1954 U.S. Tax Ct. LEXIS 138">*138 Decision will be entered under Rule 50.
1. Petitioner excluded $ 10,000 of a lump-sum settlement against his employer from his 1946 return as being damages arising out of a physical assault and exempt from taxation. Held, that the evidence not only does not establish, but tends to refute, petitioner's claim that $ 10,000, or any part, of the lump-sum settlement was received by him as damages for physical assault, and his claim is accordingly denied.
2. At the request of petitioner's counsel, the actual payment of $ 13,034.29 of the lump-sum settlement was deferred from 1946 until 1947, although the corporation charged off the full amount of the settlement on its books in 1946, and had sufficient bank balances to pay the full amount in that year. Held, that the $ 13,034.29 payment in 1947 was constructively received by petitioner in 1946, and respondent did not err in so determining.
22 T.C. 945">*946 Respondent has determined a deficiency in income tax against petitioner for the year 1946 of $ 12,221.52. The issues for decision are (1) whether $ 10,000 of a lump-sum settlement of petitioner's claims against his employer at the termination of his employment constituted the payment of damages for physical assault; (2) whether a part of the settlement actually received in 1947 and reported as income for that year was, by reason of constructive receipt, taxable income for 1946; and (3) whether part of an amount paid as attorneys' fees, for which petitioner has claimed deduction, was an expense in the sale of a capital asset and an offset against the selling price in determining capital gain, and not therefore deductible. The last of the issues stated was raised by respondent in an amended answer.
Petitioner also sought to raise an issue with respect to a claimed deduction for the year 1947. As to 1947, however, the respondent has made no determination of deficiency against petitioner, and this Court1954 U.S. Tax Ct. LEXIS 138">*140 is accordingly without jurisdiction as to that year.
FINDINGS OF FACT.
Petitioner is an individual and resides in Wyoming, Ohio. He filed his income tax returns for the calendar years 1946 and 1947 with the collector of internal revenue for the first district of Ohio.
In 1926 he began employment with The Interstate Folding Box Company, hereafter referred to as Interstate. Prior to his employment with Interstate, petitioner had worked as an accountant with the Sexton Manufacturing Company, in Illinois. Interstate was a closely held family corporation. Practically all of its stock was owned by members of the Bergstein family. It kept its books of account and filed its returns on the basis of a fiscal year ending July 31.
Petitioner's starting salary with Interstate was $ 50 a week. He served as assistant to the individual in charge of Interstate's bookkeeping and cost accounting. In or about 1930, he became secretary of the company and a member of its board of directors, which position he held until his employment was terminated in 1946. At that time, he was drawing a weekly salary of $ 100, plus a bonus at the end of the year. During the last 15 years of his employment, he1954 U.S. Tax Ct. LEXIS 138">*141 was Interstate's principal inside accountant.
22 T.C. 945">*947 When his employment with Interstate was concluded, petitioner was the owner of 100 shares of Interstate stock. Fifty of these shares were acquired December 28, 1936, but the certificate therefor was dated as if the shares had been purchased on July 31, 1934. Appropriate adjustments were made for interest on petitioner's unpaid balance and for the dividends which had been paid on the stock in the interim. The remaining 50 shares were acquired on July 31, 1939. Both purchases were subject to written terms and conditions set forth in letters dated December 28, 1936, and July 31, 1939. Both letters contained the following provisions:
If your connection with the company should be severed for any other reason whatsoever, it is mutually agreed that the stock shall be sold to the company and the company agrees to purchase, within 90 days thereafter, the stock at a price which shall be determined in the following manner: --
To the par value of $ 100 per share shall be added the pro rata portion of each share of the accumulated surplus between July 31, 1934 * and the date of the last closing of the books prior to the aforesaid date. 1954 U.S. Tax Ct. LEXIS 138">*142 If, since the last closing of the books interest is charged and dividends credited, the respective amounts shall be cancelled and if already paid shall be refunded.
Book value, as well as the surplus, at the beginning as well as the end of the period, shall be determined by reference to the audit reports of the accountants regularly employed by the corporation.
