SECTION 213 (a), ARTICLE 52: When included in gross income. 14-21-1545 T. D. 3159 (Ct. D. 5.) INCOME TAX-REVENUE ACT OF 1918-DECISION OF COURT. 1. YEAR TO WHICH INCOME APPORTIONABLE-LUMP SUM AWARDED TO RECEIVER IN ADDITION TO SALARY. Where a receiver of a railroad was, in 1918, awarded a large sum in addition to his regular salary, as additional compensation, which he was required to return on a cash receipts and disbursements basis as income for the year 1918, he was properly refused permission to report the income on an accrual basis, apportioning it over the five years of the receivership, for the reasons (1) that the taxpayer had no right to make his return on an accrual basis under section 212 of the Revenue Act of 1918, and (2) the award was compensation for personal services which was income of the calendar year of its determination and payment. 2. EFFECT OF NUNC PRO TUNC ORDER APPORTIONING OVER PERIOD OF YEARS ADDITIONAL COMPENSATION PREVIOUSLY AWARDED RECEIVER. Where upon demand by collector that he return award as income of 1918, taxpayer applied to court for a nunc pro tunc order showing that the additional compensation was earned and accrued in equal monthly installments throughout the receivership, which order was entered, such order was ineffective to alter the conclusion that the award was income for the year in which determined and paid. TREASURY DEPARTMENT, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, To collectors of internal revenue and others concerned: M. F. WEST, Acting Commissioner of Internal Revenue. Approved April 29, 1921: Secretary of the Treasury. UNITED STATES CIRCUIT COURT OF APPEALS FOR THE SEVENTH CIRCUIT. No. 2794. OCTOBER TERM, 1920, JANUARY SESSION, 1921. William J. Jackson, plaintiff in error 7. Julius F. Smietanka, collector of internal revenue, defendant in error, (Error to the District Court of the United States for the Northern District of Illinois, Eastern Division.) Before BAKER, ALSCHULER and EVANS, Circuit Judges. BAKER, Circuit Judge, delivered the opinion of the court : Jackson, plaintiff, filed a declaration to recover income taxes paid by him under protest. Defendant's demurrer was sustained; plaintiff declined to plead over; and this writ of error challenges the consequent judgment. From May, 1913, to April, 1918, plaintiff served as a railroad receiver under appointment of the District Court at Chicago. Plaintiff accepted the employment under an order providing that he "be paid on account of his services at the rate of $2.000 per month" and that on termination of his trust he "shall be at liberty to apply for such further compensation as to the court may then appear reasonable and just." For the years 1913 to 1917 inclusive plaintiff made returns on the basis of "income received"; and, respecting this receivership, he had neither a business system nor books nor unpaid allowances for service from which he could have made returns of "income accrued." In 1918 plaintiff was allowed and paid "as final payment for all services rendered by him during the receivership herein the additional sum of $100,000." On March 14, 1919, plaintiff filed his return for 1918, showing the receipt of said $100,000, and also filed amended returns for 1913 to 1917 inclusive, in which he claimed that pro rata parts of said $100,000 were "accrued income" of those years. On April 16, 1919, the collector rejected the amended returns and demanded normal taxes and surtaxes on the $100,000 so received in 1918. Plaintiff then prepared and on April 22, 1919, presented to the District Court a petition for a nunc pro tunc order showing that the additional compensation was earned and had accrued in equal monthly installments throughout the receivership, and the order as tendered was entered. Thereupon plaintiff, on May 28, 1919, paid $26,826 under protest, and subsequently brought this action to recover the difference, $19,973. Unless some effect is to be given to the nunc pro tunc order, the collector was right. Section 213 of the Revenue Act of 1918 requires a return of "income derived from salaries or compensation for personal service" and provides that the amount thereof "shall be included in the gross income for the taxable year in which received by the taxpayer unless under methods of account permitted under subdivision (b) of section 212 any such amounts are to be properly accounted for as of a different period." That subdivision permits a return "upon the basis of the taxpayer's annual account period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income." Not only do the facts of this case demonstrate that there is no permission in that subdivision to save plaintiff from the direct mandate of section 213, but article 32 of Regulations 45 (authorized by section 1309 of the Act) explicitly requires that "where no determination of compensation for personal services is had until the completion of the services, the amount received is income for the calendar year of its determination." Plaintiff from time to time during the receivership had applied to the court for additional compensation, and the court had always refused. Manifestly such refusals were in accordance with the original order of appointment, which plainly denied any intermediate right to additional compensation and left the question of what additional compensation, if any, would be fair to be determined when the trust ended and to be dependent upon the outcome of the administration. And whether the regulation means that the compensation is income of the year in which the determination of the amount is made or is income of the year in which payment is made, is immaterial in the present case, for both determination of amount and payment thereof occurred in 1918. A year after plaintiff