Comm'r of Internal Revenue

Tax Court of the United States.Mar 8, 1944
3 T.C. 427 (U.S.T.C. 1944)
3 T.C. 427T.C.

Docket Nos. 138 139.



O. Walker Taylor, Esq., for the petitioners. Melvin L. Sears, Esq., for the respondent.

Where petitioners have rendered personal services over a period exceeding five calendar years and thereafter compensation in full is paid for those services, held, petitioners have met the requirements of Internal Revenue Code, section 107, permitting the tax to be computed as though the compensation had been received ratably over the previous years. O. Walker Taylor, Esq., for the petitioners. Melvin L. Sears, Esq., for the respondent.

These two consolidated proceedings challenge the correctness of a deficiency of $939.65 in the income tax of H. Ellis Straw for 1940, and a deficiency of $579.70 for the same year in the income tax of Harry L. and Annie S. Additon.

Petitioners Harry L. and Annie S. Additon concede that their income for 1940 should be increased in the amount of $350 by reason of dividends received.

The sole issue raised by the pleadings is common to both proceedings— whether petitioners, in their returns for 1940, are entitled to the benefits of section 107 of the Internal Revenue Code.


Harry L. Additon and Annie S. Additon, petitioners in Docket No. 138, are husband and wife, residing in Manchester, New Hampshire, and for the year 1940 filed a joint income tax return. H. Ellis Straw, petitioner in Docket No. 139, is an individual residing in Manchester, New Hampshire, and for the year 1940 filed an individual income tax return.

On January 13, 1931, the two petitioners were appointed as members of the liquidating committee of the First National Bank of Manchester, New Hampshire, whose stockholders on that day resolved it ‘be placed in voluntary liquidation under the provisions of Section 5220 and Section 5221 of the United States Revised Statutes.‘

Soon after the appointment of the committee the quick assets of the bank were liquidated, and the stockholders thereof were paid partial liquidating dividends to an aggregate amount of $60 per share. Thereafter the only assets of the bank remaining in their hands were a one-half interest in the land and buildings where the bank had been located, which was carried on the books of the bank as an asset, a number of life insurance policies which had been assigned to the bank in compromise of bad loans, and some cash on deposit in the First National Bank of Boston. The insurance policies had never been carried on the books of the bank as assets.

During the year 1940 the one-half interest in the land and building of the bank was sold for cash and the only remaining assets of the bank were an unspecified amount of cash and the insurance policies.

On or about November 21, 1940, the liquidating committee determined, through recourse to the insurance agents, that the then cash value of all the life insurance policies for a face value of $215,000 was a little more than $63,000— sufficient to pay a final liquidating dividend of $60 per share to the stockholders of the bank.

The liquidating committee was in doubt as to whether they should cash in the policies and make a final distribution, or wait until the policies matured to do so. After consultation with some of the larger stockholders the committee sent the following letter to all the stockholders:

To the Stockholders of the

First National Bank of Manchester

Manchester, New Hampshire

This bank has been in liquidation since February 1931, and practically all of the assets appearing on its statement have been turned into cash so far as has been found possible. It therefore seems desirable to give those stockholders who are anxious to see an end of the matter an opportunity to dispose of their stock.

An asset of the bank which has never appeared on its statement is sundry life insurance policies on the lives of certain individuals, which have a face value of $215,000, and a present cash surrender value of over $63,000. These insurance policies appear to have been acquired by the First National Bank in compromise of debts before liquidation was begun. If this insurance were now to be surrendered to the insurance company for its cash surrender value, the bank could pay a final liquidating dividend of approximately $60.00 per share. To some of the larger stockholders, however, it seems expedient to continue to carry this insurance rather than take the cash for it at this time, and a group of these stockholders now stand ready to purchase at $63.00 per share the stock of any stockholder who would prefer to receive this amount for his stock at the present time. This price of $63.00, you will note, is more than the $60.00 above mentioned as the present liquidating value of the stock.

After the stockholders have had an opportunity to accept or reject this offer, it is the intention of the Liquidating Committee to continue the organization of the First National Bank of Manchester for the purpose of keeping the premium on these insurance policies paid as long as it seems expedient or until the policies become a claim against the companies which issued them. Any stockholder should feel free either to accept the offer of $63.00 per share for his stock or to continue to hold the stock which he now owns.

Should you decide to accept this offer, your stock should be presented on or before December 4, 1940 at the Merchants National Bank, 839 Elm Street, Manchester, New Hampshire, where you will be required to execute a full and complete assignment of your stock certificate. Prompt payment of the amount due will then be made. The transaction may be undertaken by mail if more convenient to you.


Twelve of the stockholders accepted the offer as set forth in the above letter and sold their stock to the remaining eighteen stockholders. No stock was retired by the bank as a result of this letter.

The First National Bank of Manchester has never surrendered its charter. The committee has never been discharged; it has never rendered a final accounting; and petitioners did not resign from it. Reports to the Comptroller of the Currency have been rendered during the progress of liquidation on the 1st day of April and October of each year.

