*296 Decision will be entered for the respondent.
Petitioner Harold L. Ward was president of a corporation organized in 1937 to acquire timber properties which were largely family holdings but which, because of delinquencies for taxes, had been deeded to the State of California. The corporation was not able to pay petitioner currently for the services to be rendered but it was understood that he would be paid for his services when it became financially able. Approximately one-half of the lands were cleared of delinquency charges and released to the company in 1940, and from that time on sales of timber and lands were made in each year. The remaining one-half of the lands was released to the corporation by court decree in 1945 under a State statute which permitted payment of the delinquent taxes, penalties, and interest, in installments. From its organization through December 31, 1947, the corporation had an excess of receipts from sales and rentals over expenses of approximately $ 285,000. Its sales for 1946 alone amounted to $ 258,363.67 with expenses of only $ 62,669.96, and in that year it distributed $ 180,000 to its shareholders as a dividend. In 1949 it paid petitioner *297 as compensation the sum of $ 32,000 to cover services rendered by him for the years 1941, 1942, 1943, and 1944. Held, that the $ 32,000 so received was not back pay within the meaning of section 107 (a) or 107 (d) of the Internal Revenue Code of 1939.
*816 Respondent determined a deficiency in income tax against petitioners for the calendar year 1949 in the amount of $ 5,441.77. The only issue to be decided is whether $ 32,000 received by petitioner Harold L. Ward in the taxable year for services rendered by him in 1941, 1942, 1943, and 1944 as president of the Ward Redwood Company, Inc., falls within the ambit of section 107 (a) or 107 (d) of the Internal Revenue Code of 1939.
FINDINGS*298 OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Harold L. Ward, sometimes referred to herein as petitioner, resides at Orchard Lake, Michigan. He and his wife, Virginia Palmer Ward, 1 filed a joint income tax return for 1949 with the collector of internal revenue for the district of Michigan.
The Ward Redwood Company, Inc., sometimes referred to herein as the company, was incorporated in 1937. Its principal assets were timberlands that had been assembled by petitioner's grandfather in 1897. In 1937 the owners of the lands were petitioner and many others who were his relatives and some who were*299 not related to him or the other heirs.
The lands in question were situated in the redwood country of northern California, lying in approximately equal parts in Humboldt and Del Norte Counties. In 1937 it was estimated that the company owned approximately 1 billion feet of redwood timber.
*817 There had been a period of time during which petitioner's father, Willis C. Ward, had collected the necessary funds from the various owners and had seen to it that the taxes on the said lands were paid. During the depression he had been unable to collect the funds required and beginning with the "fiscal year 1930-1931" the lands had become tax delinquent. As the result of such nonpayment of taxes the said lands were conveyed by tax deeds to the State of California.
Some friends of Willis C. Ward suggested that the advice of F. C. Knapp of Portland, Oregon, would be most helpful as to what the owners should do. For most of his life Knapp had been active in the northwest as a timber operator and broker or adviser. Willis C. Ward accordingly employed Knapp to make an investigation of the lands and to give his recommendations on what could be done with them. On September 12, 1936, Knapp*300 reported the results of his investigation and made his recommendations. He reported, among other things, that he had learned that there were but approximately 46 billion feet of redwood timber in the hands of private holders, that probably 25 per cent of this amount would eventually go into Government and State parks and reserves, and that the redwood production, which had increased about 250 per cent during the past 4 years would, within a few years, show at least 1 billion feet per year, and that it would be necessary to add to the productive capacity of the Redwood District in order to take care of the increase in demand.
Knapp's recommendations were:
1. Take the earliest possible steps to place the ownership of all the property shown on the Fentriss Hill contour map in the name of a corporation with a duly constituted board of directors and officers empowered to sell and give title to the property, to enter into contracts, etc., etc.
2. Make arrangements, which will result in the corporation having a clear title to the property.
3. Make arrangements which will ensure there being funds on hand to enable the corporation to meet taxes and pay the usual running expenses of the holding*301 company for a period of five or more years.
On September 18, 1936, petitioner enclosed a copy of Knapp's report with a letter he wrote to several relatives who were owners of undivided interests in the properties, and stated his view that "we should get a company going as soon as possible in order to handle the Redwood matters expeditiously." He also suggested that the company could have 5 directors, 1 from each of the family groups, each family designating its own director and that it should be decided in which State the company should be incorporated and the officers they desired.
