Decisions will be entered under Rule 50.
On remand from the United States Court of Appeals for the Ninth Circuit, held:
1. Back pay of $ 10,000 received by decedent R. L. Langer in 1944, and of $ 10,000 and $ 11,500 received by petitioner C. Abbott Lindsey in 1944 and 1945, respectively, was paid pursuant to prior agreement and legal obligation within the meaning of Regulations 111, section 29.107-3.
2. Above back pay of $ 10,000 received by decedent R. L. Langer constituted more than 15 per cent of the gross income of R. L. Langer and Eleanore Langer in 1944, and petitioners Estate of R. L. Langer, Deceased, Eleanore Langer, Executrix, and Eleanore Langer are entitled to the benefits of section 107 (d), Internal Revenue Code, with respect thereto.
3. Above back pay of $ 10,000 and $ 11,500 received by petitioner C. Abbott Lindsey constituted less than 15 per cent of the gross income of petitioners C. Abbott Lindsey and Pauline Lindsey in 1944 and 1945, respectively, and they are not entitled to the benefits of section 107 (d), Internal Revenue Code, with respect thereto.
*41 These proceedings return to us by mandate of the United States Court of Appeals for the Ninth Circuit, issued under its opinion of July 14, 1950, 183 Fed. (2d) 758, reversing our prior decision of September 29, 1949, in these proceedings (Findings of Fact and Opinion reported at 13 T. C. 419). The mandate directs:
It is now here ordered and adjudged by this court, that the decision of the said Tax Court of the United States in each of these causes be, and hereby is reversed, and that these causes be, and hereby are remanded to the said Tax Court with directions to proceed in accord with the opinion of this court, and to dispose of other issues presented on the record.
We therefore proceed as directed by the mandate. In addition to the facts heretofore found, which by reference are adopted here, we find on the same record as follows:
*42 FINDINGS OF FACT.
The net rentals from the Clifton Hotel were apportioned on Schedule B of the 1944 returns of R. L. Langer and Eleanore Langer as follows:
| Net Rentals | $ 14,498.01 | ||
| Apportionment among owners: | |||
| R. L. & Eleanore Langer | 1/2 | $ 7,249.00 | |
| Nelda Clinton | 3/8 | 5,436.75 | |
| Mary R. Brown | 1/8 | 1,812.26 | |
| 14,498.01 |
The net profits from the Figueroa Hotel were apportioned on *317 Schedule C of the Langers' 1944 returns as follows:
| Net Profit | $ 59,441.42 | |
| Clifford Clinton | $ 21,165.53 | |
| R. M. Callicott | 7,055.18 | |
| 28,220.71 | ||
| R. L. & Eleanore Langer | 31,220.71 | |
| 59,441.42 |
This represents a distribution of three-eighths of the net profits from the Figueroa Hotel to Clifford Clinton, one-eighth to R. M. Callicott, and one-half of the Langers, with $ 3,000 additional, or $ 250 per month, being distributed to the Langers as administration expense, in accordance with a joint venture agreement between R. L. Langer, Clifford Clinton, and R. M. Callicott, evidenced by the following memorandum executed September 22, 1945:
MEMORANDUM OF AGREEMENT
This memorandum, executed September 22nd, 1945, by R. L. LANGER, CLIFFORD E. CLINTON, and RANSOM M. CALLICOTT, of Los Angeles, California, evidences and confirms the terms of a financing and profit-sharing agreement in the nature of a limited joint venture entered into between them before execution of the lease hereinafter mentioned and ever since effective, as follows:
1. Upon the consideration and agreement herein expressed the parties joined in providing and contributing the moneys paid by said Langer in acquiring said lease and commencing operations *318 thereunder; which lease dated June 1, 1945, (and recorded in Book 13415, pp. 270-279, of Official Records of Los Angeles County, Cal.) was made by Figueroa Hotel Company, as lessor, to said Langer, as lessee, affecting, for ten years then beginning, the property and furnishings thereof known as "Figueroa Hotel," at Figueroa Street and Olympic Boulevard in said City of Los Angeles, and was extended by agreement between said parties thereto, dated July 21, 1939, for an additional term ending May 31, 1949.
