*222 Decisions will be entered under Rule 50.
Petitioner, an inventor, was the owner of 75 per cent of the stock and president of a corporation whose only assets were patents which were classified by the Government as secret and placed on the restricted list, the owner not being permitted to use them or license their use by others except by permission of the Government. As a result, the corporation was without money to pay petitioner's salary during the period 1941 to 1943, inclusive, although during that time petitioner was active in the interest of the corporation, in work for the United States Navy in an endeavor to adapt the patented inventions to its use and secure license agreements with the Navy. Finally, the Government, in 1944, entered into a contract with a manufacturer to produce sextants for it under one of the corporation's patents, and thereupon entered into a license agreement with the corporation covering its use of the patent. This license agreement provided that payments would be made to the corporation of certain percentages of cost to the Government of the manufacture of the sextants, and late in 1944 the first payment was made to the corporation under this agreement*223 in the sum of $ 39,559.50. Of this amount, the corporation at once paid over $ 38,000 to petitioner as unpaid salary for 1941 to 1944, inclusive. Held, that such payment to the petitioner constituted back pay within the purview of section 107 (d) (1) and (2) (iv), and that the petitioner is entitled to its proration for computation of tax as if received over the period 1941 to 1944, inclusive.
*643 These consolidated proceedings involve deficiencies in individual income tax asserted against each petitioner in the amount of $ 3,941.31 for the taxable year 1944. The issue in each proceeding is whether $ 38,000 received in the taxable year as compensation by petitioner Frederick H. Hagner may, for purposes of computation of tax, be allocated*224 over the prior three years under the provisions of section 107 (a) or (d) of the Internal Revenue Code.
*644 FINDINGS OF FACT.
The petitioners are husband and wife and residents of San Antonio, Texas. They filed separate individual income tax returns for the taxable year, on a cash receipts and disbursements basis, with the collector of internal revenue for the first collection district of Texas. These returns were filed in accordance with the community property laws of the State of Texas. Frederick H. Hagner, as head of the community, will hereinafter be referred to as petitioner.
Prior to 1941, petitioner had been the owner of a tire distribution business, for which he received a salary in 1940. This business was liquidated at a loss in 1942. Petitioner had formerly been in the United States Navy, and was interested in astronomical devices, having perfected a sextant, among other devices, in 1937, for which he received a patent in 1938. Most of petitioner's patents were for the purpose of national defense and on the Government's secret and restricted list.
Petitioner became acquainted with Richard Archbold, who, in conjunction with the American Museum of Natural History, *225 was sponsoring an aeroplane flight to New Guinea. The "Visible Course and Position Indicator," which petitioner had patented in 1935, was used on this flight. As a result, Archbold acquired a one-fifth interest in this patent for a consideration of $ 5,000, which was used by petitioner to continue his experiments with the sextant above referred to.
Archbold's attorneys, in order to protect their client, a wealthy man, insisted that a corporation be formed to exploit the position indicator patent, as petitioner at the time was in bad financial condition. On October 31, 1939, the Archbold-Hagner Instrument Laboratory, Inc., hereinafter called Archbold-Hagner, was organized under the laws of Delaware. The patent was transferred to this corporation, and petitioner received 80 per cent of the no par value stock, while Archbold received 20 per cent. Subsequently petitioner gave his son, Fred G. Hagner, 5 per cent, leaving petitioner with 75 per cent. Tests of the patent then held by the corporation determined it to be unacceptable to the Army Air Force. Petitioner then assigned to the corporation the patent involving the sextant at no cost either to the corporation or to Archbold.
*226 Early during the national emergency, petitioner offered his services free of charge to the Government. As a result, petitioner divided his time between his home in San Antonio, Texas, and Washington, D. C., New York, New York, Bridgeport, Connecticut, Dayton, Ohio, Annapolis, Maryland, and other points where his services were needed. In addition, he spent considerable time at the laboratories of the Naval Observatory at Washington, D. C., and Fort Belvoir nearby, experimenting *645 with various astronomical devices for the use of the armed forces and other Government agencies in the prosecution of the war. He received no salary from the Government, nor was he reimbursed by the Government for his traveling and other incidental expenses.
The Government prohibited the manufacture of these patented sextants by petitioner, the corporation, or any other instrumentality except with the permission of the Government and under its supervision.
