Opinion
Docket No. 34428.
1953-03-24
HARRY B. SIDLES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
J. Lee Rankin, Esq., for the petitioner. David Karsted, Esq., for the respondent.
J. Lee Rankin, Esq., for the petitioner. David Karsted, Esq., for the respondent.
1. STATUTE OF LIMITATIONS.— Petitioner filed his final income tax return for 1947 on January 23, 1948, after obtaining an extension of time for filing from January 15, 1948, to February 1, 1948, and contends that the statute of limitations began to run on February 1, 1948. Respondent mailed a notice of deficiency on February 20, 1951. Held, statute of limitations began to run on March 15, 1948.
2. COMMUNITY PROPERTY.— Petitioner received a bonus in December 1947 subsequent to the enactment of the community property law in the State of Nebraska on September 7, 1947. Petitioner apportioned the bonus on when earned basis. Held, bonus was community property and should be apportioned on when received basis as bonus was contingent on the occurrence of several factors which had not taken place by the date the community property law was enacted.
The Commissioner has determined a deficiency in petitioner's income tax for the year 1947 of $5,366.26. The issues for decision are:
(1) Does the statute of limitations on assessment and collection begin to run on March 15 or on a prior date where the taxpayer, reporting his income on a calendar year basis, files his final income tax return prior to March 15 of the following year under the provisions of section 58(d)(3) of the Internal Revenue Code, but within an extension of time granted by the collector of internal revenue, in order to avoid the penalties provided by sections 294(d)(1)(A) and 294(d)(2) of the Internal Revenue Code?
(2) Should a bonus paid at the end of the year be apportioned between separate income and community income for the number of days each form of property holding was in effect in Nebraska during the year rather than community income in its entirety?
Several other issues presented by the petition have been eliminated by stipulation; consequently, if the issue relating to the statute of limitations is decided in favor of respondent, a Rule 50 decision will be entered.
FINDINGS OF FACT.
The petitioner is an individual domiciled in Nebraska. He reports his income on the cash receipts and disbursements basis, and for the year 1947 filed a Federal income tax return with the collector of internal revenue for the district of Nebraska. On March 14, 1947, petitioner filed a declaration of estimated tax for 1947 wherein he estimated his tax liability to be $4,300, $2,600 of which he estimated would be withheld. The balance was to be paid in quarterly installments of $425 each and such payments were timely made on March 14, June 6, and September 15, 1947. After receipt of a bonus from Sidles Company in December of 1947, petitioner determined his income tax liability to be $8,790.03. On January 13, 1948, petitioner requested an extension of time to file his return of income. Petitioner filed his income tax return, together with a check for the balance, on January 23, 1948, after receiving an extension of time to February 1, 1948, for filing such return. The statutory notice of deficiency was mailed to petitioner on February 20, 1951.
Respondent's notice of deficiency was timely. The statute of limitations on assessment and collection commenced to run on March 15, 1948.
FACTS— BONUS ISSUE.
On October 14, 1941, at the annual stockholders meeting of Sidles Company, a plan was adopted for the distribution of an annual bonus for the purpose of rewarding the management of the company for its accomplishments during the year 1941 and subsequent years, provided business warranted such bonus. The proceedings of the meeting, in part, were as follows:
ANNUAL STOCKHOLDERS MEETING
Held in the office of the company, October 14, 1941 . . . .
Upon motion of Charles T. Stuart, second by Harry B. Sidles, the following proposal was submitted to the stockholders for distribution of a bonus and was unanimously adopted:
(a) That the management of the Company be rewarded for its accomplishments during the year 1941, in the form of a bonus, and that
(b) The amount of this bonus be computed in the following manner:
(1) Merchandise inventories be adjusted to reflect all obsolescence and other losses for the year.
(2) An amount next be deducted from earnings sufficient to provide a sum totaling 6% of the book value of all funds and other assets used strictly in the conduct of the operating divisions of the Sidles Co.
(3) An amount next be deducted from earnings sufficient to pay all Corporation income taxes; the amount of this tax to be computed to reflect the tax that would pertain, assuming that the Company had no other income; the total deduction not, however, to exceed the total amount of the tax paid by the Corporation.
(4) After the above deductions have been made from net profit, management then to receive an amount equal to 2% of the book value of all funds and other assets used in conducting the business of the operating divisions.
(5) On any earnings still remaining after the foregoing deductions Management to receive 40%, and Capital 60% of the next 2% of the operating profit, 50% to management and 50% to Capital on the next two percent of profit, and 40% to Management and 60% to Capital on any profits remaining thereafter.
