Drummond v. Commissioner

KENNETH DRUMMOND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Drummond v. Commissioner Docket No. 100767. United States Board of Tax Appeals 43 B.T.A. 529; 1941 BTA LEXIS 1491; February 7, 1941, Promulgated *1491 Taxpayer, a salesman, was employed under an agreement whereby he was to be paid on a commission basis, with an added clause as to minimum monthly payments. For no month, however, ever, was he to receive less than $625, regardless of the amount of commissions earned. Any earned commissions up to $1,000 per month were to be paid to him, but any amounts in excess of $1,000 were to be paid only if his past earnings equaled the amounts paid to him. In the years 1934, 1935, and 1936 petitioner's earned commissions amounted to less than the amounts received from his employer under the agreement. In 1937 his earned commissions were high and the employer withheld, as per the agreement, amounts equal to the difference between the earned commissions in the prior years and the amounts actually paid. The employer also credited the taxpayer on the books of the company with a certain amount which was still to his credit at the close of the taxable year. Held, the taxpayer is not taxable in 1937 on the amounts withheld by the employer and applied as per the agreement; held, further, the taxpayer is taxable on the amount credited to him on the company's books at the close of the taxable*1492 year. James C. Thompson, C.P.A., for the petitioner. B. L. Bird, Esq., for the respondent. KERN *530 This proceeding involves a deficiency in income taxes in the amount of $713.49 for the calendar year 1937, as determined by the Commissioner. The sole issue is whether petitioner, who was on the cash basis, received taxable income in the year in question by reason of his employer deducting from commissions which ordinarily would have been due to him an amount equivalent to sums paid to petitioner in prior years in the nature of advancements for the purpose of providing him with a certain minimum monthly income. FINDINGS OF FACT. The petitioner, Kenneth Drummond, is a married individual, residing in St. Louis, Missouri. Drummond is now and has been for the past eleven years in the employ of Calvin Bullock of Jersey City, New Jersey. Petitioner's duties as an employee consisted of representing Calvin Bullock in the States of Ohio, West Virginia, and Michigan from 1929 to and including part of 1936, and in Missouri, Arkansas, Kentucky, Louisiana, Oklahoma, and Texas in part of 1936 and throughout 1937. More specifically, his duties were*1493 to further the interest and sale of investment trust securities for Calvin Bullock in those territories; to keep the numerous investors in these investment trust securities informed as to what was going on so far as their management was concerned, and to imform investors concerning what the management thought about certain situations which might affect the securities underlying those investment trusts. In order to carry out those duties required of him by his employer, the petitioner has maintained an office in the city of St. Louis at his own expense. Petitioner was being paid for his services on a commission basis. He received one-half of 1 percent on transactions he negotiated. But during the latter part of 1934 it was found that Drummond was earning commissions insufficient to maintain the office and have sufficient money left on which to live and support his family. Therefore, in September of 1934 a new compensation agreement was entered into by Drummond and his employer. This agreement was never reduced to writing, however. The substance of that agreement is as follows: Bullock agreed to pay petitioner a minimum of $625 per month, regardless of the amount of commissions*1494 earned in any month by Drummond. Bullock was to credit petitioner's account each month with his commissions, however, and, in the event that the commissions in any month exceeded the $625, petitioner was to receive such commissions up to $1,000. Any commissions earned by Drummond over and above $1,000 in any single month were to be withheld by Bullock and applied against any amounts which had previously been paid to Drummond under the agreement which *531 had been in excess of commissions earned. Under this agreement Bullock would never be entitled to withhold any commissions unless and until petitioner's earned commissions in any month exceeded $1,000, and then to withhold only the excess earnings above the $1,000 figure. In the years 1934, 1935, and 1936 the petitioner failed to earn sufficient commissions to account for the minimum monthly payments of $625 which Bullock paid him. The excess of the payments over and above the commissions earned in those years was $3,568.21, $3,294.41, and $1,456.48, respectively, making a total of $8,319.10 for the three years, which figure Bullock carried on petitioner's account on January 1, 1937, as an overdraft. In each