Hurd v. Commissioner

HARRY B. HURD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HUGO PAM, JOSEPH E. OTIS, AND HARRY B. HURD, EXECUTORS, ESTATE OF MAX PAM, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hurd v. Commissioner Docket Nos. 3932, 3933. United States Board of Tax Appeals 12 B.T.A. 368; 1928 BTA LEXIS 3547; June 5, 1928, Promulgated *3547 In the circumstances, it is held that certain certificates of the face value of $50,000 delivered to petitioners in December, 1918, for services rendered, constituted income for that year in the amount of their face value. Lincoln R. Clark, Esq., for the petitioners. Thomas P. Dudley, Jr., Esq., and Harold D. Thomas, Esq., for the respondent. LOVE *368 These proceedings were, by agreement, consolidated and involve the following deficiencies in income tax for the calendar year 1918: *369 In the case of Harry B. Hurd the deficiency is $7,237.74. In the case of the Estate of Max Pam, the deficiency is $10,873.30. The question presented is whether certain certificates received by Harry B. Hurd and Max Pam for services rendered, constituted income for the year 1918 and, if so, the cash value of the certificates at the time received. FINDINGS OF FACT. While these proceedings were pending, Max Pam died testate. Hugo Pam, Joseph E. Otis, and Harry B. Hurd were, on October 29, 1925, duly appointed executors of his estate and such executors have been substituted petitioners in the place of Max Pam. For many years prior*3548 to his death in 1925, the decedent, Max Pam, and Harry B. Hurd were equal partners in the law firm of Pam and Hurd in the City of Chicago. They also kept an office in New York City but did not practice law in that city, the office being maintained for convenience in looking after eastern interests, and holding conferences and directors' meetings. Prior to the year 1918, an agreement was entered into between Pam and Hurd and the law firm of Colby and Brown whereby the petitioners agreed to perform certain services in connection with a reorganization of the Coca-Cola interests. Under that agreement, the compensation received for the services rendered by the firms of Colby and Brown, and Pam and Hurd was to be divided equally between the firms. Payment for the services rendered was made in beneficial certificates of interest in the Coca-Cola Co., of which Pam and Hurd received five of a par value of $10,000 each. By letter of December 18, 1918, Bainbridge Colby, of the firm of Colby and Brown, sent the five certificates to Pam at the office of Pam and Hurd in New York City, the relevant part of the letter reading as follows: DECEMBER 18, 1918. MAX PAM, Esq., 71 Broadway,*3549 New York City. MY DEAR MAX: Here are the certificates of beneficial ownership (just received) under the Coca Cola trustee arrangement, which are yours, to wit, five in number, each representing an interest of $10,000.00 and numbered 21 to 25, inclusive, made out in my name and endorsed to you. I hope some day they will be as valuable as they look. * * * Yours sincerely, BAINBRIDGE COLBY. This letter was received by Miss Morley, Pam's secretary, at the New York office on the same or following day. Pam was in Chicago at that time. *370 As soon as the letter and certificates were received at the New York office, Pam's secretary sent the letter to him in Chicago. He then phoned his secretary and told her that he objected to the certificates on account of the interest or dividend that was being paid on them. He instructed her to hold the certificates until he returned to New York as he was going to take up with Colby the matter concerning the interest or dividends on the certificates. From this time (about December 19, or 20, 1918) until some time in February, 1919, Pam at various times talked and conferred with Colby with reference to an adjustment of the*3550 interest or dividend rate on the certificates. The certificates were sent to Chicago in February, 1919. They were subsequently transferred, one-half to Mrs. Hurd, and one-half to Miss Morley, as nominee for Pam. A dividend was ultimately declared on the certificates, which was transmitted by Colby to Pam by letter in September, 1919. The letter of transmittal was as follows: COLBY & BROWN, 32 Nassau Street, New York, September 18, 1919. MAX PAM, Esq., 71 Broadway, New York, N.Y. DEAR MAX: You remember that dividend of 87/100 of one per cent which the Coca Cola declared on its certificates last April? I have been withholding acceptance of these ever since, as I explained to you at that time, not being satisfied with the amount. I have decided, however, that having parted with my certificates in connection with a deal just concluded, I will not attempt to raise any further question about this matter. In fact, I suppose the matter is really disposed of by the turning in of the certificates. I therefore send you check herewith for $435.00, which represents the dividend at the rate mentioned on your $50,000.00 of certificates. I hope to see you one of these*3551 days pretty soon. (Signed) BAINBRIDGE COLBY. The books of the partnership, Pam and Hurd, as well as the books