Turzillo v. CIR, No. 15764.

• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)
• Writing for the Court: MILLER and O'SULLIVAN, Circuit , and McALLISTER, Senior Circuit
• Citation: 346 F.2d 884
• Parties: Lee TURZILLO and Lucille Turzillo, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Decision Date: 18 June 1965
• Docket Number: No. 15764.

346 F.2d 884 (1965)

Lee TURZILLO and Lucille Turzillo, Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15764.

United States Court of Appeals Sixth Circuit.

June 18, 1965.

346 F.2d 885

Richard Katcher, Cleveland, Ohio, for petitioners.

Jeanine Jacobs, Dept. of Justice, Washington, D. C., for respondent, Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Attys., Dept. of Justice, Washington, D. C., on the brief.

Before MILLER and O'SULLIVAN, Circuit Judges, and McALLISTER, Senior Circuit Judge.

SHACKELFORD MILLER, Jr., Circuit Judge.

The taxpayers, Lee Turzillo (hereinafter referred to as Turzillo) and his wife, Lucille Turzillo, seek a review of the decision of the Tax Court which held that $95,000.00 of a total of $106,233.36, received by Turzillo in a settlement of a law suit for breach of contract, was ordinary income, taxable as such rather than capital gain.

The facts, which are not in dispute, are stated in detail in the Memorandum, Findings of Fact, and Opinion of the Tax Court, reported at T.C. Memo 1963-317, to which reference is made. For the purposes of this opinion, we restate the following.

Turzillo was an employee of the corporation Intrusion-Prepakt, Incorporated, hereinafter referred to as Intrusion, which was engaged in a specialized branch of the concrete and contracting business in Cleveland, Ohio. The company had a substantial growth and expansion of business, and Turzillo by 1950 became Vice-president and Chief Executive Officer. Prior to September 20, 1954, all of Intrusion's outstanding stock was owned by Louis S. Wertz, its president. At that time a reorganization of its capital structure was effected, under which Wertz became the owner of 948 shares of the 980 shares of Class A common stock, which was all of the outstanding Class A stock. Turzillo and another employee (Smith) each became the owners of 10 shares of Class B common stock, which was all of the Class B stock, and for which each paid $10,000.00. The holders of the majority of the Class B stock had the right to vote separately as a class and to elect not less than two-fifths of the members of the Board of Directors.

On September 21, 1954, five separate contracts were entered into as follows:

(1) An option contract between Intrusion and Wertz wherein Wertz gave to Intrusion during his lifetime or upon his death the first refusal to purchase his shares of Class A stock at $1,000.00 per share less certain distributions. The right to exercise that option lay exclusively with those directors of Intrusion, who were elected by the owners of Class B stock, namely, Turzillo and Smith.

(2) A contract under which Turzillo and Smith gave to Intrusion an option to purchase their Class B stock, upon a price formula set forth therein, at any time during the 12-month period beginning with whichever of the following events was the first to occur.

(a) The day after such shareholder\'s death.

(b) The date upon which the employment of such shareholder should be terminated by Intrusion for adequate cause; or

(c) The date upon which the employment of such shareholder should be terminated by such shareholder without adequate cause.

(3) A contract between Intrusion and Wertz whereby Intrusion agreed to employ Wertz as an Executive Vice-president for a period of 15 years at a salary of $20,000.00 a year.

(4) A contract under which Intrusion agreed to employ Turzillo as an executive for a period of 15 years at a salary which was later increased to $18,200.00 per year, plus 5 per cent of the net profits of Intrusion above $100,000.00 and

(5) A similar employment contract between Intrusion and Smith.

346 F.2d 886

There was evidence that at the time of the 1954 reorganization Intrusion and its subsidiaries had a value of approximately one million dollars, that the success of Intrusion was due largely to Turzillo's efforts, and that the future for the company was a bright one.

The arrangements did not work out as contemplated. On October 3, 1955, resolutions were adopted by the Board of Directors of Intrusion which removed Turzillo from his position as Executive Vice-president and created the position of General Manager of Field Operations, to which he was assigned. This took from him the authority and duties that he previously exercised and performed as Executive Vice-president. At this same meeting Smith was elected Executive Vice-president. On December 8, 1955, Intrusion fired Turzillo. In a letter dated December 15, 1955, Turzillo wrote Intrusion complaining of the action taken in firing him and stating that it was Intrusion and not Turzillo that breached the employment contract. Turzillo further complained that as a result of Intrusion's action he was deprived of his contractural rights to become a half owner of Intrusion through his ownership of one-half of the Class B stock and the option in the company to buy from Wertz all of the Class A stock.

Upon being discharged by Intrusion, Turzillo organized a competing business, the Lee Turzillo Contracting Company, which was successfully operated. In May 1957 Turzillo also organized the Masonry Equipment & Supply Co., which was engaged in the leasing of construction equipment and supplies. Subsequent to 1956 Turzillo's income from these businesses was in excess of that received as compensation from Intrusion in 1955.

In February 1956 Turzillo brought suit in the Court of Common Pleas, Cuyahoga County, Ohio, against Intrusion and its directors.

The amended petition in this suit set out four alleged causes of action, as follows: (1) Termination by Intrusion without adequate cause of its employment contract with Turzillo, which made it impossible for Turzillo to become a half-owner of Intrusion through the retirement of all of the Class A stock owned by Wertz, which would leave the Class B stock, of which he owned one-half, as the only outstanding shares of the corporation. It alleged that this contract offered unlimited possibilities for profit and constituted an asset to him of a value of not less than one million dollars; (2) that an accounting be had to determine five per cent of the corporation's net profits for the period up to the time the corporation discharged him from its employ, alleged by the plaintiff to exceed the sum of $15,000.00; (3) that the defendants be enjoined from impeding plaintiff's business operations by asserting alleged rights which they did not possess and by asserting falsehoods concerning plaintiff and his business; and (4) that the defendants be enjoined from asserting a claim for specific performance under the option agreement relating to plaintiff's shares of Class B stock.

Intrusion by its answer and counter-claim denied the material allegations of the amended petition and alleged affirmatively that its discharge of Turzillo on December 8, 1955, was for adequate cause, that Turzillo in his organization and operation of Lee Turzillo Contracting Company was illegally utilizing trade secrets of Intrusion, knowledge of which he had acquired while in the employ of Intrusion, and that it had notified Turzillo of the exercise by it of its option to purchase Turzillo's Class B stock, but that Turzillo had refused to deliver the stock to Intrusion in accordance with the option agreement. It sought specific performance of its option to purchase Turzillo's Class B stock, that Turzillo be enjoined for a period of five years from engaging in any business competitive with that of Intrusion and from using or permitting the use by others in perpetuity of any invention or trade secret...