The agreement under which petitioner's bonus was paid was oral and its exact terms are not shown. The starting point in its computation purportedly was Interstate's net profits before taxes 1 as taken from its books, and variously referred to as "Profit Per Work Sheet," "Balance Per Work Sheet," and "Profit Per Original Closing Journal Entry." To such starting amounts, various additions were made to arrive at "Adjusted Income" or "Adjusted Income for Bonus Computation." Items so added included "Excess Salaries," "Royalties," "Grand Avenue Building Rent," and "Welfare" or "Welfare Work Expense." The item "Excess Salaries" represented, for most of the years shown, 20 per cent of the salaries which had been paid to members of the Bergstein family. The1954 U.S. Tax Ct. LEXIS 138">*143 amount of petitioner's bonus for each of the years prior to the fiscal year 1946 was then computed by taking 2 per cent of the "Adjusted Income" or "Adjusted Income for Bonus Computation," with a further adjustment to allow a credit to petitioner for a ratable portion of the income tax paid by Interstate for the year. The credit allowed for income tax was determined according to the ratio of petitioner's stock holdings to the total stock outstanding. Although some questions between Interstate and petitioner occasionally arose with respect to the bonus 22 T.C. 945">*948 payments, petitioner, prior to the fiscal year 1946, had always accepted Interstate's final figures.
On or about July 2, 1946, Samuel Bergstein, president of Interstate, and petitioner had a disagreement, 1954 U.S. Tax Ct. LEXIS 138">*144 as the result of which petitioner, on or about July 29, 1946, but by letter dated July 20, 1946, resigned his position as secretary of Interstate, to be effective as of August 1, 1946. He continued with Interstate for approximately 2 months past August 1, 1946, however, in order that someone familiar with Interstate's books might be present when the annual audit was made by its outside auditors, a firm of Chicago accountants. During his stay after August 1, 1946, petitioner received $ 300 a week, but no bonus.
A few days before petitioner left Interstate, probably in late September 1946, the auditor who was then making the annual audit of Interstate's books came to petitioner's office proposing settlement of petitioner's stock and bonus claims for $ 25,000, of which $ 6,000 was to cover the bonus and $ 19,000 the stock. Shortly afterwards, possibly in October, the auditor gave petitioner a tabulation showing a bonus computation for 1946 of $ 5,923.57. In making this computation, a starting figure of $ 220,038.45, designated as "Profit Per Work Sheet," was adjusted to an ultimate figure of $ 267,612.45. To the latter amount, the rate of 2 per cent was applied, as in prior years. 1954 U.S. Tax Ct. LEXIS 138">*145 The settlement offer of $ 25,000 was rejected by petitioner. In talking with Robert Bergstein, vice president of Interstate, petitioner next received an offer of a lump-sum settlement of $ 30,000 to cover his stock and bonus claims. This offer was also rejected and Bergstein suggested that the matter be turned over to their respective attorneys for the purpose of negotiation and settlement. A series of conferences between counsel were had over a period of approximately 2 months and an agreement was reached in December of that year, whereby petitioner was to receive $ 50,641.30 in settlement of all of his claims against Interstate. Petitioner personally attended only the first and last conferences.
At one point during the negotiations, Interstate submitted a balance sheet and an analysis of its surplus as of July 31, 1946, and a statement of its operations for the year ended that date. The balance sheet and the analysis of surplus and the statement of operations included Interstate's wholly owned subsidiary, Grand Avenue Building Corporation. 2 The analysis of surplus indicated a surplus for 22 T.C. 945">*949 Interstate at July 31, 1946, of $ 545,989.12, and a surplus for Grand Avenue1954 U.S. Tax Ct. LEXIS 138">*146 Building Corporation of $ 7,868.01, or a consolidated surplus of $ 553,857.13.
