Opinion
Docket Nos. 16319 16320.
1949-01-31
MICHAEL LAURIE AND CELIA LAURIE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MICHAEL LAURIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Otto J. Rouse, Esq., for the petitioners. David F. Long, Esq., for the respondent.
In 1943 and 1944 petitioner received $750 and $1,500, respectively, from one of the partners of the partnership of which he was then, and has been for sometime theretofore, an employee. The Salary Stabilization Act, in effect during those years, generally prohibited increases in salaries. The partner was familiar with the substance of the law, and designated these payments as gifts and so treated them for accounting and tax purposes. Held, the sums received were additional compensation and includible in petitioner's gross income under Internal Revenue Code, section 22(a). Otto J. Rouse, Esq., for the petitioners. David F. Long, Esq., for the respondent.
In these consolidated proceedings, respondent determined deficiencies in income tax for the calendar years 1943 and 1944, as follows:
+---+ ¦¦¦¦¦ +---+
Petitioner Docket No. Year Deficiency Michael Laurie and Celia Laurie 16319 1943 $496.54 Michael Laurie 16320 1944 511.26 Only part of each deficiency is in controversy, as petitioners have agreed to certain adjustments made by respondent.
The sole issue to be decided is whether the sums of $750 and $1,500 received by petitioner Michael Laurie on December 24, 1943 and 1944, respectively, from one of the partners of the partnership by which he was employed, are taxable compensation or tax-free gifts, under section 22 of the Internal Revenue Code.
Some of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly and are included herein by this reference.
Petitioners, husband and wife, were, during the years involved, residents of Chicago, Illinois, and filed their tax returns for those years with the collector for the first district of Illinois. Hereinafter Michael Laurie, alone, will be referred to as petitioner.
During the years before us petitioner was an employee of the Alfred Jacobshagen Co., a partnership engaged in the business of buying and selling hides, of which Alfred Jacobshagen was one of the partners.
The company employed between 20 and 25 persons during 1943 and 1944.
In the supplementary statement of facts attached as an exhibit to the petition, it is alleged as follows: ‘On January 2, 1941 the original proprietorship of Alfred Jacobshagen was changed to a co-partnership of Alfred Jacobshagen and Martha Jacobshagen * * * .‘
Petitioner commenced working for the business in 1937, as an inspector, shortly after Jacobshagen had started the enterprise. He continued to be employed in the same capacity throughout the years before us. Prior thereto, petitioner and Jacobshagen were employees of another. A lasting friendship developed between them, dating back to 1932, which has continued beyond the years involved. Petitioner was well qualified to perform his work, and was considered to be an able workman by Jacobshagen.
During the years 1942 to 1945 petitioner's salary was $60 weekly. His duties and responsibilities remained substantially the same. In addition to his salary, petitioner received in 1943 a bonus from the partnership of $2,000 and in 1944 a bonus of the same amount, each of which he reported as taxable income.
On December 24, 1943 and 1944, respectively, petitioner received the sums of $750 and $1,500, by check of the company, which he did not report as taxable income, considering each to be a gift from Jacobshagen and not additional compensation.
In delivering the latter two checks to petitioner, Jacobshagen stated that he regarded each of them as a personal gift of himself to petitioner, and neither was to be regarded as coming from the partnership.
In the stipulation of facts, it is recited: ‘During the year 1943 the petitioner, Michael Laurie, received from Alfred Jacobshagen Company a sum aggregating $5,890 which included the proceeds of a check dated December 24, 1943, for the sum of $750, executed and delivered to him by the said Alfred Jacobshagen Company. * * * During the year 1944, the petitioner, Michael Laurie, received from Alfred Jacobshagen Company a sum aggregating $6,740 which included the proceeds of a check dated December 24, 1944, for the sum of $1,500 executed and delivered to him by the said Alfred Jacobshagen Company.‘It is, no doubt, possible to construe the stipulated facts as being contrary to the testimony in the record. Since we believe that the parties did not intend to introduce proof inconsistent with the stipulated facts, we have attempted to harmonize the facts as stipulated with the testimony offered.
These payments, although made by company checks, were not treated as business expenses of the partnership nor of Jacobshagen. Partnership checks were used, as Jacobshagen had no personal checking account, and it was his practice to use the partnership checking account for personal purposes. The partnership records, however, would reflect such transactions as personal ones of Jacobshagen.
At the same time in 1943, Jacobshagen handed checks to three other employees of the company, with the same expressions that he made when he gave the check to petitioner. Each of three received a larger amount than petitioner. In 1944 only one other employee received a check from Jacobshagen, that in the amount of $2,000.
At the time these checks were given to petitioner and the others, Jacobshagen was familiar with the substance of the Salary Stabilization Act and knew that wages were ‘frozen‘ during the years 1943 and 1944. When salaries were again permitted to be increased in 1945, petitioner received from the company a bonus, on December 24, 1945, of $3,500. At the same time, the compensation of other company employees was also increased.