(c) That the following persons be included in any such bonus distribution: Mr. C. L. Carper Mr. Harry B. Sidles Mr. Joe Hickman Mr. Fred Baumann Mr. Victor L. Toft Mr. Chas. Kelpin Mr. Garland Holeman Mr. Don Fickle Mr. Art Knispel
(d) That any bonus moneys available to management be paid to the above mentioned persons in the same percentage of the total, as their present salary bears to the total monthly salaries paid the 10 individuals involved.
(e) That Management at it's (sic) discretion, but only with the approval of the Board, may distribute any portion of the bonus earned among the other employees of the Company in a manner to be at that time determined.
(f) That a plan of this general nature be operative each and every year hereafter; but to be amended and changed at the discretion of the Board from year to year as seems necessary for the best welfare of the Company . . . .
Pursuant to this resolution, bonuses were paid yearly. The only amendments or changes made by the board of directors under the authority granted in paragraph (f) of the plan were for 1946 and 1947. Total bonus distribution was limited to $100,000 for 1946 and $106,000 for 1947. This limitation was imposed because the cash position of the company would not permit a bonus distribution according to the formula. The bonus formula would have permitted bonus distributions of between $170,000 and $180,000 in 1946 and 1947, respectively. All of the participants of the bonus distribution receive a monthly salary and an individual's participation in the total bonus distribution is determined upon the ratio that his salary bears to the total salaries of all bonus participants. Since its inception the bonus payment has been made only if the employee was employed by the company at the end of the business year, which is the calendar year. This has been the custom for all years since adoption of the bonus plan and there have been no exceptions.
In 1947 the State of Nebraska enacted a community property law, effective September 7, 1947. During that year the petitioner received from Sidles Company as monthly salary and bonus $29,200. Petitioner and his wife resided in Nebraska during the entire taxable year.
Petitioner apportioned his salary and bonus for 1947 as follows:
+------------------------------------------------------------------+ ¦Nebraska community law division ¦ ¦ ¦ ¦ +------------------------------------+-------+----------+----------¦ ¦ ¦Total ¦Husband ¦Wife ¦ +------------------------------------+-------+----------+----------¦ ¦Sidles Co., Omaha, Nebr ¦$29,200¦$19,088.98¦$10,111.02¦ +------------------------------------+-------+----------+----------¦ ¦KFAB Broadcasting Co., Lincoln, Nebr¦4,700 ¦3,960.55 ¦739.45 ¦ +------------------------------------+-------+----------+----------¦ ¦Bi-State Dist. Corp., Omaha, Nebr ¦500 ¦250.00 ¦250.00 ¦ +------------------------------------+-------+----------+----------¦ ¦H. E. Sidles Co., Omaha, Nebr ¦1,200 ¦1,011.21 ¦188.79 ¦ +------------------------------------+-------+----------+----------¦ ¦Total ¦$35,600¦$24,310.74¦$11,289.26¦ +------------------------------------------------------------------+
Respondent apportioned petitioner's salary and bonus as follows:
+------------------------------------------+ ¦Salaries ¦Husband ¦Wife ¦ +-------------------------+---------+------¦ ¦Sidles Co ¦$29,200 ¦ ¦ +-------------------------+---------+------¦ ¦KFAB Broadcasting Co ¦4,700 ¦ ¦ +-------------------------+---------+------¦ ¦Bi-State Dist. Corp ¦500 ¦ ¦ +-------------------------+---------+------¦ ¦H. E. Sidles Co ¦1,200 ¦ ¦ +-------------------------+---------+------¦ ¦Total salaries ¦35,600 ¦ ¦ +-------------------------+---------+------¦ ¦Less: 15 per cent to wife¦5,340 ¦ ¦ +-------------------------+---------+------¦ ¦Salary Distribution ¦$30,260 ¦$5,340¦ +------------------------------------------+
Petitioner's salary was $13,200 and his bonus was $16,000. Separate property of the petitioner was $8,977.96 and community property was $20,222.04.
Petitioner's right to a bonus did not become vested until after the enactment of the Nebraska community property law.
OPINION.
