Turner v. Commissioner

• Decision Date: 10 June 1964
• Docket Number: Docket No. 82122.
• Citation: 23 TCM (CCH) 952,1964 TC Memo 161
• Parties: Rufus F. Turner and Marguerite H. Turner v. Commissioner.
• Court: U.S. Tax Court

23 T.C.M. (CCH) 952 (1964)

T.C. Memo. 1964-161.

Rufus F. Turner and Marguerite H. Turner v. Commissioner.

Docket No. 82122.

United States Tax Court.

Filed June 10, 1964.

Fortescue W. Hopkins, for the petitioners. Bernard A. Heeke, for the respondent.

Memorandum Findings of Fact and Opinion

TIETJENS, Judge:

This case has been remanded to us by the United States Court of Appeals for the Fourth Circuit pursuant to that Court's opinion in Turner v. Commissioner 62-1 USTC ¶ 9488, 303 F. 2d 94 (C. A. 4, 1962), certiorari denied 371 U. S. 922, rehearing denied 371 U. S. 965. The appellate court affirmed in part and reversed in part a Memorandum Opinion of this Court and remanded "the case in order that the court may determine the market value of the stock issued to Turner as a bonus and the tax year of its receipt." The appellate court commented, at pp. 97-98, that:

While the taxpayer is in the unfortunate position of trying to escape the consequences of his deliberate misrepresentations to the Virginia Corporation Commission we cannot but feel that the Tax Court ignored the obvious realities of the situation. The contemporaneous entries clearly reflected an intention that he have stock — there was no evidence of cancelled checks or cash transferral to support the court's findings. We are not to sit in judgment upon the taxpayer's moral standards. J. M. Turner & Co. v. Commissioner of Internal Revenue 57-2 USTC ¶ 9873, 247 F. 2d 370 (4 Cir. 1957). We find the Tax Court to be clearly in error on this issue. * * *

Findings of Fact

In addition to those facts found in our original opinion, Tax Court Memorandum Opinion 1961-101, which are incorporated herein by reference, an additional stipulation of facts was filed and is also incorporated herein by reference.

Petitioners Rufus F. Turner (hereinafter referred to as petitioner) and his wife, Marguerite H. Turner (hereinafter referred to as Marguerite), reside in Martinsville, Virginia. They filed a joint income tax return, using the cash basis of accounting, for the calendar year 1957 with the district director of internal revenue for Virginia.

Petitioner, as sole proprietor, had engaged in the operation of a fresh produce wholesale grocery business under the name of Cash Produce Company for 36 years in Martinsville. In November 1956, upon the advice of his accountant and attorney, petitioner incorporated the sole proprietorship under the name of Cash Produce Company, Inc. (hereinafter referred to as Cash Produce.)

As part of the incorporation plan, petitioner was to receive 1,500 shares of Cash Produce's common stock, having a par value of $50 per share. Instead of being issued the entire 1,500 shares, petitioner, on or about February 28, 1957, had Cash Produce issue 625 shares of his stock to certain other individuals. In exchange for these shares, the individuals gave petitioner notes equal to the par value of the stock received. The individuals, the number of shares they received, and the amounts of their notes are as follows:

                                                               Stock
                                          No. of   Amount   certificate
                     To whom issued       shares   of note    number
                  Marguerite ...........    500    $25,000      12
                  Consuelo T. Ingram ...    100      5,000      13
                  James R. Ingram ......     65      3,250      14
                

Subsequently, some time prior to the end of 1957, petitioner cancelled $3,000 of each note as a gift to each person.

Cash Produce's stock certificate book, as to the first 15 common stock certificates, shows the following:

                     Stock       No
                  certificate    of    Date of
                    number     shares   issue   To whom issued
                       1         20    1/ 1/57  petitioner
                       2         20    1/ 1/57  petitioner
                       3         20    1/ 1/57  petitioner
                       4         20    1/ 1/57  petitioner
                       5         20    1/ 1/57  petitioner
                       6         20    1/ 1/57  petitioner
                       7         12    1/ 1/57  petitioner
                       8          1    1/ 1/57  James R. Ingram
                       9          1    1/ 1/57  Marguerite
                      10          1    1/ 1/57  Consuelo T. Ingram
                      11        700    2/28/57  petitioner
                      12        500    2/28/57  Marguerite
                      13        100    2/28/57  Consuelo T. Ingram
                      14         65    2/28/57  James R. Ingram
                      15        200    7/31/57  petitioner (the
                                                shares here involved)
                

Cash Produce used an accrual basis of accounting for fiscal years ending July 31. On its balance sheet for July 31, 1957, Cash Produce reported:

