*259 Decision will be entered under Rule 50.
1. Annual "improvements," not received in cash, in petitioner's commission account on the books of National Cash Register Co., containing credits for commissions earned and debits for expenses paid in connection with petitioner's sales agency, held not taxable to petitioner, a cash basis taxpayer.
2. The credit balance in the account in the year when his services were terminated, being then available to petitioner, although not actually collected until the following year, held taxable to him as constructively received.
*361 Respondent determined deficiencies in income tax for the years 1941, 1943, and 1944 in the amounts of $ 411.26, $ 13,258.74, and $ 1,813.02, respectively. *260 The year 1942 is also in issue by reason of the Current Tax Payment Act. The only questions are the propriety of respondent's inclusion in petitioner's taxable income of the annual improvements in an account recording net sales commissions due him; and the year in which the account's 1942 balance should be taxed. Other adjustments, including the entire deficiency for 1944, are not now in issue.
The case was heard on a stipulation of facts and other evidence.
*362 FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner filed his Federal income tax returns on a cash basis for the years in question with the collector of internal revenue at Cleveland, Ohio.
He began employment in 1922 with the National Cash Register Co., Dayton, Ohio, hereinafter called National, and served in various sales capacities. Under a written agreement effective as of April 9, 1934, petitioner was employed as "salesman" of accounting machines by A. W. Outten, a sales agent of National. The agreement between petitioner and Outten provided in part:
Your [petitioner's] account will be credited with 25/35ths of the commission credited to my [Outten's] account on all sales.
Your account*261 will be charged with all salaries or commissions paid to any one that you may employ, also, all selling, installation, or operating expense in connection with the sale of accounting machines in the above territory.
In 1936 Outten died, and as of March 9, 1936, petitioner and National entered into a "salesman's commission contract" on the same printed form. That contract was in effect only about four weeks when petitioner entered into a similar agreement with H. J. Hattenbach, Outten's successor.
Petitioner's duties were the same under the above three agreements. His salary of $ 100 per week, later increased to $ 125, was charged against a commission account to which were credited commissions on accounting machines sold in his area. Petitioner's salary and certain unusual expense reimbursements were paid by personal checks of Outten and Hattenbach, respectively, or by cash while he was employed by them. Petitioner's commission account had a debit balance which at Outten's death was transferred to National and, subsequently, to Hattenbach. On December 7, 1938, the debit balance of about $ 7,500 was transferred to National, and as of that time National appointed petitioner "Sales*262 Agent" for accounting machines in Cleveland, Ohio, on a drawing account of $ 125 per week. The agency agreement between petitioner and National, covering the years in question, provided in part as follows:
19. Said Company shall retain from the commissions now due or that hereinafter shall become due said sales agent, an actual credit of $ 5 per point of total quota * * * to be held as a deposit and security for good faith * * * and to protect said Company against loss by reason of amounts charged back against said sales agent's account. The balance, if any, remaining in the Company's hands when said sales agent's account is finally settled, and all possible credits and charges to said account shall have been made, shall be paid to him at that time; but before making such payment, if any, said Company may require said agent to furnish clear evidence of payment of all indebtedness to his salesmen for salaries or commissions. * * * Should said Company advance or loan to said agent from time to time any sum or sums of money, said agent *363 agrees that any such sum or sums shall be charged to his account, and that all or any part of the commissions that may become finally due*263 and payable to said agent may be applied by said Company toward payment of said agent's account, and if, upon a final account stated, said account should disclose a balance due the Company, said sales agent agrees to pay the same immediately.
* * * *
20. Said sales agent shall pay his own expenses, it being understood that the Company is not to pay any * * * traveling, office or other expenses, for all of which he expressly agrees to contract in his own name, and under no circumstances to represent that the Company is responsible for the same. * * *
* * * *
23. Said sales agent hereby authorizes the Company, upon termination of the agency created by this contract, to pay any outstanding indebtedness, including amounts due salesmen and other employees, incurred in the management of said agency, and to charge same to his account; but said Company shall not be bound to pay any such indebtedness unless it shall elect to do so * * *.