Petitioner and accountants employed by him made their own analysis of Interstate's surplus and profits. It was petitioner's position that several items had been charged or expensed which were not proper expense items. He also took the position that Interstate had grossly understated many of its assets. In his recomputation, he increased1954 U.S. Tax Ct. LEXIS 138">*147 assets by $ 604,335.19, as being the amount by which the appraised value of the buildings, machinery, and fixtures exceeded book value of the assets as reflected in the auditor's report. He also added $ 23,941.75 to the book value of the land owned by Interstate, which land was carried on Interstate's books at its cost 40 years earlier. He added $ 45,220.78 as a proper amount representing profits on orders for items already manufactured but not yet charged out. He took the position that over the years $ 140,000 in royalties had been paid to the "Bergstein Trust and Patent Trusts" by licensees of patents which had been developed by and belonged to Interstate, but which stood in the name of Samuel Bergstein, and that such royalties should be accounted for. It was his further claim that $ 30,000 which had been paid to Frank Bergstein, at the rate of $ 10,000 per year, for the 3 years Frank Bergstein was in the Army, had been an improper charge, and should be added back to surplus. Frank Bergstein had worked for Interstate for a very short period between the date of his graduation from college and his entry into the Army. Petitioner further took the position that $ 12,000 covering1954 U.S. Tax Ct. LEXIS 138">*148 work done by employees of Interstate on the Bergstein family's personal accounts had been improperly expensed on the books and should be restored, and also that $ 32,000 in rents received from outside parties on the Grand Avenue warehouse had not been accounted for to Interstate. The items mentioned, together with some lesser amounts, brought Interstate's surplus at July 31, 1946, as claimed by petitioner, to $ 1,442,723.58.
Payment of the $ 50,641.30 agreed upon in settlement of all of petitioner's claims against Interstate was made by three checks, two of which were dated December 28, 1946, and one January 3, 1947, and all of which were drawn to the order of "Nichols, Wood, Marx & Ginter, Atty's for Joseph Frank." The first of the December checks was in the amount of $ 18,701.02, and bore the words "Stock Purchase" on its face. The second December check was in the amount of $ 15,313.85, and carried the words "On Account Bonus $ 18,905.99, Less: Withholding Tax $ 3,592.14, Net $ 15,313.85" on its face. The check dated January 3, 1947, was for $ 10,557.78, and bore the words "In full payment of all claims $ 13,034.29, Less: Withholding Tax $ 2,476.51, Net $ 10,557.78" on its face. 1954 U.S. Tax Ct. LEXIS 138">*149 Upon receipt of the December 28, 1946, 22 T.C. 945">*950 check for $ 15,313.85, petitioner signed a release, of even date, protesting the withholding of $ 3,592.14, but reciting that in consideration of the payment to him by Interstate of the sum of $ 18,905.99, he thereby released "said company, all of its past and present officers, directors and stockholders, Samuel Bergstein, Robert Bergstein and Frank Bergstein in both their fiduciary and beneficiary capacities in any and all trusts with which they are, or have been connected, said trusts and any and all corporations, with which said individuals have or have had any interest or connection from any and all * * * [his] claims for a bonus and any and all other claims arising out of * * * [his] former association with said Interstate Folding Box Company as an employee, stockholder, officer, and director." Under date of January 3, 1947, petitioner signed a further document, in which it was stated, "I hereby finally and completely release said company" from bonus and any and all other claims. It was recited that this latter release was in consideration of the payment of $ 13,034.29, and as in the case of the release of December 28, 1946, 1954 U.S. Tax Ct. LEXIS 138">*150 the withholding of tax was protested.
On December 28, 1946, but as of July 31, 1946, entries were made on Interstate's books to reflect the settlement which had been effected between petitioner and Interstate. $ 18,701.02 was charged against surplus as the amount paid for the 100 shares of stock, and the remaining $ 31,940.28 was charged to administrative expenses as covering the bonus. The balancing entry to the charge of $ 31,940.28 was a credit in that amount to petitioner's salary account. The basis for allocating the settlement payments according to subject matter was determined and agreed upon between the attorneys for both sides of the controversy and that determination supplied the basis for the entries which were made on Interstate's books.
Petitioner's attorneys endorsed and cashed the three checks from Interstate, and after deducting $ 3,352 as attorneys' fees for the services which had been rendered, remitted the amounts remaining to petitioner.
The check dated January 3, 1947, was drawn and so dated at the sole instigation and request of petitioner's attorneys. At December 28, 1946, Interstate had $ 100,000 on deposit in the First National Bank of Cincinnati, the bank1954 U.S. Tax Ct. LEXIS 138">*151 on which the checks were drawn. On January 3, 1947, when the last check was drawn, it had $ 53,683.25 on deposit in the said bank.
