Bickford v. Commissioner

WALTER M. BICKFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. C. H. CHRISTENSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bickford v. Commissioner Docket Nos. 54583, 55005. United States Board of Tax Appeals 34 B.T.A. 461; 1936 BTA LEXIS 695; April 28, 1936, Promulgated *695 Held that payments made by stockholders of a corporation to its former employees in "appreciation" of past services to the corporation, out of the proceeds of the sale by such stockholders of their stock, constituted taxable income to the employees and not gifts. A. N. Whitlock, Esq., for the petitioners. S. B. Anderson, Esq., for the respondent. MCMAHON *461 These are proceedings, duly consolidated, for the redetermination of the tax liabilities of the above named petitioners for the year 1928. The respondent determined deficiencies in income tax against them for the year 1928 in the respective amounts of $180.12 and $414.19. It is alleged that the respondent erred in treating the amounts of $4,500 and $6,000 received, respectively, by Bickford and Christensen as additional compensation and not as gifts entitled to exemption from taxation. FINDINGS OF FACT. Walter M. Bickford and C. H. Christensen were, in 1928, residents of Missoula, Montana. In 1928 Christensen and Bickford were each employed by the Missoula Public Service Co., a corporation engaged in a utility *462 business in Missoula, Montana. It was one of a*696 group of corporations, the stock of which was owned by the W. H. Clark family in Montana. Christensen was general manager of that corporation and Bickford was its attorney. Each of them had been employed by that company for about 35 years. Each had been paid a salary by the company and the compensation paid was adequate. In 1928 there was not any back compensation of any sort owing to them by the company. In 1928 the stock of all the Clark companies, including the Missoula Public Service Co., was sold to the American Power & Light Co. Under date of September 1, 1928, the Clark Montana Realty Co., acting as agent or representative of the holders of all the capital stock of the Missoula Public Service Co., entered into an agreement for the sale of stock of that company to the American Power & Light Co. The stockholders of the Missoula Public Service Co. recognized the obligation of the company to establish retirement funds for a number of its employees who presumably would be retired upon completion of the sale. Inasmuch as it was not practicable, by reason of the form of the transaction, to have such retirement allowance paid directly by the Missoula Public Service Co., the*697 stockholders of the Missoula Public Service co., in the agreement authorized the Clark Montana Realty Co., among other things, as follows: (b) To establish a retirement fund for employees of the Missoula Public Service Company in such amount, not to exceed $35,000, as you shall determine to be reasonable and proper, and to be distributed either by direct payments, or annuities, or in such other manner as you shall deem advisable, all in your absolute discretion. No other action with reference to the retirement fund was taken by the stockholders or directors of the Missoula Public Service Co.The Clark Montana Realty Co., acting under the provisions of the contract with the stockholders of the Missoula Public Service Co., completed the transaction pursuant to authority granted to it, and the retirement fund was administered by a committee of two, in accordance with the following authorization of the board of directors of the Clark Montana Realty Co. at a special meeting held October 17, 1928: RESOLVED: That the sum of $35,000 be, and the same hereby is, appropriated as a fund to take care of persons who have served long and faithfully in said Missoula Public Service Company, *698 and that said fund be administered by Messrs. Tally and Harry Gerard as a committee of two who are hereby authorized and directed to administer and distribute said fund in their absolute discretion for the purposes hereinabove enumerated. The funds were duly administered by the committee and distribution of the entire amount was made. In 1928 Christensen received *463 $6,000 and Bickford received $4,500 by checks of the Clark Montana Realty Co. Accompanying the check as sent to each of them was a form letter as follows: CLARK - MONTANA REALTY COMPANY BUTTE, MONTANA. DECEMBER 19th, 1928. DEAR FRIEND: It has been a matter of sincere regret on the part of the Clarks that conditions have compelled the severance of the relations between you and them which have endured so long. Your services have not been without appreciation, but, on the contrary, the loyalty and sincerity which you have shown have always been realized and have been reciprocated. No set form of words and no honorarium can truly express our realization of your loyalty, but the enclosed check to your order is herewith tendered as a concrete evidence of our regard and of our very best wishes for*699 your future. Sincerely, [Facsimile signatures] W. A. CLARK, Jr. ROBT. E. TALLY The amounts paid to Christensen and Bickford as above set forth were made up entirely of a part of the deduction from the proceeds of the sale of the capital stock of the Missoula Public Service Co. Neither Christensen nor Bickford was ever employed by the Clark Montana Realty Co. and that company