None of the life insurance policies have fallen due as death claims, but when they do the committee would not hesitate to collect the proceeds in the bank's name if that were necessary. The policies had all been assigned to the bank by absolute assignments.

In 1940, shortly after sending the previously described letter to the stockholders, petitioners were paid for all the services they had rendered from the time of their appointment in 1931. They did not at that time expect to receive any further compensation for any further services they might be called upon to perform. During the approximately three years from the time they were paid to the time of the hearing in this case they had performed no services for which they had received or were to receive additional compensation. In 1940 they had completed the services for which they were paid in that year.

Petitioner Harry L. Additon reported the $5,000 which he had thus received in his joint return for the year 1940, but attached a schedule thereto showing the allocation of the $5,000 over the entire period of service, claiming the benefit of section 107 of the Internal Revenue Code. Petitioner Straw reported the $5,000 which he had thus received in his income tax return for the year 1940 and attached a schedule thereto showing the allocation of $500 thereof to each of the years from 1931 to 1940, inclusive, assuming to act under the provisions of section 107 of the Code.


OPPER, Judge:

Whether these petitioners may avail themselves of the provision permitting compensation for services rendered over a period exceeding five years to be taxed as though its receipt had been spread over prior years presents an apparently novel question of the correct interpretation of Internal Revenue Code, section 107 (as added by Revenue Act of 1939, section 220), reading as follows:


In the case of compensation (a) received, for personal services rendered by an individual in his individual capacity, or as a member of a partnership, and covering a period of five calendar years or more from the beginning to the completion of such services, (b) paid (or not less than 95 per centum of which is paid) only on completion of such services, and (c) required to be included in gross income of such individual for any taxable year beginning after December 31, 1938, the tax attributable to such compensation shall not be greater than the aggregate of the taxes attributable to such compensation had it been received in equal portions in each of the years included in such period.

There is no question that the payment petitioners received in the tax year in controversy was for personal services covering a period of more than five years nor that it was required to be included in their gross income for a year beginning after December 31, 1938. The single dispute is the proper interpretation of subsection (b) or, more specifically, the precise scope of the requirement that the compensation in question be ‘paid * * * only on completion of such services.‘ Petitioners insist that all that is actually called for is the elapse of a five-year period, whether or not the services have then been completed; respondent, on the other hand, regards as the sole conclusive test a determination of whether the original ‘undertaking‘ had been completed upon receipt of the compensation.

It seems to us that neither of these proposed interpretations correctly reflects the purpose of the statute nor gives effect to its specific language. The statute requires that payment be made only upon the completion of ‘such services.‘ Reference to the preceding portion of the provision demonstrates that ‘such services‘ signifies the services for which the compensation in question is paid, provided that these are rendered over a period extending not less than five years prior to payment. The evidence concern in inserting the qualifying language was to eliminate advance payments, in excess of 5 percent, for services to be rendered in the future. If this had been doubtful from the context of the provision itself, it would have been demonstrated by the subsequent amendment in which the requirement of ‘completion‘ was eliminated. Revenue Act of 1942, sec. 139(a), amending Internal Revenue Code, sec. 107 and particularly Report No. 1631, Senate Finance Committee, 77th Cong., 2d sess. We consequently view the present question as limited to the narrow issue whether the services for which petitioners received the compensation in dispute can be regarded as having been ‘completed‘ by the time payment was received.

‘ * * * Thus, for example, if an individual commences personal services on July 1, 1941, and completes them on July 1, 1944, and is paid $8,000 for such services on April 1, 1943, he is entitled to the benefits of section 107(a), provided the $8,000 is at least 80 percent of the total compensation paid to to be paid for such services; * * * ‘ (P. 108.)

While it is true that nominally the bank's ‘Liquidating Committee,‘ of which petitioners were members, continued to exist thereafter and a portion of the bank's assets in the form of insurance policies had not yet been converted into cash, the services for which the Committee was paid had been brought to a conclusion. They had accomplished the conversion of the assets into such liquid form as cash or immediately collectible cash obligations and had apparently discharged all debts. They had completed an arrangement whereby the stockholders who preferred immediate withdrawal could receive their ultimate distribution in the form of a purchase of their stock for cash by the remaining stockholders. Upwards of a third of those concerned availed themselves of that procedure. From that time on the group for whom the liquidating committee was acting as agents was differently constituted. Even though the original undertaking was not completed, the part that was paid for had been. Something remained to be done, but it was anticipated that it would be so insignificant and inconsequential that petitioners did not expect to receive any compensation for it and in fact had been called upon for no activity of a liquidating nature during the three years between the payment and the date of the hearing.

On such a record we think that all of the services for which the compensation was received had been completed at the time payment was made. Since this was the only compensation for these services, and since they represented the labor of a period in excess of the five-year requirement of the statute, we are satisfied that petitioners have brought themselves within its relief provisions. Because of conceded errors in petitioners' computations,

Decision will be entered under Rule 50.