                         T.C. Memo. 2000-228



                       UNITED STATES TAX COURT



       JAMES R. PALMER AND LINDA D. PALMER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No.   19171-98.                      Filed July 28, 2000.


     Ruth A. Rowlette, for petitioners.

     Christian A. Speck, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined a deficiency of

$44,375 in petitioners’ Federal income tax for 1995.

     The issues remaining for decision are:

     (1)   Did petitioner James R. Palmer (Mr. Palmer) construc-

tively receive during 1995 $95,935 of compensation that he did

not actually receive until after that year?      We hold that he did.
                               - 2 -

     (2)   Was the $5,100 that Mr. Palmer received during 1995

with respect to petitioners’ California house rental income or

compensation for that year?   We hold that that amount was compen-

sation.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Petitioners resided in Redding, California, at the time the

petition was filed.

     Mr. Palmer received a bachelor’s degree in chemical engi-

neering in 1969, a master’s degree in finance in 1972, and a law

degree in 1990.

     In 1974, Mr. Palmer began working as a chemical engineer for

Aerojet General Corporation (Aerojet), a U.S. defense contractor.

Mr. Palmer held a number of positions during the approximate 20-

year period of his employment with Aerojet.   The last position

that he held while employed by Aerojet was vice president of

operations of the high-tech bullet plant in Downey, California

(Downey plant), that Aerojet’s ordnance division (Aerojet Ord-

nance) operated.

     In 1994, Olin Corporation (Olin), which was primarily a U.S.

defense contractor, acquired Aerojet Ordnance, including its

Downey plant, on behalf of Olin’s ordnance division (Olin Ord-

nance), an ammunitions manufacturer.   Because of Mr. Palmer’s

experience with Aerojet Ordnance and, in particular, with the
                               - 3 -

Downey plant, Olin Ordnance wanted to retain Mr. Palmer as a

consultant.

     On May 2, 1994, Olin on behalf of Olin Ordnance1 and Mr.

Palmer entered into an agreement entitled “OLIN CONSULTING

AGREEMENT” (May 2, 1994 Olin/Palmer consulting agreement).

Pursuant to that agreement, Olin Ordnance retained Mr. Palmer as

an independent contractor to provide consulting services to it in

connection with, inter alia, the transition of Aerojet Ordnance

that Olin Ordnance had acquired from Aerojet during that year.

The May 2, 1994 Olin/Palmer consulting agreement was to remain in

effect until October 31, 1994, unless terminated sooner by mutual

agreement of Olin Ordnance and Mr. Palmer, by the death of Mr.

Palmer, or for other reasons set forth in that agreement.

Pursuant to the May 2, 1994 Olin/Palmer consulting agreement, the

term of that agreement could have been extended only by the

mutual agreement of Olin Ordnance and Mr. Palmer as set forth in

a written document.

     In July and August 1994, certain representatives of Olin

Ordnance approached Mr. Palmer several times in an effort to

persuade him to accept a consulting assignment as an independent

contractor at Olin Ordnance’s plant in Marion, Illinois (Marion

plant).   Olin Ordnance wanted Mr. Palmer to coordinate the


     1
      For convenience, we shall hereinafter refer only to Olin
Ordnance, a division of Olin Corporation, and not to Olin Corpo-
ration.
                               - 4 -

transition of certain business from its Downey plant to its

Marion plant and to monitor the other manufacturing and adminis-

trative functions at its Marion plant, which had been experienc-

ing certain operational difficulties.   Mr. Palmer was not inter-

ested in the overtures that Olin Ordnance made to him during the

summer of 1994 because he wanted to start practicing law in

Redding, California.

     Olin Ordnance ultimately succeeded in persuading Mr. Palmer

to agree to act as a consultant at its Marion plant.   On Septem-

ber 12, 1994, Mr. Palmer and Olin Ordnance entered into an

agreement entitled “OLIN CONSULTING AGREEMENT” (September 12,

1994 Olin/Palmer consulting agreement) which superseded as of

September 12, 1994, the May 2, 1994 Olin/Palmer consulting

agreement.   Pursuant to the September 12, 1994 Olin/Palmer

consulting agreement, Olin Ordnance retained Mr. Palmer as an

independent contractor to provide certain consulting services at

its Marion plant under the direction of R.R. Harris (Mr. Harris)

who was employed by Olin Ordnance at that plant.   That agreement,

as executed on September 12, 1994, provided that it was to

continue for a period of up to nine months after September 12,

1994.   On September 15, 1994, the September 12, 1994 Olin/Palmer

consulting agreement was modified to provide that the term of

that agreement was to continue until March 31, 1995, and thereaf-

ter on a month-to-month basis for a period of three months,
                                    - 5 -

unless terminated sooner by mutual agreement of Olin Ordnance and

Mr. Palmer, by the death of Mr. Palmer, or for other reasons set

forth in that agreement.    (We shall refer to the September 12,

1994 Olin/Palmer consulting agreement, as modified on September

15, 1994, as the Marion plant/Palmer consulting agreement).

Pursuant to the Marion plant/Palmer consulting agreement, the

term of that agreement could have been extended only by mutual

agreement of Olin Ordnance and Mr. Palmer as set forth in a

written document.

     The Marion plant/Palmer consulting agreement provided in

pertinent part:

          THIS AGREEMENT (“Agreement”), made as of this 12th
     day of September, 1994, by and between James R. Palmer,
     an individual, residing at 9039 Tudsbury Road, Loomis,
     CA 95650 (“Consultant”), and Olin Corporation, Ordnance
     Division, 10101 9th Street North, St. Petersburg,
     Florida 33716, (“Olin”).

                  *    *    *    *      *   *   *

          5.      CONSULTING FEES

                  Until March 31, 1995, Olin guarantees a pay-
                  ment of $3,000.00 per week, and, thereafter
                  on a month-to-month basis for a period of
                  three (3) months, with a maximum limitation
                  of $117,000.00 as fees for rendering Ser-
                  vices. Olin will reimburse Consultant for
                  the reasonable and necessary out-of-pocket
                  travel and living expenses which are actually
                  incurred in the performance of Services. In
                  addition, Olin agrees to reimburse additional
                  expenses as outlined in Exhibit D, which is
                  attached hereto. * * * The total fees, plus
                  necessary out-of-pocket expenses, are not to
                  exceed $164,000.00.
                                - 6 -

           6.    PAYMENT OF CONSULTING FEES

                 Once a month, Consultant shall submit a de-
                 tailed invoice for fees and expenses for the
                 Services, along with the required Olin Ord-
                 nance Consultant Time Record(s). The date,
                 number of hours, days worked and a brief
                 description of tasks performed must be in-
                 cluded with each invoice. * * * Correct in-
                 voices submitted for payment to Mr. R.R.
                 Harris for approval shall be paid within
                 thirty (30) calendar days of the date of
                 receipt.

                 *    *    *    *    *    *    *

           19.   ENTIRE AGREEMENT

                 Except as herein expressly provided, this
                 Agreement constitutes the entire understand-
                 ing between the parties with respect to the
                 subject matter hereof and shall supersede all
                 previous negotiations, commitments, and un-
                 derstandings, except for any Non Disclosure
                 Agreement relating to the matters herein
                 which has or may be executed between the
                 parties.

     Exhibit D, which was incorporated as part of paragraph 5 of

the Marion plant/Palmer consulting agreement relating to “CON-

SULTING FEES” to be paid to Mr. Palmer, provided in pertinent

part:   “1.   Consultant will be reimbursed $1,700/month for

expenses on California home.”    The California home to which

Exhibit D referred was the residence of petitioners in Loomis,

California (Loomis residence), in which they lived before Mr.

