Opinion
Docket Nos. 54063 54064.
1957-12-24
DAVID L. GORDON AND CLAIRE (CLARA) B. GORDON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WILLIAM C. HILDEBRAND, JR., AND JACQUELINE HILDEBRAND, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Douglas W. McGregor, Esq., for the petitioners. Graham R. E. Koch, Esq., for the respondent.
Douglas W. McGregor, Esq., for the petitioners. Graham R. E. Koch, Esq., for the respondent.
In 1950, petitioners received a lump-sum commutation paymentfor the future
amounts due under an employment contract which still had approximately 4 years to run. The employment contract covered services which were to be performed in connection with a tanker owned by the employer. The tanker was sold in 1950. The petitioners had reported previous amounts received under the contract as management fees, taxable as ordinary income. They reported the lump-sum payment as a capital gain from the sale of an interest in the tanker. Held, respondent properly determined that such lump-sum payment was a substitute for future compensation due under the contract and was taxable as ordinary income.
These consolidated proceedings involve the following deficiencies in income tax:
+-----------------------------------------------------+ ¦Docket No.¦Year ¦Income tax¦ +----------+-------------------------------+----------¦ ¦ ¦ ¦deficiency¦ +----------+-------------------------------+----------¦ ¦54063 ¦Fiscal year ended Nov. 30, 1950¦$19,807.32¦ +----------+-------------------------------+----------¦ ¦54064 ¦1950 ¦16,608.55 ¦ +-----------------------------------------------------+
The sole issue is whether the lump-sum payment which the petitioners received in 1950, as commutation of the amounts due under an employment contract between petitioner Hildebrand and his employer, which contract still had approximately 4 years to run, constituted ordinary income or capital gain.
FINDINGS OF FACT.
Petitioner David L. Gordon and his wife, Clare B. Gordon, and petitioner William C. Hildebrand, Jr., and his wife, Jacqueline Hildebrand, were residents of Houston, Texas, during the years in issue. The Gordons filed a joint income tax return for the fiscal year December 1, 1949, to November 30, 1950, and the Hildebrands filed a joint return for the calendar year 1950, with the former collector of internal revenue at Austin, Texas.
Prior to and during the years in issue, Hildebrand was engaged in the brokerage, marketing, and transportation of oil and chemical products. He was also vice president of the Anchor Oil Company of Houston, Texas (hereinafter referred to as Anchor). Gordon was the president of such company. The two men together owned 50 per cent of Anchor's stock.
In 1948, Hildebrand and Gordon wanted Anchor to purchase a surplus tanker from the United States Maritime Commission (hereinafter referred to as the Commission). Such a purchase would have necessitated an investment of approximately $2,000,000, and the other stockholders of Anchor refused to permit the corporation to make the purchase. Hildebrand, through personal contacts, learned that he could acquire a good tanker from the Commission. He enlisted the aid of the brokerage firm of Kidder-Peabody Co. to find a prospective purchaser for the tanker. The Donner Foundation of Philadelphia, Pennsylvania (hereinafter referred to as Donner), was the purchaser found.
Anchor agreed to act as the nominal purchaser of the tanker from the Commission. On April 17, 1948, it entered into a contract with Donner under which it agreed to purchase the tanker Torrance Hills for a commission or fee of $10,000. The purchase was consummated and title to the tanker was immediately transferred to Donner which in turn chartered it to the Texas Company for a 6-year period.
For services rendered in assisting Donner in the acquisition, inspection, and survey of the tanker and for further services to be performed by him, Donner entered into an employment contract with Hildebrand, the pertinent provisions of which are as follows:
In consideration of your services in assisting us in the acquisition, inspection and survey of the T-2 tanker known as ‘TORRANCE HILLS', and further services hereinafter required to be performed by you for our account, we agree to pay you the sum of $33,333.33 a year for the ensuing six years, the first payment thereof to be made upon the date of the final closing of the purchase of said vessel by us, and the remaining payments to be made upon the expiration of each year thereafter, until you have received the full sum of $200,000, said payments to the extent that they cover services to be performed, to be in advance.
During the six years' period you will, at our request, make such inspections, surveys and reports as are necessary to the proper maintenance of the vessel; furnish us with reports from time to time upon the manner of operation of said vessel by any charter party thereof; make recommendations from time to time as to the qualifications of the master and chief engineer in charge of the operation thereof; conduct as our agent and to the extent of authority from time to time delegated by us to you, any negotiations with any charter party or the American Bureau of Shipping, or such other surveyor or surveyors as we may designate to conduct surveys of said vessel; and generally cooperate with us in overseeing the maintenance and operation of said vessel. You are not authorized, however, to make any commitments on our behalf without our prior consent in writing.
Our obligation to pay you as hereinbefore set forth shall survive your death or inability to act and/or the loss of the vessel and/or the termination of the present charter with the Texas Company, and in the event of your death said sum shall be payable to your personal representative. This contract shall not be assignable by you without our consent in writing. If the above agreement is acceptable by you, kindly indicate your approval thereof by endorsing and returning to us the copy of this letter.
