Faul v. Commissioner

Elmer J. Faul and Sybell E. Faul, Petitioners, v. Commissioner of Internal Revenue, Respondent Faul v. Commissioner Docket No. 56541 United States Tax Court 29 T.C. 450; 1957 U.S. Tax Ct. LEXIS 24; December 12, 1957, Filed *24 Decision will be entered for the respondent. An informer's award of $ 68,837.96 did not qualify for treatment under section 107 (a), I. R. C. 1939, since services leading to award did not extend over a 36-month period. Francis Heisler, Esq., for the petitioners. Edward H. Boyle, Esq., for the*25 respondent. Van Fossan, Judge. VAN FOSSAN *450 Respondent determined a deficiency of $ 18,350.23 in petitioners' joint return for the taxable year 1952. The only question presented is whether an informer's award received by petitioner Elmer J. Faul qualifies for treatment under section 107 (a), I. R. C. 1939. FINDINGS OF FACT. Some of the facts were stipulated and are incorporated herein by this reference. Petitioners Elmer J. Faul and Sybell E. Faul, formerly husband and wife, were divorced after the filing of the petition in this case. Elmer J. Faul (hereinafter sometimes referred to as Faul) now resides in San Francisco, California. Sybell E. Faul (hereinafter sometimes referred to as Sybell) resides in Carmel, California. Petitioners filed their joint income tax return for the year 1952 with the district director of internal revenue, San Francisco, California. From approximately February 1941 to March 1946 Faul was employed full time as office manager by the R. E. Myers Company, of Salinas, Monterey County, California. The R. E. Myers Company was a subsidiary of the Salinas Valley Ice Company (also known *451 as Salinas Ice Company, Ltd.), of Salinas, Monterey*26 County, California. Following 1942 Faul asked his employer, Ralph Myers, why he was cheating with his books and exposing himself to a charge of fraud. Faul further stated that he did not wish to remain with Myers and continue to be exposed to such conduct. Myers regarded the objections lightly and assured Faul that he would "have someone else do it." At that time he hired Emmett Gottenburg, a certified public accountant. Gottenburg kept the tax records and prepared the tax returns for the above-named companies. In 1944 Faul went to San Francisco to talk to "some Government man" about what he should do to protect himself. He was told that he should make records and have evidence so that he would not be exposed. In order to shield himself, Faul, working in his home and in the office late at night, commenced to compile records in February or March 1944. He continued with this record making for the remainder of 1944 and during 1945 and part of 1946. Faul was discharged by the Myers Company in March 1946. Thereafter he determined to submit evidence of the alleged fraud to the Government, and on February 22, 1947, he had an interview in San Francisco with John Boland, chief field *27 deputy in the office of the collector of internal revenue, San Francisco, California. At that time he submitted to Boland a memorandum of 45 alleged violations of internal revenue laws by the Salinas Valley Ice Company. On the same day Faul filed a claim for reward on a Form 211. Additional information supplied by Faul between April and July 1947 increased the allegations to a total of about 68 or 70. Alan Russell Shurlock (hereinafter referred to as Shurlock), an internal revenue agent, commenced an audit of the Salinas Valley Ice Company in May 1947. He was in contact with Faul concerning the list of allegations during the summer and fall of 1947. The last discussion between Shurlock and Faul for the purpose of enabling Shurlock to understand the allegations took place in September, October, or November 1947. He submitted his final report on the Salinas Valley Ice Company in July 1948. The case was then forwarded to the conference section in San Francisco. Shurlock discussed the case with the conferee a number of times. To the best of Shurlock's knowledge, Faul never met nor had a conference with the conferee. Shurlock, requested by his superiors to assess the value of the*28 information furnished by Faul, reported that "the information furnished by the informer was of good value in the investigation." In so doing he had in mind only the 68 allegations. He never received from Faul any documentary evidence, further studies, or copies of other documents *452 made by him of the books and records of the Salinas Valley Ice Company or the R. E. Myers Company. Shurlock saw Faul during 1948 and 1949, usually at Faul's home. Mrs. Shurlock sometimes accompanied him. When Mrs. Shurlock came they did not all sit together; she played the piano and Shurlock stayed with Faul, not always in the same room. Conversations between Faul and Shurlock were limited to the Government case. The general tenor of these conversations was "When am I going to get my reward?" Often they would reminisce about some of the issues involved in which Faul had furnished information, and go over the points that had been brought out. On these occasions, Faul furnished Shurlock no additional information in connection with the case. Shurlock visited Faul at least once during 1950 and 1951. Sybell was present during such a visit when a conversation concerning the fraud penalties against*29 the Myers Company took place. She could not recall whether Shurlock at that time asked Faul to supply any additional information. In May 1950 Boland called Faul to San Francisco. Sybell accompanied Faul to Boland's apartment. When asked on direct examination if Boland requested any additional information from Faul, Sybell replied, "Well, yes; my husband went into the kitchen * * * and really nothing much took place, because they were talking in the kitchen for a short time and then they came out and we left." Sybell and Faul never saw Boland except in connection with the case. During 1950 and 1951 Faul corresponded with officials of the Bureau of Internal Revenue and the Treasury Department concerning his claim for reward. In one such letter Faul stated: "Mr. O'Connell as his local representative Alan Shurlock conferred with me numerous times during first 2 years after I reported this case for information [sic]." On September 10, 1951, William W. Parsons, Administrative Assistant Secretary of the