Worthy v. Comm'r of Internal Revenue
| Decision Date | 12 June 1974 |
| Docket Number | Docket No. 5105-71. |
| Citation | 62 T.C. 303 |
| Parties | FORD S. WORTHY, JR., AND ISABEL C. WORTHY, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Herman Wolff, Jr., for the petitioners.
Wright Tisdale, Jr., for the respondent.
The petitioner received stock as part of an employment agreement. The stock was later redeemed. Held, the proceeds from the redemption constituted compensation. Held, further, the petitioners have failed to show that the use of a country club was primarily for business purposes within the meaning of sec. 274(a), I.R.C. 1954. SIMPSON, Judge:
The respondent determined the following deficiencies in the petitioners' Federal income taxes:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦1967 ¦$918.99 ¦
+------+-------------¦
¦1968 ¦804.26 ¦
+------+-------------¦
¦1969 ¦1,001.81 ¦
+--------------------+
Due to concessions, two issues remain for consideration: We must first decide whether certain payments received in connection with the redemption of certain stock constituted additional compensation or capital gains. Second, we must decide whether the petitioner has shown that, within the meaning of section 274(a) of the Internal Revenue Code of 1954,1 he used his membership in a country club primarily for business purposes so that he is entitled to deduct the dues for such membership.
Some of the facts have been stipulated, and those facts are so found.
The petitioners, Ford S. Worthy, Jr., and Isabel C. Worthy, husband and wife, resided in Raleigh, N.C., at the time of filing their petition herein. For the years 1967, 1968, and 1969, they filed their joint Federal income tax returns, using the cash method of accounting, with the director, Southeast Service Center, Chamblee, Ga.
Mr. Worthy is a member of the American Institute of Real Estate Appraisers and is designated as an MAI, which refers to an appraiser with certain training and experience. Prior to the fall of 1957, he was employed in the City Mortgage Department of the Equitable Life Insurance Co. His duties consisted of negotiating commercial and industrial mortgages and appraising properties offered as security for such loans. In the fall of 1957, Mr. Worthy was employed as an assistant to J. W. York to work for Cameron Village, Inc. (Cameron), a corporation Mr. York controlled. Cameron's primary asset was the Cameron Village Shopping Center in Raleigh, N.C. Mr. Worthy's starting salary was $10,000 per year. His previous experience with the Equitable Life Insurance Co. was helpful in carrying out his duties of negotiating loans and leases for the shopping center. He later became vice president and general manager of Cameron. Mr. Worthy worked for Cameron until 1966 or 1967, and throughout the period from 1962 to 1965, it was his main employment.
In 1957, Mr. York was also involved in the development of a separate shopping center, known as the Northgate Shopping Center (Northgate), located in Durham, N.C. After Mr. Worthy was hired to work for Mr. York, Mr. York assigned him duties in connection with Northgate. In 1959, Mr. Worthy's Northgate activities began to require a considerable amount of his time. He assisted Mr. York in the general development of Northgate. Both negotiated some leases separately, and on some occasions, Mr. Worthy assisted Mr. York in his negotiations. Mr. Worthy also communicated with the architect, the general contractor, and the principal owners of Northgate, the Rand family. He also assisted Mr. York in obtaining financing for Northgate.
Construction of Northgate began in 1959, and the first store opened in September 1960. In 1962, it had a supermarket, variety store, and drugstore; it was identifiable as a shopping center. In addition, other stores were planned at that time and leases had been negotiated and secured. The leases were obtained in a competitive market as there were two other shopping centers under construction in Durham at the same time, which were seeking leases from the same tenants as Northgate. On one occasion, a store originally signed a lease with one of the other shopping centers, but eventually moved to Northgate.
Mr. York's association with Northgate began in 1956, when the Rand family, the owners of the property on which Northgate was built, approached Mr. York with a view toward employing him to develop the land. They wanted to employ him because of ‘his experience, performance in Cameron Village, and his qualifications as a developer.’ On or about February 9, 1956, Mr. York agreed to supervise the development and operation of the proposed shopping center, and on or about August 21, 1956, the parties reached an oral agreement respecting the terms and conditions on which Mr. York would provide the desired assistance. One of the conditions required by Mr. York was that he be allowed to purchase some of the Northgate stock. Pursuant to another condition of the oral agreement, on or about January 11, 1957, the Rands transferred the property to Northland Investment Co., Inc. (Northland), a corporation all of whose outstanding stock was owned by them.