Early in 1937 petitioner discussed the necessary legal requirements for setting up a company with Donald D. Geary, a member of a New *818 York law firm. Geary drew up a plan and prepared the necessary papers for organizing the company. The plan called for the issuance of 8,000 shares of stock, of which 7,800 were to be issued in return for a deed to the timberlands and 200 shares were to be subscribed for at $ 10 a share in order that the company might have $ 2,000 for paying the expenses of organization and as working capital.
Petitioner personally called on various owners who lived in different*302 places in the eastern part of the United States. He explained the plan and in most instances received their endorsements of the plan, their subscriptions to the stock, and their signatures to the deed conveying their interests in the lands to the company. There were a few who did not care to have a minority interest in the company and petitioner worked out a partition for them separating their property from that of the others. Except for this minority the owners of the lands joined together and the company was incorporated pursuant to the plan which had been prepared by Geary.
During his discussions with the various interested individuals, petitioner was told that they wanted him to manage or run the company. He agreed to do so on the condition that he would be paid an appropriate salary when the company was in a financial position to pay him. He did not expect the individuals to guarantee him a salary and knew in the circumstances that he could not be paid at the outset since no funds would be available therefor.
On or about June 7, 1939, and pursuant to California statute, the district attorney for Del Norte County filed a complaint in the Superior Court for the said county*303 to quiet the State's title to the lands herein which were located in Del Norte County. In such a proceeding the State law permitted the challenging of the validity of the tax deeds and of the taxes for any year after the tax sale of the land to the State, and by appropriate pleadings the company challenged the validity of the tax deeds and of the taxes on the lands in question.
Under date of September 30, 1939, the court entered its interlocutory decree finding and declaring that the taxes theretofore levied on the said lands for the fiscal years 1930-1931 to 1938-1939, both inclusive, were invalid and fixing the correct method of computing the taxes rightly due and owing for the said years and further that if the taxes so computed should be paid within 1 year after the interlocutory decree should become final, a final decree should then be entered adjudging that the theretofore tax deeds and tax sales were void and that proper entries be made "as in case of a redemption." Under that decree the tax liability on the company's properties located in Del Norte County and covered by the proceeding, was determined to be $ 58,817.92 as against $ 156,106.15 which had originally been levied.
*304 *819 On March 13, 1940, the court filed its final decree finding that the taxes on the said lands had been duly paid, declaring the tax sales and tax deeds theretofore made were void and of no effect and that the company was the owner of the property listed under its name free and clear of all liens for taxes prior to the fiscal year 1939-1940, and directing that proper entries be made with respect to the "said parcels of real property as in case of a redemption." While under California law the company had theretofore been barred from cutting and removing timber from the said lands, it had been permitted by the local authorities to make sales thereof provided the proceeds should be impounded in a special bank account to be applied on the taxes which were found to be due.
After the entry of the above final decree the company was at all times in possession of its timber holdings in Del Norte County and free to operate or deal with the properties as it saw fit.
With respect to the properties in Humboldt County the workout of the tax problems was different. There the State of California did not institute a proceeding to quiet its title to the property under the tax deeds but on *305 some date prior to September 5, 1944, the company instituted a proceeding in the Superior Court for Humboldt County alleging that the taxes levied on its lands in Humboldt County for the fiscal years 1930-1931 through 1943-1944 were illegal and void and praying that the tax deeds conveying the properties to the State of California be declared null and void and of no effect, that the court determine the correct amount of taxes thereon, and that there were no penalties, interest, or costs due by the company with respect thereto.
Decision was entered for the State, and the company appealed to the Supreme Court of California. The appeal did not proceed to a decision but was disposed of by agreement. The company agreed that its case might be dismissed with prejudice and the State agreed that the company might redeem its properties under a State law permitting back taxes to be paid in installments over a period of 5 years. The appeal and the proceeding were accordingly dismissed with prejudice and pursuant to stipulation by the parties that the lands involved had "been redeemed in full by the payment of all the taxes, interest and penalties due thereon or by placing said lands on the *306 5-year redemption plan pursuant to the provisions of Revenue and Taxation Code, Division 1, Part 7, Article 2," the Superior Court for Humboldt County on May 11, 1945, vacated and set aside its prior interlocutory judgment which had purported to quiet title to the said lands in the State.
