Deupree v. Commissioner

Richard R. Deupree, Petitioner, v. Commissioner of Internal Revenue, Respondent Deupree v. Commissioner Docket No. 109182 United States Tax Court 1 T.C. 113; 1942 U.S. Tax Ct. LEXIS 29; November 24, 1942, Promulgated *29 Decision will be entered for respondent. The board of directors of a corporation, of which petitioner was president, had in a prior year established a five-year plan for additional remuneration to certain executives and employees of the company, including petitioner. In the taxable year, in accordance with the plan, such a fund was established out of profits and petitioner was entitled to participate in its distribution. Out of the amount which petitioner was entitled to receive he directed the company to use $ 50,000 in the purchase of a single premium annuity policy payable to petitioner, which was done and the policy was delivered to him. Held, the $ 50,000 was constructively received by petitioner in the taxable year and was taxable income to him. F. F. Dinsmore, Esq., for the petitioner. DeWitt M. Evans, Esq., for the respondent. Black, Judge. Smith and Mellott, JJ., concur only in the result. Van Fossan, J., dissenting. BLACK *114 The Commissioner has determined a deficiency of $ 32,819.67 in petitioner's income tax for the year 1938. This deficiency is due to three adjustments which the Commissioner made to the net income as disclosed *30 by the return filed by petitioner. These adjustments were: Unallowable deductions and additional income: (a) Compensation $ 50,000 (b) Expenses 2,000 (c) Contributions [100] Petitioner does not contest the correctness of adjustments (b) and (c). The Commissioner in his deficiency notice explained adjustment (a) as follows: During the year 1938 you received from The Procter & Gamble Company as additional compensation for personal services cash in the amount of $ 50,000.00, and/or an annuity contract issued by the Connecticut General Life Insurance Company at a cost to the company of $ 50,000.00. In accordance with the provisions of section 22 (a) of the Revenue Act of 1938, your gross income has been increased by the amount of $ 50,000.00 to reflect the receipt of such income. The petitioner by an appropriate assignment of error contests the correctness of adjustment (a). FINDINGS OF FACT. Petitioner is an individual, residing in Cincinnati, Ohio, and filed his income tax returns for the year 1938 with the collector for the first district of Ohio at Cincinnati, Ohio. Petitioner was at all times herein mentioned the president and a director of the Procter & Gamble Co., *31 a corporation organized and existing under the laws of the State of Ohio. In 1938 he had been an employee of the company for 33 years. The Procter & Gamble Co. will sometimes hereinafter be referred to as the company. On June 12, 1934, the board of directors of the Procter & Gamble Co. adopted a resolution as follows: Resolved that the following plan for special remuneration of some of the executives who are largely responsible for, and certain other employees who contribute to the success and development of the business of The Procter & Gamble Company and Subsidiary Companies, by providing for additions to their compensation based upon a percentage of the consolidated annual net profit of the Companies, be and the same is hereby adopted as follows: 1. This plan shall be effective for a period of five (5) consecutive years, commencing July 1, 1934. 2. At the end of each fiscal year there shall be set aside in the special remuneration fund an amount not in excess of three percent (3%) of the *115 consolidated net profit of the Companies, conditional upon there being left at least Fourteen million Dollars ($ 14,000,000.00) of net profit after deducting said amount. 3. The said*32 fund or any part thereof, shall be available during the period referred to in Paragraph 1, at the discretion of the President of The Procter & Gamble Company, for the special remuneration of executives who are largely responsible for, and certain other employees who contribute to the success and development of the business. 4. The details of the accounting to determine the consolidated net profit of the Companies shall be exclusively in charge of the officers of The Procter & Gamble Company, subject to approval or modification by this Board, and no person who may, at any time, be selected to share in the fund provided for in Paragraph 2 hereof, shall have any right to question any item entering into the accounting in the determination of consolidated net profit. 5. At the end of each fiscal year the President of The Procter & Gamble Company shall determine the persons to receive additional compensation out of said fund, and the amount to be paid to each, subject to this proviso, that this Board shall determine to what extent, if any, the President of The Procter & Gamble Company shall share in the distribution of the fund. 6. While the amount received by any individual for any year*33 under this resolution shall be considered as earned remuneration in addition to salary paid, it shall be understood that this plan does not give to any employee or executive any contract rights against any Company for the distribution of the fund or for compensation in addition to the salary paid to him. On July 6, 1937, the above resolution was amended by the board of directors of the Procter & Gamble