Barrett v. Comm'r of Internal Revenue

• Decision Date: 11 May 1972
• Docket Number: Docket No. 970-71.
• Citation: 58 T.C. 284
• Parties: HERBERT R. BARRETT AND JOYCE S. BARRETT, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

58 T.C. 284

HERBERT R. BARRETT AND JOYCE S. BARRETT, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 970-71.

United States Tax Court

Filed May 11, 1972.

Jerold A. Fink, for the petitioners.

Donald K. James, for the respondent.

Held, that the $12,000 received by petitioner during the taxable year 1969, under a contract entered into between Philip Carey and petitioner on Jan. 5, 1962, was not self-employment income subject to tax under sec. 1401, I.R.C. 1954.

OPINION

BRUCE, Judge:

Respondent determined a deficiency in self-employment tax of the petitioners for the calendar year 1969 in the amount of $538.20. The only issue is whether $12,000 received by the petitioner, Herbert Barrett, under a contract entered into between the Philip Carey Manufacturing Co. and petition on January 5, 1962, is self-employment income subject to tax under section 1401 of the Internal Revenue Code of 1954.¹ The facts are stipulated and the stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference.

The petitioners are, and were during 1969, husband and wife. They filed a joint Federal income tax return for the calendar year 1969 with the district director of internal revenue at Cincinnati, Ohio. Their residence at the time of filing the petition herein was in Cincinnati.

Prior to December 31, 1967, when his full-time services were terminated, Herbert R. Barrett was executive vice president of the Philip Carey Manufacturing Co., Cincinnati, Ohio (hereinafter called Philip Carey). In 1967 Philip Carey and Glen Alden Corp. (a Pennsylvania corporation) effectuated the terms of a merger agreement between the two corporations, as a result of which the assets of Philip Carey were transferred to a new, wholly owned Ohio subsidiary, also named the Philip Carey Manufacturing Co. Subsequently, this new Philip Carey was merged into Panacon Corp.

On January 5, 1962, petitioner Herbert R. Barrett entered into an agreement with Philip Carey providing for his full-time employment through October 31, 1967, and thereafter until such full-time services would be terminated as provided in the agreement, at $40,000 a year plus such additional benefits as are authorized. The agreement further provided that upon the completion of the petitioner's full-time services, the petitioner would be paid $12,000 a year until October 31, 1977, providing that (1) he would not compete with Philip Carey, directly or indirectly, and (2) he would render advisory and consulting services to Philip Carey whenever reasonably requested.

The agreement of January 5, 1962, provided as follows:

AGREEMENT

THIS AGREEMENT, made this 5th day of January, 1962, but effective January 1, 1962, by and between THE PHILIP CAREY MANUFACTURING COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the ‘Company’), and H. R. BARRETT, of Glendale, Ohio (hereinafter called called ‘Barrett’),

WITNESSETH: THAT

WHEREAS, Barrett for many years has been an executive of the Company and the Company desires for a period of years to be assured of the continuance of his fulltime services and thereafter desires to be assured that he will not compete with the Company, but, on the other hand, will render consulting and advisory services, if and to the extent called upon;

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows:

1. The Company hereby employs Barrett to render fulltime services to the Company for the period beginning on the effective date of this agreement and extending through October 31, 1967, and thereafter until such fulltime services are terminated as hereinafter provided. During such period, Barrett diligently shall perform such executive and administrative duties as shall from time to time be assigned to him by the Board of Directors, and he agrees to give his full time and attention and his best efforts to the business and affairs of the Company. During such period, Barrett will act as an officer, if elected to office, without additional compensation. The foregoing shall not be construed to prevent Barrett acting as director or officer of other non-competing corporations when such activity does not occupy a substantial part of his business time.

2. During the period of fulltime employment, Barrett's salary shall be Forty Thousand Dollars ($40,000) a year. In addition to such salary, Barrett shall be entitled to reimbursement for all reasonable expenses incurred in connection with the business of the Company, to participate in all pension, profit-sharing and similar plans of the Company for the benefits of its executives, and shall also be entitled, but only if and when voted by the Board of Directors of the Company or its Executive Committee, to such bonus or additional compensation as the Board of Directors or its Executive Committee may from time to time deem to be warranted by his performance of services and the condition of the Company.

3. During the period of fulltime employment, in the event that Barrett shall be unable to perform his services by reason of illness or other disability, and such disability should continue for, at least, twelve (12) successive months, the Company shall have the right to terminate the period of fulltime employment, but in such event Barrett shall become entitled to be paid under the subsequent provisions of this agreement in which it is provided that through October 31, 1977, he will not compete with the Company and will render consulting or advisory services to the extent as hereafter provided for. Similarly, at any time on or after October 31, 1967, on written notice given, at least, ninety (90) days prior thereto by the Company to Barrett or by Barrett to the Company, fulltime employment of Barrett by the Company will cease, but in such event the Company will then make the payments to Barrett as provided for in subsequent paragraphs of this agreement under which Barrett will agree not to compete with the Company and will render consulting and advisory services.

4. Upon the cessation of fulltime employment either by reason of the disability of Barrett, as above provided for, or upon the giving of notice of election by either the Company or Barrett, as above provided for, Barrett agrees that prior to October 31, 1977, he will not compete with the Company, directly or indirectly, through employment on a fulltime or parttime or on a consulting or advisory basis for any other business organization in any matter or in any manner which might be deemed to be competitive with or against the best interests of the Company. Similarly, during such period, Barrett will, unless disabled or incapacitated, render advisory and consulting services to the Company whenever reasonably requested so to do by the Company. If Barrett's physical condition so requires, such services shall be rendered at or near the place where Barrett is then residing or sojourning. During the period of such non-competition and during which Barrett, to the extent he is not disabled, shall be required to render consulting and advisory services, if and when called upon, the Company shall pay Barrett the amount of Twelve Thousand Dollars ($12,000) per year, payable in equal monthly installments of One Thousand Dollars ($1,000).

5. The period in which Barrett shall not compete with the Company and shall render advisory and consulting services when called upon, as above provided for, shall be that period of time from cessation of fulltime employment to October 31, 1977, subject to sooner termination in the event of the death of Barrett or in the event of violation by Barrett of his agreement of non-competition or his refusal to render reasonable advisory and consulting services, if not disabled. It is understood and agreed that before the Company may terminate the agreement because of his failure not to comply with the non-competition provision or to render advisory and consulting services, the Company shall give Barrett, at least, twenty (20) days' notice of its intention to terminate and the reasons therefor. Such notices shall be served by delivery thereof in hand to Barrett or by sending the same by registered mail, return receipt requested, addressed to him at his last known address. Barrett shall have twenty (20) days after the delivery or mailing of said notice in which to cure any alleged default and to put himself in compliance with the terms of this agreement for the receipt of such payments. If Barrett shall establish that (1) the violation was unintentional and not in clearly marked disregard of any condition hereof, and (2) the violation has been discontinued, this agreement shall remain in full force and effect. Any waiver by the Company of the right to discontinue said monthly payments to Barrett shall not be construed as a waiver of any matter subsequently occurring.

6. This contract shall not be assignable by Barrett, but shall be binding upon any successors or assigns of the Company.

IN WITNESS WHEREOF, the parties have executed this agreement, in duplicate, on the day and year first above written.

(Signatures omitted.)

Petitioner's full-time employment by Philip Carey was terminated on December 31, 1967. Notice of such termination (as required by the...