16T.C.

244(1951)

E.T.SPROULL,PETITIONER,
v.
COMMISSIONEROFINTERNALREVENUE,RESPONDENT.

DocketNo.25497.

UnitedStatesTaxCourt.

PromulgatedJanuary30,1951.

LewisL.Guarnieri,Esq.,forthepetitioner.

WilliamR.Bagby,Esq.,fortherespondent.

Respondentdeterminedadeficiencyof$11,550.61inthepetitioner'sincometaxfor1945.

245 *245Thesolequestioniswhetherrespondentwascorrectinincludinginpetitioner'staxableincomefor1945theamountof
$10,500transferredintrustforpetitionerinthatyearbypetitioner'semployer,butwhichwasthereafterpaidbythetrusteetothe
petitionerininstallmentsin1946and1947asrequiredbythetrustagreement.

FINDINGSOFFACT.

Thestipulatedfactsarefoundasfacts.Thoseofthestipulatedfactstogetherwithsuchfactsfoundfromoraltestimonyasare
necessaryforthedecisionaresetforthbelow.

Petitioner,E.T.Sproull,isanindividualresidinginBristolville,Ohio.His1945incometaxreturnwasfiledonacalendaryear
basiswiththecollectorofinternalrevenueforthe18thdistrictofOhio,ClevelandDivision.

In1929petitionerbecamealargestockholderinandpresidentoftheBrainardSteelCorporation(hereinaftersometimescalled
thecorporation).HeheldtheofficeofpresidentuntilthebusinesswassoldJanuary1,1948.

Petitioner'ssalarywasoriginallyestablishedat$12,000peryear,butshortlyafter1929thecorporationranintofinancial
difficultiesandpetitionervoluntarilydecreasedhiscompensationoverthedepressionyears.Henevermadeanyclaimonthe
corporationfortheamountofthedecrease,butatonetimestatedtothedirectorsthathethoughttheyowedhimabout$80,000.

Theyear1945wasagoodonefinanciallyforthecorporationandonDecember26,1945,thecorporation,following
authorizationofitsboardofdirectors,enteredintoatrustagreementwiththeUnionSavingsandTrustCompanyofWarren,Ohio,
astrustee.Pursuanttotheagreement,thecorporationonDecember31,1945,paidovertothetrusteethesumof$10,500in
considerationofservicestheretoforeperformedforthecorporationbypetitionerandtheinadequacyofsalarypaidforsuch
services.Thetrusteewasempoweredtoinvestandreinvestthemoneyandwasdirectedtopayoutofprincipaltopetitionerthe
sumof$5,250onDecember26,1946,andthebalance,includingincome,onDecember26,1947.Intheeventofpetitioner's
priordeath,theamountsweretobepaidtohisadministrator,executor,orheirs.

Thetrustee,pursuanttotheagreement,paidtopetitionerbycheckthesumof$5,250onDecember26,1946,andalikesumon
December26,1947.

Thepetitionerinhis1946calendaryearreturnincludedasincomethefirst$5,250receivedfromthetrusteeandinhis1947
calendaryearreturnincludedasincomethe$5,250receivedfromthetrusteein1947.

246 *246Atthetimethetrustagreementwasauthorizedbythecorporation'sboardofdirectors,petitionerwaspresidentoftheboard
andheld1,375sharesofthecorporatestock.Atthesametimepetitioner'swifeheld1,000shares,andhisthreedaughters5,919
each.Petitionerthuscontrolled20,132shares,or25.1percent,ofanoutstandingtotalof78,916shares.Thissituationcontinued
toexistduringtheyears1945toJanuary1,1948.

Theactioninsettingupthetrustwasneitherinitiatedbythepetitionernortakenpursuanttohisdirection.
 OnDecember31,1945,thecorporationdeducted,asanexpenseforsalaries,thesumof$10,500paidtothetrustee,bothinits
recordsandinitscalendaryearincometaxreturnfortheyear1945.

OPINION.

TIETJENS,Judge:

TheCommissionerincludedinpetitioner's1945taxableincomeasbonusincomethesumof$10,500paidbyBrainardSteel
CorporationtotheUnionSavingsandTrustCompanyofWarren,Ohio,trusteeundertheagreementofDecember26,1945.

Petitionercontendstherespondenttaxedhiminthewrongyearandthatinsteadofbeingtaxableonthefull$10,500in1945he
wasproperlytaxablein1946and1947ontheamountspaidhimbythetrusteeinthoseyears.

Neitherthestipulatedfactsnortheoraltestimonyestablishwhetherpetitionermadehisreturnsonacashbasis.However,since
thatisthemostcommonmethodofreportingincomeandsincethetrialapparentlyproceededonthatbasisweassumethecash
methodwasused.

Superficiallytheissuelookssimple.Petitioneractuallyreceivednocashuntiltheyears1946and1947.Why,then,shouldhebe
taxedin1945?Andwhatwasthebasisforrespondent'sactioninsodoing?

Apossiblebasisistheapplicationofthedoctrineofconstructivereceiptandpetitionerinhismainargumentassumesthattobe
thefact.Hesetsouttodemonstratethedoctrine'sinapplicability,pointingout(1)thatalthoughthesumwasfixedandpaidbyhis
employerascompensationforservices,heactuallyreceivednopartofthemoneyin1945(2)thathecouldnothavereduced
anypartofthemoneytopossessioninthatyearbecauseofthetimelimitationsonpaymenttohimsetinthetrustinstrument,and
(3)thathehadnocontrolofthecorporateactioninestablishingthetrust,norwassuchactiontakenathissuggestionorpursuant
tohisdirection.