Co. as follows: Resolved, that Paragraph 5 of the Resolution providing for a five-year-plan for special compensation for some of the Executives of the Company who are largely responsible for, and certain other employees who contribute to the success and development of the business adopted by this Board at its meeting held June 12, 1934, as the same appears in Volume 3, Pages 399 and 400, of the Minutes of this Board, be amended so as to read as follows: At the end of each fiscal year the President of The Procter & Gamble Company shall determine the persons to receive additional compensation out of said fund, and the amount to be paid to each. The President also shall be entitled to share in the distribution of the fund, and shall receive an amount equal to fifteen percent (15%) *34 thereof, but in no event to exceed one hundred thousand Dollars ($ 100,000.00) for any fiscal year, and this share shall be paid to him without further action of this Board. Further Resolved, that this amendment to Paragraph 5, of said Resolution shall be effective for the fiscal year ended June 30, 1937, and for the remaining fiscal years covered by the original Resolution. In the years 1935, 1936, and 1937 bonuses were paid in cash by the company to the petitioner out of the fund provided under the foregoing resolution. At the direction of the petitioner, the company on or about August 9, 1938, purchased and delivered to the petitioner, at a cost to it of $ 50,000, one certain special single premium retirement annuity contract of the Connecticut General Life Insurance Co. The cost of the annuity contract was paid out of the fund established *116 in accordance with the resolutions set forth above. The cost of the annuity contract was deducted from income as a business expense by the company in its income tax returns for the period during which the contract was purchased. The amounts of salaries, cash bonuses, and annuity contracts delivered to the petitioner over the period*35 1936 to 1938, inclusive, are as follows: Annuity Year Salary Cash bonus contracts Total [1936] $ 100,000 $ 100,000 $ 200,000 [1937] 100,000 100,000 200,000 [1938] 100,000 20,805 $ 50,000 170,805 The cost to the company of the special single premium retirement annuity contract was fair and reasonable and substantially equal to the cost of duplication of the same contract with the same company under the same circumstances. The Connecticut General Life Insurance Co. will not accept the surrender of said special single premium retirement annuity contract and pay any money to petitioner therefor. The annuity contract was labeled "Special Single Premium Retirement Annuity with Income Settlements at Optional Ages Non-Participating." The insurance company agreed to pay in monthly installments a definite "life income," commencing on the petitioner's seventieth birthday. If he should die after that day but before he received 120 monthly payments, the remainder thereof was to be paid serially to his beneficiary. Prior to the annuity date, the annuitant might elect to receive a life income with or without a "Ten-years Certain" feature. If the annuitant should*36 die during the continuance of the contract the company agreed to pay to his designated beneficiary (or survivor) a certain sum as a "death benefit." During the first three years that sum is the amount of the premium or consideration paid for the contract and thereafter it is the amount of such consideration plus an interest surcharge. The right to change the beneficiary was reserved to the annuitant. The contract also provided: Assignment. All payments hereunder are for the support and maintenance of the Annuitant or Beneficiary, as the case may be. Neither this contract nor any payment hereunder may be assigned; and the contract and all payments shall be free from the claims of all creditors to the fullest extent permitted by law. In taking out the annuity contracts for petitioner and certain other of its employees, that of petitioner being at his own direction, the company considered that it was not only good business, but a recognition *117 of its moral obligation, to make the future of certain of its important officials and employees secure from want. The company wished to test the advantages to the company, as well as to the employees, of retirement allowances in the *37 nature of pensions, the chief feature of which was to be personal to the employee so that his rights could not be assigned, nor could he surrender his rights and obtain any present consideration. Upon investigation it found that there was no insurance company that (then) wrote such a contract, but that the Connecticut General Life Insurance Co., at least in one instance, had written such a contract for another manufacturing company and its employees. Accordingly, the matter was taken up with that life insurance company as the only one that would write a contract with the provisions therein acceptable to the company. The nonassignability of the contract and the absence of any provision of a cash surrender value were essential features, without which the company would not have been interested in obtaining the contract. In regard to the transaction, the petitioner reported on his income tax return for 1938 as follows: The Procter & Gamble Company paid (during 1938) $ 50,000.00 to the Connecticut General Life Insurance Company for an annuity