Nast v. Commissioner

Julia C. Nast, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jerome Nast, Petitioner, v. Commissioner of Internal Revenue, Respondent Nast v. Commissioner Docket Nos. 10080, 10081 United States Tax Court 7 T.C. 432; 1946 U.S. Tax Ct. LEXIS 111; July 31, 1946, Promulgated *111 Decision will be entered for the respondent. Where a physician accumulated charges for his services to a patient over a period in excess of 36 months, payments on account made during the period must be taken into account under section 107 (a), I. R. C., in determining whether compensation received or accrued in one taxable year was at least 80 per cent of the total compensation for services covering the period. Wesley E. Seale, Esq., for the petitioners. Donald Abbey, Esq., for the respondent. Harlan, Judge. HARLAN *432 The Commissioner determined deficiencies in income and victory tax against the petitioners for the calendar year 1943, in the respective amounts of $ 279.72 and $ 279.71. The petitioners contest the deficiencies and allege that the respondent erred in failing to give them the benefit of section 107 (a) of the Internal Revenue Code in respect to a lump sum payment received by Jerome Nast as physician for one family covering a period of 36 months or more. The case is submitted on a stipulation of facts and exhibits introduced at the hearing. The appeals were consolidated for hearing and opinion. The only question involved is whether, under the *112 facts of this case, the petitioners are entitled to the benefits of section 107 (a) of the code in respect to the lump sum payment made to petitioner Jerome Nast on September 4, 1943. The facts as stipulated are adopted as our findings of fact. FINDINGS OF FACT. Jerome Nast (hereinafter referred to as Nast) and Julia C. Nast are husband and wife; and for the year 1943, filed separate returns on a community basis with the collector of internal revenue for the first district of Texas at Austin, Texas. Nast and his wife reported income on a cash basis and on a calendar year basis. Nast is a practicing medical doctor, with office in the Medical Professional Building, Corpus Christi, Texas. Nast, as the family physician for one of his patients, treated the patient and his family at his office for a period beginning in 1924. He also made home calls in the course of his acting as family physician. His services extended to the family servants. He made regular charges on his books of account for the services rendered. *433 Nast and the patient were and are close personal friends and have been close personal friends for the past twenty-two years; and none of the charges included herein*113 was for any chronic disease nor for any illness extending over a long period of time. On account of the close personal friendship bills were rendered to the patient intermittently, if at all; and the patient made payments whenever it was convenient for him to do so. The patient was financially responsible and able to pay the amount due at any time. From July 1, 1934, to April 22, 1939, charges accumulated on Nast's books. On September 13, 1937, the patient paid the sum of $ 150 on account. On April 22, 1939, the balance then due was the sum of $ 990 for services rendered said patient and his family. From April 22, 1939, to September 4, 1943, charges were made against the patient of $ 1,856 1 and on September 4, 1943, a total of $ 1,946 was paid, which balanced the account and paid all accrued charges to that date. On July 8, 1939, the patient paid the sum of $ 500 on the account; and on December 23, 1940, he paid $ 500 on the account. *114 After said date of September 4, 1943, Nast continued as family physician and accumulated other charges, which are reflected by the exhibits hereto attached. OPINION. In their income tax returns for 1943 the petitioners claimed the benefits of section 107 (a) of the Internal Revenue Code2 with respect to the $ 1,946 received on September 4, 1943, by Jerome Nast, a family physician, as payment in full for services performed for one family to that date. *115 The petitioners contend that the "period" involved began April 22, 1939, and ended September 4, 1943, a period of more than 36 months; that the payment of $ 1,946 made September 4, 1943, covered services for the entire period and that the payments on account made prior to September 4, 1943, were for prior periods and should not be taken into account in determining whether the amount received on that date should be ratably allocated over the period in accordance with section 107 (a) of the Internal Revenue Code. The respondent contends that the "period" began July 1, 1934, and that the charges accumulated from that date to September 4, 1943, *434 amounted to $ 3,096. Therefore, the payment of $ 1,946 received on September 4, 1943, represented less than 80 per cent of the total compensation received during the period and section 107 (a) is not applicable. We agree with this contention. The period in question did not represent accumulated earnings over a long illness which terminated in 1943, but a running account beginning in 1924 and payments on account covering the period, so far as the record here shows, from July 1, 1934, to September 4, 1943. As we understand the statute, *116 it is the total compensation "from the beginning to the completion" of the services which must be taken into account in determining whether at least 80 per cent thereof is received or accrued in one taxable year. The basic period, therefore, is the entire period involved and it is obvious that payments on account during the period must be considered a part of the total compensation for the services performed. In order for the petitioners to be entitled to the relief provisions of section 107 (a) the payment sought to be apportioned must be at least 80 per cent of the total compensation received during the basic period. The total compensation during that period was $ 3,096 and the amount received in 1943 was $ 1,946. Since the latter amount is less than 80 per cent of the total compensation for the services covering the period, the petitioner is not entitled to the benefit of section 107 (a) in computing his net income for the year 1943. It is, in fact, doubtful whether the statutory language "from the beginning to the completion of such services" was intended to cover a portion of a running account where identical services were rendered both before and after the period completed*117 by such portion. We have not found nor have we been referred to any cases so holding. The cases examined by us have all involved services having a definite beginning and completion. Harry L. Additon, 3 T. C. 427; Harry Civiletti, 3 T. C. 1274; affd., 152 Fed. (2d) 332; Paul H. Smart, 4 T. C. 846; affd., 152 Fed. (2d) 333. See also Finance Committee Report accompanying the Revenue Act of 1942, section 140. So far as the record shows, nothing happened on April 22, 1939, unless it was the billing of services rendered to that date. To permit an ordinary running account to build up over a period of time and then require payment, which could be allocated for tax purposes over prior years, permits manipulation of income by a taxpayer to avoid high tax rates and to take advantage of more favorable rates. If a taxpayer having a running account with a customer or a client might, by rendering a bill of the amount due, "complete" his services within the meaning of section 107 (a), he would be able to take advantage of the relief provision of the*118 statute and at the same time include the compensation in income in whatever year it best suited his purpose *435 or it was to his advantage. This is particularly true in cases like the one before us, where the client is able to pay and could have paid at any time payment was required. In our judgment the statute does not permit that construction. Decision will be entered for the respondent. Footnotes 1. It appears from the facts that this amount as stipulated is in error and should be $ 1,956.↩ 2. 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.↩