Docket No. 25497.

16 T.C. 244 (1951)


United States Tax Court.

Promulgated January 30, 1951.

Attorney(s) appearing for the Case

Lewis L. Guarnieri, Esq., for the petitioner.

William R. Bagby, Esq., for the respondent.

Respondent determined a deficiency of $11,550.61 in the petitioner's income tax for 1945.

The sole question is whether respondent was correct in including in petitioner's taxable income for 1945 the amount of $10,500 transferred in trust for petitioner in that year by petitioner's employer, but which was thereafter paid by the trustee to the petitioner in installments in 1946 and 1947 as required by the trust agreement.


The stipulated facts are found as facts. Those of the stipulated facts together with such facts found from oral testimony as are necessary for the decision are set forth below.

Petitioner, E. T. Sproull, is an individual residing in Bristolville, Ohio. His 1945 income tax return was filed on a calendar year basis with the collector of internal revenue for the 18th district of Ohio, Cleveland Division.

In 1929 petitioner became a large stockholder in and president of the Brainard Steel Corporation (hereinafter sometimes called the corporation). He held the office of president until the business was sold January 1, 1948.

Petitioner's salary was originally established at $12,000 per year, but shortly after 1929 the corporation ran into financial difficulties and petitioner voluntarily decreased his compensation over the depression years. He never made any claim on the corporation for the amount of the decrease, but at one time stated to the directors that he thought they owed him about $80,000.

The year 1945 was a good one financially for the corporation and on December 26, 1945, the corporation, following authorization of its board of directors, entered into a trust agreement with the Union Savings and Trust Company of Warren, Ohio, as trustee. Pursuant to the agreement, the corporation on December 31, 1945, paid over to the trustee the sum of $10,500 in consideration of services theretofore performed for the corporation by petitioner and the inadequacy of salary paid for such services. The trustee was empowered to invest and reinvest the money and was directed to pay out of principal to petitioner the sum of $5,250 on December 26, 1946, and the balance, including income, on December 26, 1947. In the event of petitioner's prior death, the amounts were to be paid to his administrator, executor, or heirs.

The trustee, pursuant to the agreement, paid to petitioner by check the sum of $5,250 on December 26, 1946, and a like sum on December 26, 1947.

The petitioner in his 1946 calendar year return included as income the first $5,250 received from the trustee and in his 1947 calendar year return included as income the $5,250 received from the trustee in 1947.

At the time the trust agreement was authorized by the corporation's board of directors, petitioner was president of the board and held 1,375 shares of the corporate stock. At the same time petitioner's wife held 1,000 shares, and his three daughters 5,919 each. Petitioner thus controlled 20,132 shares, or 25.1 per cent, of an outstanding total of 78,916 shares. This situation continued to exist during the years 1945 to January 1, 1948.

The action in setting up the trust was neither initiated by the petitioner nor taken pursuant to his direction.

On December 31, 1945, the corporation deducted, as an expense for salaries, the sum of $10,500 paid to the trustee, both in its records and in its calendar year income tax return for the year 1945.



The Commissioner included in petitioner's 1945 taxable income as bonus income the sum of $10,500 paid by Brainard Steel Corporation to the Union Savings and Trust Company of Warren, Ohio, trustee under the agreement of December 26, 1945.

Petitioner contends the respondent taxed him in the wrong year and that instead of being taxable on the full $10,500 in 1945 he was properly taxable in 1946 and 1947 on the amounts paid him by the trustee in those years.

Neither the stipulated facts nor the oral testimony establish whether petitioner made his returns on a cash basis. However, since that is the most common method of reporting income and since the trial apparently proceeded on that basis we assume the cash method was used.

Superficially the issue looks simple. Petitioner actually received no cash until the years 1946 and 1947. Why, then, should he be taxed in 1945? And what was the basis for respondent's action in so doing?

