Dall v. Commissioner

Curtis B. Dall, Petitioner, v. Commissioner of Internal Revenue, Respondent Dall v. Commissioner Docket No. 35276 United States Tax Court 23 T.C. 580; 1954 U.S. Tax Ct. LEXIS 5; December 31, 1954, Filed *5 Decision will be entered for the respondent. Petitioner commenced a derivative stockholder's suit against Tennessee Gas and Transmission Company in a United States District Court on April 23, 1945. He proposed a settlement of the action which was accepted and was approved by the District Court on January 15, 1946. Such settlement provided that petitioner would receive 140.5 shares of stock to compensate him for expenses incurred in prosecuting the suit and to be incurred by him in implementing a natural gas purchase contract. Petitioner received stock having a value of $ 15,235.42 pursuant to the above-described settlement, which he seeks to report under the provisions of section 107 (a) of the 1939 Code. Held, the stock received by petitioner was not for personal services rendered and, hence, does not qualify as compensation reportable under section 107 (a). Alexander Kahan, Esq., for the petitioner. Max J. Hamburger, Esq., for the respondent. Rice, Judge. RICE *580 This proceeding involves a deficiency in income tax in the amount of $ 8,664.46 for the year 1946 determined against Curtis B. Dall (hereinafter referred to as the petitioner). The only issue*6 to be decided is whether petitioner is entitled to report taxable income in the amount of $ 15,235.42, received by him in 1946, as compensation for personal services rendered over a 36-month period within the meaning of section 107 (a) 1 of the Internal Revenue Code of 1939. Petitioner conceded other issues which he originally had contested. *7 FINDINGS OF FACT. Petitioner was a resident of San Antonio, Texas, for a part of 1946, and filed his return for that calendar year on the cash basis with the collector of internal revenue for the first district of Texas. Petitioner and others organized the Tennessee Gas and Transmission Company (hereinafter referred to as Tennessee) under the laws of the State of Tennessee on April 1, 1940. Petitioner was a stockholder, a director, and was its president until September 20, 1943. *581 Petitioner received a commission as an officer in the United States Army Air Corps and entered on active duty July 1, 1942. His service therein was continuous until the expiration of his terminal leave on February 24, 1946. From the time he began active military service, until his resignation as Tennessee's president on September 20, 1943, petitioner received a nominal salary of $ 100 per month. During such period petitioner assisted, to the extent that such spare time as he had would permit, the successful prosecution of Tennessee's application for a certificate of public convenience and necessity before the Federal Power Commission. In September 1943, the Chicago Corporation (hereinafter referred*8 to as Chicago) made a written offer to purchase Tennessee. A meeting of Tennessee's directors and stockholders was held in Chattanooga, Tennessee, on September 20, 1943. Incident to the sale, three of Tennessee's directors were issued 29,390 shares of its common stock. Petitioner strongly opposed such action. He resigned as president and as a director of the company. On April 23, 1945, petitioner instituted a derivative stockholder's suit in the United States District Court for the Northern District of Illinois, Eastern Division (hereinafter referred to as the District Court), against Tennessee and certain named individuals who were its then or its former directors. Petitioner's complaint alleged that on September 20, 1943, 29,390 shares of Tennessee's common stock were illegally, improperly, wrongfully, and inequitably voted and issued to certain of the named defendants. The complaint further alleged that on August 24, 1942, and January 18, 1943, common and preferred shares of Tennessee's stock were issued without any legal consideration therefor. The complaint prayed that the allegedly illegally issued shares be canceled; that the named individual defendants be made to account*9 to Tennessee for any damage to it by the issuance of such shares; and that petitioner have such other and further remedy as the court should deem proper. Negotiations for a settlement of the suit culminated in the following proposal by petitioner to Tennessee: 1 (a) I will execute and deliver to your Company a general release of any and all claims which I may have against the Company. 1 (b) Subject to Court approval, on the basis of the terms of this settlement, I will cause the action now pending in the United States Court for the Northern District of Illinois, Eastern Division, to be fully discontinued. 1 (c) I will join with you in approving such appropriate corporate action (through the vote of any stock that I may own or control) as may be necessary in your opinion to cure any defect in or cloud upon any shares of common stock of your Company which have been thus far issued, and to that end will grant irrevocable proxy to such person as you may designate to vote my stock for such purpose. *582 2. Upon the happening of all of the events set forth in paragraphs 1 (a), 1 (b), and 1 (c) above: (a) You will enter into an agreement with me in the form of the letter attached hereto, *10 in which you will undertake to execute a gas purchase contract with me, or my nominee, on the conditions therein stated. (b) You will provide payment for my attorney in the sum of $ 25,000 as and for compensation for all legal services and expenses rendered in the litigation entitled Dall, etc. vs. Wagner, et al. and in connection with my undertaking to take steps to procure the additional quantities of natural gas for your Company hereinabove referred to. Such payment shall be made to Alexander Kahan, Esq., 30 Broad Street, New York, for account of all attorneys, etc., who are entitled to share therein. (c) The defendant stockholders in the action now pending entitled Dall, etc. vs. Wagner, et al. will cause to have delivered to me or my nominee, or set aside for me in 1945, 140.5 shares of the present common stock of Tennessee Gas and Transmission Company, in further reimbursement of all expenses thus far incurred by me in the litigation entitled Dall, etc. vs. Wagner, et al., and to be incurred by me in connection with the procuring of the quantities of natural gas for your Company hereinabove referred to in paragraph 2 (a). If the foregoing meets your approval, please indicate*11 your consent on the line provided below. I understand that this settlement will be submitted by you to the common stockholders of the Company and that your consent thereto is subject to the ratification thereof by all of such stockholders or such lesser number as you may approve. At a special meeting on January 8, 1946, Tennessee's stockholders approved the proposed settlement, and on January 15, 1946, the District Court ordered the cause dismissed with prejudice. Pursuant to the settlement agreement petitioner received, from the defendant stockholders, stock having a fair market value of $ 