At some time in 1941 permission was granted to Archbold-Hagner by the Government for the negotiation of a royalty contract with the Ajax Engineering Co. of Chicago, Illinois. This contract for sextants and another Hagner device, known as a "Stadimeter," *227 negotiated with the Ajax Engineering Co. by the United States Maritime Commission, was withdrawn in 1943 when it was discovered that no sextant or Stadimeter had as yet been manufactured. Shortly thereafter the Navy Department placed an order with the Mergenthaler Linotype Co. for a minimum of 3,000 of the sextants. Under this contract the Government was to pay a stated amount for each sextant, plus certain tooling costs, amounting to $ 182,391.95, incurred by Mergenthaler. The understanding was that the Navy Department would negotiate a contract with Archbold-Hagner for a license to use the patent under its contract with Mergenthaler.
Petitioner, lacking funds, made an arrangement with Archbold under which the latter agreed to advance $ 400 per month to petitioner for his expenses while working on his inventions with the various Government departments and negotiating a license agreement. Archbold made these advances to Archbold-Hagner, which, by its check, paid $ 400 to petitioner each month.
A special meeting of the directors of Archbold-Hagner was held on December 6, 1943. At this meeting a resolution was adopted authorizing the petitioner, for Archbold-Hagner, to execute *228 a license agreement with the Navy Department. A resolution was also adopted, providing as follows:
Upon motion of Mr. Archbold, seconded by Fred G. Hagner and unanimously passed, the following resolution was adopted by the directors:
Whereas, F. H. Hagner has been the executive head and active general manager of this corporation from the time of its organization in 1939, and served from the date of incorporation until April 1941 without any compensation whatever, and has also served in said capacity from April 1941 up to the present time without actually receiving any compensation as salary, because the Corporation has had no assets with which to pay it, receiving only the sum of $ 400 per month to cover his actual expenses, which sum was advanced monthly by Mr. Archbold and which was consumed in extensive traveling from his home in Texas to various other states, including particularly Washington, D. C., and *646 New York in interests of this Corporation, and incidental living expenses in connection therewith, and
Whereas, it was agreed by the directors of this Corporation from the beginning of incorporation and understood and approved by all of the stockholders at all times *229 thereafter that when the Corporation had accumulated sufficient funds and assets to set up a salary account for the services of said F. H. Hagner, adequate to compensate him therefor, that the amount of the salary as president and general manager would be fixed and approved to be effective as of and from the date he began to receive the said item for expenses of $ 400 per month as aforesaid, the said date being April 1, 1941, and
Whereas, the Corporation has now accumulated assets and funds as a result of the special services and efforts of said F. H. Hagner, and it is now necessary to determine the amount of said Hagner's salary as president and general manager as aforesaid:
Be It Therefore Resolved that the salary of F. H. Hagner as president and general manager of this Corporation be hereby fixed as the sum of $ 12,000 per year, payable in twelve equal monthly installments of $ 1,000 each, effective April 1, 1941, the same to continue hereafter on said basis until changed by the further action of this board. That the president and the secretary are authorized to make payment to said F. H. Hagner of all of said salary in arrears from April 1, 1941 to date, from any funds presently*230 on hand and available for the purpose or as said funds are later received by the Corporation and available for the purpose, until said back salary account has been liquidated in full, and that future payments be kept current so far as practicable. The purpose of this resolution is to carry out the original agreement between all of the directors and all of the stockholders to fix the amount of the salary of F. H. Hagner when the Corporation accumulated assets available therefor, and to make the same effective as of the commencement of the expense payments in April, 1941, and to make provision for the payment of the amount due in arrears out of funds on hand and funds to be received.
On or about March 7, 1944, a license agreement was executed by petitioner, individually and as president of the corporation, and by James Forrestal, Under Secretary of the Navy. This agreement was approved by Archbold as secretary of the corporation, and provided for the grant to the Government of a license to manufacture, by itself or through its agent, under the patent for the sextant, the consideration to Archbold-Hagner being a percentage of the cost to the Government of such manufacture. The percentages*231 to be paid were 10 per cent on cost of the first 3,000 sextants, 5 per cent on the second 3,000, and 1 per cent on the balance. The payments in no event were to exceed $ 150,000.
For the tax years 1939 to 1943, inclusive, the corporation filed its returns disclosing no operations during that period. The returns disclosed that the corporation kept its books and filed its returns on the cash receipts and disbursements basis, and that through December 31, 1943, it had no available cash, although it owned valuable patents.
Petitioner and his wife filed individual income tax returns for the tax years 1941 to 1943, inclusive, wherein they reported on a community *647 basis in addition to their income or loss from other sources the $ 400 monthly expense advances made to petitioner by the corporation from April 1, 1941. On the returns for 1941 deduction was made of $ 1,200 as expenses paid. No deduction was made for expenses on the returns for 1942 and 1943.
