Comm'r of Internal Revenue

Tax Court of the United States.Aug 20, 1952
18 T.C. 883 (U.S.T.C. 1952)
18 T.C. 883T.C.

Docket Nos. 32630 32631.



Robert Ash, Esq., and Carl F. Bauersfeld, Esq., for the petitioners. Jules I. Whitman, Esq., for the respondent.

Petitioners were the sole stockholders, the principal officers, and two of the three directors of a corporation which, on January 2, 1947, authorized the payment to them of an incentive bonus based on a percentage of profits for the year. On December 2, 1947, before the exact amount of profits had been determined, the directors adopted a resolution authorizing the payment to petitioners of $10,000 each of their bonuses for that year. The corporation had ample funds available for such payments. In January 1948 it was determined that each petitioner was entitled to a bonus for 1947 of $12,067.74, based on the corporation's net profits for that year. Held that petitioners each constructively received $10,000 of their 1947 bonus in that year. Robert Ash, Esq., and Carl F. Bauersfeld, Esq., for the petitioners. Jules I. Whitman, Esq., for the respondent.

These proceedings consolidated for hearing involve deficiencies in income tax for 1947 as follows:

+---------------------------------------------------------------------------+ ¦Docket ¦ ¦ ¦ +--------+-----------------------------------------------------+------------¦ ¦No. ¦Petitioner ¦Deficiency ¦ +--------+-----------------------------------------------------+------------¦ ¦32630 ¦James J. Cooney and Helen J. Cooney, Husband and Wife¦$4,045.64 ¦ +--------+-----------------------------------------------------+------------¦ ¦32631 ¦Francis E. Cooney ¦3,869.26 ¦ +---------------------------------------------------------------------------+

The sole question in issue is whether petitioners constructively received certain bonuses authorized by the corporation of which they were the stockholders and principal officers.


The petitioners are residents of Philadelphia, Pennsylvania. They filed their returns for 1947 with the collector of internal revenue for the first district of Pennsylvania. Petitioner James J. Cooney filed a joint return with his wife, Helen J. Cooney, who is also a petitioner in Docket No. 32630. The term petitioners as hereinafter used will refer to James J. and Francis E. Cooney.

Petitioners are brothers. In 1947 and 1948 they owned equally all the stock of Cooney Brothers, Inc., a Pennsylvania corporation, engaged in the wholesale plumbing and heating supply business. James J. Cooney was president and Francis E. Cooney vice president of the corporation. H. Eugene Heine was secretary. These three persons were also the directors of the corporation.

Petitioners made their returns on a cash basis of accounting. Cooney Brothers, Inc., hereinafter referred to as the corporation, reported on an accrual basis.

On January 2, 1947, the directors of the corporation adopted a resolution fixing the salary of the petitioners at $10,000 per year each and providing further

RESOLVED, that the President and the Vice President be paid an incentive bonus of 10% of the net profit of the Corporation for the year 1947, estimated before corporate income taxes.

On December 2, 1947, the directors of the corporation adopted another resolution providing in part as follows:

RESOLVED, that whereas it would appear certainly assured that the net profits of this Corporation before taxes for the year 1947 will be not less than $125,000, but the exact amount of such net profits cannot be finally determined until after the close of the Corporation's books for the current fiscal year,

NOW, THEREFORE, BE IT AND IT HEREBY IS RESOLVED, that there be paid during the month of December to the President, James J. Cooney, on account of his incentive bonus for the current year, the sum of $10,000, and to the Vice-President, Francis E. Cooney, a like sum of $10,000, and

FURTHER RESOLVED, that the balance of the said incentive bonus determined to be due and payable after an accounting for the year 1947 be paid as of December 31st to Messrs. James J. Cooney and Francis E. Cooney in accordance with the Resolution of January 2, 1947.

The exact amount of the bonus due petitioners was determined and accrued on the corporation's books February 25, 1948, and was paid to petitioners on the following dates:

+--------------------------------------+ ¦ ¦Payments to— ¦ +----------------+---------------------¦ ¦Date ¦James J. ¦Francis E.¦ +----------------+----------+----------¦ ¦ ¦Cooney ¦Cooney ¦ +----------------+----------+----------¦ ¦4-3-47 (Advance)¦$200.00 ¦$200.00 ¦ +----------------+----------+----------¦ ¦1-9-48 ¦10,000.00 ¦10,000.00 ¦ +----------------+----------+----------¦ ¦3-12-48 ¦1,092.10 ¦1,269.17 ¦ +----------------+----------+----------¦ ¦6-15-48 ¦325.43 ¦502.50 ¦ +----------------+----------+----------¦ ¦9-15-48 ¦450.21 ¦96.07 ¦ +----------------+----------+----------¦ ¦Total ¦$12,067.74¦$12,067.74¦ +--------------------------------------+

During 1947 and 1948 the corporation maintained bank accounts at the Ninth Bank and Trust Company and at the Pennsylvania Company in the City of Philadelphia. Checks drawn on those accounts were required to be signed by both petitioners. No other corporate officer was authorized to sign checks on the accounts. From November 28 through December 1947 petitioners' cash balance in its bank accounts was in excess of $100,000.

