Aylesworth v. Comm'r of Internal Revenue (In re Estate of Aylesworth) , Docket Nos. 47581

• Decision Date: 29 April 1955
• Docket Number: Docket Nos. 47581,47582,54591.
• Citation: 24 T.C. 134
• Parties: ESTATE OF MERLIN H. AYLESWORTH, DECEASED, CAROLINE ANDREWS MCENTEER AYLESWORTH, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF MERLIN H AYLESWORTH, DECEASED, CAROLINE ANDREWS MCENTEER AYLESWORTH, EXECUTRIX, AND CAROLINE A. AYLESWORTH, SURVIVING WIFE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

24 T.C. 134

ESTATE OF MERLIN H. AYLESWORTH, DECEASED, CAROLINE ANDREWS MCENTEER AYLESWORTH, EXECUTRIX, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF MERLIN H AYLESWORTH, DECEASED, CAROLINE ANDREWS MCENTEER AYLESWORTH, EXECUTRIX, AND CAROLINE A. AYLESWORTH, SURVIVING WIFE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 47581

47582

54591.

Tax Court of the United States.

Filed April 29, 1955.

Ernest R. Mortenson, Esq., for the petitioners.

Maurice E. Stark, Esq., for the respondent.

1. Petitioners' claim that the respondent erred in disallowing as deductions amounts charged to an expense account of $2,000 per month disapproved for lack of evidence showing that a substantial portion of the amounts qualified as business expenses and that the portion that did so qualify was not included in amounts claimed as deductions in returns and allowed by respondent.

2. Decedent entered into an agreement with an incorporated advertising agency in 1947 relating to compensation to be paid to him for bringing to it and helping to maintain a large account and for any new business he might help it to secure. The agreement, after providing for a monthly expense allowance for decedent and for the right to purchase a certain amount of the corporation's common stock for a nominal amount, gave him the right to purchase 500 shares of class A and 500 shares of class B preferred stock of the corporation at 5 cents per share and to have the former redeemed in 1949 and the latter in 1950 at $100 per share. No other shares of class A or class B preferred stock were issued to anyone other than to decedent. The class A shares were in fact redeemed in 1949 and the class B shares in 1950, each at $100 a share. Held:

a. The income realized by decedent as a result of the preferred stock provisions constituted compensation for services and ordinary income.

b. The income was taxable in 1949 and 1950, when the preferred stock was redeemed, and not in 1947 when the agreement was executed.

3. Signatures of wife of decedent on joint returns filed for years 1948 to 1951, inclusive, held not to have been procured by fraud or duress.

4. Disallowance by respondent of a portion of deductions claimed in returns for traveling and entertainment, contributions, loss by theft, and sales tax, approved.

The respondent determined a deficiency in income tax against the Estate of Merlin H. Aylesworth, deceased, for the taxable year 1947 in the amount of $5,307.02, and deficiencies in income tax against the estate and Caroline A. Aylesworth, surviving wife of decedent, as follows:

+---------------+
                ¦1948¦$9,779.40 ¦
                +----+----------¦
                ¦1949¦22,797.68 ¦
                +----+----------¦
                ¦1950¦24,015.76 ¦
                +----+----------¦
                ¦1951¦6,859.48  ¦
                +---------------+
                

The issues are:

1. Are the petitioners entitled to offsetting business deductions against the amounts of $8,000 for the year 1947 and $24,000 for each of the years 1948 to 1951, inclusive, which were received by Merlin H. Aylesworth during those years from Ellington & Company, Inc., and which are conceded by the petitioners to be properly includible in income?

2. Are the amounts of $49,975 received by Merlin H. Aylesworth in each of the years 1949 and 1950 upon the redemption of certain preferred stock ordinary income or capital gains? If ordinary income, are they taxable in 1947, when the agreement respecting the stock was entered into, or in 1949 and 1950 when they were received upon redemption of the stock?

3. Were the signatures of Caroline A. Aylesworth on the joint returns for the years 1948 to 1951, inclusive, procured by fraud and duress?

4. Did respondent err in disallowing a portion of certain deductions claimed in joint returns for traveling and entertainment expenses, contributions, loss from theft, and sales tax for one or more of the years 1947 to 1951, inclusive?

FINDINGS OF FACT.

Merlin H. Aylesworth, hereinafter referred to as the decedent, died September 30, 1952. Caroline Aylesworth, his widow, is the executrix of his estate.

For the year 1947, the decedent filed an individual income tax return and for the years 1948 to 1951, inclusive, joint returns were filed signed by the decedent and his wife. All returns were filed with the collector of internal revenue for the third district of New York. Decedent's occupation was stated on the returns to be that of ‘Advisory Counsel,‘ and he had an office at 30 Rockefeller Plaza, New York City. His books were kept on the case receipts and disbursements basis.

During his lifetime the decedent had been at various times president of both the National Broadcasting Company and of R.K.O. Pictures. He had also been in the newspaper business, and during the taxable years was active in the advertising business. He was an excellent executive and salesman and he knew many prominent and influential persons.