On or about October 31, 1944, there had been delivered to and accepted by the Navy Department approximately 1,500 sextants. On November 13, 1944, Archbold-Hagner submitted to the Navy Department for payment a public voucher *232 setting out the following amounts claimed to be due under the license agreement:
| 1,500 sextants | $ 442,500.00 |
| Tooling costs, 50% of $ 182,391.95 | 91,195.97 |
| Total costs | 533,695.97 |
| 10% thereof | 53,369.60 |
On or about December 1, 1944, Archbold-Hagner received from the Government a check for $ 39,559.50. The corporation was then advised that the balance of $ 13,810.10 had been suspended by the disbursing office pending determination under the contract as to the Government's liability for payment of 10 per cent upon tooling costs. During 1945, there having then been more deliveries of the sextants, Archbold-Hagner continued to receive periodic payments under the contract, until $ 46,854.24 additional had been received, when the contract was canceled in December, 1945. The total amount suspended as of that date was $ 18,239.19, representing 10 per cent of the above tooling costs. This suspended amount was finally approved in the sum of $ 16,913.67 and checks in payment thereof were received in 1947 and 1948.
For the tax years ended December 31, 1944 and 1945, the corporation filed returns showing losses, computed as follows:
| 1944 | 1945 | |||
| Income, license fees | $ 39,559.50 | $ 48,854.24 | ||
| Less expenses: | ||||
| Legal and professional | $ 45.00 | $ 6,900.00 | ||
| Franchise tax | 10.00 | 676.70 | ||
| Capital stock tax | 375.00 | |||
| Statutory fee | 50.00 | 475.00 | ||
| Interest | 2.44 | |||
| Misc. expenses | 803.91 | |||
| Stationery and printing | 15.90 | |||
| Revenue stamps | 25.00 | |||
| Expense allowance paid | ||||
| F. H. Hagner | 4,400.00 | 14,400.00 | ||
| Salaries F. H. Hagner | 38,000.00 | 19,000.00 | ||
| Total expenses | 42,880.00 | 43,646.91 | ||
| Net income | (3,320.60) | 3,207.33 | ||
| Less 1944 net operating loss | ||||
| claimed in 1945 | 3,320.50 | |||
| Net loss per return for 1945 | 113.17 |
*233 *648 In the 1944 return the corporation stated that the $ 38,000 paid to petitioner in that year represented back salaries, as follows:
| 1941 | $ 9,000 |
| 1942 | 12,000 |
| 1943 | 12,000 |
| 1944 | 5,000 |
| Total | 38,000 |
After an examination of the books and records, as well as the returns filed by the corporation for the taxable years ended December 31, 1944 and 1945, respondent made the following reallocations of expenses in accordance with the method of accounting employed, the cash receipts and disbursements basis, and determined the net losses to be as follows:
| 1941 | 1942 | 1943 | |
| Income from license agreement | |||
| Less deductions: | |||
| Legal fees | |||
| Franchise tax | $ 10.00 | ||
| Capital stock tax | 312.50 | ||
| Statutory fee | |||
| Interest | |||
| Miscellaneous expense | |||
| Stationery and printing | |||
| Revenue stamps | |||
| Filing fees | 2.00 | ||
| Corp. Trust Co | 50.00 | ||
| S. S. T | |||
| Depreciation | |||
| Expenses advanced to F. H. Hagner repaid | |||
| Archbold in 1945 | $ 4,400 | $ 4,800 | 4,800.00 |
| Travel and car expenses refunded F. H. | |||
| Hagner | |||
| Salaries, F. H. Hagner | |||
| Corrected deductions | 4,400 | 4,800 | 5,174.50 |
| Corrected net income | (4,400) | (4,800) | (5,174.50) |
| Less net operating loss deduction: | |||
| Net operating loss carry-over: | |||
| 1943 | |||
| 1944 | |||
| Corrected net income for 1945 |
| 1944 | 1945 | |
| Income from license agreement | $ 39,559.50 | $ 46,854.24 |
| Less deductions: | ||
| Legal fees | 45.00 | 6,900.00 |
| Franchise tax | 30.00 | |
| Capital stock tax | 375.00 | 162.50 |
| Statutory fee | 50.00 | |
| Interest | 2.44 | |
| Miscellaneous expense | 524.82 | 279.09 |
| Stationery and printing | 15.90 | |
| Revenue stamps | 25.00 | |
| Filing fees | 2.00 | |
| Corp. Trust Co | 346.70 | 50.00 |
| S. S. T | 60.00 | |
| Depreciation | 37.50 | |
| Expenses advanced to F. H. Hagner repaid | ||
| Archbold in 1945 | 4,400.00 | |
| Travel and car expenses refunded F. H. | ||
| Hagner | 1,446.46 | |
| Salaries, F. H. Hagner | 38,000.00 | 19,000.00 |
| Corrected deductions | 43,814.42 | 27,937.99 |
| Corrected net income | (4,254.92) | 18,916.25 |
| Less net operating loss deduction: | ||
| Net operating loss carry-over: | ||
| 1943 | $ 5,174.50 | |
| 1944 | 4,254.92 | |
| 9,429.42 | ||
| Corrected net income for 1945 | 9,486.83 |
For the taxable year 1944 the petitioners filed separate individual income tax returns, disclosing a taxable net income of $ 37,702.82, one-half or $ 18,851.41 to each spouse. Included therein was the $ 38,000 salary as well as $ 4,400 paid by the corporation to petitioner as travel*235 and living expenses during that year. Against this latter amount deduction was claimed and allowed of $ 3,917.12 as expenses, leaving a total of $ 482.88 as either retained or expended for other purposes.