Palmer accepted the consulting position at the Marion plant

pursuant to the Marion plant/Palmer consulting agreement and

which they rented to an unidentified person during the term of
                               - 7 -

that agreement.   As a condition to his accepting that position,

Mr. Palmer required, inter alia, that Olin Ordnance pay him

$1,700 each month during the term of that agreement, which was

approximately equal to the difference between (1) the monthly

rent that petitioners were to receive on their Loomis residence

throughout the period during which Mr. Palmer was consulting at

the Marion plant and (2) the total amount of monthly mortgage,

insurance, and maintenance expenses that they were to pay on that

residence throughout that period.   (We shall refer to the addi-

tional $1,700 that Mr. Palmer was to receive each month pursuant

to paragraph 5 and Exhibit D of the Marion plant/Palmer consult-

ing agreement as the Loomis residence monthly payment.)   At no

time did Olin Ordnance receive a leasehold or any other interest

in the Loomis residence in exchange for the Loomis residence

monthly payments.

     Pursuant to paragraph 6 of the Marion plant/Palmer consult-

ing agreement, Mr. Palmer was required to submit on a monthly

basis to Mr. Harris at the Marion plant a detailed invoice

(monthly invoice) for Mr. Palmer’s fees and expenses with respect

to the services that he performed under that agreement for the

monthly period covered by the invoice.   Pursuant to paragraph 6

of the Marion plant/Palmer consulting agreement and the policy of

Olin Ordnance (company policy), promptly upon receipt of each of

Mr. Palmer’s monthly invoices, Mr. Harris was required to review
                               - 8 -

it and determine whether to approve the aggregate amount of fees

and expenses claimed in each such invoice or some other amount.

(We shall refer to Mr. Harris’ review of each of Mr. Palmer’s

monthly invoices as Olin Ordnance’s invoice review process.)

Promptly after Mr. Harris completed Olin Ordnance’s invoice

review process, he was to return each of Mr. Palmer’s monthly

invoices as approved by him to Mr. Palmer.

     Pursuant to company policy, after Mr. Palmer received from

Mr. Harris each of his monthly invoices as approved by Mr.

Harris, Mr. Palmer was required to forward each such invoice

promptly to Rita Svarzkopf (Ms. Svarzkopf).   Throughout the

period during which Mr. Palmer provided consulting services to

Olin Ordnance at its Marion plant, Ms. Svarzkopf was the procure-

ment coordinator at Olin Ordnance’s office in St. Petersburg,

Florida (Olin Ordnance’s Florida office).    As procurement coordi-

nator, Ms. Svarzkopf was responsible for determining promptly

upon receipt of each of Mr. Palmer’s monthly invoices as approved

by Mr. Harris whether the charges reflected on each such invoice

complied with the terms of the Marion plant/Palmer consulting

agreement.   Pursuant to company policy, if Ms. Svarzkopf deter-

mined that each of Mr. Palmer’s monthly invoices as approved by

Mr. Harris did so comply, she was required to forward each such

invoice promptly to Olin Ordnance’s accounts payable department

for payment within 30 days after Mr. Harris, on behalf of Olin
                                - 9 -

Ordnance, first received it, as required by paragraph 6 of the

Marion plant/Palmer consulting agreement.    (We shall refer to the

review and payment authorization process relating to each of Mr.

Palmer’s approved monthly invoices for which Ms. Svarzkopf was

responsible as Olin Ordnance’s invoice payment authorization

process.)

     Sometime prior to March 22, 1995, Olin Ordnance asked Mr.

Palmer to extend the term of the Marion plant/Palmer consulting

agreement which was to expire on June 30, 1995, and to specify

the conditions under which he was willing to agree to such an

extension.   As part of his continuing discussions with Olin

Ordnance about, and in response to, that request, Mr. Palmer sent

a memorandum dated March 22, 1995 (March 22, 1995 memorandum) to

Mr. Harris and to Jack Picker (Mr. Picker), who at that time was

vice president of human resources of Olin Ordnance.    The March

22, 1995 memorandum stated in pertinent part:

     This memo responds to your request that I identify the
     conditions under which I would agree to an extension of
     my present consulting contract thru January 1996. I
     appreciate the vote of confidence. I offer the follow-
     ing thoughts:

     1.     All terms of the existing contract continue as is
            except that the expiration date be extended to
            January 31, 1996.

     2.     In addition, I would have the right to postpone
            receipt by me of payment for any monthly invoice
            to a future date of my choosing, but in any case
            not later than January 31, 1997. In such a case,
            I would present my invoice and backup material
            monthly as incurred (as is done now) so that Olin
                               - 10 -

          could perform the necessary audits upon submittal.
          Olin would then hold the payment until called for
          by me.

     3.   In addition, Olin would pay me the equivalent of
          5% annual simple interest on the deferred payments
          of item 2 above.

     As required by paragraph 6 of the Marion plant/Palmer

consulting agreement, for each month from the inception of the

Marion plant/Palmer consulting agreement through June 1995,2 Mr.

Palmer submitted to Mr. Harris at the Marion plant a monthly

invoice for his fees and expenses with respect to the services

that he performed under that agreement for the monthly period

covered by the invoice, including the $1,700 Loomis residence

monthly payment, as follows:




     2
      Although, as discussed below, the invoice submitted by Mr.
Palmer to Olin Ordnance for June 1995 covered the period June 5
through July 2, 1995, that invoice did not reflect any fees or
expenses incurred after June 30, 1995, the date on which the
Marion plant/Palmer consulting agreement was to terminate.
                                - 11 -

                          Period Covered by    Date of Submission
Mr. Palmer’s Monthly        Mr. Palmer’s         of Mr. Palmer’s
   Invoice Number3         Monthly Invoice       Monthly Invoice

         0006             09/01/94-10/09/944        10/09/94
         0007             10/10/94-11/06/94         11/07/94
         0008             11/07/94-12/04/94         12/22/94
         0009             12/05/94-12/31/94         12/29/94
         0010             01/02/95-02/05/95         02/05/95
         0011             02/06/95-03/05/95         03/05/95
         0012             03/06/95-04/02/95         04/15/95
         0013             04/03/95-04/30/95         05/07/95
         0014             05/01/95-06/04/95         06/06/95
         0015             06/05/95-07/02/955        07/09/95

     As required by paragraph 6 of the Marion plant/Palmer

consulting agreement and company policy, Mr. Harris promptly

reviewed for accuracy each of Mr. Palmer’s monthly invoices 0006

through 0015.   With one exception, Mr. Harris completed Olin

Ordnance’s invoice review process of each of Mr. Palmer’s monthly

invoices 0006 through 0015 in less than a week, generally in a




     3
      The number shown for each of Mr. Palmer’s monthly invoices
is the invoice number that was listed on each of those invoices.
(Hereinafter, we shall refer to each of Mr. Palmer’s monthly
invoices by reference to the invoice number that was listed on
each such invoice.)
     4
      Although Mr. Palmer’s monthly invoice 0006 covered the
period Sept. 1 through Oct. 9, 1994, none of the fees and none of
the expenses (except for $322.03 of expenses most of which were
incurred by Mr. Palmer in moving from California to Marion, Ill.)
claimed in that invoice was incurred prior to Sept. 12, 1994, the
date on which the September 12, 1994 Olin/Palmer consulting
agreement became effective.
     5
      See supra note 2.
                               - 12 -

day or two.6   Mr. Harris approved, with very minor changes in

several instances, the aggregate amount of fees and expenses

claimed in each of those monthly invoices.7

     After Mr. Harris completed Olin Ordnance’s invoice review

process with respect to each of Mr. Palmer’s monthly invoices

0006 through 0010, Mr. Harris promptly returned each such ap-

proved invoice to Mr. Palmer, and Mr. Palmer promptly forwarded

each such invoice to Ms. Svarzkopf at Olin Ordnance’s Florida

office.    Ms. Svarzkopf completed Olin Ordnance’s invoice payment

authorization process of each of Mr. Palmer’s approved monthly

invoices 0006 through 0010 within a few days after having re-

ceived each such invoice.   She thereafter promptly forwarded each

such invoice to Olin Ordnance’s accounts payable department for

payment.

