
    RADOM & NEIDORFF, INC. v. THE UNITED STATES
    [No. 173-58.
    Decided July 15, 1960.
    Plaintiff’s motion for reconsideration overruled October 5, 1960] 
    
    
      Mr. Michael Kaminsley for the plaintiff. Messrs. Worth-man & EaminsJey were on the briefs.
    
      Mr. John F. Palmer with whom was Mr. Assistant Attorney General Charles K. Biee, for the defendant. Mr. James 
      
      P. Garland, Mr. Jerome Fink, and Miss June A. Mwrray were on the brief.
    
      
       Plaintiff's petition for writ of certiorari denied by the Supreme Court, 365 U.S. 815.
    
   Lahamoke, Judge,

delivered the opinion of the court:

This is an action to recover Federal income taxes and interest allegedly overpaid by plaintiff for the taxable year ended December 31, 1950.

The question presented is whether the deduction of accrued salary expenses otherwise allowable by section 23(a) (1), Internal Revenue Code of 1939, 26 U.S.C. § 23(a) (1) (1952), is barred by section 24(c) of the Internal Revenue Code of 1939.

Plaintiff, a taxpayer, is a New York corporation organized in 1916. Its capital stock issued and outstanding was owned in equal shares by David Radom and Henry Neidorff, the husband of David Radom’s sister. Henry Neidorff died on February 18, 1950, and his wife, Anna, succeeded to the ownership and possession of a full one-half interest in the corporation’s stock then outstanding. During the year 1950 and subsequently, the said David Radom and the said Anna Neidorff were engaged in a personal controversy relating to the control of plaintiff corporation. During the controversy,' it was impossible to obtain the agreement of the stockholders for the election of directors and appointment of officers. The controversy resulted in protracted litigation in the courts of the State of New York for the purpose of obtaining an enforced dissolution of plaintiff. It was eventually held by the New York court that an order for dissolution should not be granted.

During the year 1950, and during the 75-day period thereafter, and solely by reason of said personal controversy, Anna Neidorff arbitrarily and wrongfully refused to countersign any check for any part of compensation due to David Radom in payment for services performed. However, the said Anna Neidorff affixed her signature to all other checks issued by plaintiff. Plaintiff’s bank required the said countersignature in each instance or the check would not be paid. David Radom was employed by plaintiff during the entire year 1950 at the agreed annual compensation of $24,400. Radom fully and satisfactorily discharged his duties and was entitled to receive all of the agreed compensation of $24,400. Plaintiff was financially able to make payment but Radom, in spite of repeated attempts by plaintiff to pay the entire amount, received only $6,325. Plaintiff was, however, against its will, unable to make payment of the balance of $18,075 either in installments during the year or by a single payment at the end of the year or within a 75-day period ending immediately after the termination of petitioner’s taxable year, which was December 31, 1950. Plaintiff has at all times admitted liability for the full amount of Radom’s salary. Anna Neidorff did not contend that plaintiff was not liable, but alleged an offset was due plaintiff.

Radom was on the cash basis of accounting and consequently did not report as income in 1950 or 1951 any part of the salary due him from plaintiff for the year 1950.

The taxpayer was on the accrual method of accounting and in 1950 accrued the entibe obligation of $18,075 as an expense, and deducted the full amount as officer’s salary, from gross income reported on its Federal income and excess profits tax returns for the calendar year 1950.

Under date of July 29, 1954, David Radom mailed a letter to the Director of Internal Revenue in New York consenting to any additional assessment due to the application of section 24(c) as amended by the Technical Changes Act of 1953 to his back salaries. Under date of August 16, 1954, plaintiff mailed a letter to the said Director in which it elected to come under the provisions of the Technical Changes Act of 1953 as applied to accrued salaries for the year 1950, under section 24(c).

On January 21, 1955, the Commissioner of Internal Revenue forwarded to plaintiff a statutory notice of deficiency of $10,624.17 in plaintiff’s income taxes for the calendar year 1950. The major cause for the claimed deficiency was the disallowance pursuant to section 24(c) of the Internal Revenue Code of 1939 of the entire amount of the deduction against gross income of $18,075.