The company thereafter assumed possession and dominion over its Humbolt County properties and the said taxes, interest, and penalties were paid in due course under the 5-year redemption plan. Actually *820 the installments were paid as they fell due by A. K. Wilson. By contract dated June 20, 1945, the company had agreed to sell certain of its lands in Humboldt and Del Norte Counties together with all timber thereon to Wilson for a total purchase price of $ 1,750,000, 2 of which $ 10,000 had theretofore been paid, $ 50,000 was paid on the date of the contract, and the remainder was payable at the rate of $ 5 per 1,000 log-feet for all timber actually cut and removed but subject to a requirement that not less than 1 million feet of logs be cut or paid for each month beginning with September 1945 and ending with December of 1949, and thereafter not less than 12 million feet of logs per month*307 until the total purchase price should be paid. Under the contract Wilson assumed liability for all taxes and assessments which had become a lien on the land prior to March 5, 1945, and in the event of his failure to pay the said installments and interest when due under the 5-year redemption plan, the company upon payment of the same was to have a claim over against Wilson with interest at 6 per cent until repaid by him.
From the organization of the company, petitioner was its president and treasurer, as well as stockholder and director. There was no formal agreement under which the comany was to pay petitioner a salary. He was, however, reimbursed for the expenses incurred by him.
In August 1937 the company appointed Knapp to represent it in the sale of its timber and lands except for*308 sales to the United States, California, or the Redwood League, in which cases the company was represented otherwise. The company did no logging but restricted its operations to the making of stumpage contracts and the selling of various tracts of land with the timber thereon. Its cash receipts from sales, rentals, interest, and miscellaneous revenue for the years 1937 through 1949, were as follows:
| 1937 | |
| 1938 | $ 4,948.87 |
| 1939 | 44,021.07 |
| 1940 | 47,129.52 |
| 1941 | 14,571.88 |
| 1942 | 29,988.95 |
| 1943 | 2,210.10 |
| 1944 | $ 23,430.05 |
| 1945 | 69,682.48 |
| 1946 | 258,363.67 |
| 1947 | 127,075.13 |
| 1948 | 218,954.94 |
| 1949 | 94,464.97 |
For the same period its expenses, including taxes, commissions, legal fees and expense, and miscellaneous items such as sales promotion, accounting, stenographic and office help, telephone and telegraph, resident agent's fees, property inspection, interest, and salaries, were as follows: *821
| 1937 | $ 1,410.11 |
| 1938 | 4,767.96 |
| 1939 | 32,316.04 |
| 1940 | 55,718.01 |
| 1941 | 21,548.15 |
| 1942 | 12,486.73 |
| 1943 | 14,935.91 |
| 1944 | $ 28,407.75 |
| 1945 | 48,912.17 |
| 1946 | 62,669.96 |
| 1947 | 50,387.46 |
| 1948 | 123,306.70 |
| 1949 | 73,057.09 |
For the years 1945, 1946, and 1947 the company had cash remaining *309 at December 31, after expenses, as follows:
| 1945 | $ 22,980.09 |
| 1946 | 211,232.18 |
| 1947 | 111,919.85 |
In 1946 the company distributed $ 180,000 as a dividend to its shareholders. In 1948 and 1949 it distributed dividends of $ 80,000 and $ 40,000, respectively.
Prior to April 14, 1948, no action was taken by the company to pay petitioner or any other of its officers a salary or compensation for services by them to it. The company was on a cash basis and its books showed no liability for salary due petitioner or any other officer for services rendered.
At the annual meeting of the stockholders on April 14, 1948, the petitioner made a full report of the operations of the company from the time of its organization. He reported among other things that tax liabilities had been reduced from $ 313,927.69 at the end of 1937 to $ 4,785.86, that during the same period cash had increased from $ 589.89 to $ 142,981.46, that $ 180,000 had been distributed to stockholders, that Wilson's total payments under his contract to the end of 1947 had accumulated to "about $ 280,000," that negotiations were under way to sell the remaining properties owned by the company to the United States Forest Service*310 3 for a cash price of $ 310,000, and that it was his estimate that when the properties of the company had been fully liquidated and after income taxes, a net amount of $ 1,717,380.80 would remain. He called attention to the fact that during the prior period no compensation had been paid to him or other officers of the company, and it was his view that the company was then in a position to consider the matter of such compensation for the past services by its officers.
On the same date, April 14, 1948, the matter of compensation for past services rendered by petitioner and other officers was brought to the attention of the board of directors. After a general discussion a committee was named and directed by the board to consult with the stockholders and then to fix and authorize payment of the salaries to the officers for the 11 years preceding. On May 12, 1948, the *822 committee by letter notified petitioner as president and treasurer of the *311 company that it had fixed and authorized payment to the company's officers as follows:
1. The salary of Harold L. Ward, as President and Treasurer, shall be $ 8,000 for each of the nine years, 1937 to 1945, both inclusive, and shall be $ 10,000 for each of the years 1946 and 1947, or a total back pay of $ 92,000.