     As required by paragraph 6 of the Marion plant/Palmer

consulting agreement, Olin Ordnance paid Mr. Palmer the amount

that it owed to him with respect to each of his approved monthly

invoices 0006 through 0010 within 30 days after Mr. Harris, on


     6
      The one exception relates to Mr. Palmer’s monthly invoice
0008. Mr. Palmer submitted that monthly invoice on Dec. 22,
1994, and Mr. Harris completed Olin Ordnance’s invoice review
process and approved it on Jan. 4, 1995.
     7
      For convenience, we shall refer to Mr. Palmer’s monthly
invoices as approved by Mr. Harris (and, as discussed below, by
D.E. Findley) on behalf of Olin Ordnance as approved monthly
invoices, even though in several instances there were very minor
changes to some of the amounts of fees and/or expenses claimed in
certain of those invoices.
                                - 13 -

behalf of Olin Ordnance, first received each such invoice from

Mr. Palmer by issuing a check to Mr. Palmer in the following

amount on the date indicated:

Mr. Palmer’s Monthly   Amount of Check Issued   Date of Check Issued
   Invoice Number          by Olin Ordnance       by Olin Ordnance

        0006                 $16,118.84               10/20/94
        0007                  16,417.84               11/17/94
        0008                  15,497.00               01/12/95
        0009                  17,431.52               01/12/95
        0010                  19,965.00               02/16/95

Each of the payments that Mr. Palmer received in January and

February 1995 from Olin Ordnance under the Marion plant/Palmer

consulting agreement for his respective approved monthly invoices

0008, 0009, and 0010 included the $1,700 Loomis residence monthly

payment required by paragraph 5 of that agreement relating to

“CONSULTING FEES” and Exhibit D of that agreement.

     After Mr. Harris completed Olin Ordnance’s invoice review

process with respect to each of Mr. Palmer’s monthly invoices

0011, 0012, and 0013 relating to the monthly periods February 6

through March 5, 1995, March 6 through April 2, 1995, and April 3

through April 30, 1995, respectively, Mr. Harris promptly re-

turned each such approved invoice to Mr. Palmer.    However, Mr.

Palmer did not promptly forward any of his approved monthly

invoices 0011, 0012, and 0013 to Ms. Svarzkopf at Olin Ordnance’s

Florida office.   Instead, he retained those invoices until May

22, 1995, when he sent them to Ms. Svarzkopf with a transmittal

memorandum (May 22, 1995 memorandum).     The May 22, 1995 memoran-
                                - 14 -

dum stated in pertinent part:

     I am enclosing the three invoices for Feb., Mar., and
     April for your review and approval. However, PLEASE DO
     NOT ISSUE PAYMENTS. Please phone me and we can discuss
     the agreement that I am working on with Cutler and
     Picker.

     On June 1, 1995, Ms. Svarzkopf subjected Mr. Palmer’s

approved monthly invoices 0011, 0012, and 0013 that Mr. Palmer

had sent to her on May 22, 1995, to Olin Ordnance’s invoice

payment authorization process, which took no more than a day.

Ms. Svarzkopf found each of those monthly invoices to be in

compliance with the Marion plant/Palmer consulting agreement.

Because of Mr. Palmer’s request in his May 22, 1995 memorandum

that Olin Ordnance not pay any of those invoices, Ms. Svarzkopf

did not immediately forward those invoices to Olin Ordnance’s

accounts payable department for payment.   Instead, Ms. Svarzkopf

sought guidance from Glen Cutler (Mr. Cutler), an employee of

Olin Ordnance.   On June 2, 1995, Mr. Cutler advised Ms. Svarzkopf

to honor Mr. Palmer’s request that Olin Ordnance not pay any of

his approved monthly invoices 0011, 0012, and 0013 until Mr.

Palmer directed Olin Ordnance to pay each such invoice.   Conse-

quently, Ms. Svarzkopf did not forward Mr. Palmer’s approved

monthly invoices 0011, 0012, and 0013 to Olin Ordnance’s accounts

payable department for payment but retained those invoices until

Mr. Palmer directed Olin Ordnance to pay them.   At Mr. Palmer’s

direction, Olin Ordnance paid each of his approved monthly
                              - 15 -

invoices 0011, 0012, and 0013 on January 11, 1996, when it issued

three checks to him in the amounts of $15,247.46, $17,678.53, and

$17,273.83, respectively.   The only reasons Olin Ordnance did not

pay Mr. Palmer the amount that it owed to him with respect to

each of his approved monthly invoices 0011 through 0013 within 30

days after Mr. Harris first received each such invoice during

1995 were that Mr. Palmer did not promptly forward each of those

invoices to Ms. Svarzkopf after Mr. Harris returned each such

invoice to him and that Mr. Palmer did not want Olin Ordnance to

make any such payment to him during 1995.

     After Mr. Harris completed Olin Ordnance’s invoice review

process with respect to Mr. Palmer’s monthly invoices 0014 and

0015 relating to the monthly periods May 1 through June 4, 1995,

and June 5 through July 2, 1995,8 respectively, Mr. Harris

promptly returned each such approved invoice to Mr. Palmer.     Mr.

Palmer promptly forwarded each of his approved monthly invoices

0014 and 0015 to Ms. Svarzkopf at Olin Ordnance’s Florida office.

Ms. Svarzkopf promptly completed Olin Ordnance’s invoice payment

authorization review process with respect to each such invoice.

However, at the request of Mr. Palmer that Olin Ordnance not pay

him during 1995 the amount that it owed to him with respect to

each of his approved monthly invoices 0014 and 0015, Ms.

Svarzkopf did not send either of those invoices to Olin Ord-


     8
      See supra note 2.
                                - 16 -

nance’s accounts payable department for payment.    Instead, she

retained each of those invoices until Mr. Palmer directed Olin

Ordnance to pay each of them.    At the direction of Mr. Palmer,

Olin Ordnance paid each of his approved monthly invoices 0014 and

0015 on April 3, 1996, and January 9, 1997, respectively, when it

issued checks to him in the respective amounts of $19,427.00 and

$17,961.82.   The only reason Olin Ordnance did not pay Mr. Palmer

the amount that it owed to him with respect to each of his

approved monthly invoices 0014 and 0015 within 30 days after Mr.

Harris first received each such invoice during 1995 was that Mr.

Palmer did not want Olin Ordnance to make any such payment to him

during that year.

     By its terms, the Marion plant/Palmer consulting agreement

terminated as of June 30, 1995.    However, Mr. Palmer continued to

provide consulting services to Olin Ordnance after June 30, 1995.

On July 17, 1995, and July 20, 1995, Olin Ordnance and Mr.

Palmer, respectively, executed a document entitled “AMENDMENT 1”

that modified the terms of the Marion plant/Palmer consulting

agreement.    (We shall refer to AMENDMENT 1 as the July 1995

amendment and to the Marion plant/Palmer consulting agreement as

modified by that amendment as the amended Marion plant/Palmer

consulting agreement.)   The July 1995 amendment provided:

     This is AMENDMENT 1 to the Consulting Agreement between
     James R. Palmer and Olin Corporation, Ordnance Divi-
     sion, dated September 12, 1994.
                               - 17 -

     1. TERM: Delete the first sentence of this paragraph
     in its entirety and insert the following in its place:

          This Agreement will become effective as of the day
          set forth above and will continue until December
          31, 1995, unless terminated sooner by mutual
          agreement of the parties, or by the death of Con-
          sultant, or by the manner hereinafter set out.

