Culhane v. Comm'r of Internal Revenue, Docket No. 57573.
| Decision Date | 22 January 1959 |
| Docket Number | Docket No. 57573. |
| Citation | 31 T.C. 758 |
| Parties | JOSEPH R. CULHANE AND MARION C. CULHANE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John B. Huffaker, Esq., and Joseph W. Price, 3d, Esq., for the petitioners.
Max J. Hamburger, Esq., for the respondent.
1. By written agreement, petitioner was employed for the calendar year 1939 by Wilmington Construction Company as its general building superintendent, for which he was to receive a fixed salary plus 50 per cent of the corporate profits. At the end of the year, no further written agreement was executed, but petitioner continued in his employment with Wilmington on the understanding that his remuneration would continue to include 50 per cent of Wilmington's profits. Edge Moor Realty Company was later organized, and petitioner became its general manager under a similar understanding. Howard Perkins was president of Wilmington, and he and his wife, Alexandrine Perkins, owned all of the stock of wilmington and Edge Moor.
2. Perkins was killed on July 10, 1947, in the crash of an airplane owned by Wilmington. Petitioner, a passenger in the plane, was injured in the crash, and subsequently filed suit against Wilmington for damages to cover the injuries sustained. Petitioner's employment by Wilmington was thereafter terminated, and based on his understanding of the terms of his employment, he made claim to one-half of the assets of Wilmington and Edge Moor, after allowing for the capital contributed to each corporation by Perkins and Alexandrine. As being without merit, both Alexandrine and Perkins' estate resisted petitioner's claim against Wilmington and Edge Moor. At that time, petitioner, Perkins' estate, Alexandrine, and Edge Moore were indebted to Wilmington for substantial and undisputed amounts. After extended negotiations, the claims as between petitioner and Wilmington and Edge Moor, and as between Wilmington and Alexandrine, Perkins' estate, and Edge Moor were all settled in one settlement, and all of the parties thereto in joint instrument executed mutual releases.
3. Under the settlement, Alexandrine transferred all of the Wilmington stock to petitioner, receiving therefor $5,335.34 in cash and certain accounts receivable, notes, and accrued interest covering amounts owing to Wilmington by Alexandrine, Perkins' estate, Edge Moor, and Highland Gardens Realty Company. Petitioner received the Wilmington stock and cash in a net amount of. $15,986.95. He released Wilmington and Edge Moor from his claim to one-half the corporate profits of each. In addition, and in satisfaction of his claim for injuries resulting from the airplane crash, he received $35,000 from Wilmington and $5,000 from Wilmington's insurer.
4. Held, that the Wilmington stock and the net amount in cash were received by petitioner in settlement of his claim for 50 per cent of the profits of Wilmington and Edge Moor, and represented compensation for the services he had previously rendered those corporations.
The respondent determined a deficiency in income tax against the petitioners for the year 1949 in the amount of.$318,998.62. The issues raised are (1) whether petitioner Joseph R. Culhane, in 1949, constructively received a dividend in the amount of $450,000 from Wilmington Construction Company, and (2), in the alternative, whether in 1949 he received payment of compensation for prior services in the form of the stock of Wilmington Construction Company and to the extent of the fair market value thereof.
Some of the facts have been stipulated and are found as stipulated.
The petitioners are husband and wife, and residents of West Chester, Pennsylvania. They filed their joint income tax return for the year 1949 with the collector of internal revenue for the first district of Pennsylvania. The return was filed on a cash basis and by the calendar year.
Joseph R. Culhane, hereafter referred to as petitioner, had been in the building business for a number of years prior to 1937, and on occasions had testified as an expert witness in court proceedings involving real estate valuations. In 1937, at a time when he was negotiating for the purchase of some lots in Edgewood Hills for building purposes, he encountered an old friend, Howard A. Perkins, who was an employee of the real estate department of the duPont Company. Perkins expressed an interest in going into the construction business with petitioner, with Perkins to provide the capital and petitioner the ‘know-how.’
On December 31, 1937, the Wilmington Construction Company, hereafter referred to as Wilmington, was organized under the laws of Delaware. A stated purpose was to engage in real estate development and general contracting. The corporation was authorized to issue 1,000 shares of common stock having a par value of $100 per share. No other class of stock was authorized.
At the first meeting of the board of directors of Wilmington on January 4, 1938, Perkins was elected president and petitioner vice president. The original directors of the corporation were Perkins, Lammot duPont, Jr., and petitioner.