2. Upon such consideration it was and is so agreed the parties shall be entitled to and that there shall be shared between them in the proportions of: -- *43
| Langer | one-half |
| Clinton | three-eighths, and |
| Callicott | one-eighth, |
all net profits and losses accruing from operation of said property while under such lease and extension or any further such extension or lease to him, or which he shall be instrumental in obtaining as to said property for any member of his family or corporation in which he or they shall be interested, or resulting from any sale or disposition of any such leasehold (this agreement to continue in effect so long as any such lease or leasehold shall be in effect); and that said *319 other parties shall be entitled, though not required, to participate, in the proportions aforesaid, with said Langer or any such lessee in any opportunity to him or such lessee to purchase said property during or at expiration of any such leasehold.
Such net profit from operation of said property shall include all gross receipts and revenue accruing and received therefrom, after deduction of only current expenses of such operation including rental and other charges payable under such then lease; provided while Langer shall hereafter personally continue management of such operation he may deduct and retain from such profit for each month, before division thereof and in like manner as an expense of such operation, $ 350.00 (the similar deduction of $ 250.00 per month for approximately three years next prior hereto being approved).
Accounting and settlement in accordance herewith has been made as to such net profit for the period ending September 22, 1945, and shall be final save for errors. Further such accounting and payment shall be made monthly. Langer shall keep and maintain at a convenient place at Los Angeles full and complete books, accounts and records of such operation and profit, *320 and the same shall be open to inspection of the other parties and their representatives at all reasonable times with the right to make extracts or copies.
3. Langer shall endeavor to procure extensions of such existing leasehold or further leases of said property as possible from time to time so that this agreement may continue effective as aforesaid. He shall promptly notify the other parties in advance of each such further extension or new lease and proposals therefor. So far as possible each thereof shall be made only on terms first approved in writing by the other parties hereto; but should that be impossible Langer may nevertheless make the same on other terms, subject to the right of the other parties at their election to terminate this agreement effective at commencement of the term of any such lease or extension on terms not so approved by them.
4. During continuance hereof Langer and his successors shall not, without the other parties' written consent, transfer, assign or hypothecate the then leasehold interest in such property or consent to modification or termination thereof, or sublet the property other than as incident to usual hotel operation, and shall promptly discharge *321 the obligations of such leasehold and continue operation of said property in the same general manner as heretofore but shall not incur any unusual expense which might affect such profits without written consent of the parties.
5. Under and pursuant to such agreement, the subject matter thereof, and the respective rights and interests of the parties thereunder were and are only such as shall be consistent with and not in violation, or constituting in creation thereof, any violation of said lease.
*44 The respective interests of the parties hereunder are assignable and shall be unaffected by death of any of them; and the same and this agreement and its obligations shall inure to the benefit of and bind the parties, their heirs, successors and assigns in accordance with the terms thereof and as if parties hereto in the capacity of the party through whom claiming.
IN WITNESS WHEREOF, they execute this instrument on the date aforesaid.
[Signed] R. L. Langer
[Signed] Clifford E. Clinton
[Signed] Ransom M. Callicott
The Clifton Hotel was operated as a joint venture in 1944 by the Langers in conjunction with Nelda Clinton and Mary R. Brown. The Figueroa Hotel was operated as a joint venture in 1944 *322 by the Langers in conjunction with Clifford Clinton and R. M. Callicott. The Langers' distributive share of the net profits in that year from such joint ventures was $ 7,249, or $ 3,624.50 apiece, from the Clifton Hotel, and $ 31,220.71, or $ 15,610.35 apiece, from the Figueroa Hotel.
The back pay of $ 10,000 received by R. L. Langer in 1944 from the Commodore Hotel Company, allocable $ 5,000 to R. L. Langer and $ 5,000 to Eleanore Langer, comprised more than 15 per cent of their respective gross incomes of $ 30,729.45 and $ 31,854.43.
The gross income reported by the Lindseys in 1944 was $ 44,183.52, or $ 22,091.76 apiece. Their gross income for 1944 was actually $ 101,569.40, or $ 50,784.70 apiece, computed to include "other business deductions" of the Commodore Cafe, amounting to $ 57,385.88. The back pay of $ 10,000 received by C. Abbott Lindsey in 1944 from the Commodore Hotel Company, allocable $ 5,000 to Lindsey and $ 5,000 to Pauline Lindsey, comprised less than 15 per cent of such gross incomes.