     5. CONSULTING FEES: Delete this paragraph in its
     entirely and replace with the following:

          During the term of this Agreement, Olin agrees to
          pay to Consultant the sum of $3,000.00 per week,
          with a maximum limitation of $201,000.00 as fees
          for rendering Services. Olin will reimburse Con-
          sultant for the reasonable and necessary out-of-
          pocket travel and living expenses which are actu-
          ally incurred in the performance of Services. In
          addition, Olin agrees to reimburse additional
          expenses as outlined in Exhibit D, Revision 1
          dated 071195, which is attached hereto. * * * The
          total fees, plus necessary out-of-pocket expenses,
          are not to exceed $315,000.00.

     6. PAYMENT OF CONSULTING FEES: Delete the last sen-
     tence of this paragraph in its entirety, and insert the
     following in its place:

          Correct invoices submitted for payment to Mr.
          R.R. Harris for approval shall be paid within
          thirty (30) calendar days of the date of
          receipt, or deferred to a mutually agreed
          upon future date, but not later than January
          31, 1997. In addition, Olin agrees to pay
          Consultant the equivalent of 5% annual simple
          interest on any deferred payments.

     Exhibit D, Revision 1, dated July 11, 1995, which was

incorporated as part of paragraph 5 of the July 1995 amendment

relating to “CONSULTING FEES” to be paid to Mr. Palmer, provided

in pertinent part:   “1.   Consultant will be reimbursed $1,700.00

per month for expenses on California home [Loomis residence].”
                             - 18 -

     As quoted above, paragraph 6 of the July 1995 amendment

provided, inter alia, that correct invoices submitted to Mr.

Harris “shall be paid within thirty (30) calendar days of the

date of receipt, or deferred to a mutually agreed upon future

date, but not later than January 31, 1997".   Both Mr. Palmer and

Olin Ordnance interpreted, understood, and applied that provision

as requiring Olin Ordnance to pay the amount that it owed to Mr.

Palmer with respect to each of his approved monthly invoices

within 30 days after it first received each such invoice or, at

the direction of Mr. Palmer, thereafter on a date that Mr. Palmer

selected which was not later than January 31, 1997.

     Pursuant to paragraph 6 of the amended Marion plant/Palmer

consulting agreement, on the dates indicated Mr. Palmer first

submitted to Olin Ordnance at its Marion plant the following

monthly invoices covering the following periods:

                        Period Covered by     Date of Submission
Mr. Palmer’s Monthly      Mr. Palmer’s          of Mr. Palmer’s
   Invoice Number        Monthly Invoice        Monthly Invoice

        0016            07/03/95-07/30/95          07/31/95
        0017            07/31/95-09/03/95          09/01/95
        0018            09/04/95-10/01/95          10/03/95
        0019            10/02/95-10/29/95          11/20/95
        0020            10/30/95-12/03/95          12/15/95

     Each of Mr. Palmer’s monthly invoices 0016 through 0020 was

promptly reviewed and approved, with very minor changes in
                                - 19 -

  several instances, by D.E. Findley (Mr. Findley)9 on behalf of

  Olin Ordnance and promptly returned to Mr. Palmer.    Mr. Palmer

  promptly forwarded each of his approved monthly invoices 0016

  through 0020 to Ms. Svarzkopf at Olin Ordnance’s Florida office.

  Ms. Svarzkopf promptly completed Olin Ordnance’s invoice payment

  authorization process with respect to each such invoice.    How-

  ever, pursuant to paragraph 6 of the amended Marion plant/Palmer

  consulting agreement, Mr. Palmer directed Olin Ordnance not to

  pay him the amount that it owed to him with respect to each of

  his approved monthly invoices 0016 through 0020 within 30 days

  after Olin Ordnance first received each such invoice.    At Mr.

  Palmer’s direction, Olin Ordnance paid Mr. Palmer the amount that

  it owed to him with respect to each of his approved monthly

  invoices 0016 through 0020 by issuing a check to him in the

  following amount on the following date selected by Mr. Palmer:


Mr. Palmer’s Monthly   Amount of Check Issued   Date of Check Issued
   Invoice Number         by Olin Ordnance        by Olin Ordnance

           0016              $15,173.00                01/09/97
           0017               18,243.36                01/09/97
           0018               15,824.16                01/09/97
           0019               15,239.46                01/09/97
           0020                  404.89                01/09/97

The only reason Olin Ordnance did not pay Mr. Palmer the amount

that it owed to him with respect to each of his approved monthly


       9
        The record does not disclose why Mr. Findley, instead of
  Mr. Harris, reviewed and approved, on behalf of Olin Ordnance,
  Mr. Palmer’s monthly invoices 0016 through 0020.
                                    - 20 -

invoices 0016 through 0019 within 30 days after Olin Ordnance

first received each such invoice during 1995 was that Mr. Palmer

did not want Olin Ordnance to make any such payment to him during

that year.

     At all times during the performance of the Marion plant/

Palmer consulting agreement, both before and after the execution

of the July 1995 amendment, Olin Ordnance was ready, willing, and

able to pay Mr. Palmer the amount that it owed to him with respect

to each of his approved monthly invoices within 30 days after it

first received each such invoice.

     Olin Ordnance issued Form 1099-MISC (Form 1099), Miscella-

neous Income, to Mr. Palmer, which showed that Mr. Palmer received

$52,894.31 of nonemployee compensation from Olin Ordnance during

1995.     The $52,894.31 amount reported by Olin Ordnance in Form

1099 equals the total amount of the payments that Olin Ordnance

made to Mr. Palmer during 1995 with respect to his approved

monthly invoices 0008 through 0010, which included $5,100 of

Loomis residence monthly payments.10

     Petitioners, cash basis taxpayers, filed a joint Form 1040,

U.S. Individual Income Tax Return (joint return), for the year at

issue.        In Schedule E, Supplemental Income and Loss, of the joint


         10
       There is one cent difference between the amount of
 nonemployee compensation reported by Olin Ordnance in Form 1099
 and the total amount that it paid to Mr. Palmer with respect to
 his approved monthly invoices 0008 through 0010. For convenience,
 we shall ignore that difference.
                                  - 21 -

return (Schedule E), petitioners reported, inter alia, “Rents

received” of $23,013 with respect to the Loomis residence.      The

$23,013 that petitioners reported in Schedule E as rent with

respect to the Loomis residence included the $5,100 of Loomis

residence monthly payments that Olin Ordnance reported in Form

1099 as part of the $52,894.31 of nonemployee compensation that it

paid to Mr. Palmer during 1995 pursuant to paragraph 5 and Exhibit

D of the Marion plant/Palmer consulting agreement.

     In Schedule C, Profit or Loss From Business, of the joint

return (Schedule C), petitioners reported in Part I, Income, gross

receipts of $47,794, which was the amount ($52,894.31) of

nonemployee compensation that Olin Ordnance paid to Mr. Palmer

during 1995 and reported in Form 1099 reduced by the amount

($5,100) of Loomis residence monthly payments that petitioners

claimed in Schedule E as rent with respect to the Loomis resi-

dence.

     In the notice of deficiency (notice) issued to petitioners

for the year at issue, respondent, inter alia, increased petition-

ers’ Schedule C reported gross receipts by $95,935 because respon-

dent determined that during 1995 Mr. Palmer had constructively

received that amount of nonemployee compensation from Olin Ord-

nance.11      Respondent also determined that the $5,100 of Loomis


         11
       The $95,935 by which respondent increased petitioners’
 Schedule C gross receipts for the year at issue because respon-
                                                    (continued...)
                              - 22 -

residence monthly payments that petitioners claimed in Schedule E

as rent with respect to the Loomis residence constitutes self-

employment earnings and not rental income.     Consequently, respon-

dent increased petitioners’ Schedule C gross receipts by an

additional $5,100.

