Opinion
Docket No. 15177.
1948-09-30
BERT P. NEWTON AND EDNA R. NEWTON, HIS WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William F. Knox, Esq., for the petitioners. A. W. Dickinson, Esq., for the respondent.
1. A corporation, before liquidating in connection with a reorganization with P corporation, transferred certain funds to B corporation subject to liability for pensions. The reserve set up was continued through corporations B, C, and D, and 12 years later D disbursed $5,000 to the petitioner, who had been an employee of A but not a pensioner and had received payment in full when his employment ceased at time of the reorganization. Held, following Bogardus v. Commissioner, 302 U.S. 34, that the $5,000 was a gift, not compensation for past services.
2. Held, on the facts, that real estate was of such value that sale resulted in loss; and that depreciation be computed accordingly. William F. Knox, Esq., for the petitioners. A. W. Dickinson, Esq., for the respondent.
The case involves income and victory taxes for the calendar year 1943. (The year 1942 is involved because of the Current Tax Payment Act.) Deficiency was determined in the amount of $4,059.65, of which the petitioner places in issue $3,307.56. The issues before us are (a) whether petitioners are entitled to deduction of a loss on the sale of certain real estate; (b) whether petitioners are entitled to depreciation in the amount of $73.33; and (c) whether the petitioner received income, or a gift, in receiving $5,000 from a corporation which succeeded one by which he was formerly employed. A stipulation of facts was filed. It is adopted by reference and the facts therein set forth are found by us, and, so far as considered necessary for discussion of the issues, are set forth with facts found from other evidence adduced in our findings of fact.
FINDINGS OF FACT.
The petitioners reside in Pittsburgh, Pennsylvania, and they filed joint income tax returns on a cash basis for the calendar years 1942 and 1943 with the collector at Pittsburgh, Pennsylvania.
About November 2, 1923, the petitioners purchased, for $29,000, a residence on Wayne Road in Pittsburgh. On August 1, 1939, it was rented and converted to income-producing purposes, and was so held until sold on December 1, 1942, for $10,649.85 net, after sales expenses. Depreciation on the property was claimed, and not disallowed, as follows:
+--------------------------------+ ¦Aug. 1 to Dec. 31, 1939¦$202.08 ¦ +-----------------------+--------¦ ¦Year 1940 ¦485.00 ¦ +-----------------------+--------¦ ¦Year 1941 ¦485.00 ¦ +-----------------------+--------¦ ¦Total ¦1,172.08¦ +--------------------------------+
It is agreed, and we find, that the depreciation allowable from January 1 to December 1, 1942, is eleven-twelfths of 2 per cent of the fair market value of the buildings on August 1, 1939.
The property was rented for $125 a month from August 1, 1939, until April 30, 1941, and thereafter until April 30, 1947, for $135 a month.
The Allegheny County assessment on the property for the year 1939 was $17,250, allocated $6,250 to the lot and $11,000 to the buildings.
The city of Pittsburgh assessment on the property for the year 1939 was $19,750, allocated $4,750 to the lot and $15,000 to the buildings.
Petitioners, in their income tax return for the year 1942, deducted the amount of $9,094.74 as an ordinary loss on the sale of said property. Respondent in his determination of the deficiency disallowed the entire amount of the deduction claimed as a loss on the sale of the property. Disallowance was based upon respondent's determination that on August 1, 1939, the property had a fair market value of $12,000, of which amount $10,000 was allocable to the buildings and $2,000 to the lot, and that the depreciation allowed on the buildings for the years 1939, 1940, and 1941 was $1,172.08, and that the depreciation allowable for the period January 1 to December 1, 1942, was eleven-twelfths of 2 per cent of $10,000, or $183.33.
The property purchased by the petitioners was a 2 1/2-story brick house, built in 1923, with stone foundation and tile roof. It was on a terraced lot, in a good residential section. Besides basement, halls, bathrooms, pantry, and storage room, it had 8 rooms. The lot was 50 feet by 118.52 feet. There was a one-car garage of construction similar to that of the house. Prices of realty were good in 1939. Prices came down thereafter because many financial institutions which had earlier acquired property on foreclosures offered them for sale. This was despite the fact that the market was active. After 1942 prices increased. On August 1, 1939, the property had a fair market value of $17,000, allocable $3,500 to the lot and $13,500 to the buildings.
