Yost

This is a review of a decision of the Tax Court holding that compensation paid to a stockholder in the tax years 1940 and 1941 for agreeing in 1938 to the sale of the physical assets of his corporation is taxable as ordinary income and not as a capital gain.

The taxpayer appellant, a resident of the State of Washington, at all relevant times owned and now owns 510 of the shares of stock of Tricoach Corporation, hereinafter called Tricoach. There were 1000 shares of a par value of $50 each. The $50,000 par value of the 1000 shares was paid in and Tricoach was engaged in the manufacture and sale of bus and truck bodies. The remaining minority of 490 shares was owned by Richard B. Newell who managed the manufacture of the bodies and Robert L. Newell who managed their sales. The business prospered and large dividends were paid the three stockholders.

In 1938 the Newells were offered an opportunity to become employed by the Pacific Car and Foundry Co., hereafter called Foundry, in the same manufacture of bodies if they could procure from Tricoach its manufacturing facilities, and if Tricoach would agree not to engage in such manufacturing for seven and a half years.

This proposal…