of each of the partners, were kept on the cash receipts and disbursements basis. The five certificates, each of the par or face value of $10,000, were included in the partnership return for the year 1919 at 50 per cent of their face value and were reported on the individual returns of the two partners for 1919, accordingly. The Commissioner included the certificates as income for 1918 at the face value thereof and adjusted the income of each of the partners for that year in accordance with such action. OPINION. LOVE: These proceedings present two questions for consideration, namely: (1) whether the certificates delivered to and received by the partners, Pam and Hurd, in December, 1918, constituted income for the year 1918, and (2) the cash value of the certificates at the time received, if they represented income for the year 1918. *371 There is no question with respect to the fact that the certificates were physically delivered to and received (in the sense that they came through the mails to the office) by the partnership in December, 1918. The*3552 petitioners, however, take the position that the certificates were not "received" in the year 1918 as provided by section 213(a) of the Revenue Act of 1918, which in part provides: * * * The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * * In support of this position, it is contended that although the certificates were mailed to the partners, taken from the mails and reduced to possession or custody, there was no assent on the part of Pam, on behalf of the partnership, to accept delivery thereof. In this respect, it is urged that, inasmuch as Pam informed his secretary that he objected to the certificates on account of the interest or dividend rate thereon, he was merely exercising his prerogative as a lawyer to determine whether he would receive the compensation tendered him for professional services; that Pam alone had the right to make up his mind as to whether he should accept the certificates. Consequently, it is further urged that having*3553 continued negotiations concerning the interest or dividend rate on the certificates until February, 1919, he did not accept them until the year 1919 and that under such circumstances it can only be said that he received the certificates in the year 1919. We are unable to agree with petitioner in this respect. As far as the record discloses, Pam and Hurd entered into an agreement with the firm of Colby and Brown to render certain services for which they were to receive one-half of the fees obtained. On December 18, 1918, Bainbridge Colby tendered to Pam at the office of Pam and Hurd in New York City what purported to be the compensation agreed upon, at least there is nothing in the record which indicates that the certificates did not constitute one-half of the fee received by Colby and Brown. Clearly, therefore, as far as we are informed, Colby and Brown performed their obligation under the agreement upon the tender to Pam and Hurd of one-half of the fees, as theretofore agreed. Does the fact, then, that Pam objected to the certificates and withheld acceptance until February, 1919, constitute sufficient ground for holding that the certificates were not received, as provided in*3554 section 213(a) of the 1918 Act, supra, until some time in the year 1919 instead of December 18, 1918, the time when they were tendered. We think not. It is undoubtedly true, as petitioners urge, that to constitute an acceptance there must be an act of the will in addition to mere physical receipt. As far as the record discloses, the five certificates in *372 question constituted one-half of the compensation received by the firm of Colby and Brown. Therefore, we believe that, under such circumstances, acceptance, that is the mental as well as the physical act, is immaterial under the provision of the pertinent revenue act. The certificates, pursuant to contract, were unqualifiedly placed at the disposal of Pam and Hurd on December 18, 1918, and as far as the record shows, constituted the agreed compensation. We must, therefore, hold that the cash value of the certificates on December 18, 1918, constituted income for the year 1918, for to hold otherwise would permit the shifting of income over a year or period of years by the simple expedient of withholding volition to accept that which has been properly tendered pursuant to a prior agreement. We come, therefore, *3555 to the question as to the value of the certificates at the time received by the partnership, namely, December 18, 1918. The Commissioner, in restoring the certificates to the partnership income for 1918, determined that their cash value was equal to the face value, $50,000. Consequently, the burden is on the petitioners to prove that the Commissioner's determination as to the value of the certificates is erroneous. There was no evidence adduced which shows, or tends to show, that the Commissioner erred in determining that the cash value of the certificates was equal to their face value of $50,000. Accordingly, his action in this respect is approved. Judgment will be entered for the respondent in both proceedings.