The sum of $750 and $1,500 received by petitioner in 1943 and 1944, respectively, from Jacobshagen were additional compensation.
OPINION.
KERN, Judge:
Under the provisions of the Internal Revenue Code, ‘compensation for personal service‘ is subject to income tax, whereas ‘property acquired by gift‘ is not.
Cases involving the distinction between taxable compensation and tax-free gifts are many, and it has been generally regarded that each case must be decided upon its own facts. However, certain guiding principles can be distilled from the cases, which are of aid in resolving the issue herein presented, namely, whether the payments of $750 and of $1,500 received in 1943 and 1944, respectively, by petitioner are taxable as compensation, or to be excluded from gross income under section 22(b)(3). Two factors are generally emphasized:
SEC. 22 GROSS INCOME.(a) GENERAL DEFINITION.— ‘Gross income‘ includes gains, profits and income derived from salaries, wages, or compensation for personal service * * * .(b) EXCLUSIONS FROM GROSS INCOME.— The following items shall not be included in gross income and shall be exempt from taxation under this chapter:(3) GIFTS, BEQUESTS, DEVISES, AND INHERITANCES.— The value of property acquired by gift * * * .
(1) The intention of the parties, particularly that of the grantor; and (2) the presence or absence of consideration as that term has come to be defined for these purposes. ‘ * * * the presence or absence of consideration in the legal sense is not determinative.‘
‘But generalizations are dangerous, for * * * the distinction between gifts and compensation is made by weighing a number of factors, most of which have persuasive but not conclusive force. * * * courts examine * * * the factual circumstances of the payment, to determine * * * the actual motive for it.‘ Magill, Taxable Income (Rev. Ed.), p. 402.
Ibid.
More specifically, it has been decided that, even if a payment were called a gift and treated as such by the parties, these factors in themselves would not be controlling, highly important as they might be; for intention must be gathered not only from the language used and bookkeeping entries, but from all the surrounding circumstances. Charles Schall, 11 T.C. 111; Fisher v. Commissioner, 59 Fed,(2d) 192. Furthermore, if services have been performed for the payor directly or for him indirectly, as where he reaps substantial benefits from them, it is ordinarily presumed that the amount received is for the services and is not a gift. Batterman v. Commissioner, 142 Fed.(2d) 448; certiorari denied, 322 U.S. 756; Nickelsburg v. Commissioner, 154 Fed.(2d) 70; Grace v. Commissioner, 166 Fed.(2d) 1022. Such presumption is particularly strong where the employer-employee relationship exists. Wilkie v. Commissioner, 127 Fed.(2d) 953; certiorari denied, 317 U.S. 659; cf. Bogardus v. Commissioner, 320 U.S. 34. And this is not overcome merely by showing that the payments were not treated as expenses by the payor. N. H. Van Sicklen, Jr., 33 B.T.A. 544; Thomas v. Commissioner, 135 Fed.(2d) 378.
The fact that the payments may have been voluntary ones, made without legal obligation on the part of the payor, is not of itself sufficient to characterize the receipts as gifts. See, e.g., Old Colony Trust Co. v. Commissioner, 279 U.S. 716; Noel v. Parrott, 15 Fed.(2d) 699; certiorari denied, 273 U.S. 754. Payments made in recognition of long and faithful service, George B. Lester, 19 B.T.A. 549; N. H. Van Sicklen, Jr., supra, or in anticipation of future benefits from the services of the payee, Davis v. Commissioner, 81 Fed.(2d) 137, or for the maintenance of his continuing loyalty as an employee, see Bogardus v. Commissioner, supra, have been generally regarded as taxable compensation and not as tax-free gifts.
The cited authorities seem sufficient answer to petitioners' argument, which is predicated upon the propositions that the payments here were voluntary, were not treated by the payor as business expenses, and were called gifts by him. ‘The repeated reference to the payment as a 'gift’ does not make it one. ‘ N. H. Van Sicklen, Jr., supra, p. 549; Levey v. Helvering, 68 Fed.(2d) 401.
The facts, as we glean them from the record, and even viewing them favorably to petitioners, convincingly demonstrate in the light of the established principles that petitioner received taxable income and not gifts 1943 and 1944. Petitioner, a friend of Jacobshagen, was also an employee of what was, apparently, a family partnership, of which Jacobshagen was the managing partner. Aware that, under the laws in force during 1943 and 1944, employees' salaries could not be raised, Jacobshagen undertook to increase the bonuses paid to petitioner and other key employees, and designated them as personal gifts, as under the law he could not otherwise characterize them. Although their friendship extended over many years, Jacobshagen had never theretofore made any gift to petitioner, and immediately after the relaxation of the salary stabilization requirements he increased petitioner's bonus to a sum equal to the bonus paid in 1944, plus the $1,500 contended to be a gift; and all recognized that such increases in 1945 was additional compensation.
Decision will be entered for the respondent.