owed them nothing. Neither of them knew just where the money came from until they received their checks. Neither of them knew whether the amounts were based on length of service or responsibility. Each of the employees of the Missoula Public Service Co. who had been with the "Clarks" for 10 years or more received a check in some amount. Neither Christensen nor Bickford reported the amount received in the manner above described as taxable income for 1928. They assumed that it was a gift and treated it as a gift. In determining the deficiency as to Bickford, the respondent included the amount of $4,500 received in taxable income with the following statement: It is held by this office that the amount of $4,500.00 paid you at the time of the sale of the W. A. Clark interests in Montana represented*700 additional compensation for services previously rendered and as such constituted income subject to taxation under the provisions of section 22(a) of the Revenue Act of 1928. * * * The respondent also held that the amount of $6,000 received by Christensen was taxable income in 1928, with a statement similar to that in the case of Bickford. All of the stockholders of the Missoula Public Service Co. claimed deductions of their proportionate shares of the retirement fund, paid by them, and contended before the Bureau of Internal Revenue that the retirement fund was a part of the expense of the sale and that the selling price of the stock for tax purposes was the net amount *464 received from the Clark Montana Realty Co., after deduction of all expenses, including the amount of retirement fund. OPINION. MCMAHON: The sole question for determination is whether the amounts of $4,500 and $6,000 received respectively by Bickford and Christensen in 1928 constituted taxable income, or constituted gifts which are exempt from income taxation. There are set forth in the margin applicable provisions of the Revenue Act of 1928. 1 *701 In , we declined to follow our holding in , but instead followed the decision of the Court of Claims in , and the decision of the United States Circuit Court of Appeals for the Fifth Circuit in , and held that a payment made to the taxpayer president of a railroad company, in addition to his regular compensation, constituted taxable income and was not exempt from tax as a gift. All those cases involved payments made under the same circumstances to officers or employees of the same railroad company. The essential facts involved were, in substance, as follows: Such employees had been paid their full salaries; the stock of the railroad company, which was the operating company, was owned by a holding company; the holding company transferred the stock of the operating company to another railroad company in exchange for certain stocks and bonds of the latter company; after the exchange the stockholders of the holding company authorized the directors to pay "additional*702 compensation" to officers and employees "in recognition of long and faithful service of the officers and employees of the Railroad"; and each payment was accompanied by a card stating "with appreciation and best wishes of El Paso & Southwestern Company from committee appointed November 18, 1924." Whether a payment in a given case is taxable compensation or a gift exempt from tax depends upon the intention of the parties and particularly the intention of the payer, to be determined from the attending facts and circumstances. , and *465 While it is true that the intent in every case must be decided upon the particular attending facts and circumstances, and while the above cited cases are not exactly the same, factually, as the instant proceedings, yet we believe that those cases are sufficiently in point to be controlling.2 *703 In , it was stated in part: It is an essential characteristic of a gift that it be a transfer without consideration. * * * The payment was made to the plaintiff as additional compensation in consideration of former services rendered the railroad company and not as a gift or gratuity. * * * In , it was stated in part: * * * That only is a gift which is purely such, not intended as a return of value or made because of any intent to repay another what is his due, but bestowed only because of personal affection or regard or pity, or from general motives of philanthropy or charity. * * * See also , as to legal requirements of a valid gift. In the instant proceedings we believe it is sufficiently clear that the payments were additional compensation for past services. In the letter accompanying the checks it is stated: "Your services have not been without appreciation, but, on the contrary, the loyalty and sincerity which you have shown have always been realized and have been reciprocated. *704 No set form of words and no honorarium can truly express our realization of your loyalty, but the enclosed check to your order is herewith tendered as a concrete evidence of our regard and of our very best wishes for your future." Furthermore, the evidence discloses and we have found as a fact that the stockholders of the Missoula Public Service Co. recognized the obligation of the company to establish retirement funds. The evidence further shows that these payments in question were from a fund intended to be in the nature of, or in lieu of, a retirement fund. Retirement payments are subject to Federal income tax. . There is no doubt