starting at age seventy. This amount is not included in the salary here reported. The foregoing facts have been found from a stipulation of facts*38 filed by the parties and from an agreement of what Richard R. Deupree would testify if he were called as a witness and testified. Any part of the stipulated facts omitted herein, except certain stipulated facts as to the year 1939, are made a part of these findings of fact and are incorporated herein by reference. OPINION. In the stipulation of facts which was signed by the parties there was embodied this language: "this stipulation or any portion thereof may be offered in evidence in the trial of this cause by either party with the same force and effect as if the same were duly proved by the testimony of witnesses, reserving to each party the right to question the admissibility and relevancy of any fact admitted herein * * *." When the stipulation was presented at the hearing petitioner objected to paragraphs 3 and 4 thereof and also objected to that part of paragraphs 5 and 6 which included any reference to the year 1939. The ground of the objection was that the facts therein stated were not relevant and material to any issue in controversy. With the approval of the presiding Member, the argument in reference to the objections above stated was to be presented in the *118 *39 brief of petitioner and the admissibility of such evidence was then to be ruled upon. Paragraph 3 of the stipulation of facts contains a copy of a resolution of the board of directors of the Procter & Gamble Co. passed on June 12, 1934, and paragraph 4 contains an amendment of that resolution passed by the board of directors on July 6, 1937. Petitioner in his brief states his objections to the introduction in evidence of these resolutions, which objections in substance are that the origin of the funds used by the Procter & Gamble Co. for the purchase of the annuity contracts is entirely immaterial and irrelevant. We do not agree to the soundness of this objection and, therefore, we overrule it. Accordingly, the resolutions are admitted in evidence and have been incorporated in our findings of fact herein. Petitioner's objection to the inclusion of the year 1939 in paragraphs 5 and 6 of the stipulation of facts is based upon the fact that the deficiency involved in this proceeding is for the taxable year 1938 and petitioner contends that whether an annuity contract was bought by the Procter & Gamble Co. for the petitioner in the year 1939 and any cash payments were made to petitioner*40 in the year 1939 is irrelevant and immaterial to any issue in this proceeding. We think this objection is sound. The taxable year 1938 is the year which we have before us and no good reason appears as to why similar action taken by the Procter & Gamble Co. in 1939 with respect to bonuses and annuity contracts paid to petitioner as additional compensation would throw any light as to what our decision should be on the issue involved in this proceeding. Accordingly, that part of the stipulation of facts which refers to cash bonuses paid and the annuity contract purchased for petitioner by the company in 1939 is excluded from evidence and we have omitted any reference to 1939 in our findings of fact. In his determination of the deficiency, the Commissioner relied upon section 22 (a) of the Revenue Act of 1938. That section reads in part as follows: SEC. 22. GROSS INCOME. (a) General Definition. -- "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, * * * There is of course no question but that if the $ 50,000 involved in this proceeding had been paid to petitioner in cash, *41 he would have been taxable thereon. Petitioner concedes that fact. He contends, however, that the $ 50,000 was not paid to him in cash, but that instead the company purchased an annuity policy for him and used the $ 50,000 to pay the lump sum premium for the contract and delivered to him the annuity contract and not $ 50,000 in cash and that the annuity contract had no fair market value and no realizable value and *119 hence petitioner was not in receipt of the $ 50,000 income with which he is charged in the deficiency notice. It is not the contention of Commissioner that petitioner actually received the $ 50,000 in cash from the company, but that it was constructively received by him and that he is taxable thereon just the same as if it had been directly paid to him. If the Commissioner is correct in this contention, then there is no need to consider other questions raised such as the lack of any fair market value or realizable value of the annuity contract because of its nonassignability and lack of any cash surrender value. Paul and Mertens, in their Law of Federal Income Taxation, vol. 1, sec. 9.02, in discussing the underlying idea of the doctrine of constructive receipt, *42 among other things, say: It has been suggested that the simplest cases of constructive receipt are those in which "(1) the taxpayer is immediately entitled to money; (2) the money is immediately available to him; and (3) his failure to receive it in cash is due entirely to his own volition." * * * Measured by the above description of what constitutes constructive receipt, what are the facts present in the instant case which bring petitioner within the ambit of the doctrine? These facts, as we glean them from the record are: On June 2, 1934, the board of directors