ThisCourthasratherfullydiscussedthedoctrineofconstructivereceiptinRichardR.Deupree,1T.C.113,andJ.D.Amend,13
T.C.178.Althoughitbeconcededthatifweapplythetestsdescribedinthosecasestothesituationherewemustagreewith
247 petitioner'sargumentthatthisisnotatruecaseforapplicationofthedoctrine,agreeing*247withpetitioneronthatpointdoesnot
disposeofthecase.Respondentarguesthatifconstructivereceiptdoesnotapply,thenthedoctrineofcashequivalentdoes.He
citesthebroadlanguageofsection22(a)oftheInternalRevenueCodewhichreads,inpart,asfollows:

SEC.22.GROSSINCOME.

(a)GENERALDEFINITION."GrossIncome"includesgains,profits,andincomederivedfromsalaries,wages,orcompensation
forpersonalservice(includingpersonalserviceasanofficeroremployeeofaState,oranypoliticalsubdivisionthereof,orany
agencyorinstrumentalityofanyoneormoreoftheforegoing),ofwhateverkindandinwhateverformpaid,orfromprofessions,
vocations,trades,businesses,commerce,***.

RelianceisplacedonRentonK.Brodie,1T.C.275,andJ.H.McEwen,6T.C.1018.Weparaphrasethelanguageusedin
Brodie,supra.Evenifthedoctrineofconstructivereceiptasitiscommonlyunderstoodcannotherebecorrectlyapplied,itis
undoubtedlytruethattheamountwhichtheCommissionerhasincludedinpetitioner'sincomefor1945wasusedinthatyearfor
hisbenefit,albeitnotathisdirection,insettingupthetrustofwhichpetitioner,or,intheeventofhisdeaththenhisestate,wasthe
solebeneficiaryandthatthewholearrangementwaspartofaplanforhisadditionalremuneration.

Thequestionthenbecomes,asinMcEwen,supra,was"anyeconomicorfinancialbenefitconferredontheemployeeas
compensation"inthetaxableyear.Ifso,itwastaxabletohiminthatyear.Thisquestionwemustanswerintheaffirmative.The
employer'spartofthetransactionterminatedin1945.Itwasthenthattheamountofthecompensationwasfixedat$10,500and
irrevocablypaidoutforpetitioner'ssolebenefit.Whilethisfactoraloneisnotcontrolling,itdoesservetodistinguishthiscase
fromthoseinwhichtheexactamountofcompensationissubjecttosomefuturecontingencyorsubjecttothepossibilityofreturn
totheemployer.SeeMertens,LawofFederalIncomeTaxation,Volume2,Sections10.13,12.42,and12.44.

Itistrue,aspetitionerarguesintryingtopullfreefromBrodieandMcEwen,supra,thatthearrangementgavepetitioneronlyan
equitableinterestinthetrustfundandthathehadnovestedinterestinanannuitycontractdeliveredintohispossessionasin
Brodie,supra.But,thatdoesnotdeterminetheissuewhethertheestablishmentofatrustsuchaswashereestablisheddoesnot
itselfconstitutetaxableincometopetitioner.Thisisespeciallytruewhenitisconsideredthatoneoftheargumentsofpetitionerin
 Brodie,supra,wasthattheannuityhadnocashvalueandcouldnotbeassigned.Yetweheldtheamountexpendedforthe
annuityinBrodietaxableintheyearexpended.WethinkthecaseathandisastrongeronefortaxabilitythanBrodie.Here,we
248 thinkitmustbeheldthattheexpenditureofthe$10,500insettingupthetrustconferredaneconomicorfinancial*248benefiton
petitionerproperlytaxabletohimin1945.Thefundwasascertainedandpaidoverbypetitioner'semployerforhisbenefitinthat
year.Petitionerhadtodonothingfurthertoearnitorestablishhisrightstherein.Theonlydutiesofthetrusteeweretohold,
invest,accumulate,andveryshortlypayoverthefundanditsincreasetopetitionerorhisestateintheeventofhispriordeath.No
oneelsehadanyinterestinorcontroloverthemonies.Thetrustagreementcontainednorestrictionwhateveronpetitioner's
righttoassignorotherwisedisposeoftheinterestthuscreatedinhim.Onthefactsherethereisnodoubtthatsuchaninterest
hadavalueequivalenttotheamountpaidoverforhisbenefit,andthatthisbeneficialinterestcouldhavebeenassignedor
otherwisealienatedrequiresthecitationofonlythemostgeneralauthority.SeeBogert,TrustsandTrustees,188.Respondent
contendsthatthecircumstancesofthecreationofthisinterestinpetitionerwastantamounttopayingovertohimthecashin
1945.

Ofcourse,petitionerarguesthatBrodieandMcEwen,supra,aredistinguishableontheirfacts.Theyinvolvedannuitycontracts
purchasedwithfundsfurnishedbypetitioners'employers,inBrodiewithoutthepetitioner'sdirectionorcontrolbutonhissigning
awrittenapplication,andinMcEwenpursuanttoacontractofemploymenttowhichpetitionerwasparty.Wethinkthose
differencesarenotsignificanthereinviewofpetitioner'sacquisitionofavestedvaluableinterestinthetrustfundhereinquestion
inthetaxableyearunderconsideration.

ReviewedbytheCourt.

Decisionwillbeenteredfortherespondent.

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