Opinion
Docket No. 8971.
1947-09-30
OTTO SORG SCHAIRER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John F. Costelloe, Esq., and Kenneth W. Gemmill, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
During the taxable year 1943 petitioner's employer directed petitioner to move his residence nearer to his place of employment so as to be subject to call at all times. The employer promised petitioner that if in so doing he had to sell his home at a loss he would be reimbursed for the loss. Petitioner sold his home to a third party at a loss and was reimbursed by his employer for the amount of the loss. All this occurred during the taxable year. Held, the amount received by petitioner as a reimbursement should for tax purposes be treated as a part of the ‘amount realized‘ from the sale of petitioner's home as that term is used in section 111(a) and (b) of the Internal Revenue Code, resulting in neither gain or loss, rather than as additional compensation as contended for by the respondent. John F. Costelloe, Esq., and Kenneth W. Gemmill, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
This proceeding contests the respondent's determination of a deficiency of $10,692.97 in income and victory tax for the calendar year 1943. As set out and explained in a statement attached to the deficiency notice, the deficiency is due to ‘Adjustments to Net Income‘ as follows:
+--------------------------------------------------------+ ¦ ¦Income Tax¦Victory Tax¦ +---------------------------------+----------+-----------¦ ¦ ¦Net Income¦Net Income ¦ +---------------------------------+----------+-----------¦ ¦Net income as disclosed by return¦$37,922.57¦$41,249.49 ¦ +---------------------------------+----------+-----------¦ ¦Addition: ¦ ¦ ¦ +---------------------------------+----------+-----------¦ ¦(a) Reimbursement of alleged loss¦14,644.20 ¦14,644.20 ¦ +---------------------------------+----------+-----------¦ ¦Net income as adjusted ¦$52,566.77¦$55,893.69 ¦ +--------------------------------------------------------+
Explanation of Adjustments
(a) It is held that the sum of $14,644.20 received by you from the Radio Corporation of America in reimbursement of the loss claimed to have been suffered from the sale of your residence constitutes taxable income under section 22(a) of the Internal Revenue Code.
By appropriate assignments of error petitioner contests the above adjustments to its income. Some of the facts were stipulated and others were developed by oral testimony and exhibits introduced in evidence.
FINDINGS OF FACT.
The facts as stipulated are so found.
Petitioner is an individual, residing in Princeton, New Jersey. He filed his Federal income and victory tax return for the calendar year 1943 with the collector for the second district of New York. The return was prepared according to the cash receipts and disbursements method of accounting.
Petitioner is a lawyer. He was admitted to the bar in Pennsylvania in 1912. In 1901 he received the degree of Bachelor of Arts from the University of Michigan. In 1902 he received from the same institution the degree of Bachelor of Science and Electrical Engineering, and, in 1942, the same institution awarded him the honorary degree of Doctor of Engineering. He had extensive experience in the patent field prior to his election in 1930 as vice president of Radio Corporation of America, sometimes referred to herein as ‘RCA,‘ in charge of its research and patent department. He retained that position until March 1945, when he became staff vice president. He retired from the corporation on December 31, 1945.
As vice president of RCA in charge of its research and patent work, petitioner was responsible for the planning, direction, and execution of its research work which was conducted in radio, electronics, and allied branches of science. In 1941 and the following war years, RCA was extensively engaged in important military research for the United States. This research resulted in the production of military equipment of importance to the United States, including many forms of radar, underwater sound equipment, infrared viewing devices, and many types of radio tubes, especially those used in television. Because the research facilities of RCA at its plants in Camden and Harrison, New Jersey, were inadequate for this work, it was proposed to erect new laboratories of RCA near Princeton, New Jersey. In December of 1940 petitioner was given the duty of formulating and carrying out this project. The new laboratories employed a staff of about 300 persons, which, because of the nature of its work, had to be obtained principally from the existing laboratories of RCA at Camden and Harrison.
On July 30, 1941, petitioner addressed a letter to David Sarnoff, president of RCA, with reference to a proposal to erect new laboratories of RCA near Princeton and to transfer to them equipment and employees which were then located at laboratories in Camden and Harrison. The letter presented plans, specifications, and estimates of costs for the proposal. The estimates included $100,000 as the total estimated cost of moving employees and of making equitable adjustments with them for losses on their then present homes. The letter stated in part that:
The proposed plan for making adjustments with employees for their moving expenses and losses is that used by RCA Manufacturing Company in the recent transfer of personnel from Camden to the Indianapolis plant. It was carried out with complete satisfaction to all the parties concerned, and provides a fair basis for taking care of employees and their home problem.
