Dusen this option to purchase was made a part of the original proposition to him?
A I think it was.
Q You also felt, did you not, Mr. Fleet, that the option which you gave Mr. Van Dusen would be regarded as something of an additional inducement to enter the employ of Consolidated?
A I think so.
Q But the motivating influence on your part of giving this privilege was to have Mr. Van Dusen work for Consolidated, wasn't it?
A That's right.
Fixing our attention on the option agreement itself, it will be noted that in the opening paragraph the parties recognized in so many words the intimate relation of the option to petitioner's employment. The language used: ‘In connection with your employment this day by our company, it gives me much pleasure to confirm my offer to sell you fifty (50) shares of my personal common stock‘ and ‘this right to hold, however, only so long as you are retained in the company's employ,‘ all speaks in terms of inducement or consideration for the employment of petitioner.
Fleet was president of Consolidated and a large holder of its stock. As such, he was personally and financially interested in the success and growth of the company. Petitioner was able to obtain the stock only by engaging in the employment and only so long as he remained in the employ of the company, i.e., only by performing his duties and rendering services to the company. If his employment ceased the opportunity to buy the stock also ceased. Thus it is there was a vital causal connection between petitioner's employment and his rendition of services and the purchase of the stock at favorable prices. If Fleet had agreed to pay petitioner $100 per month so long as he remained in the employ of Consolidated, there would scarcely be any basis to question the fact that such payment would have been income to petitioner. Likewise if, under otherwise similar facts, Fleet had transferred the shares each month without any payment so long as petitioner remained an employee of Consolidated, of a certainty, petitioner would have received income measured by the value of the shares.
We must look at the case from the position of the petitioner. Bearing in mind the observation of the Supreme Court in Commissioner v. Smith, supra, did he receive any economic or financial benefit from the exercise of the option? Was the benefit connected with, or conditioned on, rendering services and thus connected with his employment? Was the benefit a gift by Fleet? The answers seem to be obvious. Petitioner clearly benefited by exercising the option and securing the stock at less than market prices. The benefit was directly connected with, and conditioned on, the rendition of services and thus depended on his employment. The benefit was not a gift by Fleet— it was based on the consideration of petitioner entering and continuing in the employ of Consolidated. Clearly the ‘economic or financial benefit‘ gained by petitioner from the exercise of the option falls within the broad scope of the language of section 22(a), Internal Revenue Code, as elucidated by the Supreme Court.
Whether petitioner was serving two masters or whether Fleet was acting solely for himself or as a representative of the company in the negotiations which led to the giving of the option contract, we need not decide. The facts bring the gain within the expansive scope of section 22(a). Each case turns on its facts. Close analysis of the facts in the decided cases, together with their chronology with reference to Commissioner v. Smith, supra, will serve to distinguish or render obsolete as authority the cases relied on by petitioner.
Reviewed by the Court.
Decisions will be entered under Rule 50.