Basila v. Comm'r of Internal Revenue
| Decision Date | 20 April 1961 |
| Docket Number | Docket No. 61738. |
| Citation | 36 T.C. 111 |
| Parties | BASIL F. BASILA AND M. FRANCES BASILA, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
C. A. L. Johnstone, Jr., Esq., for the petitioners.
Frederick T. Carney, Esq., for the respondent.
Petitioner Basil F. Basila was president, general manager, and principal shareholder of a company. His employment contract with the company provided for a bonus to be determined at the end of each of the company's fiscal years, October 31, to be paid to him on January 4 of the following year. For the fiscal year ending October 31, 1952, the company, on accrual basis, determined petitioner's bonus to be $129,692.24. Pursuant to an oral request by petitioner, the accountant estimated petitioner's total tax liability because of the bonus and credited that amount, $82,957.92, to a withholding tax payable account. The balance of $46,734.32 was credited to a bonus payable account. Before the bonus was calculated an advance payment of $38,000 was made in 1952 to petitioner, which was included as income in petitioner's amended return for 1952. No amount of the withholding on the bonus was reported by petitioner as income in 1952, the year in issue. The balance of the bonus, $8,734.32, was paid in 1953 and the entire amount of the withholding was paid in 1953 in reduction of petitioner's 1953 liability. Both amounts were included as income for that year. Petitioner reported his income on the cash basis in 1952. Held, that the balance of the bonus payable account which was credited to petitioner in 1952 was not constructively received by him in 1952 because it was not unqualifiedly subject to his demand. Held, further, that the amount of tax required to be withheld under section 1622(a), I.R.C. 1939, in relation to the advance of $38,000 in 1952 was constructively received by petitioner in 1952.
The respondent has determined a deficiency in petitioner's income tax for the year 1952 of $66,817.10. In the determination of the deficiency, the respondent stated in his deficiency notice as follows: ‘It is determined that you constructively received income of $91,692.24 which should have been reported on your income tax return for 1952, rather than 1953.’
The sole question presented is whether Basil F. Basila, one of the petitioners herein, constructively received from a company of which he was an officer and principal shareholder, the amount of $91,692.24 (or any part thereof) during the year 1952.
Some of the facts were stipulated by the parties. They are found accordingly and incorporated herein by this reference.
Petitioners Basil F. Basila and M. Frances Basila, husband and wife, resided in Leakesville, Mississippi, during the year 1952. For the taxable year 1952, they filed a joint Federal income tax return with the director of internal revenue in Jackson, Mississippi. During the taxable year 1953, petitioners resided in Mobile, Alabama, and filed a joint Federal income tax return for that year with the director of internal revenue in Birmingham, Alabama. Petitioners reported their income on the cash basis for both calendar years 1952 and 1953.
During the years 1952 and 1953, Basil F. Basila (hereinafter sometimes referred to as petitioner) was the president, treasurer, and general manager of the Basila Manufacturing Company (hereinafter referred to as the company). M. Frances Basila, his wife, was the secretary and Jack Russell was its vice president. Basila owned approximately 70 percent of the stock of the company. Basila and his wife both had authority to write checks on company funds. The record does not disclose the membership of the board of directors of the company or who owned the remaining shares during the period in issue.
Petitioner's written contract of employment with the company provided for payment of a base salary of $95 per week plus a bonus of 45 percent of the net earnings of the company, determined according to a formula set forth in the written contract as follows:
The bonus shall be payable annually and the annual computation thereof shall be made as of the close of business on October 31, and shall be paid to the Second Party (Basila) sixty-five (65) days thereafter, either in cash or by note or part cash and balance by note, negotiable in form and due and payable on or before six months, together with interest thereon at the rate of four per cent per annum, and acceptance of such payment and settlement shall be final and binding upon both of the parties thereto.
A written employment contract between the company and Jack Russell, the vice president, contained the same provisions as the portions of petitioner's contract mentioned above, except that Russell's bonus was fixed at 20 percent of the net earnings.