WITHEY, Judge:
The first issue for decision is whether the respondent's notice of deficiency was timely. Petitioner contends that he was required by law to file a final income tax return for 1947 by January 15, 1948, because his prior estimate of tax liability was seriously underestimated. He states that he obtained an extension of time for filing his final return until February 1, 1948; that he filed a final return on January 23, 1948; and that therefore respondent was required to assess a deficiency by February 1, 1951; that respondent, having notified petitioner of a deficiency on February 20, 1951, more than 3 years after the date the return was filed, was barred under section 275 (a),
Internal Revenue Code, from making assessment and collection of a deficiency in income tax for 1947. Petitioner further contends that since his original estimate of tax liability was less than 80 per cent of his final tax liability, he would have been subject to the penalty provided in section 294(d)(2),
SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION. Except as provided in section 276—(a) General Rule.— The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
FN2.SEC. 294(d)(2). Substantial underestimate of estimated tax.— If 80 per centum of the tax (determined without regard to the credits under sections 32 and 35), in the case of individuals other than farmers exercising an election under section 60(a), or 66 2/8 per centum of such tax so determined in the case of such farmers, exceeds the estimated tax (increased by such credits), there shall be added to the tax an amount equal to such excess, or equal to 6 per centum of the amount by which such tax so determined exceeds the estimated tax so increased, whichever is the lesser. * * *
Internal Revenue Code, if he had not filed a final tax return by January 15 of the succeeding taxable year. We do not agree with the petitioner.
Ordinarily any return filed prior to the last day prescribed by law is considered filed on the last day. See section 275(f).
Petitioner argues that the general rule is not applicable in the present situation because of section 58(a) and (d)(2) and (3). Section 58(a) requires each individual to file a declaration of his estimated tax during the taxable year provided his income meets the requirements of section 58(a)(1) and (2).
Sec. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.(f) For the purposes of subsections (a), (b), (c), (d), and (e), a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
Section 58(d)(2) and (3) provides:
SEC. 58. DECLARATION OF ESTIMATED TAX BY INDIVIDUALS.(a) Requirement of Declaration.— Every individual (other than an estate or trust and other than a nonresident alien with respect to whose wages, as defined in section 1621(a), withholding under Subchapter D of Chapter 9 is not made applicable) shall, at the time prescribed in subsection (d), make a declaration of his estimated tax for the taxable year if—(1) his gross income from wages (as defined in section 1621) can reasonably be expected to exceed the sum of $5,000 plus $500 with respect to each exemption (except his own) provided in section 25(b); or(2) his gross income from sources other than wages (as defined in section 1621) can reasonably be expected to exceed $100 for the taxable year and his gross income to be $500 or more.
Sec. 58(d)(2). Amendment of declaration.— An individual may make amendments of a declaration filed during the taxable year under this subsection, under regulations prescribed by the Commissioner with the approval of the Secretary. If so made, such amendments may be filed on or before the fifteenth day of the last month of any quarter of the taxable year subsequent to that in which the declaration was filed and in which no previous amendment has been filed, except that in the case of an amendment filed after September 15 of the taxable year, it may be filed on or before January 15 of the succeeding taxable year. Declarations and amendments thereof shall be filed with the collector specified in section 53(b)(1).
(3) Return as declaration or amendment.— If on or before January 15 of the succeeding taxable year the taxpayer files a return, for the taxable year for which the declaration is required, and pays in full the amount computed on the return as payable, then, under regulations prescribed by the Commissioner with the approval of the Secretary
(A) If the declaration is not required to be filed during the taxable year, but is required to be filed on or before such January 15, such return shall, for the purposes of this chapter, be considered as such declaration; and
(B) If the tax shown on the return (reduced by the credits under sections 32 abd 35) is greater than the estimated tax shown in a declaration previously made, or in the last amendment thereof, such return shall, for the purposes of this chapter, be considered as the amendment of the declaration permitted by paragraph (2) to be filed on or before such January 15.
The petitioner was not required to file a final return by January 15. In order to avoid a penalty for underestimating his tax he had but to amend his previous declaration of estimated tax by January 15 or within any extension of time for so doing granted by the Commissioner. It was not necessary for him to file a final return in order to avoid penalty. The taxpayer is given the right to amend his previously filed declaration of estimated tax by filing a final return on or before January 15 or to file an amended estimate by said date at his option. Section 58(d)(3)(B) is beneficial to taxpayers who find they have underestimated their income tax, as they can by filing a final return by January 15 dispose of two requirements of the Code by one act. When a taxpayer elects to file a final return by January 15, it becomes both his final return and an amended declaration of tax.