of these*1495 years the petitioner reported as income in his Federal income tax return all cash received during the year from Bullock, regardless of whether it represented commissions earned by him in the year. His returns have always been made on a cash basis. Because of office expenses, head of family exemption, exemptions for dependents, and other credits, Drummond's income was never taxable in any of those years. In 1937 the petitioner started earning large commissions. The sum total of the commissions earned in that year was $24,894.29; but of this amount petitioner received only $15,678.87 in cash. Bullock withheld $8,319.10 and purported to apply this amount against the overdraft of petitioner appearing on Bullock's books, thereby balancing Drummond's account on his record. In addition to this transaction on his books, he withheld $459.53 further and, at the end of the year 1937, Drummond had this latter amount listed to his credit on the employer's book account. Certain minor adjustments in the nature of allowable expenses totaled $406.79. Petitioner incurred expenses in the amount of $8,437.54 in maintaining the office for his employer, and this amount he deducted from the $15,678.87*1496 actually received in 1937 and reported the difference of $7,241.33 as taxable income from "salaries and other compensation for personal services" on his 1937 Federal income tax return. The employer's Federal tax information returns for the years 1934, 1935, and 1936 contained allegations showing payment of "salaries, wages, fees, commissions, bonuses" to Drummond in those years of only the amount of commissions earned, not the total actually paid over to Drummond. In his 1937 information return Bullock listed the entire amount of $24,894.29 as income paid to Drummond. OPINION. KERN: Until 1934 petitioner was compensated for his services by his employer by the payment of commissions. In that year, for the *532 reasons set out in our findings, the contract between petitioner and his employer relating to petitioner's compensation was modified in that his compensation was to consist of minimum monthly payments of $625, with provisos that if he earned commissions in excess of that sum but under $1,000 per month such commissions should be paid to him in full, but if he earned commissions in excess of $1,000 he should be entitled to such excess only to the extent that the*1497 accumulated excess itself exceeded the amount by which the minimum payments were in excess of commissions payable pursuant to his contract of employment prior to its modification. In other words, petitioner by virtue of the modified contract relinquished his unconditioned right to the payment in full of commissions in excess of $1,000 per month in order to obtain a minimum payment $625of per month, regardless of whether his commissions due under the unmodified contract equaled this sum. It therefore follows that petitioner was entitled to receive during the taxable year only the sum of the commissions which would have been earned by him according to the original contract of employment, decreased by the amount thereof which his employer was entitled to retain by virtue of the modifications of the contract made by the parties in 1934. We make this interpretation of the contract between petitioner and Bullock, as modified in 1934, not without diffculty, because it was an oral contract and the testimony of petitioner with regard to it was not as clear as might be wished, and because it is not consistent with the interpretation placed upon it by petitioner's employer as reflected on*1498 the latter's books. There the minimum payments were treated, as respondent insists they should be treated, as advances to be repaid to Bullock out of any commissions earned by petitioner in excess of $1,000 per month. It is respondent's contention that such excess during the taxable year in the amount of $8,319.10, retained by the employer on account of advances made in prior years, was constructively received by petitioner and should be included in his income during the taxable year. Even if we should interpret the contract as respondent contends we should, our ultimate result must be the same. There was no unconditional personal obligation on the part of petitioner to repay any "advances", assuming that any part of the minimum monthly payments were in the nature of advances. Not only was the repayment of such advances not a personal obligation of petitioner, but it was also doubly contingent; contingent upon his remaining in the employ of Bullock and upon his commissions calculated under the original contract being in excess of $1,000 per month. Only from such excess would the "advances" ever be repayable. In this respect *533 the instant proceeding differs decisively*1499 from the situation covered by I.T. 2043, C.B. III-2, p. 94, cited by respondent. Here the "advances" were made to petitioner in payment for his services, with a right