Wattley v. CIR

• Decision Date: 16 February 1960
• Docket Number: Docket 25801.,No. 104,104
• Parties: Ralph B. WATTLEY and Josephine R. Wattley, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

275 F.2d 461 (1960)

Ralph B. WATTLEY and Josephine R. Wattley, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 104, Docket 25801.

United States Court of Appeals Second Circuit.

Argued November 13, 1959.

Decided February 16, 1960.

Ralph B. Wattley, pro se.

Arthur I. Gould, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Harry Baum, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before SWAN, MAGRUDER and LUMBARD, Circuit Judges.

MAGRUDER, Circuit Judge.

Nobody enjoys paying taxes. This is particularly true of a taxpayer who receives a large commission in a given year as the culmination of years of service and who is told to report the income as all having been received in that year, thus boosting him into the higher tax brackets.

To some extent the Congress was sympathetic to the above feeling, so that in enacting the Internal Revenue Code of 1939 it provided in § 107(a) as follows:

"§ 107. Compensation for services rendered for a period of thirty-six months or more and back pay.

"(a) Personal services. If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual."

The Tax Court has held that the remedial provision of § 107(a) is inapplicable to the taxpayer's^* situation. 31 T.C. 510.

We have here the familiar situation where the taxpayer acquired and operated for a time a one-man corporation. It suits the taxpayer's position and arguments here for us to "disregard the corporate entity" and to treat the transactions just as though they had been carried out by the taxpayer personally, not by him as agent for the wholly controlled corporation. The Tax Court said it could not do that.

Following is a summary of the relevant facts: Taxpayer individually was licensed in January, 1931, to act as a real estate broker in the State of New York. Within a month's time he acquired all the stock in an existing corporation and became president, treasurer, and a director, as well as the sole stockholder. He caused the old corporate name to be changed to R. B. Wattley Co. Inc. Thereafter, as long as the corporation remained in existence, he continued to hold these various positions in it. The corporation was formed for a business purpose, it being authorized, as stated in its certificate, to conduct a realty brokerage business. A broker's license was issued to it, and pursuant to such license the corporation delegated its broker's privilege to the taxpayer, who thereby was granted authority to act as real estate broker both for himself and on behalf of the corporation. Other brokers purported to act for R. B. Wattley Co. Inc. from time to time from 1931 to 1937, and they received from it, by way of compensation for their services, a percentage of each commission earned.

The corporation never paid an income tax, though returns were filed in its name. However, the taxpayer's individual returns between 1931 and 1943 declared income of $68,323.45 as having been received from the corporation in the form of salary, commissions, and compensation for personal services. Between the years 1944 and 1952 the corporate returns indicated that it was inactive, and the taxpayer's individual returns showed no income from the corporation during those years. In 1949 the corporation lost its license to act as a real estate broker. Finally, in 1958 it was dissolved by action of the Attorney General of the State of New York.

In 1931 the taxpayer began attempts to obtain a lease for certain property located on the southwest corner of Fifth Avenue and 43d Street (hereinafter referred to as the Fifth Avenue property) in the Borough of Manhattan in New York City. Taxpayer made numerous contacts with prospective lessees through 1940. Title to the property was acquired by the Mutual Life Insurance Company early in 1941. Thereupon taxpayer got in touch with that company and also with Manufacturers Trust Company in the hope of arranging a lease under which Manufacturers Trust Co. could erect a new bank building. In October, 1943, taxpayer was able to inform Mutual Life Insurance Co. that Manufacturers Trust Co. was willing to lease the property.

Up to this point all the contacts which the taxpayer made with Mutual Life Insurance Co. and Manufacturers Trust Co. were under the letterhead of R. B. Wattley Co. Inc. Taxpayer at no time gave any indication to Mutual Life Insurance Co. that he was not acting as the corporation's agent. However, in a letter to R. B. Wattley Co. Inc. in December, 1943, taxpayer stated that as of January 3, 1944, he would no longer perform services for the corporation as its broker representative. Later on we shall have more to say about this correspondence by the taxpayer, because in our view the Tax Court did not attach sufficient importance to it in reaching the conclusion that the whole fee received by taxpayer in 1951 for the leasing of the Fifth Avenue property was paid to him as agent for the corporation. It does seem to be true, though the point has no present relevance, that Mutual Life Insurance Co. was not made aware of this change in the taxpayer's status, and supposed throughout that, in arranging a lease of the Fifth Avenue property, the taxpayer was acting solely as a brokerage representative of the corporation.

On April 10, 1944, Mutual Life Insurance Co. made an agreement, in form with the corporation, and with another broker who was concerned in the matter, as to the commissions that would be paid if a lease of the property was effectuated. One clause in this agreement stipulated that no commission would be due until all existing tenants on the property had been removed and the lessee had been put into possession. For one reason or another, in the years that followed the premises were not vacated and Manufacturers Trust Co. did not come into possession. Litigation between the landlord and prospective tenant ensued, and in fact in the latter part of 1949 taxpayer began to look for another possible lessee of the property. But this became unnecessary, for in July, 1950, Mutual Life Insurance Co. and Manufacturers Trust Co. buried the hatchet; remaining tenants got out, and in February, 1951, Manufacturers Trust Co. acquired possession as lessee. In the same month Mutual Life Insurance Co. made out a check in the sum of $30,666.67 payable to R. B. Wattley Co. Inc. as the corporation's share in the commission. In accordance with the agreement which the corporation had made with the taxpayer, this check was endorsed and assigned to him individually.

Taxpayer claims that, rather than having to declare the entire $30,666.67 as income in 1951, he is entitled to prorate the amount received pursuant to § 107(a) of the Code over the period of nineteen years and nine months from 1931 to 1951 during which he was endeavoring to consummate a lease of the Fifth Avenue property. Disregarding the entity of the corporation for the moment, taxpayer argues that all of the $30,666.67 which he received in 1951 was in reality paid to him as an individual broker; that the other income of $68,323.46 which he reported in his individual returns for 1931 to 1943 represented commissions upon various transactions in which he acted individually as a broker; and that each commission constituted the total compensation for personal services, as that phrase is used in § 107(a).

The Tax Court found against the taxpayer, holding that the "total compensation" mentioned in § 107(a) includes all compensation which he may have received from the corporation during the nineteen or more years; that is to say, the $30,666.67 was, in the eyes of the Tax Court, a payment to the taxpayer by the corporation as compensation for acting as its representative in the Fifth Avenue transaction; and the $68,323.45 also paid to him as commissions on other transactions in which he represented the corporation had to be lumped together with the $30,666.67 to determine "the total compensation" under § 107(a), since all the various transactions carried out by the taxpayer as a broker representative of the corporation constituted,...