A
W
Prociuk
(orally):—The
appellant,
presently
of
Cranbrook,
British
Columbia
and
formerly
of
Regina,
Saskatchewan,
appeals
from
the
respondent’s
assessment
dated
December
6,
1971,
for
the
taxation
years
1968,
1969
and
1970
and,
more
specifically,
because
the
respondent
added
to
the
appellant’s
income
the
following
sums:
$20,000
in
the
year
1968,
$29,500
in
the
year
1969,
and
$15,000
in
the
year
1970,
and
taxed
accordingly.
The
appellant
was
also
assessed
a
penalty
under
subsection
56(2)
in
respect
of
the
said
sums
as
well
as
a
penalty
under
section
19
of
the
British
Columbia
Income
Tax
Act,
SBC
1960,
c
27,
in
so
far
as
same
related
to
the
provincial
tax
payable
on
the
increased
assessments
for
the
year
in
question.
Briefly,
the
facts
as
I
find
them
are
as
follows:
The
appellant
entered
into
a
contract
dated
July
1,
1967
with
Motor
Dealers
Acceptance
Company
Ltd,
of
Regina,
Saskatchewan
(hereinafter
referred
to
as
“MD”),
whereby
he
accepted
the
position
of
general
manager
for
a
period
of
10
years
at
an
annual
salary
of
$11,400,
plus
other
benefits
as
are
more
specifically
set
forth
in
the
said
agreement
filed
as
Exhibit
A-1.
This
agreement
reads
as
follows:
1.
The
company
hereby
appoints
the
manager
to
be
and
the
manager
hereby
accepts
the
office
of
General
Manager
of
the
company,
upon
the
terms
and
conditions
following.
2.
The
appointment,
subject
to
the
terms
hereinafter
contained,
shall
be
for
a
term
of
ten
(10)
years
from
the
1st
day
of
July,
A.D.
1967.
3.
The
manager
shall
be
paid
an
annual
salary
of
Eleven
Thousand,
Four
Hundred
Dollars
($11,400.00)
payable
in
equal
monthly
instalments
on
the
last
day
of
each
calendar
month,
the
first
of
such.
instalments
to
be
payable
on
the
1st
day
of
July,
A.D.
1967.
4.
The
manager
shall
be
paid
at
the
end
of
each
fiscal
year
a
bonus
equal
to
Two
Per
Cent
(2%)
before
taxes
of
the
net.
profits
of
the
company
as
certified
by
the
auditors
of
the
company.
Net
profits
shall
mean
the
gross
earnings
of
the
company
less
all
items
normally
deductible
in
computing
net
profits,
including,
without
restricting
the
generality
of
the
foregoing:
a)
Administrative
expenses;
b)
Operating
expenses;
c)
All
taxes
and
rates
other
than
income
tax;
d)
Interest
on
loans,
including
loans
from
shareholders
of
the
company;
e)
Insurance;
f)
Repairs,
maintenance
and
renewals
of
assets
of
the
company;
g)
Reserves
for
bad
and
doubtful
debts;
h)
Any
other
proper
reserves;
l)
Legal
and
accounting
expenses;
j)
All
outgoings
payable
with
respect
to
the
business;
k)
All
wages
and
salaries,
including
the
annual
salary
of
the
Manager,
provided
for
in
paragraph
3
of
this
agreement;
l)
Office
expenses.
The
following
shall
not
be
deducted
in
computing
net
profits:
(i)
The
additional
bonus
payable
to
the
manager
under
this
paragraph;
(ii)
Depreciation;
(iii)
Capital
cost
allowance;
(iv)
Reserves
for
obsolescence
or
replacement
of
capital
assets;
(v)
Reserves
for
the
purchase
of
new
capital
assets.
The
auditors
of
the
company,
within
sixty
(60)
days
of
the
completion
of
the
fiscal
year
of
the
company
or
within
sixty
(60)
days
of
the
date
of
termination
of
the
engagement
of
the
manager
other
than
at
the
expiration
of
this
contract,
shall
certify
the
amount
of
the
net
profits
and
the
amount,
if
any,
payable
to
the
manager
as
aforesaid,
or
that
no
amount
is
payable.