had finally stepped out of the District Court and a month after his liability to make a true return of his income for 1918 had become fixed, plaintiff reappeared in court and obtained the aforesaid nunc pro tunc order. Respecting the general question of a court's authority to make nunc pro tunc orders or judgments, plaintiff cites certain authorities,' which we supplement by calling attention to others. In regard to the present order it suffices to say: There was no misprision of a clerical officer; no new facts; no newly discovered evidence concerning former issues of fact; no failure in the court to enter the original order exactly as the court intended to enter it; even if the petition for the nunc pro tunc order had tendered an issue which interested the original parties (the railroad company and its creditors), no steps were taken by the aforetime receiver to have them join issue; the petition was heard ex parte; and as to the government all the matters in the District Court were res inter alios, The judgment is affirmed. 1 Foster's Fed. Pr. (6th Ed.) vol. 2, Secs. 447, 447a, 448; Lewis v. Holmes, 224 Fed. 410; Farmers & Merchants Bank v. Arizona M. 8. & L. Ass'n, 220 Fed. 1; Accord v. Western Pocahontas, 156 Fed. 989; Kaw Valley Drainage District v. U. P. Rid. Co., 163 Fed. 836. 2 Brooks v. Ry. Co., 102 U. S. 107; Brown v. Schulten, 104 U. S. 410; In re Wight, 134 U. S. 136; Hickman v. Fort Scott, 141 U. S. 415; Gagnon v. United States, 193 U. S. 451; Wetmore v. Karrick, 205 U. S. 141; Brown v. United States, 196 Fed. 351. 61360°-21-7 SECTION 213(a), ARTICLE 52: When included in gross income. 15-21-1559 O. D. 869 The provisions of article 52 of Regulations 45 relating to undecided and indefinite items of gross income for 1918, such as claims for compensation under canceled contracts, merely provided for the temporary omission from the tax return of those items of income which were at that time undecided and not sufficiently definite in amount to be reported. Those provisions are not applicable in cases in which collections of taxpayers for the year 1920 have been postponed because of unusual conditions such as the moratorium in Cuba, there being no question as to the definiteness of the obligations of purchasers. SECTION 213 (a), ARTICLE 52: When included in gross income. 17-21-1592 T. D. 3161 (Ct. D. 10) INCOME TAX-ACT OF OCTOBER 3, 1913-DECISION OF COURT. 1. INCOME-ADDITIONAL SALARY OF OFFICER OF CORPORATION, SUBSEQUENTLY AUTHORIZED, OFFSET BY OVERDRAFTS ALREADY MADE. Where, relying on the unofficial promises of a majority of the board of directors that additional salary would be voted him for past years, the president of a corporation overdrew his account with the corporation, additional salary, subsequently voted, was income to him for the year in which the amount thereof was finally settled upon and segregated by an order of the board, although he had actually received and spent the money, as overdrafts, prior to that year. 2. SAME INVALIDITY OF VOTE OF ADDITIONAL SALARY-ESTOPPEL BY INCOME TAX RETURN, Where the corporation deducted the additional salary of the president when it made its income tax return, the validity of the order of the board granting such additional salary can not be questioned, although such president's vote as director of the corporation was necessary to pass the order, and the minority directors and the stockholders have never acquiesced therein. TREASURY DEPARTMENT, OFFICE OF COMMISIONER OF INTERNAL REVENUE, To collectors of internal revenue and others concerned: UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MISSOURI. No. 5161. W. J. Holbrook, plaintiff, v. George H. Moore, collector, defendant. Submitted to the court sitting as jury, on an agreed statement of facts. [Decided Feb. 8, 1921.] Oral opinion of the court: This case was submitted to the court sitting as a jury, and a jury being specially waived in writing the court heard the testimony and the arguments of counsel, and has since considered the briefs filed on both sides. The facts are somewhat unique, and I confess just a little difficulty with the case. Plaintiff is president of a real estate company doing business here in the city of St. Louis. He is also, of course, a director in that company. He and two others of the directors (of whom there are five in all) made the orders and passed the resolutions to which I shall hereafter refer. The remaining two directors had nothing to do with these orders and resolutions. Plaintiff and the two directors having to do with the resolution that I shall mention owned 75 per cent of the capital stock. Twenty-five per cent is in the hands of other stockholders, presumably in the hands, among others, of the two directors not taking part in the orders and resolutions to which I have before referred. In the years preceding March 1, 1913, the date at which the income tax Act took effect-that is, the Act of October 3, 1913-plaintiff was the active manager of the corporation of which he is a director and president. The affairs of his corporation seem to have been very successful and profitable. It was deemed by plaintiff and two of the directors that his services for the years 1909, 1910, 1911, and 1912 were such as reasonably to entitle him to additional compensation to that allowed him by the rules and by-laws of the board of directors. No agreement as to the amount of that compensation was ever arrived at by anybody up until December, 1913. Plaintiff relying, as he says, upon the promise of two directors, became indebted to the company, and this indebtedness was carried on the books of the company as overdrafts. These overdrafts of plaintiff amounted in December, 1913, to about $70,000. In this month and year (plaintiff and two other