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Paxson v. Commissioner of Internal Revenue.

September 11, 1944


Appeal from Tax Court of the United States.

Author: Kalodner

Before DOBIE and McLAUGHLIN, Circuit Judges, and KALODNER, District Judge.

KALODNER, District Judge.

This is a petition to review the decision of the Tax Court. The question involved is whether commissions "received" by petitioner, under agreement with the American Oil Company, during the years 1936, 1937 and 1938, constituted taxable income to him or to the Albany Service Station, Inc. The facts as found by the Tax Court are as follows (2 T.C. 819):

The petitioner, Joseph A. Paxson, is the treasurer and general manager of Albany Service Station, Inc., a corporation of the State of New Jersey (hereinafter referred to as the Albany Company) which was engaged during the taxable years in selling gasoline and other petroleum products at wholesale and retail in Atlantic City. A minority of the Albany Company's outstanding capital stock of $5,000 was owned by the petitioner and the remainder was owned by the petitioner's wife, Emma Paxson, who was president of the Albany Company, and by the petitioner's four children, his sister, and his brother-in-law. The Albany Company carried on its business and did its banking in its own name, and kept regular books of account and a minute book of proceedings of its directors and stockholders. The petitioner, as general manager, had exclusive charge of the company's business and received a salary of $8,500 per annum for his services.

On March 12, 1934, the Richfield Oil Corporation (hereinafter referred to as the Richfield Company) appointed the Albany Company as its agent for the sale of gasoline in Atlantic City and vicinity. The contract was to terminate on March 11, 1937 and was to be automatically renewed from year to year thereafter for a period of five years unless and until one of the parties gave at least 30 days' written notice of its intention to terminate on the then expiring year, but the Richfield Company reserved the right to terminate it at any time. The Richfield Company was to deliver gasoline to the Albany Company on consignment, for sale by the latter at prices fixed by the Richfield Company, and the Albany Company was to receive a stated commission on each gallon sold. The gasoline was to be delivered to the Albany Company at the Richfield bulk storage plant at Absecon, New Jersey, and the trucks and labor necessary for the operation of the agency were to be furnished by the Albany Company. The contract provided that the Albany Company should give its exclusive time and attention to the sale of Richfield products and that it should not without the written consent of the Richfield Company, sell, deal in, market, or distribute, directly or indirectly, petroleum products, other than those sold, marketed, or distributed by the Richfield Company.

Just prior to August 1, 1935, the petitioner learned that condemnation proceedings were to be instituted by the Pennsylvania Railroad Company against the property on which the Richfield bulk plant was situated, and, anticipating that this might result in a temporary suspension of operations by the Richfield Company in that location, and in order to assure the Albany Company of a continuous supply of gasoline, he entered into negotiations with the American Oil Company (hereinafter referred to as Amoco), for the appointment of the Albany Company as an agent for the sale of Amoco's gasoline and other petroleum products. Amoco had knowledge of the Albany Company's contract obligation to deal exclusively in Richfield products, and because of such obligation and of Amoco's desire to avoid any litigation or controversy with the Richfield Company, it declined to enter into any agency agreement with the Albany Company. However, the negotiations resulted in the execution on August 1, 1935, of a contract between Amoco and the petitioner individually, designated as a "commission peddler agency contract."

Under the contract of August 1, 1935, the petitioner was designated as the "Agent" of Amoco for the purpose of selling and hauling from Amoco's bulk plant at Atlantic City gasoline and other Amoco petroleum products, and petitioner was to furnish an employee fidelity bond. The contract was to continue from August 3, 1935, until terminated on written notice by either party. The petitioner was to haul all gasoline and other products from the bulk plant premises of Amoco for the purpose of re-sale to customers procured by him within such territory as Amoco might from time to time designate, and he was to give his exclusive time and attention to his employment as the agent of Amoco and to operate and make all sales in strict compliance with its rules and regulations. The petitioner was to make all sales at prices and upon terms designated by Amoco and he was to settle daily for all cash sales and to remit daily for all other sums received for the account of Amoco. The petitioner was not to extend any credit, or make any sales at a discount, credit or otherwise, without the written authority of Amoco, and all unauthorized sales, or credits, for an amount greater than authorized, were to be for his own account. The petitioner was to furnish, maintain and operate, at his own expense, the trucks necessary for servicing customers, and to carry liability insurance thereon. All trucks were to carry the name of The American Oil Company and the Agent's name and the words "Commission Peddler Agent" were to be shown on the cab of the truck. All persons employed by petitioner in connection with the performance of his duties under the contract were to be his employees and Amoco was not to be responsible for any claims or demands for wages, or otherwise, growing out of or pertaining to their employment. Amoco was to pay the petitioner daily on the sale and actual delivery by him of products from the bulk plant of Amoco to buyers made on that day, a commission of two cents per gallon on the various grades of Amoco's gasoline, and commissions of varying amounts on lubricating oils, greases, and specialties.

This contract provided against assignment without written consent of Amoco, and also stated that the agreement constituted all arrangements between the parties and that it was not subject to changes or modification without an agreement in writing signed by petitioner and Amoco.

Prior to 1936, the Albany Company was purchasing large quantities of Amoco's gasoline on credit, through petitioner as Amoco's Agent, and although Amoco believed that the petitioner was personally liable for the Albany Company account, under the provisions of his agency contract of August 1, 1935, prohibiting sales of its products by petitioner on credit, without Amoco's consent, it demanded that he execute a separate instrument guaranteeing the account of the Albany Company. The petitioner on October 28, 1936, executed an instrument wherein, in consideration of the sales theretofore made, and to be made from time to time by Amoco to the Albany Company on credit, the petitioner guaranteed payment of the account of the latter to the extent of $7,500.

The contract of August 1, 1935, was in effect until September 14, 1938. While that contract was in effect all sales of Amoco's gasoline and other products were made by petitioner to the Albany Company and were hauled in the trucks of the Albany Company and the latter paid all the expenses of such hauling, including maintenance of the trucks, wages of employees, and liability insurance. Amoco at the end of each month issued its check for commissions due on sales made under the contract of August 1, 1935. The checks were payable to the order of the petitioner, but he did not cash any of them personally or clear any of them through the bank. The bookkeeper of the Albany Company, after verification of the amount of commissions due, endorsed the monthly check to the Albany Company, applied it as payment on the account of the latter for gasoline purchased from Amoco, and returned the check to the local office of Amoco.

In September, 1938, Amoco discontinued the practice of drawing checks for the commissions and accepting them as payment on the account of the Albany Company. On September 14, 1938, Amoco entered into a contract with the Albany Company in which Amoco agreed to sell and deliver to the Albany Company, on stated terms, the latter's resale requirements of Amoco's gasoline and other products.

The petitioner was never authorized by the Albany Company by written instructions or formal corporate resolutions to enter into the agreement of August 1, 1935, on its behalf and during the time it was in effect petitioner did not assign that agreement to the Albany Company in writing, nor did he obtain consent of Amoco to make such an assignment.

In its returns for the years 1936, 1937 and 1938, the Albany Company reported net income for those years in the amounts of $2,851.28, $12,550.91, and $6,001.37, respectively. The gross income reported in such returns included, among other items, "discounts on purchases" in the ...

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