By an agreement dated April 1, 1959, Mr. York, the Rands, and Northland set forth in a written contract (the contract) the terms of their future association in the development of Northgate. In part, the contract provided that Northland change its name to Northgate Shopping Center, Inc. (the corporation). The contract detailed the duties Mr. York was to perform for the corporation. His duties ranged over a number of areas, all of which were directed toward developing and operating Northgate. He was to secure financing, direct architectural planning and improvements, select building contractors and suppliers, and select employees. He was also to direct all matters pertaining to leasing the business premises in Northgate. He was given the duty of selecting a manager and retaining the professional assistance of architects, accountants, and attorneys. In determining a course of action, Mr. York was required to obtain the consent and approval of the corporation's board of directors before he carried out his planned action. As compensation for his various duties and services, he was to receive the lesser of $12,000 per year or 5 percent of the gross rentals collected from Northgate during the preceding fiscal year.
The corporation had authorized capital stock of 1,000 common shares, par value $100. The contract provided that the corporation would change its authorized capital stock to 1,000 common shares, par value $1, and 99,000 shares, 5-percent cumulative nonvoting preferred, par value $1. The Rands were to receive 850 common shares and 15,600 preferred shares in exchange for the outstanding stock previously owned by them. Mr. York agreed to purchase 150 shares of common for $150.
The contract also contained several provisions giving one party an option to purchase some or all of the stock of another party. The first option dealt with the purchase of Mr. York's stock. The corporation was given an option to purchase Mr. York's stock for $250,000 after the first fiscal year during which the corporation had gross rentals of $300,000 or more. In the event the corporation failed to exercise the option, Mr. York could exercise an option to purchase 360 shares of the Rands' stock for $600,000. If either option was exercised, the payment could be made by means of a negotiable note, payable over a period of 10 years. Further options were given to the corporation and Mr. York in the event the gross rentals did not equal or exceed $300,000 in any 1 fiscal year within 10 years after the making of the contract. The prices to be paid under these options were to be determined by various multiples of the previous annual salary paid to Mr. York. In case Mr. York's stock was to be purchased, the multiplier was 20; however, the sum paid to Mr. York could not be less than $25,000, nor greater than $250,000. The contract also granted the corporation options to purchase Mr. York's stock in the event of his disability or death, and it was to obtain insurance on Mr. York's life. The contract terminated upon the exercise of the options to purchase stock contained therein. The stock subject to the options was all placed in escrow to be held so long as any of the options could be exercised.
On May 31, 1962, Mr. York and Mr. Worthy entered into a written agreement which reflected their prior oral understanding, in accordance with which Mr. Worthy had been assisting Mr. York in fulfilling his duties under the contract. In 1960, Mr. York had told Mr. Worthy that he would transfer to mr. Worthy 20 percent of his equity in the corporation. Mr. Worthy had not bargained with Mr. York for the interest. The written agreement contained provisions whereby Mr. York agreed to transfer 30 of his 150 shares in the corporation, subject to the terms of the contract, and 20 percent of his options in the Rands' stock to Mr. Worthy.
In setting forth the reasons for making the agreement, it was declared:
WHEREAS, pursuant to the terms and provisions of * * * (the contract), NORTHGATE has agreed to employ YORK for certain services upon the terms and conditions set forth therein; and
WHEREAS, WORTHY is presently employed by Cameron Village, Inc., a North Carolina corporation controlled by York and is associated with York in several business ventures; and
WHEREAS, WORTHY has, upon direction from York and pursuant to certain oral understandings between them, assisted YORK in the performance of certain duties prescribed for YORK in the performance of such duties; and
WHEREAS, YORK and WORTHY now desire to reduce in writing the terms and conditions of their oral understandings pursuant to which WORTHY, at the direction of YORK, has been assisting YORK in his duties under * * * (the contract);
NOW, THEREFORE, in consideration of the premises, the mutual promises hereinafter set...
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