## Facts

- Howard Veit and Laurette Veit, husband and wife, filed separate federal returns on the cash method while living in California.
- Howard was executive vice president of M. Lowenstein & Sons, Inc., a New York cotton-goods company, and was compensated by a fixed salary plus a bonus equal to 10% of corporate profits for 1939 and 1940.
- Under the original employment arrangement, the corporation was obligated to pay Howard’s profit-based bonus on dates in 1941.
- In November 1940, before the bonus became payable, Howard and the corporation agreed to defer payment until 1942.
- In December 1941, at the corporation’s request, the parties renegotiated again and provided that the 1940 bonus would be paid in five equal annual installments over 1942–1946.
- The Commissioner determined that Howard constructively received the entire 1940 bonus in 1942 despite the installment contract and asserted deficiencies (including “income and victory taxes”), with a protective position that some of the compensation could be community income taxable to Laurette.
- The Veits also contested disallowances of deductions Howard claimed for unreimbursed employee expenses incurred while working for the federal Board of Economic Warfare, and a claimed loss on the sale of stock.
- The dispute came after an earlier Tax Court decision involving related deferral arrangements (Veit v. Commissioner, 8 T.C. 809 (1947)).

## Issues

1. Whether compensation deferred by a bona fide agreement and payable only in future installments was constructively received by Howard Veit in 1942.
2. Whether the deferred compensation was Howard’s separate income or community income once the Veits were domiciled in California when installments were paid.
3. Whether Howard could deduct unreimbursed employee expenses allegedly incurred in his work for the Board of Economic Warfare.
4. Whether Howard could deduct a claimed loss on the sale of stock.

## Decision

- The Tax Court held that Howard did not constructively receive the full amount of the deferred 1940 bonus in 1942 because, under the December 1941 agreement, he lacked a present, unrestricted right to demand the whole sum in that year.
- The court treated the disputed compensation as Howard’s separate income, not community income, even though the Veits resided in California when some payments were made.
- The court allowed only those Board of Economic Warfare expenses that were sufficiently proved as ordinary and necessary employee expenses; it disallowed the remainder for inadequate proof or because they were personal in nature.
- The court disallowed the claimed stock-sale loss deduction because the taxpayers did not carry their burden to establish entitlement to the loss.
- The court redetermined the deficiencies consistent with these holdings.

## Legal Principles

- A cash-method taxpayer is taxed on income when actually received, unless the doctrine of constructive receipt applies.
- Constructive receipt requires that the income be credited, set apart, or otherwise made available so the taxpayer may draw upon it at will; it does not apply where the taxpayer’s control is subject to substantial limits or restrictions.
- A preexisting, bona fide modification of a compensation obligation—made before the employee has an unconditional right to payment and supported by real business reasons—can prevent constructive receipt in the earlier year.
- For separate vs. community characterization, the court looked to the source of the right to compensation and when and where it was earned and fixed, rather than the later place of residence when payments were made.
- Deductions are allowed only if the taxpayer proves they fall within the statute; the taxpayer bears the burden to substantiate employee business expenses and loss deductions with adequate evidence.

## Conclusion

Veit v. Commissioner (T.C. Memo 1949) held that an executive did not constructively receive an entire deferred profit-based bonus in 1942 where a bona fide agreement, made at the employer’s request, required payment in future installments and left the taxpayer without an unrestricted right to demand immediate full payment; the court also treated the compensation as the husband’s separate income, allowed only substantiated employee-expense deductions, and denied an unproven stock-loss deduction.


Veit v. Commissioner, 8 T.C.M. 919 (1949)