The option given by section 58(d)(3)(B) does not change the filing date for the return of a taxpayer on a calendar year basis. Under section 53(a)(1), the last day prescribed for filing a return made on the basis of a calendar year is March 15 following the close of the calendar year. For the purpose of the commencement of the statute of limitations, section 275(a) of the Internal Revenue Code, section 275(f) clearly and unqualifiedly provides that a return filed before the last day prescribed by law shall be considered filed on such last day. Even though section 58(d)(3)(B) was enacted after section 53(a)(1), we cannot find any suggestion in the committee reports of the House and Senate and we do not think that Congress intended to amend the provision of section 53(a)(1) so as to accelerate the time for filing a final return. Both acts can live together. They are in no way inconsistent. Section 58(d)(3)(B) does not amend section 53(a)(1). The statute of limitations began to run on March 15, 1948.
We therefore hold that respondent's notice of deficiency, made within 3 years subsequent to March 15, 1948, was timely and is not barred by the provisions of section 275.
The second issue involves the proper apportionment between husband and wife of a bonus received at the end of the year in a state which adopted a community property law during the taxable year. Petitioner apportioned income on the when received basis whereas respondent apportioned the bonus on the when earned basis.
Petitioner contends that no employee has any contract or vested right with the company entitling him to a bonus or allowing him to rely on the receipt of a bonus; that he is entitled only to his salary; that the payment of the bonus is entirely in the discretion of the board of directors of the company, depending upon the company having sufficient earnings and available cash for that purpose; that no employee may receive a bonus unless he is working for the company at the end of the year; that the company was not financially able to pay a bonus in September 1947 and, therefore, since the bonus was not declared in September 7, 1947 (the effective date of the Nebraska Community Property Act) he may apportion it equally between himself and his wife. Respondent argues that the inception of the right to the bonus accrued ratably over the year and therefore the amount received by petitioner as bonus should be apportioned between separate property and community property on the same basis. Respondent further maintains that petitioner has failed to carry the burden of proof in that he has not offered evidence on the basis of which an allocation may be made between bonus and salary, and income which is separate property or community property. We do not agree with respondent.
Considering respondent's second argument, we find it is possible to determine from petitioner's return that portion of reported income representing the separate income of petitioner and that portion which represents community property. Since petitioner and his wife each are entitled to equal portions of income under the community property law, the separate property of petitioner is determined simply by subtracting the wife's reported income from his reported income ($19,088.98-$10,111.02=$8,977.96). We find separate property to be $8,977.96 and community property to be $20,222.04. Since the separate property is all salary, petitioner having determined the bonus was community property, we find the petitioner's salary to be $1,100 per month for 8 months and 7 days before the effective date of the community property law ($8,977.96 divided 8 mo. 7 days). The petitioner's salary was $13,200 and the bonus was $16,000.
Determination of this issue turns upon the date when the initial right to the bonus was acquired. See Edwin C. F. Knowles, 40 B.T.A. 861. The respective rights of husband and wife are determined by the law in effect when the bonus vested.
See McKay, Community Property, 2d ed., par. 517, p. 352, where it is stated:
Revised Statues of Nebraska, 1947, sec. 42-603. Community or common property. All property acquired by either the husband or wife during marriage and after September 7, 1947, except that which is the separate property of either as defined in sections 42-601 and 42-602, shall be deemed the community or common property of the husband and wife, and each shall be vested with and undivided one half interest therein; and all the effects which the husband and wife possess at the time the marriage may be dissolved shall be regarded as common effects or gains unless the contrary be satisfactorily proved.
The reader should notice that it is assumed the initial right of the series is of such a character that it is recognized as valid in law or equity and is available against some one. It must be more than a mere unenforceable claim. (Emphasis supplied.)
Respondent argues that petitioner's initial right to a bonus was acquired at the beginning of the year, therefore the bonus accrued ratably over the year and the accrued proportion thereof to the effective date of the community property law was separate property. We do not find any ground upon which the petitioner could claim he possessed a vested right to a bonus prior to the effective date of the community property act. The resolution of the Board set out a specific formula for determination of the amount payable. First, adjustments had to be made in merchandise inventories so as to reflect all obsolescence and other losses. After this was done a sufficient amount was deducted from earnings to provide a sum totaling 6 per cent of the book value of all funds and other assets which were used strictly in the conduct of the operating divisions of the company. Next, it was necessary to deduct an amount large enough to pay all of the company's income taxes. At this point the formula finally reached the place where profits were merely distributable to employees and officers. If the formula did not produce an amount for distribution, then no bonus could be paid. Further, paragraph (f) of the resolution raises doubts as to a regular yearly bonus being declared even though an amount might be found to be available for that purpose. That part of the resolution provides that the plan may ‘be amended and changed at the discretion of the Board from year to year as seems necessary for the best welfare of the Company.‘ The records show that amendments had been made for the years 1946 and 1947 when the bonuses were cut to $100,000 for 1946 and $106,000 for 1947 after the amount available had been tentatively determined as being between $170,000 and $180,000 for each of the years. In addition to the aforementioned requirements, the company must have adequate cash available for the bonus. It is possible for the company to have earned enough money to pay a bonus and yet not have available cash to pay it. This might be true at any time when the company is in the process of acquiring a large inventory or accumulating cash for expansion. Without doubt it was within the absolute discretion of the board of directors to amend the plan at any time to the effect that no bonus be paid even though application of the formula resulted in an amount distributable as bonus and even though cash was available for the purpose.