Bert P. Newton, about November 1, 1923, entered the employ of the Standard Steel Car Co. (a Pennsylvania corporation incorporated in 1902 and having on March 1, 1930, a capital stock of 280,000 shares of a par value of $100 a share) as assistant to the president and served in that capacity until January 1, 1928. Thereafter he was also comptroller until February 28, 1931, when his employment ceased.His salary at time of such termination of employment was $2083.33 a month. It was paid in full up to March 1, 1930, and he had no knowledge that he would ever get anything more from the company. From March 1, 1931, to February 1, 1932, he was employed by Standard Car Securities Co. He was actually paid until March 31, 1932, receiving an extra month's compensation of $2,083.33. That paid in full for all of his services to that company. He was never employed by Standard car Securities Corporation or Standard Car Finance Corporation. Since February 1, 1932, he has been employed by Gulf Oil Corporation, or its subsidiaries.
On October 30, 1942, Standard Car Finance Corporation, a Delaware corporation, paid to petitioner, Bert P. Newton, the sum of $5,000. Petitioners in their income tax return for the calendar year 1942 disclosed the receipt of said amount, but did not include it in their taxable income.
In determining the deficiency respondent included in the taxable income of petitioners for the calendar year 1942 the aforesaid sum of $5,000, stating in his notice of deficiency in respect of this item, ‘It is determined that the amount of $5,000 received by you in 1942 from Standard Car Finance Corporation constitutes taxable income to you in that year.‘
About February 7, 1930, Standard Steel Car Co., hereinafter sometimes called Standard, transferred certain of its nonmanufacturing assets to Standard Car Securities Co., hereinafter sometimes called Securities, which have been organized on January 24, 1930, for the purpose of receiving such assets for liquidation. The transferred assets included all of the 1,000 shares of stock in Standard's subsidiary Standard Car Finance Corporation, hereinafter sometimes called Finance. Standard received from Securities and distributed to its stockholders 280,000 shares of stock in Securities. Transfer to Securities was made subject to indebtedness, liabilities, and obligations set forth in a schedule and including:
Liability of Standard Steel Car Company and any of its Liquidating Subsidiary Corporations for pensions to employees, including Life Members and Definite Period Members (estimated) . . . . . $350.000
Standard had never adopted any pension plan for its employees or those of its subsidiaries, nor prior to February 5, 1930, had it set up any reserve for pensions, though prior to that time it had paid monthly pensions to certain of its retired employees. In 1929 the amount of such payments, $42,159.04, was charged against an account entitled ‘Reserve for Federal Taxes and Contingencies.‘ On February 5, 1930, prior to the transfer to Securities, Standard set up a $350,000 reserve for pensions; and after the transfer Securities set up a $350,000 reserve for pensions; and after the transfer Securities set up a $350,000 reserve for pensions and continued to pay and to charge to the reserve for pensions the monthly pensions instituted by Standard and other monthly pensions to certain former employees of Standard or its subsidiaries.
About March 1, 1930, and pursuant to plan of reorganization between Standard and Pullman, Inc., (sometimes hereinafter called Pullman) substantially all of Standard's remaining assets were transferred to Standard Steel Car Corporation, which was wholly owned by Pullman, Inc., and Standard ceased to do business on March 1, 1930, distributing in complete liquidation to its stockholders 560,000 shares of Pullman, Inc., received in the reorganization, and about $6,000,000 in cash, received from Pullman. After the reorganization Pullman had outstanding 3,873,973 shares of stock.
