*24 Decision will be entered for the respondent.
Alfred B. Thoreson received $ 4,800 from the A. O. Jostad Company in 1946 which he designated as "back pay" for the years 1932 through 1935 and claimed the benefits of sections 107 (d) (1) and 107 (d) (2) (A) (iv), Internal Revenue Code of 1939. Held, where there is no proof that there was an agreement or legal obligation existing during the prior period to pay the sum received and there is no proof that the sum would have been paid except for the intervention of an event similar in nature to bankruptcy or receivership, the amount in question is not accorded the benefits of those sections.
*463 Respondent determined a deficiency in income tax of Alfred B. Thoreson, deceased, *25 in the amount of $ 1,102.29 for the taxable year 1946.
The sole question for decision is whether $ 4,800 received by Alfred B. Thoreson in 1946 constituted "back pay" of $ 1,200 for each of the years 1932, 1933, 1934, and 1935 within the meaning of section 107 (d) (2) (A) (iv), Internal Revenue Code of 1939.
The parties hereto have stipulated that the $ 4,800 exceeds the 15 per centum requirement of section 107 (d) (1) and that the other subdivisions of section 107 (d) (2) are inapplicable.
FINDINGS OF FACT.
All the facts were stipulated, are so found, and are incorporated herein.
Petitioner herein is the Estate of Alfred B. Thoreson, deceased, Lillian Thoreson, executrix. Lillian Thoreson is the widow of Alfred B. Thoreson (hereinafter sometimes referred to as decedent), whose death occurred subsequent to the taxable year involved. Lillian Thoreson is a resident of Holmen, Wisconsin, as was the decedent prior to his death.
The return involved is the individual income tax return of Alfred B. Thoreson filed by him for the taxable year 1946 with the collector of internal revenue for the district of Wisconsin.
Alfred B. Thoreson reported in his 1946 return adjusted gross income of *26 $ 7,732.63, as follows:
| Salary -- A. O. Jostad Company | $ 7,500.00 |
| Dividends | 50.63 |
| Other income | 182.00 |
| $ 7,732.63 |
He computed his tax liability for that year on the basis of attributing $ 4,800 of the $ 7,500 received as salary from the A. O. Jostad Company as back pay for each of the years 1932, 1933, 1934, and 1935.
The schedule of tax computation, which the decedent appended to the return, contained the following explanatory paragraph:
This return gives effect to additional compensation in the amount of $ 4,800.00, received by the taxpayer in 1946 from the A. O. Jostad Co., Holmen, Wisconsin. The amount represents back salary as Vice President of the Company at rate of $ 100.00 per month for the years 1932 to 1935 inclusive. The taxpayer owns approximately 1/3 of the outstanding capital stock of the Company and due to low earnings and unfavorable financial position during the years 1932, 1933, 1934, and 1935, no salary was withdrawn during those years. It was agreed *464 between the stockholders, two of whom were actively engaged in the management and operation of the Company affairs on a salary, that payment for the years above stated would be deferred until*27 the Company was in a better financial position. Payment was authorized by the Directors of the Company on April 25, 1946 and actual payment made on December 31, 1946. It is believed the above enumerated circumstances qualify this salary of $ 4,800.00 as "back pay" under section 107 D I. R. C. and the tax liability for the year 1946 has been computed under the provisions of this Section.
Decedent paid no tax on the $ 4,800 salary received in 1946 inasmuch as his income for each of the years 1932, 1933, 1934, and 1935, to which he allocated $ 1,200 each year, was, after the allocation, less than his credit for personal exemptions for those years.