For the year 1944 the two petitioners applied the provisions of section 107 of the Internal Revenue Code, and computed their respective tax liabilities for that year as follows: *649
| Net income | Back salary | Net income | |
| Year | per return | adjusted | |
| 1941 | $ 688.17 | $ 9,000 | $ 9,688.17 |
| 1942 | 2,090.09 | 12,000 | 14,090.09 |
| 1943 | 3,741.93 | 12,000 | 15,741.93 |
| 1944 | (97.18) | 5,000 | 4,702.82 |
| Total per return | 38,000 |
| One-half to | ||
| Year | each | tax |
| spouse | ||
| 1941 | $ 4,844.09 | $ 463.99 |
| 1942 | 7,045.05 | (Forgiveness |
| year). | ||
| 1943 | 7,870.97 | 1,974.84 |
| 1944 | 2,351.41 | 374.00 |
| Total per return | 2,812.83 |
Under the resolution of the board of directors of Archbold-Hagner adopted at a special meeting held on December 6, 1943, as hereinbefore detailed, petitioner was entitled to receive $ 1,000 per month salary, beginning April 1, 1941, in addition to the $ 400 monthly travel and living expenses actually paid him from April 1, 1941, to November 30, *236 1944.
OPINION.
The petitioners invoke the relief provisions of section 107 of the Internal Revenue Code1 and ask that the $ 38,000 in salary received during the taxable year 1944 be prorated over that and the preceding three years in computing the tax thereon.
*237 The record shows that petitioner Frederick H. Hagner received payment of $ 3,600 during the year 1941 from Archbold-Hagner, payments totaling $ 4,800 during each of the years 1942 and 1943, *650 and payments totaling $ 4,400 for the year 1944. These payments were in addition to the $ 38,000 received by petitioner from the corporation in 1944 which he here seeks to prorate over that and the three preceding years.
The prior payments at the rate of $ 400 per month were made for travel and living expenses of petitioner during that period. In so far as they were expended for travel expenses on behalf of the corporation, they did not represent compensation for services rendered by this petitioner. The record shows, however, that these amounts were included by the petitioner in his returns for the four years in question; that the deductions taken by him for expenses upon these returns were in a total amount of $ 5,117.12, the balance of $ 12,482.88 consisting of compensation received by him from Archbold-Hagner during those years; and that his total compensation from that source during those years was in the sum of $ 50,482.88.
Respondent argues, and petitioner does not dispute the*238 conclusion, that the agreement of the corporation under the resolution set out in our findings for payment of a salary to petitioner of $ 1,000 per month was contingent upon Archbold-Hagner's receiving income from its patents, and that consequently the amount of $ 38,000 paid to him in October, 1944, together with the monthly payments theretofore made to him by that corporation, constituted its total liability to him at the close of 1944 for services performed prior to that time.
Since section 107 (a) of the Internal Revenue Code applies only if 80 per cent of the total compensation for services performed is received in the taxable year, it is obvious that this section has no application, as the payment of $ 38,000 received by petitioner constitutes less than 80 per cent of the total compensation of $ 50,482.88 received in that and prior years.
