Spears
v.
Comm'r of Internal Revenue

Tax Court of the United States.Dec 4, 1946
7 T.C. 1271 (U.S.T.C. 1946)
7 T.C. 1271T.C.

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Docket No. 6823.

1946-12-4

J. MACKAY SPEARS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Prew Savoy, Esq., for the petitioner. Elmer L. Corbin, Esq., for the respondent.


Petitioner was employed from 1924 to 1929 as a superintendent of construction, receiving a fixed salary, and, on each project he bid and supervised, 10 per cent of the net profits thereof. One such project was started in 1925 and completed in 1927. Due to litigation, collection of the proceeds was not effected until 1941. Petitioner assisted in the litigation and in 1941 received $30,000 as his 10 per cent of the net profits on this project. This amount is more than 75 per cent of his total compensation allocated to the project, but less than 75 per cent of his total compensation under his contract with his employer. Held, petitioner may not apply section 107, I.R.C., in computing his tax for 1941 with respect to the $30,000 payment. Prew Savoy, Esq., for the petitioner. Elmer L. Corbin, Esq., for the respondent.

The petitioner received $30,000 in 1941 as part of his compensation for personal services performed over a period of years. He computed his income tax for 1941 by applying the provisions of section 107 of the Internal Revenue Code. The respondent determined that section 107 was not applicable and that there was a deficiency of $13,537.47. Petitioner alleges that respondent erred in this. In an amended petitioner an overpayment of $157.92, due to an error in computing petitioner's tax, is claimed. The facts are in part stipulated.

FINDINGS OF FACT.

The petitioner is an individual, residing in Washington, D.C. His Federal income tax return for the calendar year 1941 was filed with the collector of internal revenue at Wilmington, Delaware.

Petitioner is a graduate civil engineer. He studied civil engineering and mechanical engineering at North Carolina State College and at Massachusetts Institute of Technology in Boston.

In 1924 he entered the employ of the Highway Engineering & Construction Co. as engineer and superintendent of construction projects. As compensation he was to receive a fixed salary of $250 per month, and in addition 10 per cent of the net profits of each project engineered and superintended by him.

The Highway Engineering & Construction Co. was organized under the laws of Delaware, and from 1924 to 1936 it was engaged in the construction of streets, roads, and highways. In 1936 it sold and transferred all of its assets, subject to liabilities, except debts arising out of certain paving contracts. Thereupon it ceased all construction activities. It continued in existence until 1941, to collect the debts owing it on account of completed contracts.

Pursuant to his contract with the Highway Engineering & Construction Co., petitioner, on April 24, 1925, bid for the construction of a project known as Temple Terrace in Hillsborough County, Florida. The contract was awarded to the company on July 24, 1925, and construction on the contract was commenced in September or October of 1925. The construction was completed about the end of May 1927. Petitioner supervised this construction.

The total amount received by petitioner from the Highway Engineering & Construction Co. with respect to the Temple Terrace contract was $34,678.75, consisting of $4,678.75 fixed salary allocated to the project during the period of construction and $30,000 received in 1941.

In payment for the services under its contract, the Highway Engineering & Construction Co. received certificates issued by the county of Hillsborough, Florida, against certain property owners in the vicinity. Upon the termination of the construction at Temple Terrace, the question was raised as to the legal authority of th- county to enter into a contract for the construction of streets in Hillsborough County. Some of the paving certificates received for this work were bonded by the United States Fidelity & Guaranty Co., which company refused to pay the bonded certificates. The county refused to pay any amount on account of any of the certificates.

The Highway Engineering & Construction Co. brought action against the United States Fidelity & Guaranty Co. in 1930 upon its bond and in November 1931 recovered thereon. In 1932 the company brought action against the county to recover on the unbonded certificates. A decision rendered in the company's favor in 1937 was reversed on the ground that the law under which the paving certificates had been issued had been held invalid. The company also brought action against the county in 1933 on a quantum meruit basis to recover for the paving done. This case was tried in June 1939 and was terminated in 1941. In 1941 the company compromised with the holders of unbounded certificates on the basis of 65 per cent of their face value. Upon settlement with respect to the Temple Terrace unbonded certificates in 1941, this project showed a net profit of approximately $300,000, and in December 1941 petitioner was paid the sum of $30,000 under his contract of employment with the Highway Engineering & Construction Co.

From 1928 to 1941 petitioner assisted in the suits and settlements by preparing data, holding conferences, and appearing as a witness in the suits. From 1928 to 1941 the time spent in this connection was approximately 65 days.

During the period from 1924 to the end of 1929 the petitioner received $21,861.41 as compensation for personal services which he rendered under his contract with the Highway Engineering & Construction Co.

At the end of 1929 petitioner entered into a new contract with the corporation, under which he was to receive $500 per month and 25 per cent of the net profits of construction projects superintended by him in Virginia, Maryland, Pennsylvania, Delaware, and the District of Columbia. He performed services under this contract until 1936. In 1936 a new corporation, ‘Highway Engineering & Construction Co., Inc.,‘ was organized and petitioner received 25 per cent of the stock thereof in lieu of payment from profits on construction jobs, and thereafter he received a straight salary from the new corporation. He received no compensation from the predecessor corporation after 1936 until 1941.