The
amount,
if
any,
shown
to
be
payable
shall
be
paid
within
thirty-five
(35)
days
of
the
making
of
such
certificate.
The
determination
of
the
auditors
of
the
company
of
the
amount
of
said
profits
and
their
decision
in
respect
to
all
matters
necessary
to
enable
them
to
certify
and
fix
such
remuneration,
shall
be
conclusive
and
binding
on
the
parties,
except
for
manifest
error
discovered
within
thirty
(30)
days
after
the
making
thereof.
The
making
of
such
certificate
shall
be
a
condition
precedent
to
the
right
of
the
manager
to
such
additional
remuneration.
For
the
purpose
of
this
paragraph
the
auditors
of
the
company
shall
mean
a
firm
of
independent
chartered
accountants
practising
their
profession
in
the
City
of
Regina,
in
the
Province
of
Saskatchewan.
If
the
company
shall
fail
to
employ
auditors
within
the
meaning
of
this
definition
then
the
manager
may
employ,
at
the
expense
of
the
company,
any
firm
of
independent
chartered
accountants
practising
their
profession
in
Regina
to
audit
and
certify
the
amount
of
the
profits
and
the
amount
to
which
he
is
entitled.
5.
The
manager
shall
obey
the
express
directions
and
order
given
to
him
from
time
to
time
by
the
company
in
writing
but
subject
thereto
shall
have
full
power
and
authority
at
his
discretion
to
engage
and
dismiss
servants
and
to
pay
them
such
remuneration,
either
by
salary,
wages,
commission
or
otherwise
as
he
shall
see
fit.
6.
It
shall
be
the
duty
of
the
manager
during
the
said
term:
a)
To
attend
personally
during
the
usual
hours
of
business
and
to
supervise
and
control
the
business
in
such
a
manner
as
may
be
necessary
and
to
be
accessible
to
customers,
clerks,
assistants
and
servants
of
the
business.
b)
To
keep
the
usual
books
of
account
and
to
have
the
same
punctually
posted
up
so
as
to
be
a
complete
record
of
all
moneys
received
and
paid
on
behalf
of
the
said
company.
c)
To
duly
account
for
all
moneys
received
by
him
in
the
course
of
the
conduct
of
the
said
business
and
to
pay
over
the
same
to
the
company,
its
agent
or
banker,
at
such
time
and
in
such
manner
as
the
company
shall
direct,
retaining
only
in
hand
such
sums
as
he
may
be
authorized
by
the
company
to
retain
for
the
immediate
use
of
the
business.
d)
Not
to
do,
permit,
or
suffer
any
act
or
thing
whereby
the
said
company
or
any
of
the
assets
thereof
or
any
property
belonging
to
the
company
may
become
liable
to
be
seized
in
execution,
charged
or
affected
or
whereby
the
interest
of
the
company
herein
may
be
prejudicially
affected.
e)
Not
to
hold
himself
out
or
allow
himself
to
be
held
out
as
a
partner
with
the
company
in
the
business.
f)
Not
to
make
any
alterations
in
the
said
premises
without
the
previous
consent
in
writing
of
the
company.
7.
The
manager
shall
well
and
faithfully
serve
the
company
and
use
his
best
efforts
to
promote
the
interests
thereof,
and
shall
not
disclose
the
private
affairs
of
the
company
or
any
secrets
of
the
company
to
any
person
other
than
the
directors
of
the
company
or
for
the
company’s
purposes,
except
with
the
consent
or
on
the
directions
of
the
board
of
directors
or
as
otherwise
required
by
law.
8.
The
manager
shall
be
reimbursed
for
all
travelling
and
other
expenses
actually
and
properly
incurred
by
him
in
connection
with
his
duties
hereunder.
9.