The amount which Hildebrand was to receive under the employment contract was arrived at by Donner by projecting all costs and expenses incident to the purchase of the tanker and those which would be incurred by it during the 6-year charter period, and subtracting such sum from the amount which it expected to realize from the charter for hire of the vessel to the Texas Company during such period.
Donner sold the tanker to the Texas Company on September 7, 1950. The remaining unpaid balance due Hildebrand under the employment contract with Donner as of that date was approximately $100,000. At the time of the sale, Donner secured Hildebrand's release from its obligations under the contract by paying to him, on September 28 and October 5, 1950, the sum of $93,125.89.
The annual periodic payments which Hildebrand had received in 1948, 1949, and 1950, in the amount of $33,333.33 each, had been divided equally with Gordon. The payment of $93,125.89 was also divided equally with Gordon. On their returns for the taxable years 1948, 1949, and 1950, both Hildebrand and Gordon reported the receipt of the periodic payments as ordinary income received for ‘management fees.’ They reported the receipt of the $93,125.89 payment, however, as long-term capital gains from the sale of an interest in a steamship. The respondent determined that the lump-sum payment was ordinary income.
OPINION.
RICE, Judge:
Petitioners argue that their interest in the Hildebrand employment contract ‘and the Tanker ‘Torrance Hills' constituted property’; that ‘Hildebrand's transfer of such interest constituted a sale’; and that they ‘properly treated the receipts from such sale as Capital Gains.’ Petitioners' position is wholly untenable in the face of the facts of the record before us.
Hildebrand secured a valuable employment contract by virtue of the services which he performed for Donner in connection with the purchase of the tanker and for the services which he agreed to perform for it during the ensuing 6-year period. While that contract in the abstract might be property, Hort v. Commissioner, 313 U.S. 28 (1941); Shuster v. Helvering, 121 F.2d 643 (C.A. 2, 1941), affirming 42 B.T.A. 255 (1940), the commutation of the amounts due thereunder into a lump-sum figure does not change the basic nature of such payment to proceeds from the sale of a capital asset which would be taxable as capital gains. The commutation payment was compensation just as surely as were the periodic payments which the petitioners received under the contract and reported as such. Hort v. Commissioner, supra; Shuster v. Helvering, supra; General Artists Corporation, 17 T.C. 1517 (1951), affd. 205 F.2d 360 (C.A. 2, 1953), certiorari denied 346 U.S. 866 (1953); F.W. Jessop, 16 T.C. 491 (1951); George K. Gann, 41 B.T.A. 388 (1940); and Thurlow E. McFall, 34 B.T.A. 108 (1936). See Fairbanks v. United States, 306 U.S. 436 (1939).
Insofar as this record shows, the petitioners had no interest, as such, in the tanker and owned no part of it. Certainly, Hildebrand's employment contract gave them none. That contract was solely an employment contract. The fact that it called for services in connection with the tanker did not give Hildebrand a property interest in the subject matter of his employment.
Section 22(a) provides that gross income includes gains, profits, and income derived from salaries, wages, or compensation for personal services. Clearly, all amounts which the petitioners received under Hildebrand's contract with Donner fall plainly within the express provisions of the statute. The fact that the last three payments due under the contract were commuted to a lump-sum payment makes them nonetheless compensation for services. As the Supreme Court said of a similar payment in Hort v. Commissioner, supra at 31: ‘It must be regarded as ordinary income, and it is immaterial that for some purposes the contract creating the right to such payments may be treated as ‘property’ or ‘capital’.' The commutation payment involved nothing more than a relinquishment by Hildebrand of the right to future compensation in return for a present substitute payment. We conclude that the respondent did not err in determining that such payment which the petitioners received in 1950 constituted ordinary income.
The record leaves much to be desired insofar as petitioner Gordon's receipt of a share of both the periodic and the lump-sum payment is concerned. Presumably, the respondent determined the deficiency against him on the assumption that Gordon had participated with Hildebrand in securing the tanker for Donner; was to assist Hildebrand in the performance of the services called for under the contract; and, that the amounts which Gordon received from Hildebrand were therefore compensation for services, taxable as ordinary income, even though the employment contract under which such payments were received was exclusively between Donner and Hildebrand, and was not assignable by Hildebrand without Donner's consent. Petitioner Gordon did not appear at the hearing, and the only reference as to how and why he acquired an interest in the contract was Hildebrand's statement from the witness stand that there was a division of the amounts received under the contract on a 50-50 basis. Since Gordon has not seen fit to explain to the Court the circumstances under which he became entitled to share in the payments under the contract, and has argued his case, on brief, as if he stood in exactly the same position as Hildebrand, we uphold the determination of the deficiency in his income tax as we do that of Hildebrand.
Decisions will be entered for the respondent.