Court Opinion

ID: 4592590
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:18.627373+00
Date Added: 2024-06-11T07:50:53.318630
License: Public Domain

Harry A. Kaufmann and Florence Kaufmann, Petitioners, v. Commissioner of Internal Revenue, RespondentKaufmann v. CommissionerDocket No. 109450United States Tax Court9 T.C. 435; 1947 U.S. Tax Ct. LEXIS 96; September 25, 1947, Promulgated *96 Decision will be entered under Rule 50.  As an executive of Chrysler Corporation, the petitioner was permitted to acquire certificates of beneficial interest in a trust fund created by the corporation for the purpose of enabling the officers and executives to become owners of shares of stock of the corporation on a basis favorable to them.  The trust funds consisted largely of a percentage of the earnings of the Chrysler Corporation paid to the trustees, which was deducted by the corporation in its income tax returns as additional compensation for the officers and executives.  The petitioner resigned from his position with the Chrysler Corporation in 1937 and, upon surrendering his certificates for shares of beneficial interest in the trust to the corporation, received therefrom on November 23, 1937, cash in the amount of $ 115,767.60.  Held, that this sum, less the actual unrecovered cost of the shares, constituted ordinary income of the petitioner for 1937 as compensation for services rendered. Arthur L. Evely, Esq., for the petitioners.Wesley A. Dierberger, Esq., for the respondent.  Arundell, Judge.  ARUNDELL*435  This proceeding involves a deficiency of $ 36,897.15 in income tax determined for the calendar year 1937 against Harry A. Kaufmann and his wife, Florence Kaufmann.  Because such deficiency concerns only the income of the husband, Harry A. Kaufmann, he will be referred to hereinafter as petitioner.The question presented is whether there should be included in petitioner's income for 1937 the amount of $ 115,767.60 as ordinary income, under section 22 (a) of the Revenue Act of 1936.  Such amount represented the sum paid to the petitioner upon the surrender and assignment of 205 shares of beneficial interest in the Chrysler Management Trust to the Chrysler Corporation*98  in 1937, after petitioner's resignation as an executive therefrom.FINDINGS OF FACT.The petitioner and his wife were, at the time of the transaction hereinafter set forth, residents of Grosse Pointe Park, Michigan.  They filed a joint income tax return for the year 1937 with the collector of internal revenue for the district of Michigan at Detroit, Michigan.  They kept their records and filed their income tax returns on the cash receipts and disbursements and the calendar year basis.During the year 1929, and at all times subsequent thereto until the effective date of his resignation in November 1937, the petitioner was an executive of Chrysler Corporation, hereinafter referred to as the corporation.*436 The Chrysler Management Trust, hereinafter referred to as the trust, was created by a trust indenture dated April 16, 1929, by and between the corporation as the first party, the holders from time to time of certificates for shares of beneficial interest issued under the indenture as the second parties, and certain named trustees as the third parties.  The purpose of the trust was stated in the preamble of the indenture as follows:Whereas, the Corporation is desirous of adopting*99  and carrying out a plan to attract and retain desirable officers and/or executives and to insure the permanency of sound and efficient management of the Corporation and its subsidiary corporations by enabling such officers and/or executives to become owners of stock of the Corporation on a basis favorable to them * * *.The indenture provided for (1) a loan by the corporation to the trust of $ 3,000,000 in cash, to be evidenced by a promissory note payable December 31, 1938, and (2) the right of the trustees to purchase 60,000 shares of corporation common stock for $ 60 per share in cash.  The principal source of income of the trust fund was to consist of a certain percentage of the net annual earnings of the corporation, to be paid over to the trustees.  All funds of the trust were to be invested in shares of common stock of the corporation and other temporary investments.  The income derived from such investments, consisting largely of dividends and interest, was to be placed in an account called the "Surplus A Account." Annual payments to the fund by the corporation and profits from the sale of securities were to be credited to the "Surplus B Account." Distributions were to be *100  made to the shareholders from the "Surplus A Account" as the trustees should determine.The trust estate consisted of 30,000 equal "Shares of Beneficial Interest," evidenced by certificates which were to be issued only in the number "allotted" to the officers and executives of the corporation, who were to be "selected" by a designated committee.  Such certificates were issued upon each selectee's payment to the trustees of $ 25 per share in cash.Article seven of the indenture, pertinent to this proceeding, provides as follows:The Shares or Certificates for Shares of Beneficial Interest shall not be transferable or assignable by any Beneficiary to any person, firm or corporation except to the Corporation upon the termination of his employment by the Corporation or its subsidiary corporations.When any Beneficiary dies or for any other reason whatsoever ceases to be in the employ of the Corporation or its subsidiary corporations, he shall cease to be a Beneficiary and he or his executor or executors or administrator or administrators shall cease to have any right, title or interest, beneficial or otherwise, in the Trust Estate. Upon said termination of employment or within a reasonable*101  time, but in no event more than one year thereafter, he, or in the event of his death, the executor or executors or administrator or administrators of his *437  estate shall surrender, transfer and assign to the Corporation his Certificate or Certificates for Shares of Beneficial Interest and upon such surrender, transfer and assignment the Corporation will pay to him, or in the event of his death, to the executor or executors or administrator or administrators of his estate an amount computed upon the assets and liabilities of the Trustees as at the close of business on the 30th day of April preceding the date on which the employment ceased, as follows: * * * [Two formulas, (a) for determining "book value" of the shares in event of death of the beneficiary and (b) for determining the "aliquot interest" represented by the shares in event employment of the beneficiary ceased.]The Corporation may retain the Shares of Beneficial Interest in the Trust Estate acquired from any holder or may transfer the same to such of its officers and/or executives or officers and/or executives of its subsidiary corporations as may be selected by the Bonus Committee and at such prices as may be determined*102  by the Bonus Committee.  