If
at
any
time
during
his
employment
by
the
company
the
manager
shall
be
guilty
of
any
misconduct
or
shall
fail
to
keep
such
accounts
as
the
directors
shall
from
time
to
time
reasonably
require,
or
shall
disobey
or
neglect
any
lawful
and
reasonable
order
or
direction
of
the
directors,
or
shall
be
incompetent,
then
in
any
such
case
the
directors
of
the
company
may
determine
the
manager’s
employment
forthwith
without
any
notice
or
payment
in
lieu
of
notice.
Upon
such
termination
the
manager
shall
be
paid
a
proportionate
amount
of
his
annual
salary
to
the
date
of
termination
after
deducting
prior
payments
made
thereon,
and
a
proportionate
amount
of
the
bonus
payable
to
him
in
accordance
with
the
provisions
of
paragraph
4
hereof.
10.
If
the
manager
shall
at
any
time
be
prevented
by
illness
or
accident
from
performing
his
duties
as
manager
he
shall,
if
required,
furnish
the
directors
of
the
company
with
evidence
satisfactory
to
them
of
such
incapacity
and
the
cause
thereof
and
if
such
incapacity
will
not
in
the
aggregate
exceed
three
(3)
months
the
manager
shall
be
entitled
to
be
paid
in
full
compensation
herein
provided
for,
but
the
company
shall
be
entitled
to
hire
someone
else.
to
do
the
manager’s
work,
the
cost
of
such
person
to
be
deducted
from
the
moneys
otherwise
payable
to
the
manager.
If
the
manager
shall
be
incapacitated
for
a
longer
period
than
three
(3)
months,
or
if
he
shall
be
incapacitated
at
different
times
aggregating
more
than
three
(3)
months,
then
in
either
such
case
the
employment
of
the
manager
shall
at
the
option
of
the
directors
of
the
company
forthwith
determine
and
the
manager
shall
be
paid
in
the
same
manner
as
provided
for
in
paragraph
9
hereof,
less
any
expenses
incurred
by
the
company
in
hiring
any
other
person
to
do
the
work
of
the
manager.
In
case
the
manager
shall
die
during
the
currency
of
this
agreement
and
the
employment
of
the
manager
has
not
been
terminated,
the
manager
shall
be
paid
in
the
same
manner
as
if
the
contract
had
terminated
for
illness,
at
the
date
of
death.
11.
If
after
the
termination
of
this
agreement
by
the
effluxion
of
time
the
manager
shall
continue
to
be
employed
by
the
company
the
provisions
of
this
agreement
shall
mutatis
mutandis
apply
except
that,
subject
to
the
right
of
the.
company
to
terminate
for
cause
as
hereinbefore
provided,
either
party
may
terminate
this
agreement
on
six
(6)
months’
notice,
in
which
event
the
manager
shall
be
paid
his
proportionate
amount
of
the
annual
salary
to
the
date
of
termination
less
payments
made
thereon,
and
in
addition
the
proportionate
amount
of
the
bonus
in
accordance
with
the
provisions
of
paragraph
4
hereof.
By
letter
dated
April
1,
1968
the
company
increased
the
appellant’s
salary
to
$12,600
per
annum.
This
company,
late
in
1967
or
early
1968,
began
to
consider
the
possibility
of
converting
from
finance
to
investment
business,
and
it
appears
that
the
appellant
was
aware
of
these
considerations.
Apprehensive
of
his
continuing
position
as
a
general
manager
in
the
event
of
actual
conversion,
the
appellant
consulted
his
solicitor,
Joseph
Kanuka,
Esq,
a
well-known
Regina
barrister
and
solicitor,
on
or
about
May
4,
1968.
On
May
10,
1968
he—the
appellant—received
a
letter
from
his
company
authorizing
and
instructing
him
to
assist
in
the
sale
of
the
com-
pany’s
business
as
a
going
concern
and
to
seek
out
prospective
purchasers.
The
above-mentioned
letter,
which
was
filed
as
Exhibit
A-3,
reads
as
follows:
Please
consider
this
letter
your
full
permission
to
conduct
such
negotiations
and
discussions
as
you
in
your
discretion
think
necessary
with
such
interested
parties
as
you
feel
desirable
leading
towards
the
sale
of
Motor
Dealers
Acceptance
Company
Ltd.
as
a
going
business,
or
of
any
of
the
assets
thereof.
