Shaffer v. Comm'r of Internal Revenue

• Decision Date: 07 November 1957
• Docket Number: Docket No. 53993.
• Citation: 29 T.C. 187
• Parties: R. O. SHAFFER AND MILDRED M. SHAFFER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

29 T.C. 187

R. O. SHAFFER AND MILDRED M. SHAFFER, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 53993.

Tax Court of the United States.

Filed November 7, 1957.

Whitfield J. Collins, Esq., for the petitioners.

James F. Hoge, Jr., Esq., and James Q. Smith, Esq., for the respondent.

Held, that in determining whether or not at least 80 per cent of the total compensation for personal services of petitioner, as trustee under a single appointment in a reorganization proceeding, in which his services and compensation therefor covered a period of more than 36 calendar months, was received in one taxable year, all compensation received by petitioner as trustee must be taken into consideration, although the allowance of compensation to him was by separate provisions of an order of court for services rendered in relation to differing aspects of his activities as trustee in carrying out his duties as such in the reorganization proceeding.

FISHER, Judge:

Respondent determined a deficiency of $4,362.56 in petitioners' income tax for the calendar year 1951. The deficiency is based upon respondent's determination that petitioners are not entitled to avail themselves of the provisions of section 107(a), I.R.C. 1939, with respect to a portion of the amounts received by Ray O. Shaffer in 1951 as trustee of Texasteel Manufacturing Company, a debtor. The sole question for our decision is whether or not $26,500 received by Shaffer in 1951 is separable from other fees received by him for services as trustee of Texasteel Manufacturing Company, so that the 80 per cent requirement of section 107(a) is met.

FINDINGS OF FACT.

Petitioner are husband and wife, and during the taxable year in question resided at Fort Worth, Texas. They filed a joint return for the calendar year 1951 with the collector of internal revenue for the second district of Texas.

In 1944, proceedings in corporate reorganization of Texasteel Manufacturing Company, a debtor, were instituted in the United States District Court for the Northern District of Texas. On August 21, 1944, J. Mac Thompson was appointed trustee of the estate of the company, his order of appointment stating that he had ‘full power and jurisdiction over the debtor and its property wherever located and he shall have and exercise such powers as are necessary to conduct and operate the business of the debtor generally * * *.’

At the time proceedings were begun, the company operated two plants— one in Port Arthur, Texas, and the other in Fort Worth, Taxas. The Port Arthur plant had been built by the Government during World War II on land belonging to the company, the Government taking an option to purchase the land from the company. The Port Arthur plant operated under contracts from Navy ordnance, and the Forth Worth plant operated under contracts from Army ordnance. The operations of the Port Arthur plant resulted in a loss of several million dollars, including the loss of substantial investments of stockholders as well as all of the profits realized from the Fort Worth plant.

The two plants continued in operation after Thompson became trustee, the Port Arthur plant being run by a Navy-dominated management committee, and the Fort Worth plant being operated by the company. Thompson did not interfere with the arrangement.

By 1946, the Army contracts had run out, and the Navy had canceled its remaining contracts with the company. Thompson, as trustee, was preparing to liquidate the company by selling the Fort Worth plant to one of the principal creditors and by selling the land on which the Port Arthur plant was operated to the Government for $35,000, which amount represented the company's original investment in the land. With the proceeds, Thompson intended to satisfy whatever creditors he could, but not all of the creditors and stockholders could have been satisfied. Thompson offered the Port Arthur land to the Government for $35,900, but the Government declined the offer.

The creditors were dissatisfied with Thompson's plan and prevailed upon petitioner, R. O. Shaffer (hereinafter referred to as petitioner), who had considerable experience in the steel fabricating and related business as a plant operator, to accept an appointment as trustee of the company. (Thompson had no experience as a plant manager.) It was contemplated that the Port Arthur plant would remain idle, but that petitioner would actively manage the Fort Worth plant and reconvert it to peacetime use. The discussions and intentions of all parties concerned related to petitioner's taking over active management of The fort worth property, moving his office into the plant, and directing the conversion of the plant from war to peacetime products. It was not contemplated that the Port Arthur plant would be reopened, but that petitioner would perform the routine liquidation of that property.