This record does not indicate the existence of a contract by the company to pay a bonus to the petitioner either written or oral. If such a right would therefore, under these facts, have had to devolve to him through an offer by the company and an acceptance by him of that offer. We have here no offer by the company which might form the basis for such acceptance. The resolution upon which payment of the bonus is based left too much discretion in the board of directors to permit petitioner to say at any given time that the company had agreed to pay him a bonus of a fixed or even determinable amount. Courts have held such vagueness and indefiniteness to constitute a fatal defect in bonus agreements. Varney v. Ditmars, 111 N.E. 822.
Aside from that question, however, it is apparent that if a bonus contract ever came into existence during 1947 it did so only after all the conditions precedent had been met to the satisfaction of the board of directors. Campbell v. Holcomb, 72 P. 552. One of these conditions, an invariable one, was the requirement that the petitioner be employed by the company at the end of the calendar year. Only by continuing in his employment until that time could the petitioner complete a possible bonus agreement by thus accepting the company's offer. See Alice M. Macfarlane, 19 T.C. 9; Zwolanek v. Baker Mfg. Co., 137 N.W. 769, 772. It is true petitioner might on this theory be said to have earned the bonus ratably over the entire year, but on no theory of the law of contract as applied to these facts can he be said to have acquired even an initial vested right thereto prior to the end of the calendar year. Before that time petitioner had a vested right to a salary only. Before that time no contract to pay a bonus existed. Indeed, it has been held that where an express contract to pay a bonus in the event that certain precedent conditions are met to the satisfaction of the promissor, thereby leaving the ultimate determination to pay or not to pay within the discretion of the promissor, the right to receive the bonus does not accrue even though the promisee fully performs the contract so far as the express terms thereof are concerned. He must in order for his right to accrue establish the fact that the conditions were met to the satisfaction of the promissor. Campbell v. Holcomb, supra.
Respondent argues that it is uniformly held that the inception of the right to receive compensation is the service performed, citing the following cases: Asher v. Welch (S.D., Cal. 1938), 24 A.F.T.R. 1091; Howard Veit, 8 T.C. 809; Claude R. Fooshe, 46 B.T.A. 205, revd. (C.A. 9, 1942) 132 F.2d 686; C. J. Wrightsman, 40 B.T.A. 502, affd. (C.A. 5, 1940) 111 F.2d 227; Robert H. Lord, 30 B.T.A. 425; Sara R. Preston, 35 B.T.A. 312. The Asher case is distinguishable as the taxpayer therein had received a bonus in 1930 from a company for which he had worked many years and had retired from in 1928. There the bonus was separate property as all employment had been in Illinois (a non-community property state) and taxpayer did not become a resident of California (community property state) until he had retired. The Veit case is distinguishable on the facts from the instant case as the right to the income and the amount of the income there became vested while petitioner was a resident of a non-community property state. The Fooshe case is also distinguishable on the grounds that there a written contract of employment was involved. The contract gave petitioner an immediate vested right in commissions dependent only upon sales of insurance policies. Here the time of vesting of petitioner's right to a bonus is the crux of the case. The Wrightsman case is distinguishable on the facts as the right to a bonus was not there an issue. The taxpayer in that case was to receive no salary until the end of the business year. Salary, not bonus, was at issue. The facts of the Lord and Preston cases distinguish them from the present case as there the taxpayer had a contract which gave him vested rights which the present petitioner did not have. Not one of the cases cited by respondent is in point here.
We therefore hold that petitioner had no enforceable vested right, initial or ultimate, to the receipt of the bonus here involved prior to September 7, 1947.
Petitioner has properly apportioned his income for the taxable year 1947.
Decision will be entered under Rule 50.