*764 ADDITIONAL COMPENSATION - YEAR IN WHICH TAXABLE. - Petitioner and his corporate employer agreed that in addition to a cash salary petitioner was to receive compensation based on the income of the corporation. The agreement provided that the additional compensation for each year was to be deposited with a trustee until December 31 of the second succeeding year and then to be paid to petitioner. The additional compensation for 1929 was deposited with the trustee in 1930 and paid over to petitioner in January 1932. Petitioner was on the cash basis. Held, that the additional compensation for 1929 was not constructively received by petitioner in 1931 and was not income to him for that year.
*325 The respondent has determined a deficiency in income tax for the calendar year 1931 in the amount of $207,580.08. At the hearing a stipulation was filed settling one issue raised by the pleadings, the parties agreeing in the stipulation that by reason of certain expenditures by the Wellington*765 Finance Corporation for the benefit of its stockholders the petitioner realized ordinary income of $37,000. The one other issue is the amount of income, if any, realized by petitioner in 1931 by reason of petitioner's receipt of cash and stock of his corporate employer as additional compensation for services rendered.
FINDINGS OF FACT.
During 1931 and for a number of years prior thereto petitioner was an officer and employee of Paramount Publix Corporation, which operated in earlier years under different names, but will be hereinafter referred to as Paramount.
On December 15, 1922, petitioner entered into a contract with Paramount whereby Paramount agreed to pay petitioner "as compensation for all services rendered" the sums hereinafter described. First, a cash salary of $2,500 per week. The cash salary is not in controversy here. Second, Paramount agreed to pay a designated trust company "or such other trustee as may be mutually agreed upon" for each calendar year of petitioner's employment "a sum equal to 7 1/2 per cent of the net earnings of the corporation for the year in respect of which such payment is made." Such payments were expressly made subject to the following*766 conditions: (a) They were payable at the option of Paramount's finance committee either in cash or, in whole or in part, in common stock of Paramount taken at the fair market value of the stock at December 31 of the year for which such payment was to be made. (b) The cash and stock, and any investments of cash, delivered to the trustee in respect of any calendar year were to be held by the trustee "until December 31, two years subsequent to the expiration of such calendar year," and then to be paid to petitioner unless in the meantime Paramount notified the trustee that petitioner had not fulfilled his obligations. In the interim the cash received by the trustee could be invested in such securities as were approved by the petitioner, and income accruing on the trust fund was to be paid to petitioner from time to time. It was further provided, under subparagraph (d), that in the event of termination of petitioner's services during any calendar year the amounts to be paid would be adjusted proportionately *326 for the elapsed period of employment within the year. Petitioner agreed to give his exclusive services to Paramount and its subsidiaries until December 31, 1927.
*767 By agreement between petitioner and Paramount dated March 30, 1927, the agreement of December 15, 1922, was extended to December 31, 1934, and was modified in certain respects not here material.
Pursuant to the above agreements, and based on Paramount's net income for 1928 determined in accordance with the agreements, Paramount delivered on June 18, 1929, to the National City Bank of New York, as trustee designated by the parties to the agreement, 4,597 shares of its stock and cash in the amount of $7.73. The stock and cash were held by the trustee until January 2, 1931, when they were transferred and paid to the petitioner. The fair market value of the stock on December 31, 1928, was $52.726 per share, and on January 2, 1931, the fair market value was $39.50 per share.
Pursuant to the above agreements, Paramount on April 4, 1930, paid to the National City Bank of New York, as trustee, $757,500, that sum being the percentage of 1929 income provided for in the agreements. Of the amount so paid, the trustee on April 9, 1930, paid to Paramount $728,000 for 14,000 shares of Paramount stock $52at per share, plus transfer taxes of $560. This stock and the balance of the cash, *768 $28,940, were held by the trustee until January 6, 1932, when they were transferred and paid to the petitioner. The fair market value of Paramount stock on December 31, 1931, was $7 per share; on January 2, 1932, it was $6 7/8 per share, and on January 6, 1932, it was $8 1/8 per share.
During 1931 petitioner received a cash salary of $114,618.90 from Paramount.
In his income tax return for 1931 petitioner reported as compensation received from Paramount a total of $423,148.13, made up of the following sums:
| Percentage of Paramount's 1928 income: | ||
| 4,597 shares of stock at $39.50 | $181,581.50 | |
| Cash | 7.73 | |
| $181,589.23 | ||
| Percentage of Paramount's 1929 income: | ||
| 14,000 shares of stock at $7 | 98,000.00 | |
| Cash | 28,940.00 | |
| 126,940.00 | ||
| Salary, 1931 | 114,618.90 | |
| Total | 423,148.13 |
Petitioner's books were at all times kept, and his income tax returns were made, on the basis of cash receipts and disbursements.