The A. O. Jostad Company was incorporated in Wisconsin in 1908. It operated a general merchandising store in Holmen, Wisconsin, a village of approximately 500 population. Its volume of business was local in nature and relatively small. The annual sales were less than $ 100,000 during each of the years 1930 through 1946. Comparative balance sheets and profit and loss statements for the years 1932 to 1935, inclusive, are as follows:
| A. O. Jostad Company | ||||
| Balance Sheets | ||||
| Dec. 31, 1952, Through Dec. 31, 1935 | ||||
| 1932 | 1933 | 1934 | 1935 | |
| Assets | ||||
| Cash | $ 675.38 | $ 72.08 | $ 87.16 | $ 241.18 |
| Accounts and notes receivable | 17,253.15 | 18,552.50 | 15,638.50 | 13,013.48 |
| Inventory | 32,993.03 | 34,652.71 | 35,746.41 | 35,219.98 |
| Capital assets | 622.43 | 826.03 | 826.03 | 831.53 |
| Other | ||||
| $ 51,543.99 | $ 54,103.32 | $ 52,288.10 | $ 49,306.17 | |
| [sic] | ||||
| Liabilities | ||||
| Accounts and notes payable | $ 19,958.23 | $ 22,447.59 | $ 20,406.45 | $ 17,410.60 |
| Accrued expenses | ||||
| $ 19,958.23 | $ 22,447.59 | $ 20,406.45 | $ 17,410.60 | |
| Net Worth | ||||
| Capital stock | $ 17,400.00 | $ 17,400.00 | $ 17,400.00 | $ 17,400.00 |
| Surplus | 14,185.76 | 14,255.73 | 14,481.65 | 14,495.57 |
| $ 31,585.76 | $ 31,655.73 | $ 31,881.65 | $ 31,895.57 | |
| $ 51,543.99 | $ 54,103.32 | $ 52,288.10 | $ 49,306.17 |
| A. O. Jostad Company | ||||
| Profit and Loss Statements 1 | ||||
| Calendar Years 1932 Through 1935 | ||||
| 1932 | 1933 | 1934 | 1935 | |
| Net sales | $ 40,432.67 | $ 34,900.00 | $ 42,590.00 | $ 49,009.00 |
| Cost of goods sold | 33,533.28 | 28,324.70 | 35,898.35 | 41,944.21 |
| Gross profit | $ 6,899.39 | $ 6,575.30 | $ 6,691.65 | $ 7,064.79 |
| Expenses | ||||
| Compensation of officers | ||||
| Salaries and wages | $ 1,958.45 | $ 1,740.00 | $ 1,751.75 | $ 4,636.70 |
| Rent | 1,500.00 | 1,500.00 | 1,500.00 | 1,500.00 |
| Other | 3,370.97 | 3,159.90 | 3,213.98 | 914.17 |
| Total | $ 6,829.42 | $ 6,399.90 | $ 6,465.73 | $ 7,050.87 |
| Net profit (loss) | $ 69.97 | $ 175.40 | $ 225.92 | $ 13.92 |
Throughout the years 1930 to 1946, inclusive, the company had total assets of approximately $ 50,000 or more which was at all times more than twice the amount of its total liabilities. During each of these years it carried a surplus of approximately $ 14,000 or more. The company was not insolvent and was not in bankruptcy or receivership, adjudicated or otherwise, between 1932 and 1946.
Salaries and wages were paid to the company's regular employees in each of the years 1930*29 through 1946. Its officers received salaries only in the years 1942 through 1946. The corporation was on the calendar year and accrual basis of accounting during the years 1930 to 1946, inclusive. No officers' salaries were accrued in any of those years. A cash dividend of 6 per cent was paid on the capital stock by the corporation in 1930. Thereafter and through 1946 no other dividends were declared or paid.
At the time the A. O. Jostad Company was formed 58 shares of capital stock were issued to A. O. Jostad, 58 shares were issued to Alfred B. Thoreson, and 58 shares were issued to Julius O. Berg. No other shares were issued. At the time of the death of A. O. Jostad in 1937, his shares were transferred to his wife, Alice Jostad, and the stock owned by Julius O. Berg was owned by him during the period involved or by his estate through and including the year 1946. Julius O. Berg died on October 10, 1940, and Alfred B. Thoreson died on June 25, 1948.
Between 1932 and 1938, A. O. Jostad, Alfred B. Thoreson, and Julius O. Berg were president, vice president, and secretary-treasurer, respectively, of the corporation. They were also its directors. In 1938 Alice Jostad was elected*30 director and vice president of the company. *466 At that time Alfred B. Thoreson was elected president and Julius O. Berg remained as secretary-treasurer.
Alfred B. Thoreson and Julius O. Berg jointly owned the building used by the A. O. Jostad Company and were paid rent for its occupancy.
During the years 1932 to 1935, inclusive, Alfred B. Thoreson and Julius O. Berg performed services for the A. O. Jostad Company but received no salaries from it. A. O. Jostad, who was president of the corporation from 1908 until his death, did not render any substantial services to it nor did he receive any compensation for services. He was interested in another store and devoted a major portion of his time to its management.
Decedent at no time had any written salary contract with the A. O. Jostad Company.
The corporate minutes of the company contain no reference to officers' salaries from the date of incorporation to April 25, 1946. The minutes of a special meeting of the stockholders of the A. O. Jostad Company held April 25, 1946, contain the following:
Harold Johnson as Administrator of the estate of J. O. Berg was elected secretary of the meeting.
The motion was made by Alice Jostad*31 and seconded by H. Johnson that payment be made to Alfred B. Thoreson for back salary for the years 1933-1934- 1935 and 1936, at the rate of $ 100.00 per month, or a total of $ 4,800.00 and the payment be made to the estate of J. O. Berg for back salary due J. O. Berg for the years 1933-1934-1935 and 1936 at the rate of $ 100.00 per month or a total of $ 4,800. On being put to a vote the motion was unanimously carried.
The record does not contain an explanation of the inconsistency between the years to which Thoreson allocated the $ 4,800 and the years designated in the corporate minutes of April 25, 1946.
The decedent was paid $ 7,500 salary by the corporation in 1946, which amount included the $ 4,800 authorized by the directors' meeting of April 25, 1946. Likewise the Estate of Julius O. Berg received $ 4,800.
