Court Opinion

ID: 4610709
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:47:28.440934+00
Date Added: 2024-06-11T07:54:06.941933
License: Public Domain

SAMUEL KELLER JACOBS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Jacobs v. CommissionerDocket No. 34156.United States Board of Tax Appeals22 B.T.A. 1166; 1931 BTA LEXIS 1999; April 10, 1931, Promulgated *1999  Amount voted by directors of corporation to petitioner in 1925, payment to be made "at such time as in the opinion of the directors the corporation's cash position will permit," was accrued on books of corporation in 1925, but was not paid to petitioner, who files his returns on the cash basis.  Held, on the evidence, the amount was not constructively received by petitioner in 1925.  E. Louis Jacobs, Esq., for the petitioner.  Maxwell E. McDowell, Esq., for the respondent.  MATTHEWS *1167  This proceeding is for a redetermination of a deficiency in income tax of $8,642.20 for the year 1925.  The sole issue presented is whether the amount of $50,000 credited to the petitioner in the taxable year on the books of the Crosstown Realty Corporation should be included as part of his income.  FINDINGS OF FACT.  Petitioner is an individual, having his principal place of business at 730 Fifth Avenue, New York, N.Y.Petitioner and his two brothers and a brother-in-law owned all the stock of two corporations, the Tremont Corporation and the Bay View Holding Corporation, the petitioner owning the majority.  The Crosstown Realty Corporation was organized*2000  in order to carry out a large and very involved real estate deal which was being negotiated by the petitioner with respect to the purchase and sale of the Aeolian Building on Forty-Second Street, New York City.  The entire stock of the Crosstown corporation was owned by the Tremont and the Bay View corporations.  Petitioner's brothers and sisters aided in financing the transaction and the corporation gave as evidence of their participation therein debenture notes, guaranteed by petitioner, in excess of $400,000.  The deal amounted to over $6,000,000 and the details and the responsibilities of carrying it out rested entirely upon the petitioner.  In recognition of petitioner's services, which resulted in a substantial profit to the Crosstown corporation, a resolution was passed by the board of directors on December 31, 1925, which reads as follows: The treasurer then announced that Mr. Samuel Keller Jacobs had been instrumental in negotiating the sale of the Aeolian property to the Mercantile Properties, Incorporated, and had been personally responsible for certain financing required during the year 1925, and had also placed his personal credits for contemplated financing which*2001  might have been required on behalf of the corporation; that Mr. Jacobs had not received any compensation or salary for such efforts and for his services to the corporation.  Upon motion duly made, seconded, and carried, it was resolved that a commission of $50,000 be paid to Mr. Jacobs for his services in negotiating the sale of the Aeolian property to the Mercantile Properties, Incorporated.  Further resolved that said sum either in whole or in part be paid to Mr. Jacobs at such time or times as in the opinion of the Directors the corporation's cash position will permit.  Petitioner had insisted that the last provision be made a part of the resolution as he was unwilling for the corporation to pay any amount for his services until its obligations to his brothers and sisters, who had loaned money to help finance the transaction, had been discharged.  *1168  The directors of the Crosstown Realty Corporation were the petitioner; E. Louis Jacobs, his brother; and Miss Catherine Flood, the petitioner's secretary.  Miss Flood had also been for many years the secretary of petitioner's brother, Carl A. Jacobs, who died in 1925.  As of December 31, 1925, an entry was made on*2002  the books of the Crosstown Realty Corporation crediting to the petitioner's account the sum of $50,000, which item was charged to expense, but such amount was not paid to petitioner.  The cash position of the corporation at December 31, 1925, was not such as to permit payment.  At the time of the hearing the directors had never passed a subsequent resolution authorizing the payment to petitioner of $50,000 and such amount had not been paid to petitioner.  At the close of the year 1925 the petitioner owed the Crosstown Realty Corporation the sum of $151,000 which he had borrowed in the fall of 1925 to carry on his individual activities.  This sum of $151,000 was a part of $350,000 which had been borrowed from the bank by the Crosstown Realty Corporation with the petitioner's endorsement.  Each corporation in which the petitioner owned the majority stock was accustomed to borrow from the bank from time to time and to lend to the petitioner and to the other corporations such amounts as were needed, the credit of the petitioner and of the various corporations being interchanged as the occasion demanded.  The books of the Crosstown Realty Corporation are kept on the accrual basis.  The*2003  petitioner's books are kept on the cash receipts and disbursements basis.  The petitioner did not report the amount of $50,000 credited to him on the books of the Crosstown Realty Corporation in his income tax return for 1925.  OPINION.  MATTHEWS: The respondent has determined that the sum of $50,000 was constructively received by the petitioner in 1925 and has included that amount in the petitioner's gross income, although payment was not actually received in that year.  The petitioner claims that the amount in question, which represents a commission voted by the directors to be paid to petitioner when the financial position of the Crosstown Realty Corporation warranted, could not be paid until authorized by the directors, and that it was not available to the petitioner in the taxable year, although it was credited to the petitioner's account on the books of the corporation in December, 1925.  