The trustee bank was acting as trustee or depositary under agreements with two other officers of Paramount similar to the agreements *327 to which petitioner was a party. It was the practice of the bank not to deliver any of the stock or pay*769 out the cash deposited under those agreements until on or after January 1 of the third year following that in respect of which the deposits were made. This practice was carried into effect each year under each of the several agreements and no stock was delivered and no cash was paid by the bank prior to January 1 of the third year.
The respondent increased petitioner's reported income by the amount of $757,500, with the explanation in the notice of deficiency that that amount represents "additional compensation which was placed in trust in 1929 by the corporation, and was made available to you in 1931."
OPINION.
ARUNDELL: In addition to the facts stipulated in this case, the parties have filed another stipulation the effect of which, as explained by counsel at the hearing, is to estop the petitioner from claiming that any of the additional compensation reported by him in his 1931 return or added thereto by the respondent was income for any year prior to 1931. This stipulation, by its terms, leaves open the question of whether any part of the additional compensation for services rendered in 1929 was income to petitioner in 1931.
The respondent's argument is that the case*770 is governed by section 165 of the Revenue Act of 1928, set out in the margin, 1 and that under petitioner's agreements with Paramount the fund created in 1930 was available to petitioner in 1931 and constituted income to the full extent of the amount paid by Paramount in 1930.
Petitioner's views are that under the general provisions*771 of the statute defining gross and net income the fund set up in 1930 was not received, actually or constructively, and was not available to him in 1931, hence was not income; that section 165 is not applicable, but even if it is, it does not and can not constitutionally require the inclusion of more than was actually received. The latter contention we take to mean that in any event no more can be included in income than the amount of cash and the value of the stock at December 31, 1931.
*328 We are of the opinion that in so far as the fund set up in 1930 on the basis of Paramount's 1929 income is concerned, it is not necessary to decide whether or not section 165 is applicable. We do not understand that the proceeds of the 1929 fund based on 1928 earnings are in issue. Both parties have apparently treated that fund as resulting in income to the extent of cash plus the value of the stock when received on January 2, 1931. The action of the parties in so treating the 1929 fund accords with our holding in . That case did not involve the precise question we have here, but the reasoning is applicable. There the value of the shares*772 plus the cash received by the employee was less than the amount of his contribution to the employees' trust. The respondent by a literal application of section 165 treated as income the value of the shares at the time purchased by the trust, which value was in excess of the amount paid by the subscribing employee. We held that in enacting section 165 of the 1928 Act containing provisions different from section 219(f) of the 1926 Act, "The purpose * * * was, not to tax the employee where he was not taxed before, but to relieve him of all possibility of tax upon appreciation in the value of trust securities before such appreciation came to his hand by sale."
We have said above that it is unnecessary to decide whether or not section 165 applies to the 1930 fund. The reason for this is that the proceeds of the funds embraced within that section are taxable "in the year in which distributed or made available" to the taxpayer. This language does not lay down any different rule from the general provision of section 42 that items of gross income are to be included in income for the "year in which received by the taxpayer." It is under this general provision that the doctrine of "constructive*773 receipt", which depends upon the availability of the funds to the taxpayer, has been evolved. See art. 333, Regulations 74.
It is not contended in this case that the 1930 fund - either the cash or stock - was actually received in 1931. Consequently the case narrows down to the question of whether there was constructive receipt in that year. We have often said that the doctrine of constructive receipt is to be sparingly applied, ; . "* * * Income should not be construed to be received prior to the time of actual receipt except where a taxpayer turns his back upon income or does not choose to receive income which he could have if he chose." ; affd., . Cf. .
The agreement between petitioner and Paramount was that the trustee bank was to hold the fund set up each year "until the December *329 31, two years subsequent" to the particular year "and shall then pay and deliver" the fund to petitioner "unless prior to such December 31" a statement was filed with*774 the bank that petitioner had not performed his obligations. Perhaps there is room for speculation as to whether the parties intended that payment was to be made by the trustee on December 31. However, the trust officer in charge of the account testified that it was the practice of the trustee not to pay until after December 31; that in no year was payment made until after the beginning of the following year; and that if demand had been made on December 31 payment would have been refused. This established practice was apparently acquiesced in by the petitioner. Under those circumstances it does not seem to us that the fund was constructively received by the petitioner on December 31. To hold otherwise would leave the respondent in the inconsistent position of applying the constructive receipt doctrine to the 1930 fund but not to the 1929 fund under the same circumstances. If he is right in treating the 1930 fund as constructively received in 1931, he should treat the 1929 fund as income for 1930. This he does not do. Of course, the petitioner was inconsistent in reporting proceeds from both funds as income in 1931, but he is*775 now asking to have the inconsistency resolved. We hold that the fund set up in respect of Paramount's 1929 earnings was not income to petitioner in 1931.
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN dissents.
Footnotes
1. SEC. 165. EMPLOYEES' TRUSTS.
A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under section 161, but the amount contributed to such fund by the employer and all earnings of such fund shall be taxed to the distributee in the year in which distributed or made available to him. Such distributee shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of dividends and interest specified in section 25(a) and (b). ↩