The corporate income tax return of the A. O. Jostad Company for 1946 reported a net loss of $ 4,045.78 and no tax liability. The computation of the loss included a deduction of officers' salaries in the amount of $ 12,300, which consisted of $ 7,500 paid to the decedent and $ 4,800 paid to the Estate of Julius O. Berg. Had not the $ 4,800 payments been made to the decedent*32 and the Estate of Julius O. Berg, the A. O. Jostad Company would have had a net income of $ 5,554.22 for 1946.
In determining the deficiency respondent disallowed the allocation of the $ 4,800 as "back pay" on the ground that it should be included in the decedent's gross income for 1946.
*467 OPINION.
The issue in this case is whether Alfred B. Thoreson received "back pay" in 1946 from the A. O. Jostad Company which would have been paid in 1932, 1933, 1934, and 1935 except for the intervention of an event similar in nature to bankruptcy or receivership within the meaning of sections 107 (d) (1) and 107 (d) (2) (A) (iv), Internal Revenue Code of 1939. 1
*33 Petitioner contends that the financial condition of the A. O. Jostad Company in 1932 through 1935 was an event similar to bankruptcy or receivership.
The parties are in agreement and the record clearly shows that the A. O. Jostad Company was not in bankruptcy or receivership, adjudicated or otherwise, during those years. Nor do we think that the company was in a condition similar to bankruptcy or receivership during that period.
Petitioner argues that during each of the years 1932 through 1935 the company did not have sufficient cash on hand to pay officers' salaries and that the depression made it difficult for it to liquidate its inventories and receivables. There is no evidence, however, that the accounts and notes receivable were uncollectible or that it suffered any losses therefrom. We do not think that a low cash balance or slow moving assets alone constitute an event similar to bankruptcy or receivership within the meaning of section 107 (d) (2) (A) (iv). The company at all times had current assets greatly in excess of current liabilities. There is no evidence it had any funded debt or mortgage. There was no deficit. In each of the years 1932, 1933, 1934, and 1935 the*34 company made a profit and at all times it had a *468 substantial surplus. There was no question of threatened foreclosure as in Langer's Estate v. Commissioner, 183 F.2d 758">183 F. 2d 758. Neither was the financial condition such as to justify the appointment of a receiver, cf. Sedlack v. Commissioner, 203 F.2d 825">203 F. 2d 825; nor were there governmental restrictions tantamount to receivership as in Norbert J. Kenny, 4 T. C. 750, and Frederick H. Hagner, 14 T.C. 643">14 T. C. 643.
Furthermore, the petitioner has failed to show that the $ 4,800 would have been paid in 1932, 1933, 1934, and 1935 but for the intervention of an event similar to bankruptcy or receivership.
To come within the scope of this section and the regulations 2 there must have been during the years to which the taxpayer seeks to allocate the compensation an agreement or legal obligation to pay the amount received. Sedlack v. Commissioner, supra;Cowan v. Henslee, 180 F. 2d 73; Francis T. Donahoe, 22 T. C. 1276.
*35 Petitioner has not shown that any agreement or legal obligation for compensation existed between Alfred B. Thoreson and the A. O. Jostad Company for the years 1932, 1933, 1934, and 1935.
Reviewing the evidence carefully and giving petitioner every reasonable inference, we have been unable to find that the $ 4,800 received in 1946 by the decedent was "back pay" attributable to the years 1932 through 1935.
There is no mention of officers' salaries in the corporate minutes from the date of the company's incorporation through 1946, except for the meeting of April 25, 1946. There is no proof that officers' salaries were ever paid before 1942. The company was at all times on the accrual method of accounting and at no time between 1930 to 1946, inclusive, did it accrue officers' salaries.
Petitioner has not shown how much time Alfred B. Thoreson or Julius O. Berg spent in the store or whether they worked as officers or regular employees. The company had other employees, as evidenced by the fact that employees' salaries were paid from 1930 through 1946. Petitioner has failed to show the existence of an employer-employee relationship which is a prerequisite to the application of *469 *36 section 107 (d). Frank R. Bavis, 18 T. C. 418, affirmed without discussion on this point 202 F.2d 843">202 F. 2d 843.
Accordingly, we hold that the $ 4,800 received by Alfred B. Thoreson in 1946 is not "back pay" for the years 1932 through 1935 and is taxable in the year of receipt.
Decision will be entered for the respondent.
Footnotes
1. Before carry-back of losses and before payment of Federal income taxes.↩
1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY.
(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 the 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; * * *↩
2. Regulations 111 (1946 Supplement).
Sec. 29.107-3. Back Pay Attributable to Prior Taxable Years. --
* * * *
An event will be considered similar in nature to those 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. For the purposes of this section the term "back pay" does not include remuneration which is deemed to be constructively received in the taxable year or years in which the services were performed, remuneration paid in the current year in accordance with the usual practice or custom of the employer even though received in respect of services performed in a prior year or years, additional compensation for past services where there was no prior agreement or legal obligation to pay such additional compensation, or any amount which is not includible in gross income under chapter 1.