Treasury Department, wrote Faul informing him that "it has been found necessary to request additional information from the field office in California and your case can not be concluded*30 until that information is received at headquarters." In April 1952 Faul received a check in the amount of $ 68,837.96 as an informer's award. The award was paid from the appropriation for salaries and expenses, Bureau of Internal Revenue. The collection office of the Bureau of Internal Revenue demanded an estimated tax return and payment of estimated tax with respect to the $ 68,837.96. Payment of tax pursuant to such estimated tax return was made by the petitioners in the amount of $ 25,825.82. Thereafter petitioners filed their income tax return for the year 1952, and, in connection with the payment of the award, claimed the *453 benefit of section 107, I. R. C. 1939. Accordingly, the return indicated a tax liability of $ 17,150.02 and an overpayment of $ 8,825.46. This overpayment was refunded by the Bureau of Internal Revenue. Thereafter respondent determined that the award received by Faul "was not compensation for personal services covering a period of thirty-six (36) calendar months or more within the meaning of section 107 (a) of the Internal Revenue Code," and further determined that the award was includible in full in gross income for the year ended December 31, *31 1952, in accordance with section 22 (a) of the Internal Revenue Code. The examining agent computed petitioners' tax liability based upon sections 11 and 12 of the internal Revenue Code. On the basis of this computation a deficiency of $ 18,350.23 was determined. OPINION. The sole question presented here is whether an informer's award received by petitioner Elmer J. Faul may be allocated ratably over a period of 3 years or more as compensation for personal services under the provisions of section 107 (a), I. R. C. 1939. 1 *32 For section 107 (a) to apply, at least 80 per cent of the total compensation must be received or accrued in 1 taxable year, the compensation must be for personal services, and the services must cover a period of 36 calendar months or more. The respondent concedes that the first requirement has been met but contends that the two remaining contingencies have not been satisfied. A taxpayer who claims the benefit of section 107 must show that he comes squarely within the letter and spirit of the congressional grant. Van Hook v. United States, 204 F. 2d 25 (1953), certiorari denied 346 U.S. 825. We are not persuaded that petitioners have sustained this burden. Petitioners urge that Faul began performing services for the Bureau of Internal Revenue in 1944. The record shows that following 1942 Faul became alarmed about the tax practices of his employer. In 1944 he went to San Francisco to talk to "some Government man" for the purpose of determining what he might do to shield himself against possible future charges. *454 Upon his return home Faul followed advice received in San Francisco and commenced to compile records*33 so that he would have evidence to protect himself. He continued to make records during 1944, 1945, and 1946. In 1946 Faul was discharged by his employer, and in February 1947 he submitted a memorandum of alleged violations of internal revenue laws to the office of the collector of internal revenue in San Francisco. There is no evidence either as to the identity of the "Government man" contacted by Faul in 1944 or that they conferred on any subject other than how Faul might protect himself. The record does not show that Faul identified his employer at this conference. We conclude that petitioners have not shown Faul to have rendered any service to the Bureau of Internal Revenue before February 22, 1947. Barker v. Shaughnessy, an unreported case (N. D., N. Y., 1954; 48 A. F. T. R. 1301, 55-1U. S. T. C. par. 9116). Petitioners argue that even if Faul did not begin to furnish information until February 1947, nonetheless the statutory period of 36 months may be satisfied. To achieve this they must show that Faul's services continued until February 1950. The record establishes that Faul supplied no information subsequent to the fall*34 of 1947. Shurlock, the agent conferring with Faul, filed his report in July 1948. The case then went to conference. There is nothing to indicate that Faul ever met or had a conference with the conferee. The case was closed in 1950. Shurlock visited Faul from time to time throughout 1948 and 1949; doubtless they discussed the case at great length. However, their discussion was limited to reminiscence and to when Faul would receive the reward. Sybell, Faul's wife, was present when a conversation took place between Faul and Shurlock in 1950 or 1951, but could not recall whether Shurlock asked for additional information. In May 1951 petitioners paid a visit to John Boland, an official in the collector's office at San Francisco. Sybell testified that Boland requested additional information. However, no evidence was submitted as to what was said, or that Sybell could even hear the conversation, other than that petitioners never saw Boland except in connection with the case. The discussion might well have concerned solely the reward petitioners were striving for. The record does not establish that Faul furnished any such additional information. On September 10, 1951, William W. *35 Parsons, Administrative Assistant Secretary, Treasury Department, wrote Faul, informing him that it had been necessary to request additional information from the field office in California and that Faul's case could not be concluded until that information was received at headquarters. There is no evidence *455 that Faul supplied any of this additional information or that, indeed, Parsons expected to obtain such information from any source other than the field office itself. Herbert Stein, 14 T. C. 494 (1950), cited by petitioners, does not support their case. They cite only dicta in Smart v. Commissioner, 152 F. 2d 333 (1945). Other cases relied upon by petitioners may be distinguished on their facts. Petitioners have not established that Faul performed services for the Bureau of Internal Revenue over a 36-month period and hence may not claim the benefit of section 107 (a). 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.↩