Of the $ 18,905.99 covered by the December 28, 1946, check for $ 15,313.85 and the $ 3,592.14 withheld by Interstate as the tax thereon, petitioner, on his 1946 income tax return, reported $ 8,905.99 as "Bonus due me" and excluded the remaining $ 10,000 as an amount due him "for damages arising out of an assault case." Interstate, in an information 22 T.C. 945">*951 return, reported as total wages paid to petitioner in 1946, $ 24,514.74, which amount included the full $ 18,905.99 referred to. In his 1946 return petitioner also reported the sale of 100 shares of Interstate stock for $ 18,710, the gain realized as $ 8,710, and the gain "to be taken into account" as $ 4,355. In arriving at his 1946 net income, as reported, petitioner deducted under the heading "Miscellaneous Deductions" the full amount of the $ 3,352 fee paid to Nichols, Wood, Marx, and Ginter, describing the amount as having been paid "for collecting wages -- bonus & payment on stock from Interstate Folding Box Co."
In his 1947 income tax return, and under the heading "wages, salaries, bonuses, 1954 U.S. Tax Ct. LEXIS 138">*152 commissions, and other compensation received in 1947," petitioner reported $ 13,034.29 as having been received from Interstate, that amount being the sum of the final payment of $ 10,557.78 made on January 3, 1947, on his lump-sum settlement with Interstate, plus the $ 2,476.51 withheld as tax by Interstate.
Respondent, in his determination of the deficiency herein, included as a part of petitioner's compensation received in 1946, the $ 10,000 which petitioner had excluded on his 1946 return as "damages arising out of an assault case." He also included as constructively received in 1946 the $ 13,034.29 balance of the lump-sum settlement, the actual payment of which was effected by Interstate's check of January 3, 1947, for $ 10,557.78 and the withholding for income tax in the amount of $ 2,476.51.
Of the fee of $ 3,352 paid by petitioner to his attorneys, Nichols, Wood, Marx, and Ginter, $ 1,237.84 was paid for services connected with the sale by petitioner of the 100 shares of Interstate stock.
OPINION.
Under the provisions of section 22 (b) (5) of the Internal Revenue Code, 3 the amount of any damages received on account of personal injuries is specifically excluded from gross 1954 U.S. Tax Ct. LEXIS 138">*153 income. Petitioner has alleged that the president of Interstate, Samuel Bergstein, physically assaulted him in the presence of various company employees, an event which he claims seriously damaged him in his trade or business; that $ 10,000 of the above settlement was received as 22 T.C. 945">*952 damages on account of such injuries; and that respondent, in making his determination, has erred in including the said amount as taxable income.
1954 U.S. Tax Ct. LEXIS 138">*154 As to whether an assault actually occurred, as alleged, the testimony is in direct conflict. The petitioner testified that he was assaulted by Samuel Bergstein, whereas Bergstein testified that there was no assault; and although petitioner testified further that the assault was in the presence of witnesses, he did not call any of them to corroborate his story. From the testimony as we heard it, we are neither convinced nor persuaded that there was an assault as alleged, and even if there was, the proof does not show that any part of the settlement was in payment of damages on account thereof. Petitioner attended only the first and the last conferences having to do with the settlement of his claims, and he has admitted his own inability to state what transpired at the negotiation meetings. The attorney who represented petitioner in the settlement negotiations had died prior to the trial herein, and we do not have the benefit of his testimony. And while there is some indication of record that at least on one occasion a second attorney appeared in petitioner's behalf, no such attorney was called to testify. Council for Interstate did testify and while he did remember that negotiations1954 U.S. Tax Ct. LEXIS 138">*155 were had concerning the acquisition of petitioner's Interstate stock and that petitioner's original bonus claim was for "a very fantastic sum," he could recall no claim for damages by reason of any assault. Furthermore, while we note specific reference to the stock purchase and the bonus claim on the checks issued in payment of the settlement amount agreed to and in the releases signed by petitioner, there is no mention of any claim for damages on account of the assault, or of an allowance therefor. The evidence not only does not establish, but tends to refute, petitioner's claim that $ 10,000, or any part, of the lump-sum settlement between him and Interstate was received by him as damages for assault. His claim with respect thereto is accordingly denied.