On or about June 21, 1955, the full amount of the assessment, together with interest in the amount of $2,683.90 was paid to the District Director of Internal Revenue. Plaintiff on September 15, 1955, filed a claim for refund which was rejected on August 9, 1956. This suit results.

Under section 23(a) (1) of the Internal Revenue Code of 1939, supra, a taxpayer may deduct from income all ordinary and necessary business expenses “including a reasonable allowance for salaries or other compensation for personal services actually rendered.”

Section 24(c) provides that no deduction shall be allowed under section 23(a), relating to expenses incurred, or under section 23 (b), relating to interest accrued—

(1) If within the period consisting of the taxable year of the taxpayer and two and one-half months after the close thereof (a) such expenses or interest are not paid, and (b) the amount thereof is not includible in the gross income of the person to whom the payment is to be made; and
(2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and
(3) If, at the close of the taxable year of the taxpayer or at any time within two and one-half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24(b).

By 1953 the established judicial trends were (1) to treat negotiable promissory demand or time notes, worth face value, as constituting payment (Musselman Hub-Brake Co. v. Commissioner, 139 F. 2d 65); (2) to reject constructive payment as payment (P. G. Lake Inc. v. Commissioner, 148 F. 2d 898); and (3) to permit the deduction of a business expense if the creditor were deemed to have constructively received the amount due him within the taxpayer’s taxable year but not if the constructive receipt occurred any time following the close of such taxable year, even within the 214 month period. P. G. Lake Inc. v. Commissioner, supra.

Under the Technical Changes Act of 1953, section 202, 67 Stat. 617, amending section 24 of the Internal Revenue Code of 1939, a further test for the application of the statutory restriction was added; i.e., that the creditor must not have constructively received the amount due him either within the taxable year of the taxpayer or within the 214 months following the close of snch year. In other words, for the taxable years beginning after December 31, 1950, if the creditor had actually or constructively received the amount due him, either within the taxable year of the taxpayer or not later than 2*4 months following the close of such year, the taxpayer-debtor will not be denied the deduction even though all other requirements for the application of the statutory restriction have been satisfied.

Under the 1953 amendment, supra, the taxpayer was given an opportunity to elect to make the new amendment applicable to any taxable year or years of the taxpayer beginning after December 31, 1945 and before January 1, 1951. This election must have been exercised, in accordance with the regulation, before August 16, 1954.

The 1953 amendment provided “such election for any taxable year shall not be valid as to any amount unless, at or before the time when such election is filed—

(A) the person (hereinafter in this paragraph referred to as the “payee”) to whom such amount was payable included such amount in gross income for his taxable year for which such amount was includible in gross income, or
(B) the payee files a written consent to the assessment and collection of any deficiency and interest resulting from the payee’s failure to include such amount in gross income for such taxable year, or
(C) the payor pays an amount equal to the deficiency and interest which would be payable by the payee pursuant to subparagraph (B) if he filed such consent. (Any amount paid under this subparagraph shall be assessed, notwithstanding any law or rule or law to the contrary, as. an addition to the tax of the payor for the year for which the election is filed.)

Plaintiff complied with the above by the letter from Radom to the Director of Internal Revenue whereby he (Radom) agreed to pay any assessment by reason of section 24(c) as amended and the letter to the Director from plaintiff taxpayer stating that it elected to come under the provisions of the 1953 amendment.

The controversy then boils down to this — did the creditor, Radom, either actually or constructively receive payment of his salary within the statutory period, i.e., not later than 2yz months after the close of his taxable year?

It is clear from the record that the answer to this question is in the negative. Because of the refusal of Anna Neidorff to countersign the check, Radom has never received payment. Under these circumstances plaintiff has not met the burden of proving actual or constructive payment within the period required by statute.