A possible basis is the application of the doctrine of constructive receipt and petitioner in his main argument assumes that to be the fact. He sets out to demonstrate the doctrine's inapplicability, pointing out (1) that although the sum was fixed and paid by his employer as compensation for services, he actually received no part of the money in 1945; (2) that he could not have reduced any part of the money to possession in that year because of the time limitations on payment to him set in the trust instrument, and (3) that he had no control of the corporate action in establishing the trust, nor was such action taken at his suggestion or pursuant to his direction.

This Court has rather fully discussed the doctrine of constructive receipt in Richard R. Deupree, 1 T.C. 113, and J. D. Amend, 13 T.C. 178. Although it be conceded that if we apply the tests described in those cases to the situation here we must agree with petitioner's argument that this is not a true case for application of the doctrine, agreeing with petitioner on that point does not dispose of the case. Respondent argues that if constructive receipt does not apply, then the doctrine of cash equivalent does. He cites the broad language of section 22 (a) of the Internal Revenue Code which reads, in part, as follows:


(a) GENERAL DEFINITION.—"Gross Income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, * * *.

Reliance is placed on Renton K. Brodie, 1 T.C. 275, and J. H. McEwen, 6 T.C. 1018. We paraphrase the language used in Brodie, supra. Even if the doctrine of constructive receipt as it is commonly understood cannot here be correctly applied, it is undoubtedly true that the amount which the Commissioner has included in petitioner's income for 1945 was used in that year for his benefit, albeit not at his direction, in setting up the trust of which petitioner, or, in the event of his death then his estate, was the sole beneficiary and that the whole arrangement was part of a plan for his additional remuneration.

The question then becomes, as in McEwen, supra, was "any economic or financial benefit conferred on the employee as compensation" in the taxable year. If so, it was taxable to him in that year. This question we must answer in the affirmative. The employer's part of the transaction terminated in 1945. It was then that the amount of the compensation was fixed at $10,500 and irrevocably paid out for petitioner's sole benefit. While this factor alone is not controlling, it does serve to distinguish this case from those in which the exact amount of compensation is subject to some future contingency or subject to the possibility of return to the employer. See Mertens, Law of Federal Income Taxation, Volume 2, Sections 10.13, 12.42, and 12.44.

It is true, as petitioner argues in trying to pull free from Brodie and McEwen, supra, that the arrangement gave petitioner only an equitable interest in the trust fund and that he had no vested interest in an annuity contract delivered into his possession as in Brodie, supra. But, that does not determine the issue whether the establishment of a trust such as was here established does not itself constitute taxable income to petitioner. This is especially true when it is considered that one of the arguments of petitioner in Brodie, supra, was that the annuity had no cash value and could not be assigned. Yet we held the amount expended for the annuity in Brodie taxable in the year expended. We think the case at hand is a stronger one for taxability than Brodie. Here, we think it must be held that the expenditure of the $10,500 in setting up the trust conferred an economic or financial benefit on petitioner properly taxable to him in 1945. The fund was ascertained and paid over by petitioner's employer for his benefit in that year. Petitioner had to do nothing further to earn it or establish his rights therein. The only duties of the trustee were to hold, invest, accumulate, and very shortly pay over the fund and its increase to petitioner or his estate in the event of his prior death. No one else had any interest in or control over the monies. The trust agreement contained no restriction whatever on petitioner's right to assign or otherwise dispose of the interest thus created in him. On the facts here there is no doubt that such an interest had a value equivalent to the amount paid over for his benefit, and that this beneficial interest could have been assigned or otherwise alienated requires the citation of only the most general authority. See Bogert, Trusts and Trustees, § 188. Respondent contends that the circumstances of the creation of this interest in petitioner was tantamount to paying over to him the cash in 1945.

Of course, petitioner argues that Brodie and McEwen, supra, are distinguishable on their facts. They involved annuity contracts purchased with funds furnished by petitioners' employers, in Brodie without the petitioner's direction or control but on his signing a written application, and in McEwen pursuant to a contract of employment to which petitioner was party. We think those differences are not significant here in view of petitioner's acquisition of a vested valuable interest in the trust fund here in question in the taxable year under consideration.

Reviewed by the Court.

Decision will be entered for the respondent.


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