Putchat v. Comm'r of Internal Revenue , Docket No. 1896-64.

• Citation: 52 T.C. 470
• Decision Date: 18 June 1969
• Docket Number: Docket No. 1896-64.
• Parties: NATHAN PUTCHAT AND SALLY PUTCHAT, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

52 T.C. 470

NATHAN PUTCHAT AND SALLY PUTCHAT, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1896-64.

Tax Court of the United States.

Filed June 18, 1969.

Robert B. Alexander, Jr., for the petitioners.

Gerald Backer, for the respondent.

Held, an amount received by petitioner as consideration for the release of all his rights under an employment contract, including the right to be employed as a project manager, the right to receive 20 percent of net profits, and the right to exercise a stock option, constitutes ordinary income.

DAWSON, Judge:

Respondent determined a deficiency of $16,370.90 in petitioners' Federal income tax for the year 1959 and of $15.94 for 1960.

Petitioners have conceded certain adjustments made by respondent. The only issue remaining for decision is whether a net amount of $58,433.36 received by petitioner Nathan Putchat in consideration of his release of all rights under a contract constitutes ordinary income or capital gain.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Nathan Putchat (herein referred to as petitioner) and Sally Putchat, husband and wife, were residents of Pleasant Valley, Pa., at the time they filed their petition herein. Their joint Federal income tax return for 1959 was filed with the district director of internal revenue at Camden, N. J.

Petitioner is a graduate civil engineer who has had wide experience in the general construction business and who is a member of a number of professional engineering and related technical societies. From 1938 until 1959 he was the administrative head and principal shareholder of two New Jersey corporations engaged in the general construction business. During that period he also was employed as a consultant by other companies.

In 1958 petitioner was approached by Samuel Simkin (herein referred to as Simkin), president of Charles Simkin & Sons, Inc., a corporation engaged primarily in the mechanical construction business, with regard to subcontracts for construction work on an atomic energy facility for the U.S. Atomic Energy Commission and the U.S. Navy (herein referred to as the atomic energy project). Project specifications required that work be awarded to low bidders whose capability to perform had been demonstrated through experience in jobs of like quality and size. Combustion Engineering had been awarded the prime contract. Charles Simkin & Sons, Inc., was seeking an alliance with an established general construction company in order to meet the specifications for certain subcontracts awarded by Combustion Engineering.

Petitioner was interested in Simkin's proposals and favored a permanent association of some sort to extend beyond the atomic energy project. After numerous discussions between petitioner and Simkin, during which the scope of the arrangement was of primary concern, the two jointly submitted a bid on the atomic energy project. When that bid was accepted, a new corporation, Associated General Builders, Inc. (herein referred to as Builders), was immediately formed to begin construction. The initial capital contributions to Builders were made by Simkin and two other members of his family. No formal arrangement was entered into between Builders and the two corporations controlled by petitioner, but Builders purchased some of their assets and borrowed others for limited periods of time after which they were returned. Out of a maximum of 125 employees of petitioner's corporations, 7 to 10 key employees were employed by Builders or Simkin.

In May 1958 an agreement was entered into by Builders, Charles Simkin & Sons, Inc., and petitioner which provided, inter alia:

WHEREAS COMBUSTION ENGINEERING, INC., a corporation of the State of Delaware, hereinafter called ‘COMBUSTION’, did on the 15th day of July, 1955, enter into a contract with the United States of America, acting through the United States Atomic Energy Commission, identified as Contract #AT (30-3)-198; and

WHEREAS SIMKIN has received a sub-contract from COMBUSTION whereunder SIMKIN is to perform certain work in connection with the performance of the aforementioned contract with the United States of America; and

WHEREAS BUILDERS and SIMKIN have entered into a subcontract whereunder BUILDERS has agreed to perform work under the aforementioned subcontract which SIMKIN has entered into with COMBUSTION; and

WHEREAS BUILDERS desires to engage PUTCHAT and PUTCHAT desires to work for BUILDERS,

2. BUILDERS hereby engages PUTCHAT to work for BUILDERS and PUTCHAT hereby agrees to work for BUILDERS upon the following terms and conditions:

(a) BUILDERS agrees to employ and PUTCHAT agrees to be employed as ‘Vice President in Charge of Construction’ (if there be any legal impediment in PUTCHAT being designated a Vice President he shall be denominated as Superintendent in Charge of Construction) for the period of time necessary to complete the work required to be done by BUILDERS under its said contract with SIMKIN and by SIMKIN under its said contract with COMBUSTION upon the aforementioned Atomic Energy project.

