Commissioner of Internal Revenue v. Brooklyn RS Corp.
| Citation | 79 F.2d 833 |
| Decision Date | 02 December 1935 |
| Docket Number | No. 31.,31. |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. BROOKLYN RADIO SERVICE CORPORATION. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Frank J. Wideman, Asst. Atty. Gen., Sewall Key and A. F. Prescott, Sp. Assts. to Atty. Gen., A. L. Jacobs, and L. W. Post, both of Washington, D. C., for petitioner.
Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
On December 28, 1928, the board of directors of the Brooklyn Radio Corporation adopted the following resolution:
"Resolved: That Mr. Benjamin Ginsberg, the President of this corporation receive a salary for the year 1929 the sum of Twelve Thousand ($12,000.00), payable $1,000.00 per month, plus 2% of the net sales for the year 1929, with the understanding however, that such 2% of the net sales be not paid to him as long as the corporation is indebted to Finance Companies on account of its own insufficiency of working capital or to any banks, and in no event until after January 1, 1930, and with the further understanding that said 2% of the net sales to be due to Benjamin Ginsberg be subordinated by him to the indebtedness to all other creditors of this corporation."
The salary of the president of the corporation for the year 1929 as per the above resolution would be computed as follows:
A. Fixed salary .................... $12,000.00
B. Salary computed at the rate
of 2% of the net sales in
1929 amounting to $1,687,880.73 33,757.61
__________
$45,757.61
The balance sheet of the taxpayer for the close of the year 1929 showed:
Notes payable, $40,780.97. Accounts payable, $250,916.77. Due finance companies, $251,145.28. Notes receivable discounted, $7,261.57. Capital, $122,800. Surplus, $30,694.16.
The proceeding here was reviewed by the whole board, and a majority of the members held that the liability to pay to Ginsberg $33,757.61 as 2 per cent. of net sales for the year 1929 was not a contingent obligation, and in the case of a corporation which reported on an accrual basis was properly attributable to that year. Five members of the board, however, dissented on the ground that the item was not payable as long as the corporation was indebted to finance companies or banks because of its own insufficiency of working capital. The circumstance that the 2 per cent. of net sales when payable to Ginsberg had to be subordinated to the claims of all other creditors of the corporation likewise seemed to be regarded by the minority as a factor of moment.
The dissent was placed upon the ground that during the year 1929 the liability for the 2 per cent. commission remained contingent. It is evident that in the year 1929 it was by no means certain that the commissions would ever be paid unless in the event of liquidation of the company and then only at some unpredictable time and in an amount which could not even approximately be ascertained. The items from the balance sheet show a capital and surplus of only $153,494.16 and obligations in notes, accounts payable due finance companies and banks aggregating $550,140.59. A corporation with such a balance sheet was apparently indebted to finance companies and banks "on account of its own insufficiency of working capital." While the subordination of Ginsberg's commissions to the indebtedness of all other creditors would not necessarily render the claim one which could not be accrued, the subordination bears greatly on the value of the claim when its liquidation is tied up with conditions precluding payment so long as the corporation is indebted to finance companies or banks on account of insufficiency in working capital. How can we say that even in case of final dissolution of the corporation its assets will suffice to pay anything to Ginsberg after taking care of all other creditors? If Ginsberg had attempted to sell his precarious right to receive commissions, it can hardly be supposed that he would have been able to realize any substantial amount seeing that neither the time of payment, nor the amount payable, could be...
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