On August 1, 1941, the board of directors of RCA, after discussion, passed a resolution in which they approved in substance the above proposal made by petitioner and appropriated money to pay the costs of moving employees from their then locations to the vicinity of Princeton and to make adjustments with employees with respect to homes owned by them.
The plan for reimbursing employees so presented and approved did not, however, apply to petitioner, and no payment was made to him thereunder.
Construction of the new laboratories began in August of 1941 and was completed in September of 1942. Prior to, and at the time of completion of construction of the new laboratories, petitioner's only business office was located in the RCA Building, 30 Rockefeller Plaza, New York City. At that time, and since 1931, petitioner owned and lived in a home in Bronxville, New York.
Petitioner's responsibilities at the new laboratories required that he be on call there at all times of the day and night. Early in 1943 he established an office at the new laboratories.
About five hours were required for a round trip between petitioner's Bronxville home and the new laboratories by public or private transportation. Petitioner had no personal desire to live in Princeton and had intended to continue to live indefinitely in his Bronxville home, which was very well adapted to his personal taste and convenience. Prior to 1943 petitioner had not lived in Princeton.
In January of 1943 Sarnoff told petitioner that petitioner must change his residence to Princeton in order to be more readily available at the new laboratories at all times. The order that petitioner change his residence to Princeton was given because of the importance of his duties to RCA. When Sarnoff ordered petitioner to take up residence in Princeton, he agreed with petitioner that, if he would sell his Bronxville home, RCA would reimburse him for any loss that might result from the sale. If no loss had resulted from the sale, petitioner would have been entitled to no payment from RCA by reason of this promise.
The promised payment was the difference between the net selling price of petitioner's Bronxville house and grounds, and the cost thereof to petitioner, less depreciation on the cost of the house at a rate of 2 per cent per year for a period of 12 years.
Petitioner's salary was not discussed in connection with the order to change his residence and the promise to pay him for any loss on the sale of his home. There had been no suggestion that petitioner's salary might be insufficient to compensate him for his past, present, or future services.
On May 1, 1940, petitioner's annual salary from RCA was increased from $30,000 to $35,000. Effective September 1, 1941, petitioner's annual salary was increased from $35,000 to $40,000. The reason for the latter increase was stated on the records of RCA as ‘Efficient work and increased responsibilities as head of RCA Laboratories.‘ During the taxable year 1943, petitioner was paid a total salary of $40,000 in 24 semimonthly payments and a total of $440 in director's fees. He has paid income taxes on this salary and director's fees. None of this is in controversy here.
The promise to reimburse petitioner for the loss on the sale of his Bronxville home was not intended to be a promise of compensation for petitioner's services.
In reliance upon the promise to reimburse, petitioner in January of 1943, offered his Bronxville home for a quick sale at an asking price of $22,500. The total actual cost to petitioner of his Bronxville house and grounds and permanent improvements to both was $41,408.71. Of this total actual cost, there remained unsatisfied a first mortgage in the amount of $14,500.
On April 24, 1943, petitioner, in an arm's length transaction, sold his Bronxville home to Alexander E. W. Ada for $20,000. Petitioner paid an agent a commission of $1,000 for making the sale, and also paid off the remainder of the first mortgage in the amount of $14,500. Two days later petitioner moved his residence to Princeton.
On April 29, 1943, petitioner wrote Sarnoff a letter, the body of which is as follows:
In compliance with your instructions to move my residence to the vicinity of the new RCA Laboratories at Princeton, N.J., which are under my direction, I have sold my home in Bronxville, New York, and have moved to 89 Battle Road, Princeton.
At your request there is submitted herewith a statement showing a loss to me of $14,644.20 caused by this sale and the method of its computation.
