Knuckles v. CIR, 7846.
| Decision Date | 17 August 1965 |
| Docket Number | No. 7846.,7846. |
| Parties | Mason K. KNUCKLES and Bernice A. Knuckles, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Tenth Circuit |
William R. Bagby, Lexington, Ky., for petitioners.
Anthony Z. Roisman, Atty., Dept. of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Melva M. Graney, Attys., Dept. of Justice, on the brief), for respondent.
Before PHILLIPS, LEWIS and HILL, Circuit Judges.
Petitioners, husband and wife,1 by this petition for review seek to reverse a decision of the Tax Court sustaining a deficiency income tax assessment for the year 1959 in the amount of $9,081.00.
On March 25, 1957, petitioner Mason K. Knuckles entered into an employment contract, effective as of November 1, 1956, with the Perpetual Life Insurance Company (hereafter referred to as Perpetual) located in Denver, Colorado. The contract employed him in an executive capacity for a period of five years and he was to receive a salary of not less than $20,597.50 per year at the monthly rate of $1,716.45. In addition, he was to receive, or in event of his death his wife or estate would receive, the sum of $225.31 per month from the time he reaches age 65 until his death or the expiration of ten years whichever is longer. This pension or retirement payment by the company was funded with a $50,000 ten-pay life insurance policy on the life of petitioner which required the company to pay a $4,402.50 premium each year. Perpetual was the beneficiary of this policy and had all the incidents of ownership therein. So far as is here material, the contract of employment also provided that the petitioner's employment may be terminated by a majority of Perpetual's board of directors although the salary was to continue for the five year period. Furthermore, if his employment was terminated by the board of directors, Perpetual was to continue payments into the insurance fund and the policy was to be kept in effect until November, 1961.
In 1958, the board of directors of Perpetual reached the conclusion that Knuckles had mismanaged the affairs of the company to the extent that its continued existence was imperiled. Some of the directors attempted, without success, to procure Knuckles' resignation. Finally, on December 1, 1958, the board, by formal resolution, terminated the contract of employment on the ground that Knuckles was incompetent to manage the affairs of the company. Knuckles denied his incompetency and refused to accede to the board's resolution. On March 4, 1959, Knuckles commenced a suit upon his contract of employment against Perpetual with the summons stating in part that the action was brought to recover "the amount of $73,282.00 for Defendant's breach of its March 25, 1957 employment contract with Plaintiff." The filing of a complaint in the case was delayed by agreement between the parties pending the taking of depositions of several members of Perpetual's board of directors. During this time settlement negotiations between the parties were in progress. At all times pertinent Knuckles was deeply concerned about the effect of the controversy upon his future ability to obtain employment and insisted that any settlement made vindicate him in the eyes of the public. On May 20, the board of directors of Perpetual, by formal motion, accepted Knuckles' offer of settlement, which included a cash payment to Knuckles in the amount of $20,000 and an agreement by Perpetual to pay the eight remaining annual premiums on the life insurance policy included in the employment contract. The attorney for Perpetual was authorized to effectuate the settlement by proper legal instruments.
During the course of the settlement negotiations Knuckles became emotionally disturbed and believed that his health had been impaired because of the pending controversy. In May, counsel for Knuckles first suggested that Perpetual permit recovery on the basis of a tort claim for personal injury because of the tax advantage to his client. Perpetual, at this time and during all of the negotiations, refused to recognize any liability in tort on its part to Knuckles.
The settlement agreement, as outlined by Perpetual's board of directors' motion of May 20, was finalized by formal agreement dated July 15. Between these dates negotiations between counsel were carried on in an effort to arrive at a solution of the problem posed by Knuckles insistence upon the settlement being based on his claimed personal injuries and Perpetual's vehement denial of any liability because of personal injuries. Perpetual also refused to permit an...
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