The only business income reported by the decedent in returns for the taxable years 1947 to 1951, inclusive, was that realized from his activities as ‘Advisory Counsel.’ The amounts of reported business income and claimed business deductions, including certain deductions for traveling and entertainment expense, were as follows:

+--------------------------------------+
                ¦    ¦        ¦Claimed   ¦Traveling    ¦
                +----+--------+----------+-------------¦
                ¦Year¦Business¦business  ¦and          ¦
                +----+--------+----------+-------------¦
                ¦    ¦income  ¦deductions¦entertainment¦
                +----+--------+----------+-------------¦
                ¦1947¦$79,000 ¦$28,816.26¦$9,197.19    ¦
                +----+--------+----------+-------------¦
                ¦1948¦49,000  ¦20,031.80 ¦6,264.77     ¦
                +----+--------+----------+-------------¦
                ¦1949¦25,000  ¦17,964.28 ¦4,271.46     ¦
                +----+--------+----------+-------------¦
                ¦1950¦26,800  ¦18,923.91 ¦5,474.75     ¦
                +----+--------+----------+-------------¦
                ¦1951¦30,700  ¦15,754.60 ¦2,339.98     ¦
                +--------------------------------------+
                

The respondent disallowed $1,500 of the amount claimed as traveling and entertainment expense for the year 1947. He allowed the remainder of the business deductions claimed for that year, and all of the business deductions claimed for the years 1948 to 1951, inclusive. The business deductions claimed and allowed for the taxable years covered expenditures for salaries, interest, taxes, club dues, depreciation on furniture and automobile, rent, light, water, petty cash, telephone and telegraph, office supplies, office expense, insurance, miscellaneous expense, safe-deposit box, and auto expense, as well as traveling and entertainment. The decedent owned only one automobile.

Additional deductions claimed by petitioners in the returns for the years 1948 to 1951, inclusive, were partially disallowed by the respondent as follows:

+-----------------------------------------+
                ¦Year¦Item           ¦Claimed  ¦Disallowed¦
                +----+---------------+---------+----------¦
                ¦1947¦Contributions  ¦$4,954.00¦$2,000.00 ¦
                +----+---------------+---------+----------¦
                ¦1948¦Contributions  ¦4,570.00 ¦2,500.00  ¦
                +----+---------------+---------+----------¦
                ¦1949¦Contributions  ¦2,745.00 ¦1,500.00  ¦
                +----+---------------+---------+----------¦
                ¦1949¦Loss from theft¦600.00   ¦250.00    ¦
                +----+---------------+---------+----------¦
                ¦1950¦Contributions  ¦2,875.00 ¦1,500.00  ¦
                +----+---------------+---------+----------¦
                ¦1951¦Contributions  ¦2,105.00 ¦1,000.00  ¦
                +----+---------------+---------+----------¦
                ¦1951¦Sales tax      ¦268.40   ¦143.40    ¦
                +-----------------------------------------+
                

Ellington & Company, Inc. (hereinafter referred to as Ellington), was an advertising agency. In 1947, decedent was instrumental in bringing to Ellington an important new client, referred to as Cities Service. Prior thereto decedent was neither an officer, employee, nor stockholder of Ellington.

On September 10, 1947, decedent entered into a written agreement with Ellington, which was set forth in a letter by Ellington to the decedent reading as follows:

This will confirm our conversation of yesterday. If this meets with your understanding, we can initial it, as you suggest, and later on have any documents drawn up that may be indicated.

Based on your estimate of minimum annual revenue from the Cities Service account of $212,000, the following will be carried out: (The understanding also is that if revenue from Cities Service or other new business you may help secure develops beyond this point, we would mutually work out additional means of compensating you, such as salary, bonus or expense allowance— the controlling principal being that this is a starting basis by which the account pays its way, and likewise, in case revenue from the account is lost in part or in whole during the next thirty-six months, and is not made up be (sic) revenue from other business you help secure, then this factor would be taken into consideration in paying off your Preferred Stock. This could be mutually worked out— for example, by extending the callable dates or reducing the amount of the Preferred Stock).

1. Expense Allowance of $2,000 per month.

2. 20% of the total outstanding Common Stock of the Corporation— cost to you 1¢ per share— subject to the same options and agreements as the other stockholders (principals) give and receive. (We are to change the present agreement to provide a formula for setting a value on the Common Stock and add a provision against any call of any principal's stock, except by mutual agreement, as long as the principal is an active member of the firm.) 3. $50,000 of Prior Preferred Stock, which the company agrees to call for $50,000 eighteen months after receiving the Cities Service account— and $50,000 of Prior Preferred Stock which the company agrees to call for $50,000 thirty-six months after getting the Cities Service account— cost to you 5¢ per share.

This stock will be held in escrow for you, but with this provision for the protection of your widow or estate in case of your death: She would receive the full amount of the callable price if the...