Petitioner's second allegation of error is that the respondent erroneously included in taxable income for 1946, as constructively received in that year, that part of the settlement, $ 13,034.29, which was not in fact actually paid to him until 1947.
As a general rule, there must be actual receipt of income in the case of a taxpayer reporting on a cash basis of accounting before income tax liability with respect thereto is incurred. 1954 U.S. Tax Ct. LEXIS 138">*156 An exception to this rule is found in the theory, or doctrine, of constructive receipt, which treats as taxable that income which is unqualifiedly made subject to the demand of the taxpayer, whether or not such income is actually reduced to possession. Regs. 111, sec. 29.42-2. In short, a taxpayer may not avoid the tax by turning his back on income which is available to him and may be taken by him at will. Hamilton Nat. Bank of Chattanooga, 22 T.C. 945">*953 , 29 B. T. A. 63. For the converse of this case, see Walter I. Bones, 4 T.C. 415. Compare Hedrick v. Commissioner, 154 F.2d 90.
Petitioner and Interstate, through their respective counsel, arrived at the final settlement of $ 50,641.30 for bonus and stock not later than December 28, 1946. The record amply shows that Interstate was ready, able, and willing to pay the full amount of the settlement at that time, and there is nothing to indicate that from its standpoint any purpose would be served or any advantage would inure to it by not doing so. Interstate regularly kept its books of account and reported its income on the1954 U.S. Tax Ct. LEXIS 138">*157 basis of a fiscal year ending July 31, and tax-wise, the result would have been the same if the settlement had been paid in full in December of 1946, January of 1947, or partly in one month and partly in the other. Furthermore, there is no indication, money-wise, that it was of any moment to Interstate whether the payment was made in full in December or in January, or divided between the two months. The payments were not made through the bank in Middletown regularly used by Interstate in its day-to-day operations, but through a bank in Cincinnati, and in which funds sufficient for making the payment in full were on deposit and had been since November 30, 1946. Looking at the other side of the picture, it is to be noted that the payment of the $ 13,034.29 was postponed from December 1946, to January 3, 1947, solely at the request of petitioner's counsel. Such being the record on the matter, we are of the opinion and hold that the said $ 13,034.29 was constructively received by petitioner in 1946, and that the respondent did not err in including the amount in petitioner's gross income for that year.
By amended answer, filed at the trial herein, it is the claim of the respondent 1954 U.S. Tax Ct. LEXIS 138">*158 that $ 1,237.84 of the fees paid by petitioner to his attorneys in negotiating and collecting the amount of the above settlement was an expense in the sale of petitioner's Interstate stock and therefore an offset against the selling price in determining the amount of capital gain realized thereon, and not therefore deductible against gross income. By reply, belatedly filed, and in a proposed computation of tax attached as Appendix B to his brief, petitioner seemingly accepts respondent's claim in principle, but does have some points of difference as to the ratio by which the portion of the fees allocable to the stock sale should be computed. While the proposed computation is not clear, there is some indication that the results under the respondent's claim may be the more favorable to petitioner. In any event, we have found on the evidence that $ 1,237.84 of the amount paid to the attorneys was for services in connection with the sale by petitioner of his Interstate stock, leaving any mathematical differences which may exist between the parties to be resolved in the computations hereunder.
Decision will be entered under Rule 50.
Footnotes
*. With respect to the 1939 purchase, the date shown was July 31, 1939.↩
1. The amounts so used as the starting point for the bonus computation were in all instances at variance with the amounts appearing on Interstate's annual audit statements as its net profits before taxes, and as to such variances, there is no explanation.↩
2. According to Interstate's auditor's report for the year ended July 31, 1946, Grand Avenue Building Corporation was incorporated on February 24, 1945, and owned a warehouse building in Middletown, Ohio, part of which was rented to outside tenants and the balance of which was used by Interstate for storage purposes. According to petitioner's testimony, the warehouse building had been purchased by and belonged to Interstate, but title had been carried in the name of a member of the Bergstein family and there had not been a proper accounting to Interstate for the rent which had been paid by the outside tenants.↩
3. SEC. 22. GROSS INCOME.
(b) Exclusions From Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
* * * *
(5) Compensation for injuries or sickness. -- Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 23 (x)↩ in any prior taxable year, amounts received through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness, and amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country;