Please
feel
free
also
to
enter
into
such
discussions
or
negotiations
as
you
think
wise
or
desirable
which
might
lead
up
to
a
beneficial
arrangement
for
Motor
Dealers
Acceptance
Company
Ltd.
with
any
other
company.
It
is
realized
that
your
contract
of
employment
with
Motor
Dealers
Acceptance
Company
Ltd.
might
restrict
such
outside
activities
on
your
part;
however,
you
are
hereby
released
from
any
such
restrictions
insofar
as
any
past
or
present
negotiations
may
lead
to
a
sale
or
other
arrangement
which
could
be
beneficial
to
us.
You,
of
course,
realize
that
any
arrangements
or
negotiations
made
by
you
will
ultimately
need
the
approval
of
the
Board
of
Directors
and/or
the
Shareholders
before
they
could
be
considered
binding
upon
the
Company.’
The
appellant’s
solicitor,
on
being
consulted
again
by
the
appellant,
wrote
to
the
company
on
May
16,
1968,
pointing
out
that
if
the
appellant
proceeds
as
instructed
and
authorized
he
will
in
effect
be
taking
steps
to
cause
the
loss
of
his
own
employment.
This
letter,
filed
as
Exhibit
A-12,
further
requests
that
the
company
confirm
that
the
appellant’s
contract
will
be
honoured.
J
Kanuka,
Esq,
aforesaid,
appeared
before
the
Board
as
a
witness,
and
stated
that
there
then
followed
a
series
of
telephone
conferences
and
conversations
between
him
and
J
R
Davidson,
Esq,
the
president
of
the
Company.
Mr
Davidson
then,
on
May
24,
1968,
replied
to
Mr
Kanuka
by
letter
filed
as
Exhibit
A-13,
which
reads
as
follows:
Messrs.
Pierce,
Hleck,
Kanuka,
Mitchell
&
Thuringer,
Barristers
and
Solicitors,
201
Gordon
Building,
2180
—
12th
Avenue,
REGINA,
Saskatchewan.
Attention:
Mr.
J.
W.
Kanuka
Gentlemen:
Re:
Mr.
Jack
Fraser
—
Your
file
#3768
JWK
Your
letter
of
May
16,
1968
is
acknowledged.
The
Board
of
Directors
of
Motor
Dealers
Acceptance
Company
Ltd.
considered
the
position
of
Mr.
Fraser
at
a
regular
Board
meeting
held
on
the
17th
of
May,
1968.
Although
Mr.
Fraser
has
been
authorized
by
letter
dated
May
10,
1968,
to
conduct
negotiations
to
dispose
of
the
assets
of
the
Company
and
to
enter
into
whatever
arrangements
he
wishes
with
M.G.F.
Management
Limited
until
the
transaction
is
completed,
Motor
Dealers
Acceptance
Company
Ltd.
considers
the
Management
Agreement
of
July
1,
1967,
fully
operative
and
binding.
It
is
presumed
that
if
the
transaction
is
completed
Motor
Dealers
Acceptance
Company
Ltd.
would
be
converted
to
an
investment
and
holding
company,
in
which
event
Mr.
Fraser
would
be
relieved
of
his
duties.
It
is
the
view
of
the
Board
of
Directors,
subject
to
approval
by
the
shareholders
of
Motor
Dealers
Acceptance
Company
Ltd.,
that
the
proposed
conversion
would
be
in
the
best
interests
of
the
Company.
If,
however,
the
conversion
does
not
become
a
reality,
Motor
Dealers
Acceptance
Gompany
Ltd.
will
continue
its
present
business
and
Mr.
Fraser
would
continue
to
be
retained
as
the
General
Manager
in
accordance
with
his
contract.
Considering
the
future,
however,
and
in
order
to
avoid
any
misunderstanding
or
court
proceedings,
Motor
Dealers
Acceptance
Company
Ltd.
is,
prepared
to
make
the
following
offer
in
the
event
the
conversion
is
effected:
1.
...
In
exchange
for
a
complete
release
by
Mr.