                             OPINION

     Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous.     See Rule 142(a);12 Welch v.

Helvering, 290 U.S. 111, 115 (1933).

Constructive Receipt Issue

     Respondent determined in the notice that Mr. Palmer construc-

tively received during 1995 $95,935 of nonemployee compensation

from Olin Ordnance with respect to his approved monthly invoices

0011 through 0016 covering the period from February 6, 1995, to


     11
      (...continued)
 dent determined that Mr. Palmer had constructively received that
 amount during 1995 equals the total of (1) the aggregate amount
 of nonemployee compensation that Olin Ordnance owed to Mr. Palmer
 during 1995 with respect to his approved monthly invoices 0011,
 0012, 0013, 0014, 0015 and (2) the approximate portion of the
 amount of nonemployee compensation that Olin Ordnance owed to him
 during that year with respect to his approved monthly invoice
 0016 covering the period from July 3, 1995, to the execution of
 the July 1995 amendment. For convenience, we shall ignore the
 fact that respondent approximated the portion of the amount of
 nonemployee compensation that Olin Ordnance owed to Mr. Palmer
 during 1995 with respect to his approved monthly invoice 0016
 covering the period from July 3, 1995, to the execution of the
 July 1995 amendment.
          12
       All Rule references are to the Tax Court Rules of Practice
 and Procedure. All section references are to the Internal
 Revenue Code in effect for the year at issue.
                               - 23 -

the execution of the July 1995 amendment.   At trial and on brief,

it is respondent’s position that Mr. Palmer also constructively

received during 1995 the amount of nonemployee compensation that

Olin Ordnance owed to him with respect to his approved monthly

invoices 0016 through 0020 covering the period from the execution

of the July 1995 amendment to the end of 1995.   However, respon-

dent does not seek an increased deficiency for 1995 with respect

to that contention.   Petitioners counter that Mr. Palmer did not

constructively receive during 1995 any amount of nonemployee

compensation from Olin Ordnance.

     Before turning to the constructive receipt issue before us,

we shall summarize the principles of the doctrine of constructive

receipt.   Section 1.451-2, Income Tax Regs., entitled “Construc-

tive receipts of income”, provides in pertinent part:

     (a) General rule. Income although not actually reduced
     to a taxpayer’s possession is constructively received by
     him in the taxable year during which it is credited to
     his account, set apart for him, or otherwise made avail-
     able so that he may draw upon it at any time, or so that
     he could have drawn upon it during the taxable year if
     notice of intention to withdraw had been given. How-
     ever, income is not constructively received if the
     taxpayer’s control of its receipt is subject to substan-
     tial limitations or restrictions. * * *

     The constructive-receipt doctrine requires a taxpayer who is

on the cash method of accounting to recognize income when the

taxpayer has an unqualified, vested right to receive immediate
                                - 24 -

payment of income.13    See Ross v. Commissioner, 169 F.2d 483, 490

(1st Cir. 1948), revg. and remanding on another issue a Memorandum

Opinion of this Court; Martin v. Commissioner, 96 T.C. 814, 823

(1991); Amend v. Commissioner, 13 T.C. 178, 185 (1949).    Under

that doctrine, a taxpayer may not deliberately turn his back on

income otherwise available.    See Martin v. Commissioner, supra at

823; Young Door Co., E. Div. v. Commissioner, 40 T.C. 890, 894

(1963); Basila v. Commissioner, 36 T.C. 111, 116 (1961).    In order

to trigger application of the constructive-receipt doctrine, there

generally must be an amount that is due and owing which the

obligor is ready, willing, and able to pay.    See Childs v. Commis-

sioner, 103 T.C. 634, 654 (1994), affd. without published opinion

89 F.3d 856 (11th Cir. 1996).    If a taxpayer has an absolute and

unconditional right to receive income in the year earned, the

constructive-receipt doctrine requires the taxpayer to report such

income for that year.    See Childs v. Commissioner, supra at 655;

Basila v. Commissioner, supra at 115.

     If a taxpayer has entered into a binding contract or agree-

ment to defer income before it is due, the taxpayer is not re-

quired to report such income until it is actually received.    See

Oates v. Commissioner, 18 T.C. 570 (1952), affd. 207 F.2d 711 (7th

Cir. 1953).   Similarly, if the income under such a contract or


      13
       Hereinafter, our discussion is limited to taxpayers, like
 petitioners, who are on the cash method of accounting and who
 therefore are subject to the constructive-receipt doctrine.
                               - 25 -

agreement is not yet due, a taxpayer may elect to defer that

income further by entering into a superseding binding contract or

agreement.   See Veit v. Commissioner, 8 T.C. 809 (1947); Kimbell

v. Commissioner, 41 B.T.A. 940 (1940).

     In Oliver v. United States, 193 F. Supp. 930, 933 (E.D. Ark.

1961), the U.S. District Court summarized the foregoing principles

of the constructive-receipt doctrine as follows:

     Where income, although not actually received, is unqual-
     ifiedly and without substantial limitation available to
     the taxpayer in a given year, and his failure actually
     to receive it is due to nothing other than his own
     volition, then such income is considered as having been
     constructively received during that year, and it must be
     so reported and the tax paid thereon. * * * But, if
     during the tax year in question the taxpayer has no
     right to receive income, or if his right to receive it
     is subject to substantial qualifications or restric-
     tions, then he will not be deemed to have received such
     income constructively during that year. * * *

          When the item of income in question consists of the
     proceeds of a sale by the taxpayer of merchandise or
     other property * * * and where the sale is completed in
     a given year and the taxpayer at the time acquires an
     unconditioned vested right to receive the proceeds of
     the sale, and the buyer is ready, willing, and able to
     make payment, the taxpayer cannot avoid treating the
     proceeds as income for that year by voluntarily declin-
     ing to accept payment during that year, or by requesting
     the purchaser not to pay him until a later year, or even
     by voluntarily putting himself under some legal disabil-
     ity or restriction with respect to payment. In such
     circumstances, he will be deemed in constructive receipt
     of the income notwithstanding his refusal to accept
     payment or his self-imposed restraints on payment. * * *

          On the other hand, it must be recognized that a
     taxpayer has a perfect legal right to stipulate that he
     is not to be paid until some subsequent year, or that
     the payments are to be spread out over a number of
     years. Where such a stipulation is entered into between
                               - 26 -

     buyer and seller prior to the time when the seller has
     acquired an absolute and unconditional right to receive
     payment, and where the stipulation amounts to a binding
     contract between the parties so that the buyer has a
     legal right to refuse payment except in accordance with
     the terms of the agreement, then the doctrine of con-
     structive receipt does not apply, and the taxpayer is
     not required to report the income until the same actu-
     ally is received by him. * * * [Citations omitted.]

     We shall now address the constructive receipt issue presented

in this case.   In doing so, we bear in mind that the determination

of whether a taxpayer has constructively received income is

essentially a question of fact.   See Martin v. Commissioner, supra

at 822.