of the Procter & Gamble Co. adopted a resolution for a five-year plan of additional compensation to certain of its executives and employees who were regarded as being largely responsible for the success of its business. The president of the company, who was petitioner, was to determine the persons who were to receive this extra compensation, except the board of directors itself was to determine to what extent, if any, the president of the company should participate in the distribution of the fund. By an amendment to the resolution of June 12, 1934, which was adopted July 6, 1937, it was provided, among other things: * * *43 * The President also shall be entitled to share in the distribution of the fund, and shall receive an amount equal to fifteen percent (15%) thereof, but in no event to exceed one hundred thousand Dollars ($ 100,000.00) for any fiscal year, and this share shall be paid to him without further action of this Board. Thus it will be seen that petitioner's right to participate in the extra compensation fund, which was at first made contingent upon affirmative action by the board of directors, was by the amendment adopted July 6, 1937, made absolute without any further action upon the part of the board of directors. In the taxable year 1938 there was established a fund in accordance with the resolutions set forth above and out of this fund the petitioner was entitled to receive his portion in cash, and out of his portion the company purchased an annuity contract for petitioner *120 and paid $ 50,000 therefor. As to the purchase of this annuity contract the stipulation of facts reads: At the direction of the petitioner the Procter & Gamble Company on or about August 9, 1938 purchased and delivered to the petitioner at a cost to it of $ 50,000.00, one certain special single premium retirement*44 annuity contract of the Connecticut General Life Insurance Company, * * * The resolutions which were adopted by the board of directors, incorporated in our findings of fact, providing for the setting up of a special fund to pay additional compensation to certain of the executives and employees of the company, including its president, did not make any mention of the purchase of annuity contracts as a part of the plan. The record shows that the decision to make the purchase of annuity contracts a part of the plan was one wholly made by petitioner, acting in his capacity as president of the company. So far as the record shows, the board of directors of the company had nothing to do with this feature of the plan. Therefore, it seems plain that petitioner's failure to receive $ 50,000 in cash instead of an annuity policy costing $ 50,000 was due entirely to his own volition. Under such circumstances we think the doctrine of constructive receipt applies. Paul and Mertens, vol. 1, sec. 9.12, states: * * * One of the leading examples of income constructively received is furnished by transactions in which items of income (the proceeds of the sale of property or compensation for services*45 rendered or some other type of income) are paid to a third party designated by the taxpayer. * * * The Supreme Court, in the leading case of Corliss v. Bowers, 281 U.S. 376, among other things, said: * * * The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not. * * * In the instant case the $ 50,000 additional compensation was not only at petitioner's unfettered command, but he saw fit to enjoy it by directing Procter & Gamble to purchase for him an annuity contract costing $ 50,000. It seems to us that this income was, at his own direction, just as effectively used for petitioner's benefit as if it had been paid over to him and he had purchased directly the annuity policy from the insurance company. In contending that the doctrine of constructive receipt should not be applied in the instant case, the petitioner cites and strongly relies upon A. P. Giannini, 42 B. T. A. 546; affd., 129 Fed. (2d) 638. We think that case is clearly distinguishable on its facts. Facts which, *46 we think, distinguish the Giannini case from the instant case were stated by the Circuit Court in its opinion affirming the Board of Tax Appeals, as follows: Now, turning again to the instant case. The findings of the Board, supported by the evidence, are to the effect that the taxpayer did not receive the *121 money, and that he did not direct its disposition. All that he did was unqualifiedly refuse to accept any further compensation for his services with the suggestion that the money be used for some worth while purpose. So far as the taxpayer was concerned, the corporation could have kept the money. All arrangements with the University of California regarding the donation to the Foundation were made by the corporation, the taxpayer participating therein only as an officer of the corporation. In the instant case the petitioner not only did not refuse to accept the $ 50,000 as additional compensation, but he directed that it be used in the purchase of the annuity contract which was delivered to him. These facts, it seems to us, clearly distinguish the instant case from the Giannini case and justify the taxation of the income in question to petitioner. Decision*47 will be entered for respondent. VAN FOSSAN Van Fossan, J., dissenting: I respectfully dissent. I do not regard this as a proper case in which to apply the doctrine of constructive receipt.