* * * *
34. Said sales agent agrees not to employ any salesman to assist him in said agency except under written contract by the terms of which the Company shall be released from all liability for any indebtedness from said sales agent to such salesman. *264 * * *
35. * * * No liability or obligation on the part of the Company to any salesman or assistant employed by said sales agent, for payment of any amount due * * * from said sales agent shall be created by anything contained herein. * * *
The agreement as amended effective February 1, 1942, further provided:
30. Said sales agent agrees, for the benefit of his salesmen and other employees, to comply in all respects with the Workmen's Compensation law or laws * * * and * * * accept full and exclusive liability for the payment of * * * taxes imposed by the provisions of the Federal Social Security Act * * *.
In the event that the Company is called upon to make payment of contributions, taxes or penalties on behalf of the said sales agent or anyone under him, * * * the said sales agent will forthwith reimburse the Company for the entire amount so paid.
During the period in question petitioner was a party to contracts with "junior accounting machine" salesmen, reciting that petitioner, "having a salesman's contract with "National, agreed "to employ you to sell" in the Cleveland territory. The contracts provided in part:
24. It is understood and agreed that this contract is a personal*265 one between us, and that The National Cash Register Company is not to be held responsible for the payment of any salary, commission, or charges falling due under it, and all claims of liability of any kind against said Company under this contract are hereby waived.
Each contract was signed only by petitioner as "Salesman" and by the "Assistant Salesman." Selection of the assistants and the amount of salary paid them were subject to National's approval. National paid the assistants their salaries and commissions, less deductions for *364 social security taxes, and obtained receipts from them. It was National's practice to reimburse the salesmen for travel and entertainment expenses incurred outside of their assigned territories. The reimbursements were made to petitioner. Other expenses, such as telephone and telegraph bills, were paid directly by National.
During the years in question National maintained on its books a "prospective commission account" with petitioner. The account was credited on the date of sale with the commissions on sales made by petitioner and his assistants. Subsequently, when payments for the goods were received, the credits were transferred to *266 an "actual commission account" of petitioner. National also kept separate accounts in the name of each assistant salesman, the balances of which were reflected in petitioner's account. The "actual commission account" was debited with expenditures made by National connected with petitioner's agency, including $ 125 per week paid to petitioner; the assistants' salaries and commissions, and social security taxes thereon; repairs and services on machines demonstrated by petitioner and the assistants; freight charges; reimbursements for travel and entertainment expense; and other expenses, such as telephone and telegraph bills. Petitioner was furnished with monthly statements of the account.
Both the duties required of petitioner and the method of compensating him, including maintenance of the commission account, remained the same from the time he was first employed by Outten until the termination of his relationship with National. The account was debited with a part of the expenses connected with the sales, including amounts paid to any assistants under petitioner's supervision. For all years shown by the record, and inferentially over the entire period, the credits to his account*267 more than equaled the amounts withdrawn by him in cash.