     In support of their position, petitioners first contend that

Mr. Palmer and Olin Ordnance orally modified the Marion plant/

Palmer consulting agreement as of September 12, 1994, the effec-

tive date of that agreement, before Mr. Palmer had a right to

receive any nonemployee compensation under that agreement with

respect to, inter alia, the period from February 6, 1995, to the

execution of the July 1995 amendment.   According to petitioners,

the terms of that alleged oral modification are essentially the

same as the terms of the July 1995 amendment, including the

deletion of the last sentence of paragraph 6 of the Marion plant/

Palmer consulting agreement entitled “PAYMENT OF CONSULTING FEES”

and the insertion in its place of the following sentences:

     Correct invoices submitted for payment to Mr. R.R.
     Harris for approval shall be paid within thirty (30)
     calendar days of the date of receipt, or deferred to a
     mutually agreed upon future date, but not later than
                                    - 27 -

     January 31, 1997. In addition, Olin agrees to pay
     Consultant the equivalent of 5% annual simple interest
     on any deferred payments.

     On the record before us, we find that petitioners have failed

to establish that Mr. Palmer and Olin Ordnance orally modified the

Marion plant/Palmer consulting agreement as of September 12, 1994,

by agreeing to terms essentially the same as those appearing in

the July 1995 amendment.        In fact, the record, including Mr.

Palmer’s own testimony, his March 22, 1995 memorandum to Mr.

Harris and Mr. Picker, and his May 22, 1995 memorandum to Ms.

Svarzkopf, establishes that Mr. Palmer and Olin Ordnance did not

agree to such an oral modification as of September 12, 1994.

     Mr. Palmer testified that he was having “continuing discus-

sions” in March 1995 with Mr. Picker and Mr. Harris about an

agreement to defer income.        Mr. Palmer’s testimony shows that

there was no modification, oral or written, of the Marion

plant/Palmer consulting agreement in effect in March 1995, let

alone on September 12, 1994.

     Moreover, petitioners’ March 22, 1995 memorandum to Mr.

Harris and Mr. Picker stated in pertinent part:

     This memo responds to your request that I identify the
     conditions under which I would agree to an extension of
     my present consulting contract thru January 1996. * * *
     I offer the following thoughts:

          *         *       *         *       *       *       *

     2.       In addition, I would have the right to postpone
              receipt by me of payment for any monthly invoice to
              a future date of my choosing, but in any case not
                              - 28 -

          later than January 31, 1997. In such a case, I
          would present my invoice and backup material month-
          ly as incurred (as is done now) so that Olin could
          perform the necessary audits upon submittal. Olin
          would then hold the payment until called for by me.
          [Emphasis added.]

The language that Mr. Palmer used in his March 22, 1995 memorandum

is consistent with an offer by him to enter into an agreement with

Olin Ordnance under which he would agree to continued consulting

work on certain terms and is inconsistent with petitioners’

contention that when Mr. Palmer wrote his March 22, 1995 memoran-

dum there was in effect a binding oral modification of the Marion

plant/Palmer consulting agreement.

     Mr. Palmer’s May 22, 1995 memorandum to Ms. Svarzkopf also

supports our finding that petitioners have failed to establish

that Mr. Palmer and Olin Ordnance orally modified the Marion

plant/Palmer consulting agreement as of September 12, 1994, and

belies petitioners’ contention to the contrary.    In the May 22,

1995 memorandum, Mr. Palmer requested that Olin Ordnance not issue

payments for his approved invoices 0011, 0012, and 0013 covering

the period from February 6 through April 30, 1995.    In making that

request, Mr. Palmer stated in his May 22, 1995 memorandum:

“Please phone me and we can discuss the agreement that I am

working on with Cutler and Picker.”    (Emphasis added.)   The

foregoing language shows that no modification, oral or written, of

the Marion plant/Palmer consulting agreement was in effect at the

time Mr. Palmer sent his May 22, 1995 memorandum to Ms. Svarzkopf
                               - 29 -

and that Ms. Svarzkopf was unaware of any oral modification by Mr.

Palmer and Olin Ordnance of paragraph 6 of the Marion plant/Palmer

consulting agreement regarding the payment of consulting fees to

Mr. Palmer.   That is why on June 2, 1995, after she completed Olin

Ordnance’s invoice payment authorization process with respect to

Mr. Palmer’s approved monthly invoices 0011, 0012, and 0013

covering the period from February 6 through April 30, 1995, she

sought guidance from Mr. Cutler.   Mr. Cutler advised Ms. Svarzkopf

to honor Mr. Palmer’s request that Olin Ordnance not pay any of

those invoices until Mr. Palmer directed Olin Ordnance to pay each

such invoice.   If, as petitioners contend, there had been an oral

modification of the Marion plant/Palmer consulting agreement in

effect on June 2, 1995, we believe that any such modification

would have been communicated to Ms. Svarzkopf and that there would

have been no need for Ms. Svarzkopf to seek guidance from Mr.

Cutler.

     Based on our examination of the entire record before us, we

find that petitioners have failed to show that an oral modifica-

tion of the last sentence of paragraph 6 of the Marion plant/

Palmer consulting agreement was in effect on June 2, 1995, after

Ms. Svarzkopf completed Olin Ordnance’s invoice payment authoriza-

tion process with respect to Mr. Palmer’s approved monthly in-

voices 0011, 0012, and 0013 and approved those invoices and before

she asked Mr. Cutler for guidance, so as to permit Mr. Palmer to
                              - 30 -

defer receipt of the nonemployee compensation that Olin Ordnance

owed to him with respect to each of those invoices.14

     On the present record, we further find that when Mr. Cutler

advised Ms. Svarzkopf on June 2, 1995, to honor Mr. Palmer’s

request that Olin Ordnance not pay any of his approved monthly

invoices 0011, 0012, and 0013 until Mr. Palmer directed Olin

Ordnance to pay each such invoice, there was an oral modification

(June 2, 1995 oral modification) by Mr. Palmer and Olin Ordnance

of the last sentence of paragraph 6 of the Marion plant/Palmer

consulting agreement entitled “PAYMENT OF CONSULTING FEES” to read

as follows:

     Correct invoices submitted for payment to Mr. R.R.
     Harris for approval shall be paid within thirty (30)
     calendar days of the date of receipt or, at the direc-
     tion of Consultant [Mr. Palmer], thereafter on a date
     selected by Consultant.

     We also find on the record before us that, as of the time the

June 2, 1995 oral modification was made, Mr. Palmer had an abso-

lute and unconditional right to receive the amount of nonemployee

compensation that Olin Ordnance owed to him with respect to each

of his approved monthly invoices 0011 and 0012.   That is because,

as of that time, 30 days had expired from the respective dates

(March 5, 1995, and April 15, 1995) on which Olin Ordnance first


      14
       We further find on the instant record that petitioners
 have failed to establish that there was in effect on June 2,
 1995, an oral modification of any other terms of the Marion
 plant/Palmer consulting agreement such as those appearing in the
 July 1995 amendment.
                                 - 31 -

received those invoices, and both Mr. Harris and Ms. Svarzkopf had

approved them.15   We further find on the record in this case that

the June 2, 1995 oral modification was not made before the amount

that Olin Ordnance owed to Mr. Palmer with respect to each of his

approved monthly invoices 0011 and 0012 was due.

     On the instant record, we also find that, as of the time the

June 2, 1995 oral modification was made, Mr. Palmer did not have

an absolute and unconditional right to receive the amount that

Olin Ordnance owed to him with respect to his approved monthly

invoice 0013 covering the period from April 3 through April 30,

1995.    That is because, as of that time, 30 days had not expired

from the date (May 7, 1995) on which Olin Ordnance first received

that invoice.    We further find on the present record that the June

2, 1995 oral modification was made before the amount that Olin

Ordnance owed to Mr. Palmer with respect to his approved monthly

invoice 0013 was due.   We thus must address whether the June 2,

1995 oral modification precludes application of the constructive-

receipt doctrine with respect to the amount of nonemployee compen-

sation that Olin Ordnance owed to Mr. Palmer with respect to his

approved monthly invoice 0013.    We must address the same question

with respect to the amount of nonemployee compensation that Olin

Ordnance owed to Mr. Palmer with respect to each of his approved



        15
       There was a minor change made to Mr. Palmer’s monthly
 invoice 0012.
                                  - 32 -

monthly invoices 0014 and 001516 covering the period from May 1

through July 2, 1995.17      That is because Mr. Palmer did not submit

those invoices to Mr. Harris until after the June 2, 1995 oral

modification was made, and Olin Ordnance’s invoice review process

and invoice payment authorization process had not been completed

with respect to those invoices as of the time of that modifica-

tion.    On the present record, we find that the June 2, 1995 oral

modification was made before the amount that Olin Ordnance owed to

Mr. Palmer with respect to each of his approved monthly invoices

0014 and 0015 was due.

