Court Opinion

ID: 4602256
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:29:19.543472+00
Date Added: 2024-06-11T07:52:38.296124
License: Public Domain

D. G. Haley, Petitioner, v. Commissioner of Internal Revenue, RespondentHaley v. CommissionerDocket No. 28002United States Tax Court16 T.C. 1462; 1951 U.S. Tax Ct. LEXIS 139; June 29, 1951, Promulgated *139 Decision will be entered under Rule 50.  1. Section 107 (a) -- Compensation for Personal Services -- Legal Managerial Fees.  -- Fees paid in 1943 for personal services in managing a property over a period of years to relieve it of heavy encumbrances and to put it upon a profitable basis, held taxable under section 107 (a).2. Section 107 (a) -- Compensation for Personal Services -- Legal Services to a Corporation -- Liquidating Distributions. -- Liquidating distributions on stock received for legal services are not within section 107 (a).  Henry Ravenel, Esq., and Lawrence A. Baker, Esq., for the petitioner.Percy C. Young, Esq., for the respondent.  Murdock, Judge.  MURDOCK *1462  The Commissioner determined deficiencies in the income tax of the petitioner of $ 2,658.29 for 1943 and $ 3,690.55 for 1947.  The issues for decision are whether section 107 (a) applies to the $ 7,500 which the *1463  petitioner received from his wife in 1943 and to $ 26,821.43 which the petitioner received from Clearwater Bay Company in 1947.  The parties have agreed to dispose of other issues in the settlement under Rule 50.FINDINGS OF FACT.The petitioner filed his returns*140  for the years 1943 and 1947 with the collector of internal revenue for the district of Florida.  He is an attorney at law, specializing in real estate and equity practice.The petitioner's wife, Anne, acquired a tract of land, referred to herein as Terra Ceia, in 1928.  The property was then subject to two mortgages and other heavy obligations which had to be met before it could produce any income for the owner.  Anne had had no experience in handling real estate and they had an understanding that the petitioner would handle the property, endeavoring to clear it of debts and put it on an income-producing basis.  The amount of his compensation was not agreed upon at that time.The petitioner undertook his duties in connection with the property, obtained loans from time to time, perfected the title in connection with one loan, sold a part of the property, began to grow gladioli on the property when a storm destroyed a citrus grove on the property, defended Anne in a suit growing out of the property, and organized a company which rented the property to produce and sell gladioli. This new tenant paid its first rent for the use of the land in 1943.The petitioner and Anne then discussed*141  the matter of compensation for his services in connection with the property from 1928 to 1943, and he received from his wife in 1943 $ 7,500 for handling the property and all legal details of its management during that period.  That was the only compensation which he ever received for those services.The property was then satisfactorily leased and they felt that it would not require much attention from then on, and not the kind of management which it had required in the past, but they agreed that should it require any further attention the petitioner would give it that attention.  The property required little or no attention from the petitioner from that time until the hearing in this case, and the petitioner neither received nor earned any further fee in connection with it.The petitioner on his return for 1943 reported the $ 7,500 as income subject to tax under section 107 (a) and computed the tax accordingly.  The Commissioner, in determining the deficiency for 1943, held that the $ 7,500 was taxable as ordinary income for 1943 and not subject to the provisions of section 107 (a).The $ 7,500 was the total compensation received in 1943 for personal services covering the period *142  of more than 36 months from the beginning to the completion of the services, and was taxable under section 107 (a).*1464  T. R. Palmer and Garrett A. Hobart, acquaintances of the petitioner, formed a plan in October 1936 to acquire land through tax certificates, and they sought the services of the petitioner in that connection.  The three agreed that Palmer and Hobart would supply the money to buy the tax certificates and that the petitioner would perform the necessary legal services in connection with the acquisition of the land and the clearing of title.  Palmer and Hobart did not want to be known in the transaction, and the three decided to form a corporation to be known as Clearwater Bay Company.The petitioner, Palmer, and Hobart entered into a written agreement dated January 20, 1937, to reduce their prior oral agreement to writing.  It recited that Palmer and Hobart had advanced money to purchase tax certificates for certain years on certain amounts and those tax certificates had been assigned to the corporation and they had also advanced money to purchase a mortgage which had been assigned for the benefit of the corporation.  The petitioner agreed to institute the necessary*143  actions to acquire title for the corporation under the tax certificates and the mortage.  The corporation was not to be charged any fee for his services, but those services were a part of the consideration for the agreement.  Palmer and Hobart agreed to pay some additional moneys to acquire title to the lots.  