The opening and closing balances of the actual commission account for the years 1940 through 1942; the total credits (commissions earned by petitioner and his assistant salesmen, and miscellaneous adjustments); the total debits (amounts paid by National to petitioner and for salaries and other expenses of petitioner's agency); and the net "improvement" in the account for each year, are as follows:
| 1940 | 1941 | 1942 | |
| Balance as of Jan. 1 | 1 $ 20,841.27 | 1 $ 21,620.53 | 1 $ 19,041.63 |
| Add total credits | 36,655.96 | 43,637.99 | 34,562.85 |
| 15,814.69 | 22,017.46 | 15,521.22 | |
| Less total debits | 37,435.22 | 41,059.09 | 12,943.32 |
| Balance as of Dec. 31 | 1 21,620.53 | 1 19,041.63 | 2 2,577.90 |
| Net improvement | 779.26 | 2,578.90 | 21,619.53 |
*365 As disclosed by the commission account, the total debits consisted of the following items:
| 1940 | 1941 | 1942 | |
| Petitioner's "salary" | $ 7,541.66 | $ 6,458.33 | $ 6,175.00 |
| Salesmen's salaries and bonuses | 22,550.66 | 30.023.97 | 3,945.80 |
| Transportation and telephone | 144.81 | ||
| Repairs, betterments and freight | 1,922.57 | 2,475.00 | 991.40 |
| Advertising | 306.75 | 352.72 | |
| Social security taxes | 200.33 | 239.50 | |
| Overage charges | 436.25 | 216.75 | |
| Missing equipment | 60.00 | ||
| Reimbursements for selling expenses | 3,723.08 | 109.59 | 577.39 |
| Postage | 43.87 | ||
| Miscellaneous expense | 211.57 | 436.41 | 945.89 |
| Adjusting entries | 542.35 | 498.14 | 317.84 |
| Total | 37,435.22 | 41,059.09 | 12,943.32 |
*268 In a letter to petitioner, dated April 15, 1942, L. H. Thompson, vice president of National, canceled petitioner's contract as sales agent. He was reduced to the status of "salesman" at a salary of $ 75 per week, and instructed to cancel "all commission and bonus contracts of salesmen in your organization." The letter stated that the accounts of petitioner and of commission salesmen working under his direction were to be assigned to National and "carried here until * * * paid out." Effective as of April 20, 1942, petitioner entered into a "salesman's contract" with National, under which he continued to be employed at $ 75 per week until he resigned on June 20, 1942. The actual commission account with a credit balance of $ 2,577.90 as of December 31, 1942, received total credits during 1943 of $ 3,445.78 and total debits of $ 5,797.72. The $ 5,797.72 included aggregate cash payments by National to petitioner of $ 4,750," in liquidation of" the account.
In his return for 1941 petitioner reported as taxable income from National $ 5,979.41, being the difference between $ 11,962.17 reported for information by National on Treasury Form 1099, less deductible expense of $ 5,982.76 not *269 now in dispute. In his return for 1942 he reported $ 6,125, 1 representing all of the money actually received in cash during that year; and for 1943, $ 2,172.10, being the $ 4,750 received in liquidation of his account less the credit balance as of December 31, 1942, of $ 2,577.90, which he stated was constructively received in 1942 and should have been reported in that year.
There was no change in the system of accounting nor in petitioner's method of reporting sales and expenses during the years 1934 (when he began employment under Outten) to 1943, inclusive.
In a letter to the treasurer of National's Dayton office, dated October 18, 1943, petitioner requested National to report "to the Federal Government *366 as 1942 income" the credit balance to his account as of December 31, 1942, stating:
As I understand the Income Tax Laws money is considered to have been "Constructively Received" at the moment it becomes available*270 and must accordingly be included in income.
* * * *
There is no question about the fact that the money was mine and that I could have received it during 1942 upon request.
In a letter to the tax division of National's Dayton office, dated March 14, 1944, a copy of which was appended to his return for 1943, petitioner stated in part:
I have just recently discovered that any amounts credited to me on your books as of Dec. 31, 1942 and available to me upon request or demand are considered as constructive income and must be reported as of the year in which they would become available rather than the time they are actually received.
On Dec. 31, 1942 I had a credit balance on your Dayton ledger of $ 1450.96; and, on your Cleveland ledger - $ 1,126.94.
The $ 2,577.90 was available to petitioner in 1942, at his request, and he could have received it in that year had he chosen to do so.
In his notices of deficiency respondent increased petitioner's income from National by amounts determined to represent the improvements for each year in the actual commission account, being $ 2,578.90 for 1941, and $ 29,012.21 for 1942; and increased petitioner's income by $ 1,126.94 for 1943. Respondent now*271 contends for an increase of only $ 21,619.53 for 1942. Petitioner now contends that the $ 2,577.90 actually received in 1943 was not constructively received in 1942.