     In support of their position that the oral modification of

the Marion plant/Palmer consulting agreement, which they contend

was effective as of September 12, 1994, and which we have found

was effective as of June 2, 1995, precludes application of the

constructive-receipt doctrine, petitioners rely on Martin v.

Commissioner, 96 T.C. 814 (1991), Robinson v. Commissioner, 44

T.C. 20 (1965), Oates v. Commissioner, 18 T.C. 570 (1952), affd.

207 F.2d 711 (7th Cir. 1953), Veit v. Commissioner, 8 T.C. 809

(1947), and Kimbell v. Commissioner, 41 B.T.A. 940 (1940).      We

find all of those cases to be distinguishable from the instant

case and petitioners’ reliance on them to be misplaced.      In each


        16
       See our discussion below with respect to Mr. Palmer’s
 approved monthly invoice 0016 covering the period from July 3
 through July 30, 1995.
        17
             See supra note 2.
                               - 33 -

of the above-cited cases, there was a binding contract or agree-

ment, or a superseding binding contract or agreement, to defer

income before it was due.

     With respect to each of Mr. Palmer’s approved monthly in-

voices 0011 and 0012, we have found that the June 2, 1995 oral

modification was not made before the amount of nonemployee compen-

sation reflected in each such invoice that Olin Ordnance owed to

him was due.

     With respect to Mr. Palmer’s approved monthly invoices 0013

through 0015, we have found that, as of the time the June 2, 1995

oral modification was made, Mr. Palmer did not have an absolute

and unconditional right to receive the amount of nonemployee

compensation reflected in each such invoice that Olin Ordnance

owed to him.   However, the cases on which petitioners rely are

nonetheless distinguishable from the instant case with respect to

those invoices.   This Court and its predecessor, the Board of Tax

Appeals, held that the binding contracts or agreements involved in

the cases relied upon by petitioners were effective to preclude

application of the constructive-receipt doctrine.     In contrast, on

the instant record, we find that the June 2, 1995 oral modifica-

tion does not preclude application of the constructive-receipt

doctrine to the aggregate amount of nonemployee compensation that

Olin Ordnance owed to Mr. Palmer with respect to his approved

monthly invoices 0013 through 0015.     That is because we find on
                                - 34 -

that record that the June 2, 1995 oral modification did not impose

a substantial limitation or restriction on Mr. Palmer’s control of

the receipt of the amount of nonemployee compensation that Olin

Ordnance owed to him with respect to each of those invoices.    At

all times under the Marion plant/Palmer consulting agreement as

modified by the June 2, 1995 oral modification, Olin Ordnance was

ready, willing, and able to pay Mr. Palmer the amount that it owed

to him with respect to each of his approved monthly invoices 0013,

0014, and 0015 within 30 days after Olin Ordnance first received

each such invoice.18   Pursuant to the June 2, 1995 oral modifica-

tion, it was totally within Mr. Palmer’s control whether Olin

Ordnance paid each such amount to Mr. Palmer within 30 days after

Olin Ordnance first received each such invoice or deferred its

payment to him of each such amount until a date after that 30-day

period.    If Mr. Palmer wanted Olin Ordnance to defer such payment

of the amount that Olin Ordnance owed to him with respect to each

of his approved monthly invoices 0013, 0014, and 0015, all he had

to do under the June 2, 1995 oral modification was to direct Olin

Ordnance not to pay each such amount within 30 days after Olin

Ordnance first received each such invoice.   Mr. Palmer did just



      18
       At all times prior to the time the June 2, 1995 oral
 modification of the Marion plant/Palmer consulting agreement was
 made, Olin Ordnance was ready, willing, and able to pay Mr.
 Palmer the amount that it owed to him with respect to his ap-
 proved monthly invoices 0006 through 0012 within 30 days after
 Olin Ordnance first received each such invoice.
                               - 35 -

that, and consequently Olin Ordnance did not pay him the amount

that it owed to him with respect to each such invoice until a date

selected by Mr. Palmer.

     Based on our examination of the entire record in this case,

we find that petitioners have failed to establish that the June 2,

1995 oral modification of the Marion plant/Palmer consulting

agreement precludes application of the constructive-receipt

doctrine to the amounts of nonemployee compensation that Olin

Ordnance owed to Mr. Palmer with respect to his approved monthly

invoices 0011 through 0015.

     In further support of their position that Mr. Palmer did not

constructively receive during 1995 any amount of nonemployee

compensation from Olin Ordnance, petitioners rely on paragraph 6

of the July 1995 amendment to the Marion plant/Palmer consulting

agreement.   Paragraph 6 of that amendment deleted the last sen-

tence of paragraph 6 of the Marion plant/Palmer consulting agree-

ment and inserted the following sentences in its place:

     Correct invoices submitted for payment to Mr. R.R.
     Harris for approval shall be paid within thirty (30)
     calendar days of the date of receipt, or deferred to a
     mutually agreed upon future date, but not later than
     January 31, 1997. In addition, Olin agrees to pay
     Consultant the equivalent of 5% annual simple interest
     on any deferred payments.

Petitioners maintain (1) that the July 1995 amendment was effec-

tive as of September 12, 1994, prior to the respective dates on

which the amount of nonemployee compensation reflected in peti-
                               - 36 -

tioners’ approved monthly invoices 0011 through 0016 covering the

period from February 6, 1995, to the execution of the July 1995

amendment was due to Mr. Palmer, and (2) that paragraph 6 of the

July 1995 amendment precludes application of the constructive-

receipt doctrine to each such amount.

     In support of their position regarding the July 1995 amend-

ment, petitioners also rely on the same cases discussed above on

which they rely to support their argument regarding the alleged

oral modification of the Marion plant/Palmer consulting agreement.

We find all of those cases to be distinguishable from the instant

case and petitioners’ reliance on them to be misplaced.   As

discussed above, in the cases on which petitioners rely, there was

a binding contract or agreement, or a superseding binding contract

or agreement, to defer income before it was due.   In contrast, in

the instant case, we find on the record before us that the July

1995 amendment was not effective retroactively to September 12,

1994.   We further find on that record that paragraph 6 of the July

1995 amendment permitting Mr. Palmer to defer the amount of

nonemployee compensation that Olin Ordnance owed to him was not

effective before the amount of such compensation was due with

respect to his approved monthly invoices 0011 through 0015.

     With respect to Mr. Palmer’s approved monthly invoice 0016

covering the period from July 3 through July 30, 1995, we find on

the record presented that the July 1995 amendment applied to that
                                 - 37 -

invoice.    In making this finding, we rely heavily on the provision

in the Marion plant/Palmer consulting agreement that the term of

that agreement, which ended on June 30, 1995, could have been

extended only by mutual agreement of Olin Ordnance and Mr. Palmer

as set forth in a written document.       We find that a written

document, here the July 1995 amendment, was necessary in order to

extend the Marion plant/Palmer consulting agreement beyond June

30, 1995.   We further find that the July 1995 amendment was

effective before the amount of nonemployee compensation reflected

in Mr. Palmer’s approved monthly invoice 0016 was due.       That is

because, as of July 1, 1995, 30 days had not expired from the date

(July 31, 1995) on which Olin Ordnance first received that in-

voice, and Olin Ordnance had not completed its invoice review

process, and its invoice payment authorization process with

respect to that invoice.