In December 1933 certain assets of Securities were transferred to Standard car Securities Corporation, hereinafter sometimes called Standard car, then organized for the purpose of receiving and liquidating said assets, in exchange for 280,000 shares of Standard car stock. Securities then distributed the stock pro rata, and its remaining assets in complete liquidation, and dissolved. The transfer by Securities to Standard car was made subject to the indebtedness, liabilities, and obligations of Securities, as set forth in a schedule, which included:
+-----------------------------------------------------------------------------+ ¦Liability of Standard Car Securities Company for Pensions ¦$168,601 ¦ ¦(estimated) ¦ ¦ +-------------------------------------------------------------------+---------¦ ¦Liability of Standard Car Securities Company for Pension Fund ¦1,000,000¦ ¦(estimated) ¦ ¦ +-----------------------------------------------------------------------------+
Standard car set up reserves accordingly of $168,601 for pensions and of $1,000,000 for pension fund. Up to February 5, 1935, Standard car, pursuant to action by its board of directors, continued to pay the monthly pensions theretofore authorized and other monthly pensions to certain former employees of Standard or its subsidiaries and to charge such payments to the reserve for pensions.
On February 4, 1935, the stockholders of Standard car adopted a resolution with reference to the reserve for pension fund, the reserve for pensions, and the reserve for contingencies. The president, Frank Drake, suggested the three reserves be consolidated into one. After reciting, inter alia, and in pertinent part, that in the reorganization between Standard and Pullman, Standard's stockholders received a share of stock in Securities for each share of their Standard stock, and that Securities was formed to liquidate Standard assets not taken over by Pullman, and to provide for pensions and gratuities to former employees of Standard and its subsidiaries; and reciting the merger between Securities and Standard car, the setting up of a reserve for contingencies and a reserve for pensions by Securities, and the assumption of the liabilities of Securities by Standard car, including such reserves, and the fact that certain sums remained in the reserve for pensions and in the reserve for contingencies, it was resolved that the action of the officers and directors in assuming and setting up the reserves ‘for Steel Car Co. and its subsidiary companies and/or contingencies‘ and ‘payments of or in the nature of a pension or a gratuity that have heretofore been made‘ and charged to the reserves, are ratified and approved; and that there be set up on Standcar's books, as of January 31, 1935, a ‘reserve for pensions and gratuities‘ made by the transfer of funds from the reserve for pension fund, from the reserve for pensions, and from the reserve for contingencies; and that the board of directors of Standard car are authorized to ‘continue such pension and/or gratuitous allowances as they have heretofore made, and to grant other and further pensions and/or gratuitous allowances‘ to or for the benefit of former employees of Standard and its subsidiary companies. The reserve for contingencies referred to in the resolution did not at any time have anything to do with pensions; but there were charged to the reserve for contingencies certain terminal pay payments to former employees of Standard, or its subsidiaries, designated retirement allowances.
On April 18, 1935, the directors of Standard car resolved that the president be authorized to grant such gratuitous single payment allowances to former employees of Standard and its subsidiaries who had a minimum service of ten years with that company or its subsidiaries, as to him seemed fitting and proper ‘within the limitation of the following schedule based on years of service‘ to Standard or its subsidiaries or successors. The schedule is:
+-----------------------------------------------------------+ ¦Under 10 years of employment¦Nothing. ¦ +----------------------------+------------------------------¦ ¦10 to 15 years of employment¦Equivalent of 2 months salary.¦ +----------------------------+------------------------------¦ ¦15 to 20 years of employment¦Equivalent of 4 months salary.¦ +----------------------------+------------------------------¦ ¦20 to 25 years of employment¦Equivalent of 6 months salary.¦ +----------------------------+------------------------------¦ ¦25 to 30 years of employment¦Equivalent of 9 months salary.¦ +-----------------------------------------------------------+
In August 1939 Standard car transferred to Finance, its wholly owned subsidiary, certain of its assets, including the balance in the reserve for pensions and gratuities created by Standcar's stockholders on February 4, 1935; and Standard car was thereupon liquidated and dissolved in September 1939. Its stockholders each received 1/280 of a share of stock of Finance. The terms of the transfer from Standard car to Finance, set forth in letter dated July 25, 1939, were, in pertinent part, as follows: Standard car transferred its ‘reserve for pensions and gratuities fund * * * * originally set up * * * by virtue of a resolution of the stockholders * * * adopted * * * ‘ February 4, 1935, (quoting the language hereinabove quoted from the resolution of February 4, 1935, as to continuation of pensions and/or gratuitous allowances made by the directors and to grant other and further pensions and/or gratuitous allowances to former employees of Standard or its subsidiaries) subject to the conditions that Finance set up a reserve for pensions and gratuities in the amount of the fund transferred to it; that it adopt as a plan for gratuitous allowances substantially the plan adopted by Standcar's directors on April 18, 1935 (quoting as to the power of the president to grant allowances, the language hereinabove set forth from the resolution of April 18, 1935, and quoting the schedule above set forth); that ‘any gratuitous allowances that do not come within such schedule‘ and ‘any allowances of pensions‘ be ‘made only by the authority of the board of directors‘ of Finance; that Finance continue the payment of pensions already granted, all subject, however, to the right in Finance's board of directors to alter, amend, change, or discontinue this schedule of gratuitous allowances, to change the amount of, or to discontinue any pension already granted, or later granted, and to discontinue the entire plan for pensions and/or gratuitous allowances, and to return to or place any unexpended balance in the reserve for pensions and/or gratuities to Finance's surplus account.
