210 F.2d 505 (7th Cir. 1954), 10915, McNamara v. C.I.R.

Docket Nº:10915.
Citation:210 F.2d 505
Party Name:McNAMARA v. COMMISSIONER OF INTERNAL REVENUE.
Case Date:February 23, 1954
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 505

210 F.2d 505 (7th Cir. 1954)

McNAMARA

v.

COMMISSIONER OF INTERNAL REVENUE.

No. 10915.

United States Court of Appeals, Seventh Circuit.

February 23, 1954

Herman A. Fischer, Chicago, Ill., Ellsworth C. Alvord, Washington, D.C., William H. Quealy, Chicago, Ill., for petitioner.

H. Brian Holland, Asst. Atty. Gen., Harry Marselli, Ellis N. Slack, Joseph F. Goetten, Sp. Assts. to Atty. Gen., U.S. Dept. of Justice, for respondent.

Before MAJOR, Chief Judge, and DUFFY and SWAIM, Circuit Judges.

SWAIM, Circuit Judge.

The petitioner, Harley V. McNamara, filed his petition in the Tax Court of the United States for a redetermination of a tax deficiency found by the Commissioner on petitioner's individual income tax for the years 1946 and 1947. The Commissioner had determined that the petitioner owed additional income tax in the amount of $61, 244.87 for the year 1946, and $64, 215.93 for the year 1947.

The Commissioner contended that these additional amounts of tax were due because of the purchase by the petitioner in the years 1946 and 1947 of corporate stock of his employer, the National Tea Company, pursuant to an option granted to the petitioner by the National Tea Company to purchase the stock at a price less than the fair market value of the stock in consideration of services of the petitioner. The petitioner contends that he was granted this option not as compensation but in order to give him a proprietary interest in his employer's business; that, if the option were intended as compensation, it could only be considered as compensation to the extent of the difference between the option price and the fair market price of the stock when the option was granted in 1945; and that it, therefore, should be considered as income to him only in 1945, and not in 1946 and 1947 when the option was exercised. During the years 1945, 1946 and 1946, the petitioner filed his income

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tax returns on a cash receipts and disbursements basis.

Prior to March 1, 1945, the petitioner was employed by the Kroger Grocery and Baking Company as manager of its Chicago branches. In this employment he received a fixed salary and a percentage of the profits. Early in 1944 the petitioner and Mr. John F. Cuneo had a talk concerning the possible acquisition by Cuneo of stock in the National Tea Company. This stock had been selling at a low price, which they agreed resulted from poor management of National. In 1944 Cuneo, after acquiring a large block of National stock, talked to the petitioner about leaving Kroger and taking over the management of National. The petitioner indicated that he would be willing to do this at a slight increase in salary, but that if he did so he would also want an opportunity to acquire some of the National stock. Cuneo told the petitioner that he (Cuneo) would recommend such an arrangement to the board of directors of National.

On February 2, 1945, the petitioner received a letter from Cuneo enclosing a proposed contract of employment of the petitioner, and asking for the petitioner's assurance that he would sign the contract if Cuneo could secure its approval by National. This proposed contract was for one year and provided for an annual salary of $27, 500.00 and additional compensation of 2 per cent of the net profits of National in excess of $300, 000.00, but limited the aggregate annual compensation to the petitioner to $60, 000.00. The contract also provided that, 'In consideration of the Employee's acceptance of employment hereunder, the Company agrees to set aside 12, 500 shares of its Capital Stock now in its Treasury, subject to an option to purchase by the Employee at any time during the term of this contract at the price of $12.00 per share.' The stock was then selling at $15.25 per share. Prior to the annual meeting of the shareholders of National, which was held on March 21, 1945, Cuneo sent a notice to the stockholders notifying them that he was going to recommend to the directors the employment of petitioner as executive vice president and general manager in accordance with the terms set out above.

At the meeting of March 21, 1945, the petitioner was elected a director of National, and at the meeting of the directors on the same date the proposed contract of employment with the petitioner was discussed, but it was decided that no action should be taken on the contract prior to...

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