In 1945 the total receipts of the Commodore Cafe, as reported by the Lindseys, were $ 144,897.99, cost of goods sold $ 58,911.83, other business deductions $ 65,564.72. The gross income *323 reported by the Lindseys in 1945 was $ 52,493.82, or $ 26,246.91 apiece. Their gross income for 1945 was actually $ 118,058.54, or $ 59,029.27 apiece, computed to include "other business deductions" of the Commodore Cafe, amounting to $ 65,564.72. The back pay of $ 11,500 received by C. Abbott Lindsey in 1945 from the Commodore Hotel Company, allocable $ 5.750 to Lindsey and $ 5,750 to Pauline Lindsey, comprised less than 15 per cent of such gross incomes.
OPINION.
The Court of Appeals for the Ninth Circuit determined in Estate of Langer v. Commissioner, 183 Fed. (2d) 758, reversing 13 T.C. 419">13 T. C. 419, that the deferment in payment of the amounts of back salary here in question was caused by an event similar to receivership within the requirement of section 107 (d) (2) (A), *45 Internal Revenue Code, contrary to the contention of respondent and to our prior holding. Respondent, however, also contends that section 107 (d) is not applicable because the employer was under no obligation to pay in prior years, and because the payments were less than 15 per cent of petitioners' gross incomes, which he says should be computed to comprise receipts undiminished by the expenses of businesses from which *324 they derived income. Pursuant to mandate we now consider these contentions, which we found it unnecessary to consider under our prior holding.
Respondent points out that under Regulations 111, section 29.107-3, "back pay" does not include "additional compensation for past services when there was no prior agreement or legal obligation to pay such additional compensation * * *." He maintains that except as to part of the year 1937, petitioners' salaries were authorized retroactively by the board of directors of the Commodore Hotel Company on January 3, 1944, that there was no prior agreement or legal obligation to pay such salaries, and that the resolution of the board of directors of April 14, 1937, that salaries of $ 600 a month be paid Langer and Lindsey from January 1, 1937, and "every month hereafter" was intended for 1 year only. Petitioners maintain that the 1937 authorization was a continuing one and extended beyond the year.
We think the facts clearly support petitioners on this issue. The salaries were voted in 1937 and we do not understand the resolution to cover only 1937, especially in view of the phrase "every month hereafter." But whatever period the resolution covered, *325 the presumption is that petitioners' services after 1937 were not gratuitous and that the parties intended the same compensation. As said in 6A Cal. Jur. 1125:
If an officer is hired at a fixed salary and continues in the same employment after expiration of the term of his original hiring without a new contract, it is presumed that the parties intend the same compensation.
See also, Fletcher, Cyclopedia of Corporations, Vol. 16, pp. 440-41; Caminetti v. Prudence Mut. Life Ins. Assn., 62 Cal. App. (2d) 945, 146 Pac. (2d) 15; Perry v. Noonan Furniture Co., 8 Cal. App. 35">8 Cal. App. 35, 95 Pac. 1128. The facts show that the Commodore Hotel Company failed to pay salaries from 1937 to 1942 because it was not able to do so, not because it was not liable to do so. The 1944 authorization recognized that there were owing to the officers specific amounts of back salary for 1937, 1938, 1939, 1940, 1941, and 1942. In other words, the 1944 authorization was not a retroactive authorization but a recognition of a liability that already existed, and it merely directed the satisfaction of that liability as soon as possible. The fact that the corporation paid the back salaries without approval of the *46 Salary Stabilization *326 Unit of the Treasury after being informed by the latter that it could do so without approval only if "there was a bona fide contractual liability on October 3, 1942," also supports our conclusion that such a liability existed. We can not assume that the corporation violated the law.
Respondent also contends that petitioners have failed to meet the requirement of section 107 (d) that in order for a taxpayer to be entitled to the benefits of that section, the amount of back pay received or accrued during the taxable year must exceed 15 per cent of the taxpayer's gross income for that year. Petitioners contend that only the net profits derived from the operation of the Commodore Cafe in 1944 and 1945, i. e., gross receipts less cost of goods sold and other business deductions, are includible in the gross incomes of the Lindseys in 1944 and 1945 for purposes of section 107 (d). They concede that "if gross receipts are to be used in determining the percentage under section 107 (d), the Lindseys are not entitled to the relief which they have claimed. Likewise, if gross sales, less cost of goods sold, is the correct figure, the relief is lost." In effect, they are claiming that the adjusted *327 gross incomes of the Lindseys in 1944 and 1945, which include only net profits from business, should be the figures upon which the 15 per cent should be computed for purposes of section 107 (d).