This back pay shall be paid by the Company to Harold L. Ward in installments as follows: Salary for the years 1937, 1938, 1939 and 1940, of $ 8,000 a year shall be paid forthwith. On January 2, 1949, the salary for the years 1941, 1942, 1943 and 1944, of $ 8,000 a year shall be paid. On January 2, 1950, salary for the year 1945 of $ 8,000 and for the years 1946 and 1947 of $ 10,000 a year shall be paid. These payments shall be in addition to any payments of current salary that have been, or may from time to time be authorized, by the Board of Directors.
2. Mrs. Katharyn B. Fay shall forthwith be paid $ 1,000 as back pay of Mr. Harold V. V. Fay as Vice-President of the Company for each of the 8 years, 1937 to 1944, both inclusive, or a total of $ 8,000.
3. A salary of $ 1,000 a year shall be paid Mr. Donald D. Geary for his services as Secretary of the Company for each of*312 the 11 years, 1937 to 1947, both inclusive, or a total of $ 11,000, which amount shall be paid forthwith. This payment is for Mr. Geary's personal services as Secretary during these years and is separate and distinct from fees for legal services charged by his firm from time to time during this period.
The $ 32,000 authorized above as salary to petitioner for services rendered for the years 1941 through 1944 was paid to petitioner in 1949. In his return for 1949 the petitioners reported the said $ 32,000 as being taxable to them under section 107 of the Internal Revenue Code of 1939. The respondent in his determination of the deficiencies determined that the said $ 32,000 was not compensation or back pay within the meaning of that section.
OPINION.
Petitioner contends first that the $ 32,000 in question herein was compensation within the meaning of section 107 (a) of the Internal Revenue Code of 1939, and in the alternative that it was back pay within the meaning of section 107 (d). 4
*313 *823 It is clear, we think, that it was not compensation within the meaning of section 107 (a). To qualify as compensation under that section "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)" must have been received or accrued to petitioner in the taxable year. The facts show that petitioner's employment by the company had been continuous from 1937 when the company was formed. For such employment "from the beginning" through 1947 the petitioner was to receive a total of $ 92,000, only $ 32,000 of which was received in the taxable year. It is patent, therefore, that section 107 (a) does not apply. See Cowan v. Henslee, 180 F.2d 73">180 F. 2d 73.
We are also of the view and hold that the said $ 32,000 was not back pay within the meaning of 107 (d). Under that section compensation payments qualify as back pay provided the compensation received "would have been paid prior to the taxable year except for the intervention" of events specified which include bankruptcy or receivership of the employer; or "any other event determined*314 to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary."
It is the claim of the petitioner that the conveyance to the State of California under tax deeds was an event similar in nature to bankruptcy or receivership of his employer. We find it unnecessary, however, to decide that point since on the facts it is clear that payment of the compensation was not made prior to 1949 not because of the holding of the company lands by the State of California under tax deeds, but because the company saw fit to apply or use its earnings and profits for other purposes, including the payment of $ 180,000 in dividends in 1946, 3 years prior to the taxable year herein. The lands in Del Norte County had been returned to the company clear of tax liens in 1940, the year before the first of the years for which the compensation here claimed as back pay was paid. In short, since 1940 the company had been free to sell or otherwise deal with its properties in Del Norte *824 County in a perfectly normal manner and it did so deal with them and at a profit. Furthermore, the same had been true of its properties in Humboldt County from and after the*315 decree of the Superior Court of that county filed May 11, 1945. Thus the failure on the part of the company to pay petitioner for the services rendered by him to it for the years 1941 through 1944 prior to 1949 was not due to an event described in section 107 (d) (2) but because the company chose to apply its funds otherwise. And so far as appears, such other use of its funds was with petitioner's consent and approval.
In light of the above, it is accordingly unnecessary to decide whether the holding of petitioner's properties by the State of California under tax deeds was an event falling within the ambit of section 107 (d).
Decision will be entered for the respondent.
Footnotes
1. After the hearing in this proceeding petitioner Virginia Palmer Ward died. Her husband duly became the executor of her estate, and, upon motion properly filed herein on March 2, 1955, and by order of the Court issued on March 11, 1955, the Estate of Virginia Palmer Ward, Deceased, Harold L. Ward, Executor, was substituted as petitioner in the place and stead of Virginia Palmer Ward, Deceased.↩
2. At some date not shown the company had made an exchange of land with Blue Creek Redwood Company and the proceeds from the Wilson contract were to be allocated 95 per cent to the company and 5 per cent to Blue Creek Redwood Company.↩
3. The record shows that these negotiations were later terminated.↩
4. 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 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 liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings; (iii) if the employer is 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; * * *↩