A condensed summary of the statement attached to the letter of April 29, 1943, is as follows:
+-----------------------------------------------------------------------------+ ¦Total cost allocated to land and improvements thereto ¦$9,056.60¦ +-------------------------------------------------------------------+---------¦ ¦Total cost allocated to house and improvements thereto ¦32,352.11¦ +-------------------------------------------------------------------+---------¦ ¦Total cost of petitioner's Bronxville home ¦41,408.71¦ +-------------------------------------------------------------------+---------¦ ¦Less depreciation of house and improvements thereto (24% of ¦7,764.51 ¦ ¦$32,352.11) ¦ ¦ +-------------------------------------------------------------------+---------¦ ¦Depreciated cost of petitioner's Bronxville home (adjusted basis) ¦33,644.20¦ +-------------------------------------------------------------------+---------¦ ¦Selling price of $20,000 less commission of $1,000 ¦19,000.00¦ +-------------------------------------------------------------------+---------¦ ¦Loss caused by sale of Bronxville home ¦14,644.20¦ +-----------------------------------------------------------------------------+
The minutes of a regular meeting of the board of directors of RCA held on May 7, 1943, state in part that Sarnoff:
* * * reported that, in view of the importance of the activities now centered at the RCA Laboratories at Princeton, N.J., which are headed by the Vice President in Charge of RCA Laboratories, the best interests of the corporation would be served by this official making his residence at or near Princeton, N.J.; that, accordingly, he had instructed the Vice President in Charge of RCA Laboratories to move his residence to the vicinity of the new Laboratories at Princeton, N.J.; and that the Vice President had submitted a statement showing a loss to him of $14,644.20 caused by the sale of his former residence in Bronxville, N.Y., in complying with such instructions.
The President recommended that the Vice President be reimbursed for such loss.
Thereupon, after discussion, on motion, duly made and seconded, the following resolution was unanimously adopted:
RESOLVED, that the corporation reimburse the Vice President in Charge of RCA Laboratories in the amount of $14,644.20 for the loss caused to him by the sale of his former home in Bronxville, N.Y., in complying with instructions of the President to move his residence to the vicinity of the RCA Laboratories at Princeton, N.J.
Pursuant to the above resolution RCA on May 12, 1943, paid petitioner by check the amount of $14,644.20.
On its Federal income tax return for the year 1943, RCA deducted the above payment of $14,644.20 as ‘Other Sundry Expenses.‘ The amount was entered on its books in an account captioned ‘Other Sundry Expenses.‘
Petitioner did not include the payment to him of $14,644.20 as income in his Federal income and victory tax return for the calendar year 1943. On March 10, 1944, he addressed a letter to the collector in which he enclosed, among other things, his said return for 1943 and also the following:
4. Correspondence respecting an amount received by me in 1943 claimed to be non-taxable, being an amount received as reimbursement for the loss caused to me by the sale of my former home in Bronxville, N.Y., in compliance with instructions of my employers. Included is an itemized statement showing the computation of the loss, and also correspondence with the Collector of Internal Revenue at Camden, N.J., showing that reimbursement for losses incurred in similar cases is non-taxable.
OPINION.
BLACK, Judge:
The question in this proceeding is how the receipt by petitioner of the $14,644.20 from RCA should be treated for tax purposes. The parties agree that the payment was not a gift, which eliminates the necessity for any consideration or discussion along that line. Petitioner contends that the payment should be considered as a part of the ‘amount realized‘ in the determination of gain or loss from the sale of his Bronxville home, as that term is used in section 111(a) and (b) of the Internal Revenue Code.
The respondent contends that the payment in question was in fact and in law additional compensation for services rendered to RCA by petitioner and constituted taxable income to petitioner under section 22(a) of the Internal Revenue Code, as amended.
SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.(a) COMPUTATION OF GAIN OR LOSS.— The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113(b) for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.(b) AMOUNT REALIZED.— The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.
SEC. 22. GROSS INCOME.(a) GENERAL DEFINITION.— ‘Gross income‘ includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership of use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *
The question becomes material only because of the settled proposition that an individual may not deduct a loss sustained from the sale of his personal residence not used for business purposes. See Heiner v. Tindle, 276 U.S. 582. Therefore, if the receipt by petitioner of the $14,644.20 should be considered as a part of the ‘amount realized‘ in the determination of gain or loss from the sale of his Bronxville home, then the result should be that petitioner realized neither gain nor loss from the sale of his home, for his adjusted basis
of $33,644.20 would equal exactly the total amount realized of $14,644.20 received from RCA plus the net selling price of $19,000 received from the vendee. But if the receipt by petitioner of the $14,644.20 should be considered in fact and in law as additional compensation for services rendered to RCA by petitioner and not as a part of the amount realized in the determination of gain or loss from the sale of the home, then the result would be that the receipt of the $14,644.20 should be treated in the same manner as petitioner's annual salary of $40,000 and petitioner would realize a loss from the sale of his residence of $14,644.20, which loss he would not be permitted to deduct from his gross income.