So long as the Corporation shall retain any of said Shares it shall have the same rights therein as if it were a Beneficiary, and upon the transfer of any of said Shares by the Corporation as authorized in this paragraph, and the payment by the transferee to the Corporation of the price fixed by the Bonus Committee, the transferee shall become and be a Beneficiary entitled to all of the rights and subject to all of the obligations of a Beneficiary as set forth herein, except only the duty to pay $ 25 per share to the Trustees.On May 31, 1929, the corporation delivered 60,000 shares of its unissued common stock to the trust at the rate of $ 60 per share. At the same time the trust issued a promissory note to the corporation for $ 3,000,000, bearing interest at 5 per cent, payable December 31, 1938, and secured by the 60,000 shares of stock.The petitioner acquired 200 shares of beneficial interest on October 10, 1929, upon the payment therefor of $ 25 per share, or an aggregate of $ 5,000.  On October 23, 1936, petitioner acquired 5 additional shares, for which he paid to the trustees the sum of $ 1,766.90.  The said 205 shares of beneficial interest in the*103  trust were owned by the petitioner at the time he left the employ of the corporation in November 1937.In 1932 the petitioner received a distribution from the trust of $ 300, which he applied in reduction of the cost of his original 200 shares of beneficial interest, reducing the unrecovered cost of such shares to $ 4,700.  During the years 1936 and 1937, the petitioner received distributions from the aforesaid trust as follows:Feb. 20, 1936, 1 share Chrysler Corporation common stock for each 5shares of beneficial interest in the aforesaid trust held byhim, or an aggregate of 40 shares of Chrysler Corporation stock,valued at $ 97.25 per share$ 3,890Sept. 30, 1936, cash at the rate of $ 10 per share of beneficialinterest 2,000Dec. 21, 1936, cash at the rate of $ 75 per share of beneficialinterest 15,375June 14, 1937, cash at the rate of $ 17 per share of beneficialinterest 3,485Sept. 13, 1937, cash at the rate of $ 18 per share of beneficialinterest 3,690The aggregate amount received by the petitioner on his original 200 shares of beneficial interest during the years 1936 and 1937 totaled *438  $ 27,890, of which $ 4,700 was *104  applied against the unrecovered cost thereof.  The balance of $ 23,190 was subjected to Federal income taxes.  The aggregate amount received by the petitioner on his additional 5 shares of beneficial interest during the years 1936 and 1937 totaled $ 550, leaving an unabsorbed cost for such shares of $ 1,216.90.On November 23, 1937, the petitioner surrendered, transferred, and assigned his 205 shares of beneficial interest in the trust to the corporation and received therefrom cash in the amount of $ 115,767.60.The trust indenture was twice amended.  The second amendment, dated December 2, 1938, provided, inter alia, that, upon termination thereafter of a shareholder's employment by the corporation or its subsidiaries, his shares of beneficial interest were to be surrendered to the trustees rather than to the corporation.The amount of the corporation's earnings which were paid annually to the trust from 1929 to 1937, inclusive, totaled $ 6,114,741.18.  The payments were deducted by the corporation in income tax returns for the respective years and allowed by the respondent as additional compensation in the computation of the income tax liability for those years.In a joint income*105  tax return for the year 1937 the petitioners reported the receipt from the corporation of $ 115,767.60 as proceeds received from the exchange of 205 shares of beneficial interest in the trust and reported as long term capital gain realized therefrom an amount of $ 46,462.96.In determining the petitioner's deficiency, the respondent treated the unrecovered cost of the shares as being $ 6,766.90 and held that the difference between that figure and what he received was ordinary income.  By amended answer respondent claims an increase in the deficiency on the basis of petitioner's actual unrecovered cost of $ 1,216.90.OPINION.This proceeding presents the question of whether the money received by the petitioner upon his resignation as an officer of the Chrysler Corporation and his transfer to that corporation of 205 shares in the trust constitutes compensation for services rendered and is therefore taxable as ordinary income rather than capital gain.Two other cases, Commissioner v. Alldis, 140 Fed. (2d) 885, and Frazer v. Commissioner, 157 Fed. (2d) 282, involve the income tax liabilities of executives of the same*106  corporation holding shares in the same trust.  The petitioner relies on Alldis, supra, while the respondent places his reliance on Frazer, supra.In the Alldis case, employment of the executive terminated by death, after which his administratrix received payment upon the transfer of the trust *439  shares to the Chrysler Corporation.  In the Frazer case, the executive resigned, surrendered the shares to the trust, and received the proceeds himself.  The basic issue in Alldis was whether the income was taxable to the decedent in his final return as having accrued under section 42 of the Revenue Act of 1938 and the principles of Helvering v. Enright, 312 U.S. 636">312 U.S. 636. In Frazer, as in the instant case, the question was whether the net proceeds from the trust constituted compensation for services rendered or was to be treated as a capital gain.It has been argued that the Alldis case is bottomed on the theory that the transaction giving rise to the income was a capital one and is therefore contrary in principle to the reasoning in the Frazer case.  If there is in fact*107  a conflict between the two cited cases as to the nature of the income derived from a disposition of the trust shares, the later pronouncements of both this Court and the Sixth Circuit Court of Appeals in the Frazer case must be accepted as controlling.  We hold, therefore, on authority of Frazer, supra, that the net proceeds paid to the petitioner upon his resignation as an executive of the Chrysler Corporation are taxable as ordinary income for the year 1937.We do not think the amendment to the trust instrument, pursuant to which the petitioner in the Frazer case surrendered his shares to the trust rather than transferred them to the Chrysler Corporation, serves to distinguish the Frazer case from the instant proceeding.Decision will be entered under Rule 50.