On January 6, 1938, certificate No. 1 for 150 shares of the common stock of Wilmington, having a par value of $100 per share, was issued to Perkins, in consideration of his payment of $15,000 to the corporation.
On January 11, 1938, an agreement between Wilmington and petitioner for the period January 1, 1938, to January 1, 1939, was executed. Petitioner agreed to act as general building superintendent for Wilmington, supervising its construction of residential properties, in t return for which he was to receive $3,600 for the year, payable monthly, plus 50 per cent of the profits of the business. The agreement provided that it was intended that the salary authorized for petitioner as vice president of Wilmington in the amount of $3,600, by a prior act of the board of directors, would be the same as the salary therein provided for him as general superintendent, except that as general superintendent he would be further entitled to 50 per cent of the profits.
In addition to 50 per cent of the profits of the business realized during the period of his employment, petitioner was also to be entitled to 50 per cent of the profits arising from houses erected during his employment but not sold until after the termination of such employment. In the case of such houses petitioner was to be limited to participation in the profits of no more than 12 houses so erected.
On July 22, 1938, certificate No. 2 for 100 shares of the common stock of Wilmington, having a par value of $100 per share, was issued to Alexandrine duPont Perkins, hereafter referred to as Alexandrine, then the wife of Perkins, in consideration of her payment of $10,000 to the corporation. Certificate No. 3 for 580 shares of the common stock of Wilmington, having a par value of $100 per share, was issued to Perkins on October 31, 1938, in consideration of his payment of $58,000 to the corporation.
At and after January 1, 1939, the final date of petitioner's employment under the written contract of January 1, 1938, no further written agreement of employment was executed, but petitioner had an understanding with Perkins that he would continue to work for Wilmington on the basis of a 50 per cent division of Wilmington's profits.
In 1939 or 1940, Edge Moor Realty Company, hereafter referred to as Edge Moor, was organized. Petitioner rendered services to Edge Moor under a similar understanding that he would be entitled to 50 per cent of the profits of that corporation.
At a special meeting of the stockholders of Wilmington held on May 9, 1940, Perkins and petitioner were appointed as its executive committee. Alexandrine was elected to the board of directors on November 24, 1941, after Lammot duPont, Jr., had resigned. There were no further changes in the board of directors or in the executive committee until after July 10, 1947, and Perkins continued as president and petitioner as vice president until that date.
On January 10, 1942, Wilmington's charter was amended, whereunder Wilmington's authorized capital stock was increased to 2,000 shares of common stock having a par value of $100 per share. On May 8, 1942, certificate No. 4 for 700 shares of the common stock of Wilmington was issued to Alexandrine, in consideration of her payment of $70,000 to the corporation.
On August 7, 1946, Wilmington's board of directors authorized the payment of a dividend in the amount of $3 per share. This dividend was paid as follows:
+--------------------------------------------------+
¦ ¦Number of ¦Amount of ¦
+--------------------------+-----------+-----------¦
¦ ¦shares ¦dividend ¦
+--------------------------+-----------+-----------¦
¦Alexandrine duPont Perkins¦800 ¦$2,400 ¦
+--------------------------+-----------+-----------¦
¦Howard A. Perkins ¦730 ¦2,190 ¦
+--------------------------------------------------+
At the same meeting, the directors authorized a cash bonus payment in the amount of $2,000 to petitioner.
Petitioner at no time prior to July 28, 1949, owned any of the shares of stock of Wilmington or Edge Moor.
Petitioner and Perkins, on July 10, 1947, were riding in a company airplane, which crashed. Perkins was killed, and petitioner was seriously injured.
As of the date of Perkins' death, on July 10, 1947, the capital stock of Wilmington was held as follows:
+--------------------------------------+
¦ ¦Number of ¦
+--------------------------+-----------¦
¦ ¦shares ¦
+--------------------------+-----------¦
¦Alexandrine duPont Perkins¦800 ¦
+--------------------------+-----------¦
¦Howard A. Perkins ¦730 ¦
+--------------------------------------+
On August 8, 1947, Lammot duPont, Jr., was elected a director an on August 12, 1947, he was...
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Turner v. Commissioner
...55-1 USTC ¶ 11,509, 219 F. 2d 18 (C. A. 9, 1955), affirming a Memorandum Opinion of this Court Dec. 19,121(M); Joseph R. Culhane Dec. 23,412, 31 T. C. 758 (1959). A further contention of petitioners is that they urge that the stock bonus is in the nature of a stock dividend and so is nontax......