Stockholders of Standard car Securities Corporation, at a meeting on August 21, 1939, at which there were present in person or by proxy, 256,475 shares out of 280,000 shares outstanding, voted unanimously to approve and ratify the action of the board of directors of Standard car Securities Corporation taken at its meeting on July 25, 1939, with respect to the transfer of the reserve for pensions and gratuities and certain other assets of Standard car Securities Corporation to Standard Car Finance Corporation.
After the adoption of the above resolution on February 4, 1935, by Standcar's stockholders, Standard car and its successor, Finance, continued to pay certain monthly pensions theretofore authorized by the directors of Standard car or its predecessor, Securities, to certain former employees of Standard or its subsidiaries, and after the adoption of the resolution of February 4, 1935, and up to October 16, 1942, Standard and its successor, Finance, paid monthly pensions to other former employees of Standard or its subsidiaries, authorized by the directors of Standard car or Finance. All such payments were charged to reserve for pensions and gratuities. No such pension was paid to Newton. All such monthly pensions were terminated by action of Finance's directors at a meeting on October 15, 1942, hereinafter mentioned.
After the adoption on April 18, 1935, of the resolution by Standcar's directors, and prior to October 30, 1942, Standard car and its successor, Finance, paid certain single payment allowances to certain former employees of Standard or its subsidiaries and charged such payments to the reserve for pensions and gratuities established by the stockholders' resolution of February 4, 1935. No such allowance was paid to Newton.
On October 16, 1942, the directors of Finance held a meeting, the minutes of which, in pertinent part, were: That the president stated that the meeting was to consider the matter of distribution and final disposition of the reserve for pensions and gratuities; that a study had been made as to gratuitous lump sum payments to be made in lieu of pensions theretofore granted and for other gratuitous payments to former employees of Standard or its subsidiaries. Thereupon certain directors submitted two lists, one of lump sum payments to be made in lieu of pensions that had been granted, and the other of gratuitous allowances or payments. Thereupon it was resolved that the treasurer be authorized and directed to pay out of the reserve for pensions and gratuities to the following named former employees, and/or their widows, of Standard and/or its subsidiaries the amounts set opposite their names ‘as gratuitous allowances or gifts‘ (after which follows a list of 117 names, including the name of Bert P. Newton, with $5,000 set opposite his name). It was also resolved that the treasurer be authorized and directed to pay out of the reserve for pensions and gratuities to a list of former employees (their widows or executors or administrators) of Standard and/or it subsidiaries to whom pensions had been theretofore granted, and ‘as gratuitous allowances or gifts in lieu of such pension payments after October 31, 1942,‘ certain amounts of money; and that the treasurer transfer to paid-in surplus the balance of the reserve for pensions and gratuities, after making such payments.