Fraser
of.
the.
undertakings
of
Motor
Dealers
Acceptance
Company
Ltd.
contained
in
the
Management
Agreement
of
July
1,
1967,
Motor
Dealers
Acceptance
Company
Ltd.
will
pay
to
Mr.
Fraser
the
sum
of
Fifteen
Thousand
Dollars
($15,000.00)
on
the
2nd
day
of
January
A.D.
1969.
2.
...
Mr
Fraser
must
give
a
covenant
not
to
sue
Motor
Dealers
Acceptance
Company
Ltd.
for
breach
of
contract
and
will
undertake
further
not
to
influence
the
Directors
or
the
shareholders
of
Motor
Dealers
Acceptance
Company
Ltd.
without
the
prior
approval
of
M.G.F.
Management
Limited.
3.
...
To
ensure
payment
of
the
amounts
set
out
above
Motor
Dealers
Acceptance
Company
Ltd.
would
undertake
to
provide
reasonable
security.
The
foregoing
offer
is
conditional
upon
the
contemplated
conversion
becoming
a
reality
and
is
made
only
as
a
means
of
avoiding
any
conflict
with
Mr.
Fraser
now
or
in
the
future.
The
foregoing
contents
of
this
letter
are
strictly
without
prejudice
to
the
rights
of
the
Company
in
the
event
that
the
proposed
conversion
is
not
proceeded
with.
Motor
Dealers
Acceptance
Company
Ltd.
is
completely
aware
and
in
fact
has
authorized
Mr.
Fraser
to
co-operate
fully
with
M.G.F.
Management
Limited
and
has
no
objection
to
Mr.
Fraser
receiving
compensation
or
remuneration
for
the
assistance
he
may
give
that
Company.
Yours
truly,
MOTOR
DEALERS
ACCEPTANCE
COMPANY
LTD.,
per:
“J.
R.
Davidson”
J.
R.
Davidson,
President.
Further
discussions
and
negotiations
took
place,
and
on
June
11,
1968
Mr
Kanuka
replied
by
letter
filed
as
Exhibit
A-14,
accepting
the
offer
and
together
therewith
forwarded
an
executed
release
by
the
appellant
in
favour
of
the
company,
which
release
was
filed
as
Exhibit
A-4.
This
release
is
in
the
usual
form,
undertaking,
in
consideration
of
the
said
payments
of
$15,000
per
annum
for
8
years,
commencing
on
January
2,
1969,
to
release
the
company
of
all
claims
he
may
have
against
it,
and
not
to
sue
the
company
for
breach
of
agreement.
This
release
was
amended
slightly,
and
the
amended
release,
dated
July
9,
1968,
was
forwarded
to
the
company.
This.
release
was
filed
as.
Exhibit
A-5.
The
company,
by
agreement
dated
May
17,
1968,
agreed
with
MGF
Management
Limited—hereinafter
referred
to
as
“MGF”—that
MGF
should
have
the
exclusive
listing
for
the
sale
of
the
company’s
business
as
a
going
concern
for
a
sum
not
less
than
$2,500,000.
The
commission
payable
to
MGF
was
agreed
at
$50,000,
plus
3%
on
any
amount
over
and
above
the
$2,500,000.
This
agreement
was
filed
as
Exhibit
R-1.
MGF,
by
agreement
in
the
form
of
a
letter
to
the
appellant
dated
May
17,
1968,
hired
the
appellant
to
assist
it
in
the
said
sale,
and,
on
satis
factory
conclusion
thereof,
obligated
itself
to
pay
the
appellant
$20,000
plus
one-third
of
the
percentage
excess
fee
received
by
MGF
under
its
agreement
with
MD.
This
agreement
was
filed
as
Exhibit
R-2,
which
reads
as
follows:
J.
W.
Fraser,
Esq.,
2054
Broad
Street,
Regina,
Saskatchewan.
Dear
Mr.
Fraser:
We
are
coincidentally
herewith
entering
into
arrangements
with
Motor
Dealers
Acceptance
Company,
Ltd.