Neither the petitioner nor the corporation was to receive the proceeds of any redemptions of properties which might come to Palmer and Hobart if anyone redeemed any of the lots from the tax certificates. The agreement recited that the corporation had been formed for the purpose of acquiring title to the lots through the foreclosure actions; its capital stock was to consist of 50 shares of no par value; the petitioner was to be entitled to receive one-third of the stock for his services; the remaining two-thirds were to be divided equally between Palmer and Hobart; and the three were to be the directors of the corporation.A resolution was passed at the meeting of the incorporators of the corporation for the issuance of all of the stock of the company to Palmer and Hobart in return for the transfer by them of the tax certificates and a mortgage to the company, and certificates*144  for 25 shares each were issued to them on August 16, 1937.  Those certificates were surrendered the next day, and one-third of the stock was issued at that time to each of the three men.  Palmer and Hobart told the petitioner at that time that his stock was to be earned by his professional services to the company and they were delivering it to him at that time rather than later because they were confident that he would carry out his agreement.  They further reminded him that if he did not perform his agreement the stock would not be of any value to him.The petitioner became president of the corporation and served without salary and without receiving any money for expenses throughout *1465  its existence.  He performed for the corporation continuous legal services which were worth all that he ever received from the corporation.  The company by 1946 had sold all of its land and had as its only assets cash and a mortgage. The mortgage was paid off in March 1947, and the directors voted on April 15, 1947, to dissolve and liquidate the corporation.$ 26,821.43 was received by the petitioner on April 16 and 19, 1947, as his share of a liquidating distribution. The petitioner received*145  a final liquidating distribution of $ 1,502.52 in 1948.  Those two amounts were the only amounts which the petitioner received either from the corporation or from Palmer and Hobart in connection with the transactions above described.The petitioner, on his return for 1947, reported the receipt in that year of $ 26,821.42 as an attorney's fee earned under the contract of January 20, 1937, which was subject to tax under section 107 (a), and computed the tax accordingly.  The Commissioner, in determining the deficiency for 1947, held that the petitioner had received $ 28,253.20 from the corporation as a liquidating dividend upon its dissolution on June 30, 1947, all of which was taxable as a long term capital gain and was not income subject to tax under section 107 (a).  He included $ 14,126.60 in income for 1947.The $ 26,821.43 which the petitioner received in 1947 from the corporation was a liquidating distribution on his stock and was not compensation for personal services within the meaning of section 107 (a).OPINION.The Commissioner calls attention to the fact that the petitioner performed, not only legal services but also managerial services, in connection with his wife's property*146  over the period from 1928 to 1943.  He concedes that the legal services were completed in 1943 but argues that the managerial services were to continue.  The record shows, however, that the managerial services of the kind performed up to 1943 were also terminated at that time and that no important services of any kind were or were to be rendered by the petitioner in connection with this property after that time.  The Commissioner also argues that no particular service was continuous over a period of as much as 36 months.  There was continuity in all of the services rendered in that they were for the purpose of protecting and developing the wife's equity in the property by various means, including refinancing, selling, and developing profitable uses of the property.  That task was finally completed and the $ 7,500 was paid for those services which began in 1928 and were completed in 1943.  The Commissioner has advanced no valid argument and has cited no *1466  authority for his holding that section 107 (a) does not apply to the $ 7,500.  The evidence shows that section 107 (a) applies.The situation in regard to the amount received from Clearwater Bay Company is entirely different. *147  Here no basis for applying section 107 (a) has been shown.  The agreement and the evidence show that the petitioner was to receive stock of the corporation for his services.  The remaining two-thirds of the stock was to go to his two associates, who contributed the necessary cash for the operation of the corporation.  There is no evidence that the petitioner was to receive cash for his services.  He actually received stock of the corporation for his services.  He received the stock on August 16, 1937.  Of course, ultimately he received cash for his stock, but that was almost ten years later.  The petitioner, as a stockholder, shared in the profits realized by the corporation.  Those profits were from transactions in land, and various costs, charges, and expenses were deducted in computing them.  The liquidating distributions which the petitioner received are not distinguishable from such distributions generally.  They can not be regarded, for the purpose of section 107 (a), as compensation for legal services merely because legal services were the consideration for the issuance of the stock to the petitioner.  The petitioner argues that the distributions were in substance compensation*148  for legal services, although they were in form liquidating dividends on stock. It appears to the Court that they were in substance, as well as in form, liquidating dividends on stock. Section 107 (a) was not intended to apply to this kind of a situation.  Cf. Doyle J. Dixon, 16 T. C. 1016.Decision will be entered under Rule 50.