     Although we have found that the July 1995 amendment applied

to Mr. Palmer’s approved monthly invoice 0016 before the amount of

nonemployee compensation reflected therein was due, the cases on

which petitioners rely do not require us to conclude that the

constructive-receipt doctrine is inapplicable to the amount of

such nonemployee compensation.    Moreover, assuming arguendo that

we had found that the July 1995 amendment was effective retroac-

tively to September 12, 1994, and applied not only to Mr. Palmer’s

approved monthly invoice 0016 but also to his approved monthly
                               - 38 -

invoices 0011 through 0015, those cases do not require us to

conclude that the constructive-receipt doctrine is inapplicable to

the amount of nonemployee compensation reflected in each of those

invoices 0011 through 0015.   We reach these conclusions because

the July 1995 amendment is distinguishable from the binding

contracts or agreements involved in the cases on which petitioners

rely.   Unlike those binding contracts or agreements, we find on

the record before us that paragraph 6 of the July 1995 amendment,

like the June 2, 1995 oral modification of paragraph 6 of the

Marion plant/Palmer consulting agreement, did not impose a sub-

stantial limitation or restriction on Mr. Palmer’s control of the

receipt of the amount of nonemployee compensation that Olin

Ordnance owed to him with respect to each of his approved monthly

invoices 0011 through 0016.   Regardless of when the July 1995

amendment was effective, pursuant to paragraph 6 of that amend-

ment, Olin Ordnance was ready, willing, and able to pay Mr. Palmer

the amount that it owed to him with respect to each of his ap-

proved monthly invoices which was subject to the Marion plant/

Palmer consulting agreement as modified by that amendment within

30 days after Olin Ordnance first received each such invoice.

Pursuant to the July 1995 amendment, it was totally within Mr.

Palmer’s control whether Olin Ordnance paid each such amount to

Mr. Palmer within 30 days after the date on which Olin Ordnance

first received each such invoice or deferred its payment to him of
                               - 39 -

each such amount until a date after that 30-day period which was

not later than January 31, 1997.   If Mr. Palmer wanted Olin

Ordnance to defer such payment of the amount that Olin Ordnance

owed to him with respect to each of his approved monthly invoices

that was subject to the July 1995 amendment, all he had to do

under that amendment was to direct Olin Ordnance not to pay each

such amount within 30 days after Olin Ordnance first received each

such invoice.   Mr. Palmer did just that, and consequently Olin

Ordnance did not pay him the amount that it owed to him with

respect to each such invoice until a date selected by Mr. Palmer

which was not later than January 31, 1997.

     Based on our examination of the entire record in this case,

we find that petitioners have failed to show that the July 1995

amendment precludes application of the constructive-receipt

doctrine to the respective amounts of nonemployee compensation

reflected in Mr. Palmer’s approved monthly invoices 0011 through

0016 covering the period from February 6, 1995, to the execution

of that amendment.   We further find on that record that Mr. Palmer

constructively received during 1995 such amounts of compensation.19

Consequently, we sustain respondent’s determination in the notice

to increase petitioners’ Schedule C gross receipts for 1995 by




      19
       We have considered all of the contentions and arguments of
 petitioners that are not discussed herein, and we find them to be
 without merit and/or irrelevant.
                              - 40 -

$95,935.20

Loomis Residence Monthly Payment Issue

     Each of the two monthly payments that Mr. Palmer received in

January 1995 and the one monthly payment that he received in

February 1995 from Olin Ordnance with respect to his respective

approved monthly invoices 0008, 0009, and 0010 included the $1,700

Loomis residence monthly payment.   Petitioners reported in Sched-

ule E as rent with respect to the Loomis residence the total of

those three Loomis residence monthly payments ($5,100).21   Respon-

dent determined in the notice that the $5,100 of Loomis residence

monthly payments that petitioners claimed in Schedule E as rent

with respect to the Loomis residence constitutes self-employment

earnings and not rental income and therefore increased petition-



      20
       Since respondent does not seek an increased deficiency for
 1995 attributable to the respective amounts that Olin Ordnance
 owed to Mr. Palmer with respect to his approved monthly invoices
 0016 through 0020 covering the period from the execution of the
 July 1995 amendment until the end of 1995, we need not address
 whether Mr. Palmer constructively received during 1995 the
 aggregate amount of such compensation. Suffice it to say that
 our views with respect to the inefficacy of the July 1995 amend-
 ment to preclude application of the constructive-receipt doctrine
 to the respective amounts of nonemployee compensation that Olin
 Ordnance owed to Mr. Palmer with respect to his approved monthly
 invoices 0011 through 0016 covering the period from Feb. 6, 1995,
 to the execution of the July 1995 amendment apply with equal
 force to the respective amounts of nonemployee compensation that
 Olin Ordnance owed to Mr. Palmer with respect to those subsequent
 invoices.
      21
       Olin Ordnance reported, inter alia, in Form 1099 the
 $5,100 of Loomis residence monthly payments as nonemployee
 compensation that it paid to Mr. Palmer during 1995.
                               - 41 -

ers’ Schedule C gross receipts for 1995 by an additional $5,100.

Petitioners dispute that determination.

     In support of their joint return position with respect to the

$5,100 of Loomis residence monthly payments, petitioners contend,

inter alia:   “As the funds from Olin were conditional on the

rental of Petitioners’ home and the amount of those funds were

[sic] determined by the amount of rent the tenant paid, the funds

should be characterized as rental income.”

     On the record before us, we reject petitioners’ contention.

The fact that the Loomis residence monthly payment was agreed to

in the Marion plant/Palmer consulting agreement because petition-

ers were renting their Loomis residence while Mr. Palmer was

consulting at the Marion plant does not require us to accept

petitioners’ contention that the Loomis residence monthly payments

in question constitute rent.   Nor does the fact that the amount of

the Loomis residence monthly payment was determined as the approx-

imate difference between (1) the monthly rent that petitioners

were to receive on their Loomis residence throughout the period

during which Mr. Palmer was consulting at the Marion plant and

(2) the total amount of monthly mortgage, insurance, and mainte-

nance expenses that they were to pay on that residence throughout

that period require us to accept that contention.

     In order to resolve the question presented with respect to

the $5,100 of Loomis residence monthly payments in question, we
                              - 42 -

must determine the nature of those payments.   The record discloses

that Mr. Palmer required Olin Ordnance to pay him the Loomis

residence monthly payment as a condition to his accepting a

consulting position at its Marion plant.    The record also estab-

lishes that at no time did Olin Ordnance receive a leasehold or

any other interest in the Loomis residence in exchange for the

Loomis residence monthly payments.   Finally, the Marion

plant/Palmer consulting agreement, as well as the July 1995

amendment to that agreement, included the requirement that Olin

Ordnance pay Mr. Palmer the Loomis residence monthly payment in

paragraph 5 entitled “CONSULTING FEES”.

     Based on our examination of the entire record in this case,

we find that the $5,100 of Loomis residence monthly payments that

Mr. Palmer received during 1995 from Olin Ordnance constitutes

nonemployee compensation to Mr. Palmer for that year.22    Conse-

quently, we sustain respondent’s determination to increase peti-

tioners’ Schedule C gross receipts for 1995 by an additional

$5,100.

     To reflect the foregoing and the concessions of petitioners,



                                     Decision will be entered for

                              respondent.


      22
       We have considered all of the contentions and arguments of
 petitioners that are not discussed herein, and we find them to be
 without merit.