in our minds that the payments would not have been made to Bickford and Christensen except for their prior service to the Missoula Public Service Co. See . We can not find or hold upon the record that there was an intention on the part of the stockholders of the Missoula Public Service Co. to make gifts in these amounts to Bickford and Christensen, within the meaning of the revenue act and within the legal requirements of a gift as above set forth. *705 There is no showing that the payments were made "because of personal affection or regard or pity, or from general motives of philanthropy or charity." Even if the *466 payments had been denominated "gifts", it would not necessarily justify a different result here. The fact that the payments were not made by the Missoula Public Service Co., the employer, but were made by the stockholders thereof, is not determinative. ;; and We have found as facts that all of the stockholders of the Missoula Public Service Co. claimed deductions of their proportionate shares of the retirement fund paid by them, and that they contended before the Bureau of Internal Revenue that the retirement fund was a part of the expense of the sale and that the selling price of the stock for tax purposes was the net amount received from the Clark Montana Realty Co. after deduction of all expenses, including the amount of the retirement fund; and the undisputed evidence shows that this contention was overruled and*706 the deductions were disallowed by the Bureau on the ground that the fund was created by donation from the stockholders and was not a fund provided by the Missoula Public Service Co. Those stockholders and the issue as to whether the respondent erred in failing to permit the stockholders of the Missoula Public Service Co. to deduct their proportionate shares of the retirement fund as a part of the expense of sale are not before us and we expressly do not decide that question. In any event, the action in that respect cannot be determinative here. However, it should be noted that in the instant proceeding the stockholders attempted to deduct the amount paid as expenses of the sale and to that extent did not treat the payments as gifts. This action on their part negatives an intention to make gifts. In ;; and , payments were held not to be gifts, even though it appeared that the payer did not claim them as deductions. Counsel for petitioners relies upon *707 , and . Those cases are not controlling here for the same reason that they were not controlling in , as pointed out by the court in the latter case. 3 *708 *467 The case of , cited by counsel for petitioners, is distinguishable. There the taxpayer was never an employee of the payer, the payer expressly represented the payment to be a gift, and "the record is entirely barren of any proof of services performed by the taxpayer for the donor, either concurrently * * * or in previous years, and there is no promise * * * for future services." , and , relied upon by counsel for the petitioners, are distinguishable. The facts in those cases are quite different from those in the instant proceeding and establish that the transfers there in question constituted gifts. The determination of the respondent is approved. Counsel for the petitioners cites . The resolution of the payer in that case recited that the payment was an "honorarium" which the court, under all the facts and circumstances there presented, construed to be a gift. In the instant proceedings neither payment is specifically called an "honorarium" *709 although that term is used in the letter accompanying each payment. The use of the term honorarium is not determinative. The resolution in the Cunningham case was somewhat ambiguous in that it was also stated that the payment was "in appreciation of Mr. Cunningham's excellent guidance of this Corporation through times of difficulty and depression." Under all the facts and circumstances of the instant proceeding, as disclosed by the record, the Cunningham case does not justify a different result herein, in view of the weight of clear authority heretofore pointed out in support of our conclusions. Decision will be entered for the respondent. Footnotes 1. SEC. 22. GROSS INCOME. (a) General definition. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. (b) Exclusions from gross income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: * * * (3) GIFTS, BEQUESTS AND DEVISES. - The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income). ↩ 2. See also ; ; ; ; and . ↩ 3. In , it was stated in part as follows: "* * * Hawley relies strongly on , and . Each of these cases in holding payments to employees to be nontaxable gifts relies on the fact that there was no obligation to pay and the payments were over and above the wages and salaries due. The controlling importance of that fact has since been denied by the Supreme Court in Old Colony Trust Co. v. Commissioner,↩ 279 U.S. at page 730, 49 S.Ct. 499, 504, 73 L.Ed. 918, where the question was whether the litigant owed a tax, saying: 'The payment for services, even though entirely voluntary, was nevertheless compensation within the statute.' Again in , where the question was whether the litigant could deduct the payment as an expense of business, a like result was reached. , was approved. In , it was ruled that absence of legal duty to pay is not conclusive of a gift. * * *"