Frank v. Commissioner

In July 1946, Joseph Frank (plaintiff) resigned as an employee of the Interstate Folding Box Company (Interstate). Pursuant to agreements between Frank and Interstate, Frank was entitled to a bonus for Interstate’s fiscal year ending July 31, 1946, and Interstate was to purchase Frank’s shares of Interstate stock. The amounts to be paid by Interstate to Frank for his fiscal 1946 bonus and his shares of Interstate stock were negotiated over a period of several months, with the parties agreeing in December 1946 that Frank would receive $50,641.30 in settlement of all his claims against Interstate. Payment was made by three checks: (1) a check dated December 28, 1946, in the amount of $18,701.02, which bore a notation that it was for the purchase of Frank’s shares of Interstate stock; (2) a check dated December 28, 1946, in the amount of $15,313,85, which bore a notation that it was for Frank’s fiscal 1946 bonus of $18,905.99, less tax withholdings of $3,592.14; and (3) a check dated January 3, 1947, for $10,557.78, which bore a notation that it constituted payment of all of Frank’s remaining claims of $13,034.29, less tax withholdings of $2,476.51. Although Interstate had sufficient funds in its bank account to issue all three checks on December 28, 1946—and no business reason for not doing so—it delayed issuing the third check until January 3, 1947, at the behest of Frank’s counsel. Frank included the payments he received from the first two checks on his 1946 federal income tax return and the payment from the third on his 1947 return. The commissioner of internal revenue (commissioner) (defendant) determined that the third payment was constructively received by Frank in 1946 and should have been reported on Frank’s return for that year instead of 1947. Frank was assessed a deficiency for 1946, which he challenged in the United States Tax Court.