Veit v. Commissioner

Facts

Ps, husband, and wife, are residents of California. They filed separate income tax returns for 1942 and 1943 with the collector of internal revenue for the sixth district of California. Both prepared their returns on a cash basis. Husband (H) was employed by M. Lowenstein & Sons, Inc., They were engaged in the business of converting, printing, and styling cotton goods. His employment was the subject of a series of contracts, made without specific corporate resolution, by him and Leon Lowenstein, the corporation's president. H was executive vice president under a two-year agreement dated January 2, 1939. H was to receive an annual salary of $25,000 and a share of 10 percent in the corporation's profits for the two-year period, or if losses should be sustained, he was to bear 10 percent of them but not in excess of $50,000. One-half of the amount computed due as his share of the profits was payable to him by July 1, 1941, and the other half by October 1, 1941. After the corporation had paid him $10,000 on profit account under the agreement, he made with it a second contract on May 16, 1940, whereby it agreed to pay him an extra $15,000 bonus for meritorious service; computed $81,999.93 as his share of 1939 profits, and paid him $1,999.93 thereof, thus leaving $85,000 unpaid. H had been a resident of New York but in June 1938 he purchased a home in California, and on November 30, 1940, he and his Wife (W) became legal residents of California. Leon Lowenstein had convinced H to be the supervisor of west coast sales, and on November 1, 1940, he made a contract of employment for 1941 whereby the corporation agreed to pay him a salary of $15,000 a year plus a percentage of the west coast sales. The balance owed him on account of 1939 profits was now to be paid in installments in 1940 and 1941 and that his share of 1940 profits be paid in quarterly installments in 1942 rather than in 1941, as provided in the contract of January 2, 1939, and bear 1 1/2 percent interest from October 1, 1941. On June 18, 1941, H and the corporation signed another instrument wherein $27,500 was still due for 1939 and payable one-half on September 1, 1941, and one-half on December 1, 1941, and H's share of 1940 profits was $87,076.40 and should be payable in equal quarterly installments of $21,769.10 during 1942. The corporation kept its books on an accrual basis and wrote off the $87,076.40 on its return for 1940. Leon worried that H might accept employment from a competitor. Yet, another contract was made for 1942 and 1943 for a salary of $15,000 a year; a bonus of $25,000 - in addition to his $15,000 salary - for services rendered in 1941, and agreed that the $87,076.40, to which he was entitled in quarterly installments during 1942, be paid in five annual installments of $17,415.28 each, with 1 1/2 percent interest from October 1, 1941, on March 1, 1942, 1943, 1944, 1945 and 1946. The war started and because of the resulting uncertainties about business H, at Lowenstein's request, consented to accept a nominal salary of $2,500 instead of the $15,000 mentioned at the conference. This agreement was dated December 26, 1941. Deferment of the installment payments on the $87,076.40 profits due petitioner for 1940 was a condition exacted by Lowenstein, who wished to keep the use of the money for the corporation. It was recorded on the corporate books as a liability payable in five annual installments as agreed. On March 1, 1942, H received the first installment of $17,415.28, and on March 1, 1943, he received the second installment. On their tax returns for 1942 and 1943 Ps included each installment in community gross income, together with his current salary and interest received from the corporation, and each reported half as taxable. For 1943, D included in H's 1942 income the entire $87,076.40, thereby increasing income in the amount of $69,661.12 above that reported. In 1943, D added to H's income $9,957.64 reported by his wife. D treated the $87,076.40 as community income in determining the income and victory tax of W for 1943, and included one-half, or $43,538.20, in her 1942 income. D made no change in the net income reported by her for 1943. In November 1942, H was released from employment to join the Board of Economic Warfare in D.C. H remained in D.C. until June 25, 1943. Things were very hectic and H made many quick emergency trips in furtherance of the procurement and manufacture of war materials. H was unable to await the issuance of transportation requests or the arrival of government automobiles for local trips and expended substantial amounts of his own funds for taxis, rail, and air transportation. He also paid for his lodgings and subsistence. After one claim for reimbursement was denied because authorization for the trip involved had not been obtained in advance, he made no further claim, and never got any reimbursement. H kept a daily record of his expenditures, which in total figures were as follows: meals, $1,102.90; laundry, $175; hotel rooms, $1,103; valet service, $88.25; entertainment, tips, etc., $318; rail and airplane fares, $603.51; taxi fares, $306.25. H received from the United States Government a salary of $2,828.63, which he and his wife reported as community income in 1943. D once again held that H had constructively received the entirety of the 1940 bonus in 1942. H petitioned the Tax Court. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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