Barnett v. Comm'r of Internal Revenue , Docket No. 9270-76.
| Decision Date | 26 January 1978 |
| Docket Number | Docket No. 9270-76. |
| Citation | 69 T.C. 609 |
| Parties | BURLEIGH F. BARNETT and NANON L. BARNETT, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner formerly was employed as the chief executive officer of a bank. Upon retirement, he entered into an agreement to provide consulting services to the bank for $1,000 per month. Petitioner also agreed not to provide similar services to any of the bank's competitors in Tyler, Tex. Although he did not in fact perform services for anyone but the bank, petitioner was available to provide consulting services to banks and other financial institutions. Held, based on the entire record, petitioner was engaged in a trade or business for which he received self-employment income, taxable under sec. 1401(a). Allen E. Pye, for the petitioners.
William P. Hardeman, for the respondent.
Respondent has determined a deficiency in petitioners' Federal self-employment tax for 1972 in the amount of $589.97. The issue is whether money received by petitioner Burleigh F. Barnett under a contract between him and Citizens First National Bank of Tyler is self-employment income subject to tax under section 1401.1
This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and attached exhibits are incorporated herein by reference.
Petitioners timely filed a joint Federal income tax return for 1972 with the Internal Revenue Service Center in Austin, Tex. When they filed their petition with this Court, petitioners resided in Tyler, Tex.
Prior to December 31, 1969, petitioner Burleigh F. Barnett (hereafter petitioner) was employed as the chief executive and administrative officer of Citizens First National Bank of Tyler in Tyler, Tex. On December 31, 1969, petitioner retired. Upon retirement, petitioner entered into an agreement with the bank in which it was provided that the bank would pay petitioner $1,000 per month for his services as a consultant. Among other things, petitioner promised not to compete with the bank.
The text of the agreement follows:
CONSULTING AGREEMENT
THIS AGREEMENT made this 21st day of October, 1969, between CITIZENS FIRST NATIONAL BANK OF TYLER, Tyler, Texas, (hereinafter referred to as the “Bank”) and B. F. BARNETT (hereinafter referred to as “Barnett”);
WHEREAS, Barnett has been active in the commercial banking business for over fifty-two (52) years and has great ability in such business and intimate knowledge of the Bank, its operating methods, personnel and problems; and
WHEREAS, the Bank desires to secure Barnett's commitment to furnish advisory services to the Bank following termination of his employment by the Bank and to compensate him therefor;
NOW, THEREFORE, the Bank and Barnett mutually agree as follows:
1. Bank agrees to retain Barnett as a consultant and advisor with respect to the business and affairs of the Bank for a period commencing with his retirement (the 31st day of December, 1969) and to end the 31st day of December, 1974, or upon Barnett's prior death or disability or inability by reason of health to furnish reasonable services of an advisory or consulting nature.
2. Barnett agrees to furnish reasonable services of an advisory or consulting nature with respect to the business and affairs of the Bank as the Bank may reasonably call upon him to furnish and as his health may permit. However, it is understood that such services shall not require Barnett to be active in the day-to-day operations of the Bank and that Barnett shall not be an employee of the Bank but shall act in the capacity of an independent contractor. In this regard, Barnett is free at all times to arrange the time and manner of performance of the consulting services. The Bank may if it wishes, provide Barnett with an office on the Bank premises but Barnett shall not be obligated to use such office. The Bank may also make a secretary available to Mr. Barnett on a part-time basis.
3. Barnett's activities as a consultant and advisor shall include, but not be limited to (1) advice to the management of the bank; (2) advice to the officers of the Bank in the solution of banking problems and contract negotiations; and (3) to present recommendations and make studies with reference to the operation of the bank.
4. Barnett agrees that during the period covered by this contract, he will not act in a similar capacity for any business enterprise which competes in a substantial degree with the Bank and will not engage in any activities involving substantial competition with the Bank.
5. In consideration of Barnett's promise to perform services under this contract, the Bank agrees to pay to Barnett the sum of ONE THOUSAND AND NO/100 ($1,000.00) DOLLARS per month plus reimbursements for expenses incurred in connection with the performance of services under this contract.
6. In addition to the amounts specified in Paragraph 5 above, Barnett shall continue to receive as a member of the Board of Directors of the Bank, a fee presently fixed at $50.00 for each Directors Meeting which he attends. However, at no time shall Barnett accept the position of Chairman of the Board of Directors. If the Board of Directors asks him to serve on the Executive Committee of the Board of Directors, he will agree to serve as a member of such committee but will not accept the position of Chairman of such committee. If Barnett is asked to serve on the Executive Committee of the Board of Directors, he shall receive a fee presently fixed at $20.00 for each Executive Committee meeting which he attends.
7. In the event that Barnett shall for any reason become unable, by reasons of disability or poor health or otherwise, to perform the duties contemplated by this agreement, and if such incapacity shall continue for a period of six months or more, the Board of Directors acting in good faith and without prejudice may terminate this agreement.
8. Either party may, without reason, terminate this contract at the end of any calendar year during the term hereof. Such option may be exercised by either party giving written notice to the other party prior to December 31st of any year during the term hereof of such party's intent to exercise this option.
9. This agreement is contingent upon the receipt by Mr. Barnett of a ruling from the Internal Revenue Service that he has been separated from the service of the Bank within the meaning of Section 402(a)(2) on the 31st day of December, 1969, and that the total amount standing to the credit of Mr. Barnett under the Bank's retirement plan, if distributed within one of his taxable years, will be considered a gain from the sale or exchange of a capital asset held for more than six months as provided in Section 402(a)(2). In the absence of such a ruling, neither party to this contract shall be bound under the terms hereof. (Signatures omitted.)
Pursuant to paragraph 9 of the agreement, petitioner sought a ruling from respondent concerning the taxability of certain distributions to him from the Bank's retirement plan. The ruling was favorable, and the contract is therefore no longer contingent.
In order to obtain a favorable ruling, petitioner had to explain the circumstances under which the distribution from the retirement plan arose. Those circumstances were recited in the ruling issued by respondent, which provides in pertinent part as follows:
The Bank has entered into an agreement with you to retain you as a consultant and advisor with respect to its business and affairs for a period commencing with your retirement and ending December 31, 1974, or upon your prior death or inability to perform services for health reasons. It is understood that such services shall not require you to be active in the day-to-day operations of the Bank and that you will act in the capacity of an independent contractor. You will be free at all times to arrange the time and manner of the performance of the consulting services. The Bank may, if it wishes, provide you with an office on its premises but you will not be obliged to use such office; it may also provide you with secretarial services. Your activities as a consultant shall include giving advice to the Bank's management and to its officers in the solution of banking problems and contract negotiations, presenting recommendations, and making studies with reference to the Bank's operations.
After January 1, 1970, you no longer had authority to initiate policies or procedures and no officer or employee reported to you. You expect to be requested to study policies and procedures in connection with the Bank's operational policies but will have no authority to initiate such studies, order changes to be...
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