directors concurring) plaintiff was allowed a credit upon the books of the company for $50,000, leaving the plaintiff owing the company at that time $20,000 on his overdrafts. Although seven years have passed, neither the other two directors nor the stockholders have ever affirmatively acquiesced in this allowance, although plaintiff was given credit for it upon the books of the company in December, 1913, in the sum that I have heretofore stated, $50,000. In the year 1913 the Holbrook-Blackwelder Real Estate Trust Company (I believe this is the exact style of it) made out its return as it was required to do by the law then in force, as a basis of assessment against it of an income tax for the year 1913. It may have been, perhaps, in January, 1914, but that cuts no figure in the case. In this return it took credit for the $50,000 that it had allowed to plaintiff on its books as an expense. It is true that it happened, fortuitously, that the company during the year 1913 had lost $76,000, so that it had to pay no income tax at all. It would not have had to pay it in any event. Upon this $50,000 so carried to the credit of plaintiff upon the books of his company in 1913, the defendant assessed against him an income tax amounting to, I believe, $990.36. This tax the plaintiff paid. After the usual procedure he brought suit against the defendant, Moore, in order to secure a refund. The question is whether this tax was correctly or incorrectly assessed against him under the law then in force I have reached the conclusion that it was. Up until December, 1913. and on the 28th of the month, I believe, there had never been an ascertainment of the amount that plaintiff should have from the company as additional compensation; that matter was left undetermined. It is true that he had gotten the money and had spent it in the years preceding the taking effect of the income tax Act of October, 1913. Upon the books of the company he owed it overdrafts not only for the $50,000 but for an amount largely in excess of that sum. Up to that time he had never gotten it and it was not certain that he ever would get it. But at this time the credit to conre to him was finally settled upon and segregated by an order of the board. It may be said, since only two members of the board (in addition to plaintiff himself) acquiesced in this, that therefore it was no order, and that since the other two directors and the stockholders have never to this good day acquiesced in it, that it was no order. I take it that the company is foreclosed by the fact that they took credit for it when they made their income tax return for the year following the year at which they passed this credit to plaintiff upon the corporation's books. I am led to the conclusion that I have reached largely by the case of Jackson v. Smietanka, 267 Fed., 932, a case recently decided in Illinois wherein the facts were that Jackson, as receiver for some railroad company, was allowed by order of the court $2,000 per month for a number of years prior to the taking effect of the inconre tax Act of 1918. When a final settlement came, Jackson as receiver was allowed $100,000 additional for his services, over and beyond the $2,000 a month that he had been collecting theretofore. It was understood throughout the receivership that when the same was finally settled he was to be allowed additional compensation. The order of the court allowing that additional compensation proportioned that allowance over the years 1914, 1915, 1916, and 1917 in practically equal amounts. Of course, Jackson contemplated paying an income tax; he conceded that, but the question the court had before it was whether Jackson ought to pay according to the law of 1916, or whether he ought to pay according to the law that was in force in 1914, 1915, and so on. The court held that he ought to pay as of the time and under the law in force at the tire the final settlement and final allowance was made. This Jackson case is the one that I find nearest to the facts in this case. As I stated in the beginning, the case is a close and difficult one, but I have concluded both upon the reasoning and under the authority of the Jackson case, that the judgment should be for the defendant. It is so ordered. SECTION 213 (a), ARTICLE 52: When included in gross income. (See 24-21-1687; sec. 214 (a)8, art. 165.) Earnings of a business received in 1919 after years of dispute as to their ownership. SECTION 213(a), ARTICLE 53: Income not re duced to possession. 4-21-1404 A. R. R. 366 The Committee has had under consideration the appeal of A from the action of the Income Tax Unit in ruling that certain credits on the books of the M Company, authorized by the stockholders and directors of said company as compensation for A's services, represented income to A in the taxable years 1916, 1917, and 1918. In 1891 A purchased an interest in the M Company, and was elected treasurer of said company. At the time of its purchase the M Company had large funded and floating indebtedness, a very small and inadequate plant with limited circulation and comparatively few advertising contracts. A placed behind the M Company all of his personal credit and endorsed its notes and contracts freely. After some years of business and financial effort, the business became one of the leading businesses of its kind, and the company regularly paid dividends. At a meeting of the directors in 1906, and at a meeting of the stockholders of the company held in 1907, there was voted a commission to be paid to A upon the increase of business of the M Company under his management as compared to the business prior to his management. At the time, it was explained and clearly understood, according to affidavits of certain stockholders which |