On July 6, 1946, Thompson submitted his resignation as trustee of the company, reciting in his application for discharge that the operation and affairs of the Port Arthur Division of the company had been concluded and that ‘a plan of operation for the Fort Worth Division has been developed which involves the management of the Forth Worth plant by Mr. Ray Shaffer; that your Trustee, J. Mac Thompson, and his Attorney, Raymond E. Buck, desire to resign in order that Mr. Shaffer may be appointed Trustee * * *.’

Thompson's application for discharge was granted and on July 16, 1946, petitioner was appointed trustee of the estate of the company. His interim compensation was fixed at $1,000 per month. It was understood that if the operation of the Fort Worth plant proved so successful that all of the debts could be paid out of the profits, Shaffer's compensation would be increased. Petitioner handled the property of the company in his capacity as trustee and by authority of his original order of appointment from the time of his appointment until the estate of the company was closed, in 1955. In the order appointing petitioner trustee, the court stated that he ‘shall have and he is hereby granted, all of the powers and rights heretofore granted to and conferred upon J. Mac Thompson as trustee, and all powers as granted by law to a trustee in such proceedings. * * *.’

Shortly after entering on his duties, on or about August 1, 1946, petitioner received, through another company with which he was associated, an advertisement from the War Assets Administration to the effect that War Assets was planning to sell the Port Arthur plant, including the land. Petitioner knew that Texasteel had some interest in the property, and after investigation, discovered that the option in favor of the Government to purchase the property had run without the Government exercising it. Petitioner, through his attorney, then gave notice to the Navy to remove its facilities and restore the land to its original condition. After much litigation and negotiations between petitioner and his attorney on the one hand, and the Government on the other— which included obtaining an injunction against the proposed sale by the War Assets Administration, defeating the Navy's attempt to condemn the property, obtaining a judgment recognizing the company's title to the property and ordering restoration of the land to its original condition, and obtaining contempt citations against the Secretary of the Treasury and the head of the War Assets Administration— a settlement was worked out, in October 1947, whereby petitioner, as trustee for Texasteel, obtained full title to the Port Arthur property and the facilities thereon, in return for the company giving up certain claims which it had against the Government. Certain other claims against the Navy Department involving the operation of the Port Arthur plant were prosecuted by petitioner and his attorney in the Court of Claims.

Petitioner was not a lawyer. He personally participated in the litigation and in the negotiations leading to settlement of the controversy with the Government in his capacity as trustee. His efforts involved numerous trips to Port Arthur and Beaumont, Texas, and to Washington, D.C., where most of the negotiations took place. Petitioner's naval background was most helpful in the negotiations and his services in effecting the settlement were very valuable. Petitioner used his attorney's office in connection with the affairs of the Port Arthur property. He used the plant office in connection with the management of the Fort Worth properties.

After petitioner obtained title to the Port Arthur property, he personally contacted prospective buyers as well as real estate agents in the area. After 3 years of negotiation with approximately 20 prospective buyers, the property was sold for $247,000 in October 1950, and the court approved the sale on October 24, 1950. The sale was not made through a real estate broker and the company received the entire proceeds of sale. The property was sold to George Armstrong, Sr., the chief stockholder of debtor company. The Fort Worth plant was sold on January 18, 1951, to the Texasteel Company for $480,000. The amount received from sale of the plants enabled petitioner, as trustee, to pay off all nonstockholder creditors of the company, a bank loan of some $450,000, and part of the obligations to stockholder creditors.

From July 16, 1946, the date of petitioner's appointment as trustee, until December 31, 1948, petitioner spent the major portion of his time managing the For Worth plant. In the latter part of 1948, it appeared to petitioner that the services of a full-time executive were no longer needed to manage the Forth Worth plant. Petitioner thereupon delegated the management to a plant manager, sold the office headquarters, and began devoting his time to other interests. As a result, petitioner limited his claim for compensation as plant manager to $29,500, representing $1,000 per month for 29 1/2 months, although he acted as trustee of the property until it...