There can be no doubt that the primary motivation of Congress in drafting section 24(c) was to prevent tax avoidance. However, the plain and unambiguous wording of the statute compels the view that as enacted, its scope is much broader. Nor does the legislative history bear out plaintiff’s contention that the legislation was not meant to apply to a situation such as presented here. Had Congress intended section 24(c) to apply solely in cases of attempted tax avoidance, which is not present here, either the wording of the statute or the legislative history would make such intention clear. Obviously the statute is not so worded and the legislative history does not conclusively show intent to include only situations involving tax avoidance. In other words, the amendment as written deals with the result of a failure to pay, and permits deduction if the salary was constructively received within the period, even if not actually paid. MekteNS Law oe Federal INCOME TaxatioN, Vol. 4, § 25.11 (1954 Ed.).

Obviously Congress could not and did not foresee the events which have taken place and which, by application of the statute, probably results in harsh treatment to the taxpayer. That certain inequities result from the tax laws is a natural consequence of an intricate tax system. However, as the Supreme Court held in United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 236, “* * * But as we have said before, ‘general equitable considerations’ do not control the question of what deductions are permissible.” To grant plaintiff the relief prayed for would either be to invoke equity or to legislate, which in either instance, is not our province. Therefore, plaintiff’s petition must be dismissed.

It is so ordered.

Dukfee, Judge; MaddeN, Judge; Whitakek, Judge, and JoNes, Chief Judge, concur.

FINDINGS OE FACT

Tbe court, having considered the evidence, the report of Trial Commissioner S. E. Gamer, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiff is a corporation incorporated and existing under the laws of the State of New York. Its office and principal place of business is located at 438 West 37th Street, in the County, City and State of New York.

2. This action is brought for the recovery of income taxes which plaintiff claims were erroneously and illegally collected with respect to the taxable year ending December 31, 1950.

3. Plaintiff timely filed with the Collector of Internal Eevenue for the Third District of New York the prescribed income and excess profits tax returns for the calendar year 1950. These returns showed the computation of net income by means of the accrual method of accounting. Plaintiff made timely payments of the full liability of $36,971.63 which had been disclosed on said returns and had been accordingly assessed.

4. One David Eadom was employed by plaintiff during the entire year 1950 at the agreed annual compensation of $24,400, serving as plaintiff’s president. David Eadom fully and satisfactorily discharged his duties, and was entitled to receive all of the agreed compensation of $24,400. David Eadom received only $6,325. Plaintiff was financially able to make payment of the unpaid amount of $18,075. Plaintiff, however, was unable to make said payment, either in installments during the year, or by a single payment at the end of the year, or within a 75-day period ending immediately after the termination of plaintiff’s taxable year, which was December 31,1950.

5. Plaintiff was organized in October 1916 as a corporation under the laws of the State of New York. From the time of its organization and to and including February 18, 1950, the capital stock of plaintiff, issued and outstanding, was owned in equal shares by David Radom and one Henry Nei-dorff, the husband of David Radom’s sister, Anna. Henry Neidorff died on February 18,1950, and his wife Anna, the sole executrix and legatee under the will of Henry Neidorff, succeeded to ownership and possession of a full one-half interest in plaintiff’s stock then outstanding.

6. During the balance of the year 1950 and subsequently, David Radom and Anna Neidorff were engaged in a personal controversy relating to control of plaintiff. During the controversy, it was impossible to obtain the agreement of the stockholders for the election of directors and the appointment of officers. The controversy resulted in protracted litigation in the courts of the State of New York for the purpose of obtaining an enforced dissolution of plaintiff. The Court of Appeals of New York held, on April 22, 1954, in In re Radom & Neidorff, Inc., 307 N.Y. 1, 119 N.E. 2d 563, that the dissolution sought by Radom by a dissolution proceeding instituted on July 17,1950, should not, under the circumstances present, be granted, Anna Neidorff’s refusal to sign Radom’s salary checks being considered alone as an insufficient basis for a dissolution under the applicable provisions of New York’s General Corporation Law.