It is argued, however, by petitioner that the sum of $ 38,000 received in 1944 is subject to proration over the four-year period under the provisions of section 107 (d) of the Internal Revenue Code. Under this subsection, the back pay received during the taxable year is subject to proration if it exceeds 15 per cent of the gross income of *239 the individual for such year. Here the amount of $ 38,000 did exceed 15 per cent of such income. The contested right of proration, therefore, rests upon whether this compensation falls within the definition of back pay under subsection (d) (2) (A) (i), (ii), (iii), or (iv). Manifestly it does not come within the description of (i), (ii), or (iii), as there was neither (i) bankruptcy or receivership of the employer, nor (ii) dispute as to the liability of the employer to pay such remuneration, nor (iii), was the employer the United States, a State, Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing. *651 The ultimate question, therefore, is whether the conditions with respect to the payment bring it under the provisions of subsection (iv), which allow the proration if payment was precluded by any other event similar in nature to those set out in subsections (i), (ii), and (iii). Such similarity is to be determined under regulations prescribed by the Commissioner.
Respondent, by his supplement to Regulations 111, section 29.107-3, provides: "An event will be considered similar in nature to those*240 events specified in section 107 (d) (2) (A) (i), (ii), and (iii) 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."
The circumstances delaying the receipt by petitioner of salary from Archbold-Hagner were undoubtedly "unusual," and respondent does not argue otherwise. His contention is that they are in no way similar to the conditions specified in (i), (ii), and (iii). He argues that in Norbert J. Kenny, 4 T. C. 750, this Court went as far as could be justified in determining that the circumstances there were similar to restrictions imposed by a receiver. In that case the taxpayer was an officer of a corporation serving under a contract calling for a specified salary. The corporation wished to obtain a loan from the Reconstruction Finance Corporation, which imposed a condition that a portion of the taxpayer's salary be retained and not paid to him until the loan was repaid by the corporation. In that case, although*241 the restriction upon payment was voluntarily accepted by the corporation and by the taxpayer, we held that, inasmuch as it was a restriction imposed by a Government agency, it was analogous to a restriction imposed by a receiver, and relief was granted under subsection (iv). We followed this decision in the case of James Newton Dean, 10 T. C. 672, where the restriction upon payment of a corporate salary was required by the Salary Stabilization Unit of the Bureau of Internal Revenue.
Upon a careful examination of the facts disclosed in the present record, we believe that the restrictions here are more analogous to those in a receivership than the restrictions involved in the Kenny case, supra. There the restrictions were voluntarily accepted by the corporation and the taxpayer. In the present case, the only assets of Archbold-Hagner were certain patents. The restrictions imposed upon their use or employment by the corporation in deriving profit were mandatory. Here, as in a receivership, all of the corporation's assets were in effect impounded by the Government for use by it or by the corporation only with the consent of the Government. *242 The corporation could neither manufacture under its patents nor license *652 others to manufacture. It was forced to sit and await the Government's action. This it did, and was ultimately permitted to execute a contract with a Chicago manufacturer. This contractor was selected by the Government, and the contract negotiated was canceled latter by the Government for failure of the contractor to successfully perform. A further delay was caused. Finally, the Government itself contracted with the Mergenthaler Linotype Co. to manufacture sextants for it under the Archbold-Hagner patents, and separately negotiated a license agreement for the payment by the Government direct to Archbold-Hagner of agreed royalties for the use of such patents. The payment here in question was made by the corporation to the petitioner as accrued salary. It constituted practically the entire amount of the first payment by the Government to Archbold-Hagner of royalties under this contract.
In these circumstances, we think that the situation imposed by the Government, under which it held the assets of the corporation and forbade their use, is more analogous to a receivership than those involved in either*243 of the cited cases.
Upon the authority of the Kenny and Dean cases, supra, we hold that this situation falls within subsection (iv). The petitioners are entitled to the relief sought.
An issue raised by the petitioners with respect to respondent's computation in applying the forgiveness feature of the Current Tax Payment Act was not mentioned at the hearing of the proceeding nor in the briefs filed by petitioners, and it is consequently considered as abandoned.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY.
(a) Personal Services. -- If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.
* * * *
(d) Back Pay. --
(1) In general. -- If the amount of the back pay received or accrued by an individual during the taxable year exceeds 15 per centum of the gross income of the individual for such year, the part of the tax attributable to the inclusion of such back pay in gross income for the taxable year shall not be greater than the aggregate of the increases in the taxes which would have resulted from the inclusion of the respective portions of such back pay in gross income for the taxable years to which such portions are respectively attributable, as determined under the regulations prescribed by the Commissioner with the approval of the Secretary.
(2) Definition of back pay. -- For the purposes of this subsection, "back pay" means (A) remuneration, including wages, salaries, retirement pay, and other similar compensation, which is received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and 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; (iii) if the employer is in the United States, a State, a Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or (iv) any other -event determined to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary; * * *↩