reserved to the employer to make certain adjustments upon certain contingencies in the payment of his compensation in the future. The petitioner received them as a matter of right, with no restrictions as to their use and with any condition as to future adjustments thereof being only contingent. Regardless of the happening of the contingencies, petitioner will always be entitled to retain the "advances" paid to him. Under these circumstances petitioner, being on the cash receipts basis, correctly reported these "advances" as income for the years in which received. Cf. North American Oil Consolidated v. Burnet,286 U.S. 417, 424. To hold otherwise would be to offer encouragement to schemes whereby large sums could be paid as remuneration to taxpayers by way of "advancements", with remote contingencies as to future adjustments attached thereto, which would unduly postpone the collection of taxes as well as result in an ultimate distortion of income. Since petitioner properly reported these minimum*1500 monthly payments as income in the years when they were received, it follows that he is not properly taxable in a later year on sums withheld from him by his employer which would otherwise have been payable to him. In 1937 Drummond had no control over the $8,319.10 credited to him but held back by the employer. We conclude that petitioner is not taxable in 1937 on the $8,319.10 withheld by his employer. Another question is presented by the $459.53 credited to Drummond on his employer's books as of December 31, 1937. Here is a case where petitioner has earned certain commissions but will not get them until a later year. Under our interpretation of the agreement, commissions were only to be withheld when there was an existing credit balance in favor of the employer. Once petitioner had erased this balance, the agreement no longer sanctioned the withholding of commissions. The fact that petitioner actually received over $15,000 in the taxable year, $3,000 in excess of the $12,000 which would have been the maximum amount payable under a contrary interpretation of the agreement, adds factual support to our conclusion. Notwithstanding, the petitioner asserts that the $459.53*1501 was withheld and credited to him pursuant to the agreement which Drummond claims required all excesses over $1,000 to be withheld and, in this case, set aside for future use in case his future earned commissions did not amount to $625 per month. It is not easy to paraphrase this agreement, *534 since it was oral and the only evidence thereof in this proceeding was that elicited from petitioner himself by way of oral testimony. The following testimony of Drummond is the basis of our conclusion: A. * * * Above the thousand went back in the account. Q. But, you received more than $1,000.00 a month in 1937? A. That is right, therefore what was in excess of $1,000.00 went back in the account. Q. But, it didn't - you actually got and kept? A. That is right. As I say, above $1,000.00 went back. And at a further stage of the examination Drummond stated: "A. * * * and over $1000.00 was to go back, for any so-called differences * * *." On redirect examination petitioner's counsel propounded the following questions: Q. Mr. Drummond, in 1937, when you received $15,678.87 from your employer, you have also made the statement that any income in excess of $1000.00*1502 was returned back or withheld by your employer to apply to any debit balances which might be existing in your account. Now, due to the fact that there is a difference there between $15,678.87 and $12,000.00, wasn't that due to the fact that in that year, towards the end of 1937, that you had started to show a credit balance in that account and they began to pay you out in cash each month? a. That is right. q. In excess of $1000.00, to account for that difference? a. That is correct. The witness's last answer appears to contradict his former answers, but, since it is on redirect examination, it is apparently his final decision on the matter. Since the agreement did not prevent petitioner from taking this $459.53 he earned in 1937, there is no apparent reason for not concluding that Drummond had full power and control over the money and merely elected to allow it to remain to his credit on the employer's books. This, of course, is the basis of the Commissioner's determination. Petitioner has not introduced any conclusive proof in rebuttal. There is no showing that petitioner ever made demand upon Bullock for the money. Upon the facts it appears that petitioner*1503 had a right to the $459.53 in the taxable year and at any time he chose could have made demand upon and received from the employer this money. Upon these facts we have no alternative but to hold petitioner taxable on the $459.53 on the theory of constructive receipt set forth in John A. Brander,3 B.T.A. 231, and followed by this Board in John I. Chipley,25 B.T.A. 1103. Decision will be entered under Rule 50.