The respondent makes no contention that petitioner's adjusted basis of his Bronxville home was other than the $33,644.20 set out in the statement attached to his return. He does not dispute that petitioner suffered a loss of $14,644.20 on the sale for which he was reimbursed by RCA.
We think the receipt by petitioner of the amount in question should be treated in the manner contended for by petitioner. The evidence clearly shown that the amount was paid to petitioner for the sole and only purpose of reimbursing him for the loss he sustained in selling his home so that he could move to Princeton and be subject to call at the RCA laboratories at any time of the day or night. Or, stated in another way, the evidence shows that petitioner was to sell his home for as much as he could get for it and that RCA would then add to that amount a sum sufficient to insure petitioner against any loss. The amount paid by RCA was never intended as additional compensation. The amount would never have been paid by RCA if petitioner had not sold his home or if he had sold his home for a net selling price of $33,644.20, or more, instead of $19,000. The agreement between petitioner and RCA was that petitioner was to change his residence to Princeton for the company's convenience and that, if in so doing he had to sell his Bronxville home at a loss, RCA would reimburse him for the loss. The payment by RCA was definitely a part of the sale transaction.
Suppose that the petitioner had some kind of a policy of insurance which insured him against a loss from the sale of his private residence and under such a policy collected $14,644.20 to reimburse him for such loss, could it be contended that petitioner would have to return such $14,644.20 as a part of his gross income? We think not. Such $14,644.20 would merely be a restoration of his capital and would not be taxable income. Of course, if the amount of $14,644.20 collected under such assumed circumstances should be more than enough to restore his capital, the remainder would be gain from the disposition of property. We are unable to see any distinction between the collection by the petitioner of the $14,644.20 from RCA and a collection of it from an insurance company under the foregoing assumed circumstances.
As previously stated, the respondent contends that the entire $14,644.20 constituted additional compensation and taxable income to petitioner under section 22(a) of the Internal Revenue Code, as amended. This section provides that ‘Gross income’ includes * * * income derived from * * * compensation for personal service * * * of whatever kind and in whatever from paid * * *.‘ But it also provides that ‘Gross income’ includes gains, profits, and income derived from * * * sales, or dealings in property,‘ and section 111 of the code provides how such gains are to be determined. In view of our finding from the evidence that the payment by RCA was never intended as additional compensation, but was only intended to be such an amount which, when added to the net selling price of petitioner's home, would insure petitioner against any loss from the sale thereof, it is our opinion that the only proper way to treat the payment of $14,644.20 to petitioner by RCA is to treat it as a part of the ‘amount realized‘ from the sale of petitioner's Bronxville home, as that term is used in section 111, supra. It is apparent that, when the payment is so treated, petitioner realized neither gain nor loss from the sale and that, therefore, no part of the $14,644.20 should be included in petitioner's gross income under section 22(a) of the code. We so hold. Cf. James Brown, 10 B.T.A. 1036, 1054-1055; Cyrus S. Eaton, 37 B.T.A. 715 (issue 1); and David A. DeLong, 43 B.T.A.A 1185. In the DeLong case we said: ‘There is no requirement of which we have been made aware that the sales price of an article can not be paid in whole or in part by one other than the vendee.‘ We see no reason why the total ‘amount realized‘ by petitioner from the sale of his Bronxville home should not include the $14,644.20 he received from RCA, as well as the $20,000 he received from the vendee.
The respondent in his brief says the situation in which petitioner finds himself here is not unlike that existing in Old Colony Trust Co. v. Commissioner, 279 U.S. 716, And levey v. Helvering, 68 Fed.(2d) 401. The taxpayers in those cases were reimbursed by their employers for the income taxes they were required to pay on their salaries and the question was whether such reimbursement was exempt as a gift or taxable as additional compensation for services rendered. It was held in both cases that the reimbursements were taxable as additional compensation. In those cases no reimbursements for losses in capital were being made by the employer which had resulted to the employee as a direct result of carrying out orders received from the employer. We do not think the fact situation in those cases is comparable with the fact situation in the instant proceeding, which, as previously stated, is simply whether the payment from RCA was intended as compensation or as an additional realization on the sale of petitioner's home to insure petitioner against loss. We have found and we hold that it was the latter.
Decision will be entered for the petitioner.