(“MD”)
providing
for
the
sale
of
its
present
business
through
us
and
its
conversion
into
an
investment
and
holding
company,
all
in
accordance
with
an
agreement
with
schedules
annexed
which
you
have
seen.
In
consideration
of
your
co-operation
in
assisting
us
in
arranging
the
sale
of
the
business
of
MD
and
on
condition
that
MD
shall
have
accepted
our
offer
to
purchase
rights
in
the
form
seen
by
you
and
shall
enter
into
the
foregoing
agreement,
we
agree
to
pay
to
you
out
of
the
fee
receivable
by
us
in
connection
with
such
sale
the
sum
of
$20,000.00
plus
one-
third
of
the
percentage
excess
fee
receivable
by
us.
You
will
assist
us
in
interesting
and
aiding
potential
purchasers
of
the
business
of
MD
to
submit
an
acceptable
offer
to
purchase
to
MD
and
you
will
further
aid
in
the
solicitation
and
obtaining
of
support
and
proxies
for
the
management
proposals
at
the
resultant
shareholders’
meeting
of
MD
as
contemplated
under
the
foregoing
agreement.
It
is
understood
also
that
you
will
use
your
best
efforts
to
cause
the
directors
to
approve
the
foregoing
agreement
in
the
initial
instance
and
to
proceed
thereafter
in
accordance
with
its
provisions
and
intent.
Save
and
except
in
respect
of
your
presently
outstanding
employment
contract
with
Motor
Dealers
Acceptance
Company
Ltd.,
you
will,
after
we
have
become
investment
manager
of
Motor
Dealers
Acceptance
Company
Ltd.,
refrain
from
influencing
directly
or
indirectly
the
directors
or
shareholders
of
Motor
Dealers
Acceptance
Company
Ltd.,
except
with
our
approval.
For
our
part,
we
will
at
all
times
use
our
best
efforts
to
cause
MD
to
comply
with
its
existing
contract
with
you.
Please
acknowledge
your
agreement
of
the
foregoing
in
the
space
provided
below.
Yours
very
truly,
M.G.F.
MANAGEMENT
LIMITED
|
Per:
|
(Illegible)
|
|
President
|
|
Per:
|
(Illegible)
|
|
Secretary
|
The
foregoing
is
acknowledged
and
I
agree
to
be
bound
thereby.
“J
W
Fraser”
J
W
Fraser
On
August
21,
1968
MGF
paid
the
appellant
$20,000.
From
the
evidence
of
the
appellant
and
Mr
Kanuka,
it
would
appear
that
MGF
obligated
itself
to
the
appellant
for
more
than
appears
in
Exhibit
R-2,
such
as
payment
of
bank
interest
on
the
appellant’s
loan
of
$85,000
till
the
loan
was
fully
retired
by
the
appellant,
and
obtaining
for
the
appellant
an
option
of
10,000
initial
shares
of
Westgrowth
Investment
Ltd,
which
was
the
converted
form
of
MD.
Bearing
in
mind
that
all
other
transactions
were
carefully
documented,
and
this
additional
matter
not
at
all,
I
am
not
prepared
to
find
that
there
was
in
fact
a
binding
agreement
to
that
effect.
The
appellant
sought
to
establish
that
any
dealings
he
had
with
MGF
were
part
of
the
“package
deal”
he
and
his
solicitor
put
forward
to
MD
for
settlement
of
damages,
which
he
placed
at
approximately
$233,000
for
MD’s
breach
of
contract
and
arbitrary
termination
of
his
employment.
He
did
not
care,
he
stated,
where
the
money
in
the
said
amount
came
from.
Viewing
the
evidence
in
its
totality,
I
am
not
prepared
to
accept
this
submission.
In
any
event,
MGF
did
not
pay
the
bank
interest,
nor
take
any
steps
to
secure
the
stock
for
the
appellant.
MGF
did,
however,
pay,
on
October
3,
1969,
to
the
appellant,
the
sum
of
$14,500
following
a
mutual
release
executed
by
both
parties
on
July
7,
1969
and
filed
as
Exhibit
A-7.
