Opinion
Docket No. 32091.
1952-07-11
THOMAS THOMPSON AND AGNES D. THOMPSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Nathan Kosseff, C.P.A., for the petitioners. Robert R. Blasi, Esq., for the respondent.
SECTION 107(d)(2)(A)(iv)— BACK PAY— SIMILAR EVENT.— A payment made pursuant to a settlement reached by the employee and employer themselves is not taxable under section 107(d)(1), since the failure to pay it in prior years was not due to the intervention of any event similar in nature to bankruptcy, receivership, or a dispute determined after the commencement of court proceedings. Nathan Kosseff, C.P.A., for the petitioners. Robert R. Blasi, Esq., for the respondent.
The Commissioner determined a deficiency of $18,503.88 in the income tax of the petitioners for 1946. The only issue for decision is whether an amount which Thomas received in 1946 is taxable under section 107(d)(1).
FINDINGS OF FACT.
The petitioners, husband and wife, filed their return for 1946 with the collector of internal revenue for the district of Virginia.
Thomas was employed by Virginia Shoe Company, hereafter called the company, from April 1, 1939, until February 1, 1946. The company manufactured children's shoes.
The company employed Thomas to sell shoes on commission in an assigned territory. He paid his own expenses when covering his assigned territory.
The company was without new orders for shoes in March 1942 and was facing the possibility of closing down when existing orders had been filled. It was agreed between Thomas and the secretary-treasurer of the company that Thomas would attempt to obtain orders for shoes in New York, which was outside his regular territory. He secured an order from W. H. Miles Shoe Company for about 30,000 or 35,000 pairs of shoes by April 15 at an average price of about $1.90 a pair, an order for 25,500 pairs of shoes from Melville Shoe Company at about $1.62 1/2 a pair, an order for 12,000 or 14,000 pairs of shoes at about $1.90 a pair from Allied Purchasing Corporation which operated a chain of department stores and, in the fall of 1942, an order from Montgomery Ward for 7,000 or 8,000 pairs of shoes.
It was agreed between Thomas and the secretary-treasurer of the company that beginning June 15, 1942, Thomas would receive $5,000 a year from the company.
Thomas told the secretary-treasurer of the company in January 1943 that ‘I am here not working on a pittance, I have got a lot of shoes that have been sold, a lot of shipments have been made and I have got to have more money.‘ He was told that under the Wage Stabilization Act his salary was frozen at $5,000 a year. They had similar talks later in that year, and in August, Thomas threatened to leave, at which time the secretary-treasurer told him the company was letting three of its salesmen go and Thomas could have their territory, in addition to his own regular territory which he was covering, and would be designated sales manager at $1,000 a month. The company then started to pay him $1,000 a month beginning October 1, 1943.
The company continued to sell shoes during 1943, 1944, and 1945 on repeat orders to the large accounts opened by Thomas in 1942. Shoes were easily sold after 1942 and the company limited the number of shoes to be sold in each salesman's territory beginning in the latter part of 1943 and fixed the maximum compensation of each salesman. Thomas was familiar with those policies. His maximum compensation based upon the quotas established for his territory was $12,000 annually.
The company decided to discharge Thomas as of February 1, 1946, and gave him a letter of resignation to sign, together with a check for $3,000, intended to represent separation pay. Thomas refused to resign and the company discharged him on February 1, 1946.
Thomas then employed a lawyer from New York, explained the situation to him, returned to the company's place of business on February 18 with the lawyer, there met with the secretary-treasurer and president of the company, and demanded payment of about $125,000 representing alleged past due commissions for the years 1942 up to February 1, 1946. This demand flabbergasted the secretary-treasurer of the company. Thomas threatened court action if he was not paid and, after a long discussion in which the representatives of the company denied that it owed any commissions to Thomas, the company paid Thomas $60,000 in a compromise settlement. Thomas paid his lawyer a fee of $12,000 for assisting him in the controversy.
The company never conceded that it owed Thomas anything for unpaid commissions and never accrued any such commissions on its books during those years. It regarded the large accounts opened by Thomas as ‘house accounts‘ similar to others handled by salaried executives not on a commission basis. It paid Thomas the $60,000 in order to avoid the expense, annoyance, and uncertainty of a law suit and to avoid the ill will in the trade which would result from a salesman's suit for commissions.
Thomas never instituted any legal proceedings against the company in connection with his claim. No bankruptcy or receivership of the company occurred at any time material hereto.
The Commissioner, in determining the deficiency, added $34,101.40 to the income reported for 1946 with the explanation ‘that the net amount of $51,838.08 received by you in 1946 from the Virginia Shoe Company (corporation) represents taxable income in that year and your net income has accordingly been increased $34,101.40.‘
OPINION.
MURDOCK, Judge:
The petitioner contends that the $60,000 which he received in 1946 is taxable as ‘back pay‘ under the provisions of section 107(d)(1). Back pay is defined in (d)(2) to include remuneration received during the taxable year by an employee for services performed prior to the taxable year for his employer
which would have been paid prior to the taxable year except for the intervention of one of the following events: (i) bankruptcy or receivership of the employer; (ii) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings; * * * or (iv) any other event determined to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary; * * *
Regulations 111, section 29.107-3 provides that an event will be considered similar in nature to those mentioned in section 107(d)(2)(A)(i), (ii), and (iv)
Only if the circumstances are unusual, if they are of the type specified therein, if they operate to defer payment of the remuneration for the services performed, and if payment, except for such circumstances, would have been made prior to the taxable year in which received or accrued. For the purposes of this section the term ‘back pay‘ does not include * * * additional compensation for past services where there was no prior agreement or legal obligation to pay such additional compensation.
Section 107(d) was added by section 119(a) of the Revenue Act of 1943, but the legislative history of that amendment sheds no particular light on the present question.
The petitioner concedes that there was no bankruptcy or receivership of the employer and no court proceeding commenced in connection with the payment here in question. He must necessarily fail in his contention if he can not show that he would have been paid the amount here in question or some other amount in lieu thereof except for the intervention of some event which would be similar in nature to a dispute as to the liability determined after the commencement of court proceedings. Here there was a dispute. The evidence is conflicting as to whether Thomas was to receive commissions on the accounts opened by him in New York in 1942 and as to when he first insisted he was entitled to such commissions. However, decision of the case need not turn upon that evidence since the petitioner is not able to point to any event similar in nature to a court proceeding which had anything to do with the payment in question. Thomas and his employer were able to settle whatever dispute they had through a mere discussion between themselves without the commencement of any court proceeding or without resort to arbitration and without the participation of any agency or tribunal of any kind. Not only do the regulations of the Commissioner fail to help the petitioner, but it is difficult to see how any more specific regulation could help the petitioner and still carry out the intention of Congress as expressed in section 107(d)(2). The words ‘which is determined after the commencement of court proceedings ‘ would be superfluous and ineffective if Congress meant that every settlement of a dispute would be sufficient to bring the payment within section 107(d). Congress must have intended to exclude the settlement of a dispute by the parties through a mere discussion between themselves without the commencement of any court proceeding or without the intervention of any event which might be considered similar in nature to a court proceeding, even though in the discussion between the parties threats of suit might be mentioned.
Decision will be entered for the respondent.