The petitioner's income tax return was filed on a cash receipts and disbursements basis, so that the commission constitutes income for 1925 only if it was constructively received.  *1169  The rule is well established by the decisions of this Board that mere book entries crediting*2004  officers or employees with amounts of undrawn salaries do not necessarily establish the taxability of said amounts.  See , and cases cited therein.  We have repeatedly held that the doctrine of constructive receipt of income by one on a cash basis of accounting should be sparingly applied.  In , we said: This doctrine, as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable.  When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his bona fide selection of this method by "construing" that to be received of which in truth he has not had the use and enjoyment.  In , we said with reference to the doctrine of constructive receipt: "It is only in unique circumstances and a clear case that the invoking of this doctrine will be approved." The test as to constructive receipt is whether the debtor has funds standing to the credit of the taxpayer*2005  which the debtor is able to pay and which are available and unqualifiedly subject to the taxpayer's demand.  Here we do not find such a case.  We have found that the petitioner owned the majority of the stock of the Tremont and Bay View corporations, which two corporations owned the entire stock of the Crosstown Realty Corporation.  All three of these companies were close corporations, being owned by petitioner, his two brothers, and his brother-in-law.  The petitioner's sisters aided in financing the transaction, out of which a substantial profit arose to the Crosstown Realty Corporation.  The evidence shows that the petitioner agreed with his brothers and sisters to accept a bonus for negotiating the deal only after they had been paid in full and all other obligations of the corporation had been satisfied.  The resolution of the directors of the Crosstown Realty Corporation, dated December 31, 1925, is to the effect that compensation for his services would be paid to the petitioner only in the event and not until "the corporation's cash position will permit." The directors of the corporation were to decide the time when the corporation's cash position would permit payment.  *2006  The above mentioned resolution was passed on the last day of the year 1925, and the liability was accrued on the books of the corporation as of that date.  No further action has been taken by the directors with respect to the payment of the amount in question and it has never been received by the petitioner.  *1170  The petitioner had no right to this amount except as the corporation's cash position warranted.  Each of the directors testified that the cash position of the Crosstown Realty Corporation at the close of 1925 was not such as to justify payment of $50,000 to the petitioner.  Under these circumstances it can not be said that the amount credited to the petitioner was unqualifiedly subject to his demand in 1925.  ; . The respondent has taken the position that funds were available to pay the $50,000 commission in 1925, and that the amount in controversy was in the control of and capable of withdrawal by the petitioner.  It is pointed out that the petitioner owed the Crosstown Realty Corporation $151,000 at the time the commission was voted to be paid to the petitioner and was credited*2007  to his account.  This does not establish that the corporation had on hand in 1925 sufficient cash with which to pay the commission.  The presumption that the corporation was in a satisfactory cash position because it had advanced $151,000 to the petitioner during the taxable year is rebutted by the petitioner's proof that this sum was a part of $350,000 which had been borrowed from the bank by the Crosstown Realty Corporation with the petitioner's endorsement.  Petitioner was accustomed to borrow large sums from the bank and these loans were sometimes obtained in the name of the petitioner and sometimes by one of the corporations which he controlled.  It is not sufficient to show that the petitioner owned the majority stock.  It is possible that the Crosstown Realty Corporation could have borrowed an additional amount or that it might have disposed of some of its assets in order to raise the money with which to pay the petitioner's commission, but it is not for us to speculate or theorize on what might have been but was not done.  As was said in the case of *2008 : Before it should be held that a taxpayer constructively received income in any taxable year when he did not, in fact, come into possession of the money or property, it should appear beyond question that the taxpayer, although at liberty, considering the financial requirements and needs of the corporation, to withdraw the amount due him, deliberately chose not to draw or receive the amount owing by the corporation.  * * * The theory of constructive receipt of income should not be extended beyond the principle announced by the Board in , and this proceeding is clearly not within the rule announced in that appeal.  The fact that the decedent owned practically all of the stock of the corporation had nothing to do with the question whether he received income.  The Commissioner argues that "the Board is wholly without information as to the corporation's ability to borrow money or to pay it (the bonus) from other sources than its balances of cash held in banks." The mere fact that a creditor of the taxpayer might borrow sufficient money or sell some of its assets and realize sufficient*2009  cash to pay the taxpayer the amount due does not make the taxpayer in receipt of income on the cash basis.  * * * See *1171  also , and cases cited therein; . The evidence convinces us that the amount of $50,000 voted to the petitioner was not at his command or available for his use in 1925.  The Commissioner erred in his determination of a deficiency and it is disallowed.  Judgment will be entered for the petitioner.