                  CAPITAL
                    Common stock — authorized 3,000
                      shares of $50.00 par value; issued
                      and outstanding, 1,700 shares .............  $85,000.00
                    Retained earnings
                      Net earnings for the period from
                        November 14, 1956 (date of incorporation)
                        through July 31
                        1957 ....................................    1,701.14
                

One of the closing journal entries of Cash Produce for the fiscal year ended July 31, 1957, was as follows:

                  Officers' salaries .......  $12,000.00
                  Payroll taxes ............       55.12
                    Social security tax payable ........  $   110.25
                    Withholding taxes ..................    1,919.88
                    Petitioner — accounts payable ....       24.99
                    Capital stock.......................   10,000.00
                  To record additional salary paid to
                    petitioner in corporate common
                    stock
                

The journal entry was prepared on petitioner's request that he be compensated in full for his corporation work for the period ending July 31, 1957.

Cash Produce deducted the entire $12,000 additional salary paid to petitioner on its income tax return for the fiscal year ended July 31, 1957.

Petitioners included the entire $12,000 additional salary on their 1957 return.

The minutes of the "annual meeting of all the stockholders and the Board of Directors of Cash Produce," held on January 7, 1958, stated:

Having been previously approved by the board of directors the board voted unanimously to approve the payment of a bonus of $12,000.00 for the year ending July 31, 1957 to petitioner, the president. Petitioner advised that after various withholdings that he had used the remainder of the sum of $10,000.00 in the purchase of 200 shares of the common stock at $50.00 per share to be issued and dated July 31, 1957.

A "Stock Statement" dated January 10, 1958, was filed with the Virginia State Corporation Commission by Cash Produce. It contained the following sentence:

If stock is to be issued for money, give the amount per share to be received by the corporation after all underwriting discounts and selling commissions: $10,000.00 in cash for 200 shares common stock at $50.00 per share in one issue.

The State Corporation Commission's authorization for the issuance of the stock bonus to petitioner was obtained on January 10, 1958.

In an amended petition, petitioners claimed an overpayment of taxes in the amount of $3,056.48, relying on the following alleged errors:

The respondent erred in failing to eliminate from petitioner's 1957 taxable income the amount of $10,000 representing an accrued bonus or a bonus of 200 shares of capital stock of Cash Produce * * *.

Alternately, if the Court should determine that said stock (or bonus) referred to * * * above, was constructively received by petitioner in 1957, then the respondent erred in failing to determine that the fair market value of said 200 shares of stock (or bonus) was zero or an amount substantially less than $10,000.

The 200 shares of stock were constructively received by petitioner in 1957.

The fair market value of the stock received by petitioner was $50 a share. Additional salary of $10,000 was correctly reported.

Opinion

Under the appellate court's mandate, we are to "determine the market value of the stock issued to petitioner as a bonus and the tax year of its receipt." If, however, the year of receipt was not 1957, the taxable year in issue, the necessity for determining the market value of the stock is obviated,¹ since

Gains, profits, and income are to be included in gross income for the taxable year in which they are actually or constructively received by the taxpayer unless includible for a different year in accordance with the taxpayer's method of accounting. * * * Under the cash receipts and disbursements method of accounting, such an amount is includible in gross income when actually or constructively received. Sec. 1.451-1(a), Income Tax Regs.

Petitioners, relying on LaMotte T. Cohu Dec. 15,715, 8 T. C. 796 (1947), contend that the stock was not constructively received in 1957. Petitioners' reliance on Cohu is misplaced. In that case the California Commissioner of Corporations had put "substantial limitations"² of the stock issue, which "requirements were clearly conditions precedent to the company's authorization to issue shares." (Cohu, supra at 806.) In the present case, on the other hand, the filing of the statement was not a "substantial limitation or restriction" on the issuance of the stock, as petitioners would have us find, for "failure to file such a statement does not impair the legality or validity of the issue." Va. Code Ann. Sec. 13.1-16 (1956). And cf., Ohio Battery & Ignition Co. Dec. 14,616, 5 T. C. 283, 288 (1945); Glenwood Sanatorium Dec. 19,914, 20 T. C. 1099, 1102 (1953).

In addition, clearly militating against petitioners are the facts that they considered the stock income in 1957 and so reported it on their return; that Cash Produce recognized the stock bonus as an expenditure in 1957 and so deducted it on its return; that the stock record book of Cash Produce shows the date of issue of the stock in question as July 31, 1957; and that the minutes of the January 7, 1958 meeting show that the stock bonus had been "previously approved" by the board of directors.

Even if we concede that the stock certificate was not actually issued, in light of the foregoing facts, we are compelled to hold that the stock was constructively...