(b) PUTCHAT agrees to devote all of his time, for not less than five (5) days per week, and his best efforts to and for the benefit of SIMKIN and BUILDERS (except as mentioned in provision 2(c) below), and by way of inclusion but not by way of limitation to perform the following services:

(i) To be over-all project manager and to be subject to the direction and control of SIMKIN and to be considered to be employed also by SIMKIN as project manager without any additional compensation except as shall be paid by BUILDERS as hereinafter stated.

(ii) To coordinate all trades, including the mechanical trades of plumbing, heating, and process piping.

(iii) To act in the best interest, according to his best judgment and discretion in good faith, of SIMKIN as well as BUILDERS.

(iv) To do all purchasing involved in the general construction part of the contract, SIMKIN and BUILDERS to be responsible for payment for all purchases.

(v) To be in charge of all job drawings, processing of all paper work involved in general construction, and to be in charge of all records involved in general construction; BUILDERS and SIMKIN to supply all the necessary clerical help, equipment, office space and other things necessary or proper to carry on this work, as well as for the purchasing involved in provision 2(b)(iv) above.

(vi) Not to engage in any work for any other person, firm or corporation during the lifetime of this agreement than BUILDERS and SIMKIN (subject to exceptions not here relevant).

3. (a) During the period of time necessary to complete the work required to be done by BUILDERS under its said contract with SIMKIN and by SIMKIN under its said contract with COMBUSTION upon the aforementioned Atomic Energy project, and for a period of sixty (60) days thereafter, SIMKIN and BUILDERS shall make all reasonable efforts to submit legitimate bids and get more contracts and jobs, whether together or separately, and this contract and employment shall continue upon all the terms, covenants and conditions, including but not by way of limitation, all provisions of compensation, including profits mentioned, also during said period of sixty (60) days, and whether or not there is any additional work to be done during said period of sixty (60) days (salary and other compensation to be apportioned during the last week of the sixty (60) day period), and

(b) if either SIMKIN or BUILDERS or both enters into any other contract or contracts or takes on any additional job or jobs during said Atomic Energy project or the sixty (60) days thereafter, this contract and employment shall continue upon all the terms, -covenants and conditions, including but not by way of limitation, all provisions of compensation including profits mentioned, during the time necessary to complete said additional job or jobs.

4. PUTCHAT shall be entitled to and BUILDERS agrees to pay him the following compensation:

(a) The sum of Three Hundred Dollars ($300.00) per week.

(b) PUTCHAT shall be paid in addition thereto a living allowance in the amount of Fifty Dollars ($50.00) per week.

(c) PUTCHAT shall receive in addition to all the foregoing transportation (the mode or modes of transportation, such as by plane, train, bus or otherwise, to be at the option of PUTCHAT) of PUTCHAT to and from the place of work to his home in Trenton.

(d) PUTCHAT is also to be provided for the purposes of the job or jobs with a station wagon or car and all operating expenses therefor to go to and from the job site or sites.

(e) In addition to all the foregoing PUTCHAT shall receive twenty per cent (20%) of such net profits, determined as hereinafter stated as shall be made by BUILDERS upon its aforesaid contract with SIMKIN, and upon any other contract or contracts entered into upon which job or jobs PUTCHAT shall be employed, payable upon completion of each job and only if PUTCHAT shall remain until completion of the job. In determining net profits there shall be charged off from the total income and revenue of the particular job the actual cost of: labor employed on the job, material used on the job, bonds and insurance premiums, reasonable upkeep and necessary repairs of equipment for the job, freight necessary to transport any equipment or materials to the job, proper overhead charges in connection with the performance of the work of the particular job, but no depreciation shall be charged, and no salaries shall be charged for any services of Theodore T. Simkin, Samuel Simkin or Milton Simkin or for any persons not actively engaged in the performance of the particular contract or the work.

(f) In addition to all the foregoing, and as further consideration and compensation, BUILDERS hereby grants to PUTCHAT an option to acquire forty (40) shares of the common stock of BUILDERS upon the following terms and conditions:

(i) That PUTCHAT abides by all of the terms and...