It
appears
to
me—and
I
so
find—that
this
payment
relates
to
the
one-third
of
excess
fee
referred
to
in
Exhibit
R-2.
Having
given
the
matter
my
best
consideration,
I
find
that
the
sums
of
$20,000
and
$14,500
paid
by
MGF
to
the
appellant
were
in
respect
of
services
rendered
by
the
appellant,
and
therefore
taxable.
In
so
far
as
the
settlement
with
MD—now
known
as
“Westgrowth
Investments
Ltd”—is
concerned,
the
question
is
whether
this
constitutes
a
capital
payment
or
income
in
the
hands
of
the
appellant.
The
fact
that
the
payments
are
spread
over
a
period
of
8
years
is
of
no
significance
in
determining
the
point.
Similarly,
it
does
not
matter
what
the
quantum
of
settlement
was,
although,
in
this
instance,
the
appellant,
with
the
aid
of
an
able
lawyer,
ended
up
with
a
princely
amount.
The
respondent
relies
on
section
25
of
the
Act,
which
reads
as
follows:
25.
An
amount
received
by
one
person
from
another,
(a)
during
a
period
while
the
payee
was
an
officer
of,
or
in
the
employment
of,
the
payer,
or
(b)
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
an
obligation
arising
out
of
an
agreement
made
by
the
payer
with
the
payee
immediately
prior
to,
during
or
immediately
after
a
period
that
the
payee
was
an
officer
of,
or
in
the
employment
of,
the
payer,
shall
be
deemed
for
the
purpose
of
section
5,
to
be
remuneration
for
the
payee’s
services
rendered
as
an
officer
or
during
the
period
of
employment
unless
it
is
established
that,
irrespective
of
when.
the
agreement,
If
any,
under
which
the
amount
was
received:
was
made
or
the
form
or
legal
effect
thereof,
it
cannot
reasonably
be
regarded
as
having
been
received
(i)
as
consideration
or
partial
consideration
for
accepting
the
office
or
entering
into
the
contract
of
employment,
(li)
as
remuneration
or
partial
remuneration
for
services
as
an
officer
or
under
the
contract
of
employment,
or
(iii)
in
consideration
or
partial
consideration
for
covenant
with
reference
to
what
the
officer
or
employee
is,
or
is
not,
to
do
before
or
after
the
termination
of
the
employment.
The
question
is:
is
this
settlement
of
$20,000
an:
obligation:
arising
out
of
the
agreement?
In
perusing
Exhibit
A-1
there
is
no
reference
whatsoever
to
a
situation
such
as
déveloped
ten
.or
eleven
months
later.
The
contract
does
not
even
contemplate
such
a
situation.
The
evidence
establishes
beyond
any
doubt
that
the
company
was
in
breach
of
the
agreement
when
it
decided
to
convert
to
an
investment
company
without
any
provision
for
a
similar
position
for
the
appellant.
It
is
obvious
that
the
company
realized
that
it
could
not
successfully
contest
a
lawsuit
at
the
instance
of
the
appellant,
and
agreed
to
settle
as
it
did,
rather
than
face
a
court
order.
The
appellant
succeeded
in
settling
for
an
amount
almost
as
great
as
he
would
have
earned
had
the
company
continued
to
exist.
This,
however,
does
not
make
it
subject
to
tax,
and
I
so
find.
It
represents
damages
for
breach
of
contract.
The
penalties
Imposed
by
the
respondent
are
not
supported
by
any
evidence.
The
fact
that
the
appellant
bona
fide
takes
the
position
that
a
certain
sum
is
capital
and
not
income
does
not
render
him
liable
to
penalty
when
his
position
is
overruled
on
appeal.
In
view
of
my
findings,
the
appellant’s
appeal
is
allowed
in
part
as
follows:
(1)
all
penalties
imposed
by
the
respondent
are
hereby
disallowed;
(2)
the
appellant’s
taxable
income
for
the
years
1969
and
1970
is
hereby
reduced
by
$15,000
in
each
of
these
years,
and
the
matter
is
referred
back
to
the
respondent
for
reassessment
accordingly.
Appeal
allowed
in
part.
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