Petitioner paid his 1941 Federal income tax in three installments of $2,000 each on March 18, June 15, and September 4, 1942, and one of $1,699.18 on December 9, 1942. On December 3, 1945, he filed a claim for refund of $157.92 of his Federal income tax paid for 1941. This claim was filed less than three years after the payment of $1,699.18 made on December 9, 1942.

The sum of $30,000 received by petitioner in 1941 is less than 75 per cent of the total compensation received by him for personal services rendered covering a period of 60 months or more.

OPINION.

ARNOLD, Judge:

The issue is whether section 107 of the Internal Revenue Code, as amended by section 139 of the Revenue Act of 1942, is applicable to the payment of $30,000 received by petitioner in 1941 for services as superintendent of construction on a paving project at Temple Terrace, Florida, undertaken by Highway Engineering & Construction Co. in 1925. The section affords relief to taxpayers who receive in one year a large amount as compensation for personal services over a period of years and would otherwise have to pay higher surtaxes than if the amount had been received ratably over the period covered by the services. With respect to payments received or accrued in a taxable year beginning in 1941, the amount must be at least 75 per cent of the total compensation for the services and the period from the beginning to the completion of the services must be at least 60 calendar months, if the statute is to apply. The amount received by petitioner in the taxable year was more than 75 per cent of his total compensation for services in connection with the Temple Terrace job alone, but less than 75 per cent of his compensation for personal services in the employ of the Highway Engineering & Construction Co. from 1924 through 1929 under his first contract of employment. The question is whether the statute applies with respect to compensation for services performed on an individual job where several jobs are performed under the same contract.

(a) Section 107 is amended to read as follows:‘SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE.‘(a) PERSONAL SERVICES.— If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.‘(b) The amendment made by subsection (a) shall be applicable to taxable years beginning after December 31, 1940, but with respect to a taxable year beginning after December 31, 1940, and not beginning after December 31, 1941, the period specified in such subsection shall be sixty months in lieu of thirty-six months, and the percentage specified in such subsection shall be 75 per centum in lieu of 80 per centum.

Petitioner contends that the ‘personal services‘ to which the compensation relates are only those rendered in connection with the Temple Terrace Job; that the ‘total compensation‘ received was the amount of $34,678.75 paid him with respect to that job, of which $30,000, or more than 75 per cent, was received in 1941; that such services began in 1925 and were completed in 1941; and that, therefore, he is entitled to apply section 107 in computing his tax for 1941.

In Harry Civiletti, 3 T.C. 1274; affd., 152 Fed.(2d) 332, the taxpayer, as trustee, received annually compensation for services in receiving and paying out income, and in the tax year received compensation for services in receiving principal. He sought to establish a separation of his duties so as to bring the latter compensation within the purview of section 107. We observed that there was but one appointment, one trust, and one employment, and concluded that the trust did not consist of separate parts, separately compensative.

In Paul H. Smart, 4 T.C. 846; affd., 152 Fed.(2d) 333, the taxpayer, as trustee, received in 1941 compensation allowed by the court for services from 1933 to 1940 in looking after the corpus of the trust. He performed services also in collecting the income of the trust, for which he was separately compensated. We held the Civiletti case was controlling, that the services of the trustee were not severable, and that section 107 was not applicable as the payment in 1941 was not 75 per cent of the total compensation for all the personal services of the trustee.

In Julia C. Nast, 7 T.C. 432, a physician received in 1943 payment of the balance due on a running account which began in 1934. Payments were made thereon in 1937, 1939, and 1940. We held that the period from 1939 to 1943 could not be severed for the purpose of applying section 107, that the total compensation from the beginning to the completion of the services meant the compensation for the entire period from 1934, and that the percentage requirement was not met.

In the present case the petitioner received a fixed salary. His services involved bidding on prospective paving projects and if a bid was accepted the contract was awarded to the company. Petitioner then supervised the work and gave what assistance he could to the collection of the amount due. If a profit resulted to the company on the project, petitioner was to receive 10 per cent thereof in addition to his salary. He supervised several construction jobs in the years 1924 to 1929 under this arrangement. On some of these there were no net profits. His fixed salary was payable in any event. While a portion of the salary was taken from a bank account set up for the project and was charged against the contract price, that was a matter of accounting necessary to ascertain the net profits from which his share thereof could be determined.

We think the issue must be resolved against the petitioner. The statute may be invoked where the taxpayer receives in one taxable year a certain percentage of the total compensation for personal services covering a period of stated duration. The petitioner was employed on a full time basis and did not have a separate contract with the company for each individual project. His ‘total compensation for personal services‘ under his employment contract was his entire salary, together with his share of the profits of the several projects he supervised which resulted profitably. The amount of his compensation charged to or derived from a specific project was but a part of his ‘total compensation for personal services.‘ Under his contract he received $21,861.41 from 1924 to 1929. In 1929 he entered into a new contract providing for 25 per cent of the profits, as well as a fixed salary. The $30,000 received in 1941 under the terms of his 1924 contract was less than 75 per cent of his total compensation for personal services under that contract. We sustain the respondent's determination that section 107 is not applicable.

The petitioner, in his amended petition, claims an overpayment of $157.92 due to an error in computing his tax. Our decisions will result in no overpayment. If an error in computation was made, it will be taken care of in a recomputation under Rule 50.

Decision will be entered under Rule 50.