We disagree. The statute plainly says "gross income," not "adjusted gross income." Whenever Congress has intended a percentage to apply to "adjusted gross income," it has said so, as in the allowance for charitable contributions under section 23 (o), or for medical expenses under section 23 (x). Similarly, when it has intended a percentage to apply to "gross income," as in section 275 (c), it has also said so. We can not therefore impute an intention on the part of Congress to refer to "adjusted gross income" in section 107 (d) when it has plainly said "gross income."
In defining "gross income from business," section 29.22 (a)-5 of Regulations 111 provides:
In the case of a manufacturing, merchandising, or mining business, "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income subtractions should not be made for depreciation, depletion, selling expenses, or losses, *328 or for items not ordinarily used in computing the cost of goods sold. 1 * * *
The back pay received by Lindsey of $ 10,000 in 1944 and $ 11,500 in 1945, allocable half to his wife, not being more than 15 per cent of the gross incomes of the Lindseys of $ 101,569.40, or $ 50,784.70 apiece, *47 in 1944, and $ 118,058.54, or $ 59,029.27 apiece, in 1945, computed to include gross receipts from the Commodore Cafe less cost of goods sold, they are not entitled to the relief of section 107 (d).
As for the Langers, the other petitioners herein, the facts show that they reported income in 1944 from the operation of the Clifton Hotel and the Figueroa Hotel. In each hotel the interest of the Langers was 50 per cent. The other owners of the Clifton Hotel were Nelda Clinton, who owned 37 1/2 per cent, and Mary R. Brown, who owned 12 1/2 per cent. The other owners of the Figueroa Hotel were Clifford E. Clinton, who owned 37 1/2 per cent, and R. N. Callicott, who owned 12 1/2 per cent. The Langers reported on the *329 schedules of their 1944 returns the gross receipts from these two hotels, but they brought forward to the face of the returns only their 50 per cent share of the net profits from each hotel, i. e., gross receipts less business expenses less the 50 per cent share of the net profits apportioned to the other owners. Petitioners contend that only this net amount is includible in the Langers' gross income for purposes of section 107 (d). They maintain that these two hotels were operated by the Langers and the co-owners as joint ventures. They point out that if the joint ventures had filed partnership returns as they should have, 2*330 the business expenses of the joint ventures would have been deducted on the partnership returns and only the Langers' distributive share of the net profits from these ventures would have been reported on their individual returns.
Respondent does not question the division of the income from these hotels between the Langers and their co-owners, and he concedes that if partnership returns had been filed, he would not question the Langers' inclusion of only their share of the net profits from such ventures in their individual gross incomes for purposes of section 107 (d). But he maintains that in view of the failure to file partnership returns petitioners can not now contend that these were joint ventures and compute the Langers' individual gross incomes as though partnership returns had been filed.
We do not agree. The determination of whether or not an undertaking is a joint venture or partnership does not depend on whether or not a partnership return was filed, and respondent gives no other reason for challenging the existence of these joint ventures. We have *48 found on the facts that joint ventures did exist between the Langers and their co-owners *331 in the operation of the Figueroa and Clifton Hotels in 1944. Accordingly, partnership returns should have been filed and the Langers are entitled to include, as they did, in their gross incomes for 1944 only their distributive shares of the net profits of the joint ventures. The $ 10,000 in back pay received by Langer in 1944, allocable $ 5,000 to him and $ 5,000 to his wife, constituted more than 15 per cent of their gross income ($ 30,729.45 for Langer and $ 31,854.43 for his wife) so computed, and, being otherwise within the provisions of section 107 (d), Internal Revenue Code, petitioners Estate of R. L. Langer and Eleanore Langer are entitled to the benefits of that section with respect to that back pay.
Decisions will be entered under Rule 50.
Footnotes
1. This fundamental concept of "gross income" from business as gross receipts less cost of goods sold has stood unchallenged for many years. See Mim. 2915 and I. T. 1241, I-1 C. B. 233, 234↩.
2. INTERNAL REVENUE CODE.
SEC. 3797. DEFINITIONS.
(a) When ued in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof --
* * * *
(2) Partnership and partner. -- The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.