15,235.42. Some of the shares were sold immediately to his attorney for $ 9,165.82. The attorney received payment of $ 25,000 upon the entry of the District Court's order. On his income tax return for 1945, petitioner reported $ 9,254.90 as "Settlement of law suit." He reported no additional amount received in 1946 on his return for that year. Also on his return for 1945, petitioner deducted expenses "re law suit" of $ 727. On his return for 1946, he deducted expenses of $ 3,825.60 incurred in implementing natural gas contracts. The respondent allowed the deduction of the expenses claimed*12 for both years. In the deficiency notice, respondent determined that petitioner had erroneously reported $ 6,069.60, as the fair market value of stock received in settlement of the suit, on his return for 1945. He further determined that that amount plus the cash received in the amount of $ 9,165.82 should have been reported by petitioner on his return for 1946. He accordingly determined an overassessment for 1945 and the deficiency here in issue for 1946. *583 Petitioner received taxable income of $ 15,235.42 in 1946, the entire amount of which he should have included as income in his return for that year. OPINION. Petitioner concedes that the entire amount which he received pursuant to the settlement of his suit against Tennessee and certain of its directors was taxable income. He contends, however, that he is entitled to report such amount under the provisions of section 107 (a) of the 1939 Code. The respondent argues that the petitioner has failed to bring himself within the specific requirements of that section. It is apparent from our findings of fact herein that the petitioner has so failed. The essential fact which the petitioner has not established is that stock *13 having a fair market value of $ 15,235.42, received by him in 1946, was compensation for personal services. To the contrary, the record shows that the stock received was reimbursement for expenses incurred in prosecuting the derivative stockholder's suit and advances against expenses which petitioner expected to incur in implementing the natural gas purchase contract. The proposed settlement offered by petitioner provided for the receipt of Tennessee stock "in further reimbursement of all expenses thus far incurred by me in the litigation entitled Dall, etc. vs. Wagner, et al., and to be incurred by me in connection with the procuring of the quantities of natural gas for your Company * * *." Petitioner's counsel stated at the hearing that the payment in question was "to reimburse him [petitioner] for his disbursements that he had incurred, which amounted to approximately $ 10,000, up to that time, in the prosecution of these questions, in and out of court, and a $ 25,000 payment to me as counsel." Counsel further stated, "[This payment], or whatever one chooses to call it, was not a recovery of a judgment. If one wants to view it as compensation, one may do so. If one wants to *14 view it as an advance against his disbursements to implement the gas contract, one can do so. If one wants to view it as part reimbursement of the cost of prosecuting the operation, the investigation and litigation of the common stock structure, one can do so." We do not agree that the payment received can be optionally viewed under the above-described categories. Clearly the payment was, in fact, a reimbursement for past expenses and an advance against future expenses. It, therefore, does not qualify under the specific requirements of section 107 (a). To avail himself of the benefits of that section, a taxpayer must bring himself within the letter of the congressional grant; that, the petitioner here has not done. See Guy C. Myers, 11 T.C. 447 (1948). *584 The only cases which he cites in support of his position -- E. A. Terrell, 14 T.C. 572 (1950), and Love v. United States, 85 F. Supp. 62 (E. D., Mo., 1949) -- are very obviously distinguishable on their facts from those before us here. In the Terrell case, a corporation's president successfully prosecuted a claim over*15 a period of several years in behalf of the corporation against a third party. The corporation's directors formally resolved that his regular compensation as president was inadequate for the additional services rendered and voted him $ 29,996.67 of additional compensation for his services in connection with the claim. We held that such additional compensation was taxable under section 107 (a). In the Love case, the taxpayer performed services in behalf of a corporation in prosecuting extended litigation against the United States, in addition to other services which he performed for the corporation. He received compensation for his personal services in connection with the litigation, and the court allowed that income to be reported under section 107 (a). The essential element present in those cases, but absent here, is that the amounts received by the taxpayers there were for personal services rendered -- not as reimbursement for expenses incurred or advances against future expenses to be incurred as was the payment to petitioner here. The respondent also argued that the period over which the petitioner claims to have rendered alleged services was not 36 months or more as specifically*16 required by the Code. Our conclusion that the amount received by petitioner was not for personal services makes it unnecessary for us to decide that question. However, if we are wrong in that conclusion and the services rendered by the petitioner were personal services for which the payment was received, he has failed to show that such services extended over the required statutory period. Petitioner's testimony as to his concern that there were irregularities in the issuance of Tennessee's common stock prior to September 1943, scarcely could be held to constitute the commencement of "personal services" within the meaning of the statute. He was Tennessee's president, a director, and a large stockholder and should have been concerned if his fears were well founded. But what he has not shown is that he, personally, undertook to do anything actively to correct such irregularities as he imagined existed. He also testified that during his military service in Washington, D. C., he assisted, as time would permit, in carrying on the work of the company. But it is clear from the record that such efforts as he expended were to assist in securing a certificate of public convenience and*17 necessity for Tennessee from the Federal Power Commission. The only active effort petitioner made, which was directly related to the payment he received in 1946, commenced after September 20, *585 1943. The exact dates on which he received the shares of stock were not shown. The suit was settled on January 15, 1946, however, which ended the period over which any such services could have been rendered; thus the span of time concerned is less than the 3 years required by the Code. Decision will be entered for the respondent. Footnotes 1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY. (a) Personal Services. -- If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.↩