For the company's fiscal year ending October 31, 1952, eight employees of the company were also entitled to receive bonuses from the company in addition to basic weekly salaries. The employment contracts of these eight employees provided for bonuses calculated and to be paid in a method similar to those of Basila and Russell, except that three of the employees were to be paid not later than 75 days after October 31 instead of the 65-day provision in the other contracts.
During the month of October 1952, before the amount of the bonuses was calculated, advance payments totaling $80,970.13 were made to Basila, Russell, and seven of the employees. Petitioner received a check for $35,000 and was discharged from a $3,000 indebtedness to the company. The record does not disclose who signed these checks.
During the audit of the company's books between the middle of November and the middle of December 1952, the accountant determined the amounts of the employee bonuses for the fiscal year ending October 31, 1952, as follows:
+---------------------------------+
¦Basila ¦$129,692.24¦
+---------------------+-----------¦
¦Russell ¦57,640.99 ¦
+---------------------+-----------¦
¦Eight other employees¦44,441.21 ¦
+---------------------+-----------¦
¦Total ¦231,774.44 ¦
+---------------------------------+
The accountant at this time determined the amount which should be withheld from the bonuses when the bonuses were paid. The amount to be withheld from the employees' bonuses was determined from the Government table, and the accountant credited 20 percent of the employees' bonuses to the withholding account. Basila and Russell, however, orally requested the accountant to estimate what their total tax liability would be because of the bonus and withhold that amount from their bonuses. This estimate was based upon the basic salaries of the husbands and wives in 1952, their entire bonus, and estimated other income and deductions.
The records and the income tax returns of the company were based upon an accrual method of accounting. In the adjusting entries made by the accountant during the audit, the total amount of the bonuses, $231,774.44, was debited to the profit and loss account and two liability accounts were set up and credited. They are summarized as follows:
+---------------------------------------+
¦Accrued withholding tax: ¦ ¦
+----------------------------+----------¦
¦Basila ¦$82,957.92¦
+----------------------------+----------¦
¦Russell ¦27,782.14 ¦
+----------------------------+----------¦
¦Other employees ¦8,888.25 ¦
+----------------------------+----------¦
¦Total ¦119,628.31¦
+----------------------------+----------¦
¦Contractual bonuses payable:¦ ¦
+----------------------------+----------¦
¦Basila ¦46,734.32 ¦
+----------------------------+----------¦
¦Russell ¦29,858.85 ¦
+----------------------------+----------¦
¦Other employees ¦35,552.96 ¦
+----------------------------+----------¦
¦Total ¦112,146.13¦
+---------------------------------------+
The item of accrued withholding tax as of October 31, 1952, was segregated as an accrual on the books of the company by the accountant because the audit statements were to be presented for credit purposes, and, in accordance with generally accepted accounting principles, taxes were shown separately on the audit statement as a preferred claim. The items were also segregated to instruct the company as to the method of payment.
The sum of the advance payments in 1952 of $88,728.89 (which included the $38,000 paid to petitioner) was then debited to the contractual bonuses payable account, leaving a total balance in the account as of December 31, 1952, of $23,417.24. Of this figure the amount of $8,734.32 represented petitioner's share.
During January 1953, a bank loan of $109,000 was negotiated by the company and $24,017.24 was paid as the remainder due on the bonuses payable. Petitioner's balance due of $8,734.32 was paid to him by check on January 3, 1953.
The audit report was completed and sent to the company on December 22, 1952.
The withholding from petitioner's bonus in the amount of $82,957.92 was paid by the company to the Government on February 14, 1953, and reported as withholding from 1953 income.
The statement of the company's current asset and liability position as of December 31, 1952, and January 31, 1953, is as follows:
BASILA MFG. CO., INC.
+-----------------------------------------------------------------------------+
¦ ¦Dec. 31, 1952 ¦Jan. 31, 1953 ¦
+-----------------------------+-----------------------+-----------------------¦
¦Liquid assets: ¦ ¦ ¦ ¦ ¦
+-----------------------------+-----------+-----------+-----------+-----------¦
¦Cash on hand and in bank ¦ ¦$122,776.98¦...To continue reading
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