7. During the entire year 1950, and during the 75-day period thereafter, and solely by reason of the said personal controversy, Anna Neidorff refused to countersign any check for any part of the compensation due to David Radom in payment for the services performed by David Radom for plaintiff. Anna Neidorff affixed her signature to all other checks issued by plaintiff. Plaintiff’s bank required said countersignature in each instance or the check would not be paid.

8. Solely by reason of said action of Anna Neidorff, plaintiff was prevented from making any payment to David Radom during the year 1950 or within 75 days thereafter, and David Radom did not, during said period, receive any part of the amount due him as salary. David Radom was on the cash basis of accounting and did not report as income in 1950 or 1951 any part of the salary, for the year 1950, due him from plaintiff.

9. Plaintiff at all times admitted its liability for the full amount of David Badom’s salary. Anna Neidorff did not contend that plaintiff was not liable for the full amount, but alleged that an offset was due to plaintiff. Plaintiff would have paid the full amount of $18,075 during the year 1950, or within 75 days thereafter at the latest, had Anna Neidorff countersigned a check in payment. Plaintiff accrued the entire obligation of $18,075 as an expense and deducted the full amount as officer’s salary from gross income reported on its federal income and excess profits tax returns for the calendar year 1950.

10. Under date of July 29,1954, David Badom mailed the following letter to the Director of Internal Bevenue in New York:

I, David Badom, do hereby consent to any additional tax assessment due to the application of Section 24c as amended by the Technical Changes Act of 1953 to my back salaries from Badom & Neidorff, Inc.

Under date of August 16, 1954, plaintiff mailed the following letter to said Director:

Please be informed that we elect to come under the provisions of Technical Changes Act, of 1953 as applied to accrued salaries for the year 1950, under Section 24-C.

11.On January 21, 1955, the Commissioner of Internal Bevenue, by registered mail, forwarded to plaintiff a statutory notice of a deficiency of $10,624.17 in plaintiff’s income taxes for the calendar year 1950. The major cause for the claimed deficiency was the disallowance pursuant to section 24(c) of the Internal Bevenue Code of 1939 of the entire amount of the deduction against gross income of $18,075, claimed by reason of the accrual of salary due to plaintiff’s president. As to this item, the Commissioner stated:

(a) The deduction for compensation of officers claimed on your return for the taxable year ended December 31, 1950 has been disallowed to the extent of $18,075.00 in accordance with the provisions of Section 24(c) of the Internal Bevenue Code of 1939, for the reason that that portion of the salary accrued to the president, Mr. David Badom, was not actually or constructively paid within two and one-half months after the close of the taxable year.

12. Plaintiff did not file a petition in the Tax Court of the United States and, in due course, the amount of the claimed deficiency was assessed. On or about June 21, 1955, plaintiff paid to the District Director of Internal Eevenue the full amount of the assessment of $10,624.17, together with interest in the amount of $2,683.90.

13. On September 15,1955, plaintiff filed with the Director of Internal Eevenue the prescribed form constituting a claim for refund of the payment of income taxes so paid on the ground that the deficiency had been erroneously and illegally assessed and collected. As to the salary item, plaintiff stated:

Claimant maintains that the deduction is fully allowable and that the said provisions of the Internal Eevenue Code are not applicable since the nonpayment of the accrued salaries within the prescribed period was not occasioned by reason of the difference in the accounting methods of payor and payee, but rather by legal disability. Claimant maintains that a condition precedent to the applicability of the said section is that the nonpayment be directly the result of the difference in accounting methods.

14. On August 9, 1956, the District Director of Internal Eevenue mailed to plaintiff, by registered mail, the prescribed statutory notice that the claim had been rejected in full.

15. Plaintiff is the sole owner of the claim herein presented and has not at any time assigned or transferred such claim nor any part thereof or interest therein. The claim presented herein has not been presented in any other court and no action thereon is pending in any other jurisdiction.

16. Pursuant to Eule 38 (c), the parties, with the approval of the commissioner, agreed that there should be a separate determination of the right of plaintiff to recover, reserving the determination of the amount of recovery, if any, for further proceedings.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is therefore dismissed.  