Appeal from a decision of the United States Tax Court, Wilbur, J., upholding the Commissioner's determination of a deficiency in appellants' federal income tax for the calendar year 1973.
Waterman, Friendly and Meskill, Circuit Judges. Friendly, Circuit Judge, concurring in the result.
John A. and Sally Gambling ("Gambling") appeal from a decision of the United States Tax Court, Wilbur, J., upholding a determination by the Commissioner of Internal Revenue ("Commissioner") of a deficiency in Gambling's federal income tax for the calendar year 1973 in the amount of $50,508.17 plus accrued statutory interest. For the reasons set forth below, we affirm.
On January 1, 1963, Gambling and radio station WOR, a division of RKO General Inc. ("RKO"), entered into an agreement (the "1963 agreement") "providing for the engagement by RKO of [Gambling's] services" as a radio announcer for the three year period commencing January 1, 1963 and ending December 31, 1965. The contract provided for the payment of deferred compensation to Gambling in the event that Gambling's contract share of revenues from his radio programs exceeded $125,000 per annum. Subparagraph 5(d) of this agreement provided that deferred compensation "shall be accrued or set aside and be paid by RKO to [Gambling] upon the terms and conditions" set forth in paragraph 6. Under subparagraph 6(a), RKO agreed to make payments of deferred compensation to Gambling at the rate of $2,000 per month beginning in January 1985. Subparagraph 6(b) provided, however, that --
In the event of the death or permanent disability of [Gambling] prior to December 31, 1984, or in the event of the discontinuance of the employment of [Gambling] by RKO upon the expiration or termination of the term of this agreement or any extension or renewal thereof prior to December 31, 1984, the monthly payments provided in subparagraph "(a)" above shall be made commencing on the first day of the month following such death, permanent disability or discontinuance of employment; in all other respects such payments shall be paid in the manner and to the extent provided in subparagraph "(a)" above.
By a letter agreement dated February 28, 1965 (the "1965 letter agreement") Gambling and RKO agreed to terminate the 1963 agreement "in all respects" except that subparagraphs 5(c) and (d) and paragraph 6 were to continue in "full force and effect until the accounting and payments contemplated thereby [were made]."*fn1 The next day, RKO and John A. Gambling Enterprises, Inc. ("Enterprises"), a New York corporation which had elected Subchapter S status under the applicable provisions of the Internal Revenue Code, entered into a new contract (the "1965 agreement") whereby Enterprises agreed to furnish the services of Gambling to RKO for the period commencing March 1, 1965 and ending December 31, 1969. Although Enterprises was substituted for Gambling as a party to the 1965 agreement, Gambling continued to perform the same services he had performed under the 1963 agreement.
Pursuant to subparagraph 5(d) of the 1963 agreement, $70,777.52 in deferred compensation owed Gambling accrued. RKO, however, did not fund an account for Gambling's deferred compensation or set aside the funds owed Gambling. Gambling neither demanded nor received payment of compensation prior to 1973. However, in May 1973, Gambling asked RKO to pay him $23,000 of the deferred compensation. RKO agreed to pay Gambling the money if he signed a letter amendment to the 1963 agreement which stated, inter alia :
At [Gambling's] request, RKO is paying to [Gambling] upon the signing of this letter agreement, from the sums accrued or set aside and held by RKO as provided in subparagraph (d) of paragraph 5 and in paragraph 6 of the 1963 Agreement as amended by the 1965 Amendment [(the 1965 letter agreement)], the amount of Twenty-three Thousand Dollars ($23,000).
As herein amended, the 1963 Agreement as amended by the 1965 Amendment shall continue in full force and effect.
In response to Gambling's further oral request, RKO paid the $47,777.52 balance of Gambling's deferred compensation on July 26, 1973.
Gambling did not report the deferred compensation on his federal income tax returns for years prior to 1973. As an attachment to the 1973 return, Gambling reported the receipt of the $70,777.52 in deferred compensation, but he did not include it in his 1973 gross income, claiming that "this [amount] was taxable in 1963, 1964 and 1965." Arguably, under section 6501(a) of the Internal Revenue Code, these years were closed to tax assessment. In a Notice of Deficiency dated June 23, 1978, the Commissioner rejected this position, increased Gambling's gross income by $70,777.52, and assessed a $50,508.17 deficiency against Gambling.*fn2
On September 19, 1978, Gambling filed a petition for redetermination in the United States Tax Court. J. App. at 3. Gambling contended that in accordance with the terms of the 1963 agreement, he was entitled to receive the deferred compensation in 1965 through 1968 and that, therefore, he was in ...