OPINION.
Two theories of tax liability are somewhat confusingly resorted to by respondent in determining the instant deficiency. The one is the undoubtedly valid concept that where a payment is made for the account of a taxpayer, such as the discharge of his indebtedness, it will be considered income to him exactly as though he himself had received it in cash. Lucy A. Blumenthal, 30 B. T. A. 591; affd., U.S. 552; Douglas v. Willcuts, 296 U.S. 1">296 U.S. 1. The other is that income available without restriction will be taxed even though the potential recipient has turned his back on it. John A. Brander, 3 B. T. A. 231. The latter is the type of situation which, as a purely tax concept, has been labeled "constructive receipt" and in that sense only do we use the term.
The applicable accounting and income tax principles are by now too well settled to require extended discussion. Cases of this type are hence essentially factual, and*272 prior decisions are of no great benefit in dealing with such issues -- a conclusion which is at once *367 strengthened by, and explanatory of, their disposition in unpublished opinions.
There are many ways of dealing with transactions for accounting purposes. The prime prerequisite of proper accounting treatment is consistency. But that seems to us to be present here, since the evidence shows that petitioner over the years regularly treated his income on a strict cash receipts and disbursements basis and reported as income what he received in cash.
The other requirement is that any accounting method selected shall not cause a distortion of income. Sec. 41, I. R. C. We can not see, however, that such could be the consequence of the method adopted by petitioner. He concededly used and seems to have followed consistently the cash system of accounting.
When payments were received by the National Cash Register Co., it did not, and was not obligated to, pay them to petitioner. It ultimately applied them to the payment of expenses "incurred in the management of said agency." 2 They may well then have represented income to him for the year when so treated. But, if so, the payment*273 in each case being a business expenditure and petitioner having been on the cash basis, the sums paid out would represent corresponding deductions which he could not have taken sooner, since they were not paid in cash, Eckert v. Burnet, 283 U.S. 140">283 U.S. 140, and which as shown by our findings of fact, if treated as contemporaneous deductions, virtually offset and eliminate the corresponding income items. Whatever petitioner received in each year for his own account he returned as income. Being on the cash basis, this was permissible, Consolidated Asphalt Co., 1 B. T. A. 79, 82; George Hyatt, 36 B. T. A. 121; Kenneth Drummond, 43 B. T. A. 529, 533; and were it not for the termination of his contract in 1942, one of the tax years before us, the entire matter could be disposed of by the foregoing discussion. The conclusion follows as to 1941 that only the amounts received by petitioner in cash and not the "improvements" in his account were income taxable to him in that year, and that the deficiency was erroneously determined. The same conclusion would apply to the*274 1942 income in its entirety were it not for the question of constructive receipt also involved as to that year.
A different question and the application of the true constructive receipt doctrine is involved for 1942. By the end of that year petitioner had severed his connection with the National Cash Register Co., a balance had been struck, and the amount then due him had been ascertained. If this was available to him without restriction in 1942, *368 it was constructively received in that year, even though he did not in fact collect it until the year after. Kenneth Drummond, supra.
The facts are not entirely clear in this respect, but in view of petitioner's*275 own assertions made at a time much more nearly contemporaneous, we have concluded and found as a fact that he could so have received the money in 1942. The parties having stipulated that this amount, which is the only other contested item, is taxable either in 1942 or 1943, the determination that it was constructively received in 1942 disposes of the proceeding.
Decision will be entered under Rule 50.
Footnotes
1. Debit.↩
2. Credit.↩
1. To be compared with $ 6,175, stipulated as the amount actually received from National in 1942.↩
2. Paragraph 23 of the agreements provided, in part: "Said sales agent hereby authorizes the company, upon termination of the agency created by this contract, to pay any outstanding indebtedness, including amounts due salesmen and other employees incurred in the management of said agency, and to charge same to his account * * *."↩