Since the corporation did not keep a perpetual inventory record, it was necessary for it to take a physical inventory before the exact amount of its 1947 profits could be determined. An inventory count was commenced about a week before the end of 1947 and was completed about the end of the first week in 1948. The pricing of the inventory, at cost or market, whichever was lower, was completed about a month later. A value of $104,460.35 was determined for the inventory as of December 31, 1947.

Petitioners constructively received $10,000 each of their 1947 incentive bonus in that year.


LEMIRE, Judge:

Our above finding that petitioners constructively received $10,000 of their incentive bonus for 1947 in that year disposes of the only issue before us in these proceedings.

By the resolution of January 2, 1947, petitioners were entitled for that year, in addition to their salaries of $10,000 each, to a bonus equal to 10 per cent of the corporation's net profits. The resolution of December 2, 1947, authorized the payment to petitioners in December of that year of $10,000 each in partial payment of the bonus due them under the January 2 resolution. That amount was based on an estimate that the corporation's profits for 1947 would be not less than $125,000. These payments were not subject to any contingencies. The petitioners themselves were in complete control of the corporation and could have withdrawn the $10,000 payments at any time after the December 2 resolution, without any further action by the corporation.

This is not a situation where, as petitioners argue, their constructive receipt of the funds depended upon book entries showing the amounts set aside or credited to them in the corporation's books. The December 2 resolution was in itself sufficient to vest in petitioners a complete and unqualified right to the present use and enjoyment of the funds. Its very purpose was to make $10,000 of their bonuses available to them in 1947, before the final determination of the exact amount of the corporation's profits for that year. It stands to reason that if any further corporate action had been deemed necessary to carry out that purpose it would have been taken. It is not explained why neither of the petitioners withdrew any of their bonuses in 1947 after the resolution was passed. Ample funds were available and petitioners were in a position to withdraw the funds at their pleasure. Apparently, they each withdrew $200 as an advance on their bonus in April 1947 before any credit was made to them in the corporation's books and without any specific authorization, such as the December 2 resolution.

In Van W. Peabody, 5 T.C. 426, one of the cases relied upon by the petitioners, we held that there was no constructive receipt in 1940 of extra compensation which had been agreed upon but not credited to the account of the taxpayer or set apart for him in any manner in that year, saying:

Applying the regulation tests (Regs. 111, sec. 29.42-2), we find that the income was not credited to the account of the taxpayer in the taxable year, nor was it set apart for him in any manner. Though there were general funds on hand, no funds were labeled in any way as available for the taxpayer to draw upon them. He had an agreement as to the amount with the president of the corporation, but there is no evidence of any action by the board of directors binding the corporation. There are no minutes or other record of any corporate action. Such an agreement with the president was not tantamount to crediting or setting apart ‘to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition on which payment is to be made,‘ nor can we say that such income was ‘made available to him so that it (could) be drawn at any time, and its receipt brought within his own control and disposition.‘ The book entries were not made until after the close of the taxable year.

In Weil v. Commissioner, 173 F.2d 805, it was held that there was no constructive receipt of executors' commissions where such commissions had not been credited to the executors' accounts or ‘set apart for them in any manner ‘ and the estate did not have sufficient cash to make the payments. The court said:

* * * Section 19.42-2 of Regulations 103 does not require any particular type of bookkeeping. Indeed, the section itself clearly implies that a book entry is not the only way to establish a credit, since it provides: ‘A book entry, if made, should indicate an absolute transfer from one account to another ‘. Usually, of course, an entry on the obligor's books crediting a sum to the account of the obligee will be the best evidence that the obligee has only to reach out his hand to reduce the debt to possession, but it is not necessarily the only evidence that he has unfettered control of the money. See Acer Realty Co. v. Commissioner, 8 Cir., 132 F.2d 512, 515-516.

In the Acer Realty Co. case (132 F.2d 512) to which the court referred in the Weil case it was held that the mere postponement of making a book entry did not prevent constructive receipt. Cf. also Eckhard v. Commissioner, 182 F.2d 547, and Hyland v. Commissioner, 175 F.2d 442.

In C. E. Gullett, 31 B.T.A. 1067, we said that

* * * amounts due from a corporation but unpaid, are not to be included in the income of an individual reporting his income on a cash receipts basis unless it appears that the money was available to him, that the corporation was able and ready to pay him, that his right to receive was not restricted, and that his failure to receive resulted from exercise of his own choice. * * *

All of those conditions were met in the instant case.

In the circumstances here we do not think that constructive receipt depended upon book entries showing the bonus money set aside or credited to the petitioners. The determining facts are that the $10,000 payments to petitioners were duly authorized by the corporation's board of directors; that they were expressly made payable within the taxable year; that the funds were available and that they were subject to petitioners' use and enjoyment within the taxable year. The action of the respondent in including the bonuses, to the extent of $10,000 each, in petitioners' income for 1947 is sustained.

Decision will be entered under Rule 50.