The directors of Finance also, on October 16, 1942, adopted a plan of liquidation, which plan was also adopted by the stockholders, on December 3, 1942. Pursuant to the resolution of the directors of Finance on October 15, 1942, $5,000 was paid to Bert P. Newton and charged against the reserve for pensions and gratuities. The check of Finance to Newton was accompanied by a notice, in effect, that it had been voted on October 16, 1942, ‘to make certain gratuitous allowances or gifts to certain former employees of Standard Steel Car Co. or its subsidiaries‘ and that counsel considered it a close question whether the amount was taxable income to Newton, under Bogardus v. Commissioner, 302 U.S. 34, and that it was recommended that Newton consult his own attorney on the question.
Finance did not claim any deduction for Federal income tax purposes for the amounts paid, including the $5,000 paid Newton, and no such deduction was allowed.
In 1929 Standard deducted in its income tax return the $42,159.04 pensions paid by it as above recited and the deduction was allowed. In 1930 Standard likewise deducted $40,841.20 and the deduction was allowed. Securities deducted $53,962 in 1931 and $43,538.80 in 1932, but the deductions for 1931 and 1932 were not allowed. After 1932 no deductions were taken in income tax returns for pensions or gratuities paid by Securities, Standard car, or Finance.
Petitioner had no understanding or agreement with Standard Steel Car Co., Standard Car Securities Co., Standard car Securities Corporation, or Standard Car Finance Corporation, or any of its stockholders, directors, or officers, with respect to the $5,000 received by him in October 1942. J. Frank Drake was president of Standard Steel Car Co. from 1923 until the sale to Pullman, Inc., in 1930, and president of Standard Car Securities Co., Standard car Securities Corporation, and Standard Car Finance Corporation at all times here involved; and was a member of the board of directors of all such companies. He is now president of Gulf Oil Corporation. He took part in the transaction between Standard Steel Car Co. and Pullman, Inc., on March 1, 1930. The transaction was a good one for the stockholders of Standard Steel Car Co. They received a very good price for their property. Pullman, Inc., and its subsidiaries never had any stock interest in Standard Car Securities, Standard car Securities, or Standard Car Finance Corporation. Drake was present at the directors' meeting of Standard Car Finance Corporation on October 16, 1942, at which the resolution was adopted to make payments to a list of 117 former employees of Standard Steel Car Co. or its subsidiaries, including Newton. Drake regarded the payments to the 117 men as outright gifts, because the 117 men had never received pensions like some others who were on pension, because of retirement due to old age or illness, or incapacity, while the payments to the 117 men had nothing to do with retirement because of age or incapacity. Drake did not participate in the payments. The Mellon family were the majority and controlling stockholders of Standard Steel Car Co., Standard Car Securities, Standard car Securities, and Standard Car Finance. W. L. Mellon, R. K. Mellon, T. H. Gillespie, William Bierman, and Max Epstein were directors from about January 1930 to about January 1934. Directors of Standard car Securities Corporation from 1933 to 1939 were Drake, R. K. Mellon, W. L. Mellon, Gillespie, Bierman, A. M. Scaife, and Max Epstein. The same men, with Adolph Schmidt and E. B. Clarke, were directors of Standard Car Finance Corporation from 1939 to 1942, though R. K. Mellon, Scaife, Clarke and Schmidt served only part of that period.
OPINION.
DISNEY, Judge:
We first dispose of the question of loss claimed on the sale of real estate, also depreciation. The sole point is the value thereof on August 1, 1939, when converted from residence purposes to income production, for the petitioners claim that the value was $17,000, resulting in a loss when sale was made December 1, 1942, for $10,659.85 net, whereas the respondent thinks the value was such on the day of conversion of the residence to income production, that no loss was sustained. We have examined the evidence in detail but see no object in setting such detail forth here. Two real estate men testified to the $17,000 value, of which $3,500 was for the lot, in the opinion of one, $3,000 in the view of the other, and in particular they both testified that values were higher in 1939 than in 1942. Though it is not easy to reconcile such evidence with the increased rental value of the property shown by the raise in rents from $125 to $135 a month, or the advent of war and increased activity in sales, and though in some respects the testimony was not very convincing, we have, in general, accepted it. No contradictory evidence was offered from similar witnesses, or otherwise, by the respondent. The testimony as to $13,500 for the buildings appears to reflect a fair consideration of both assessments. We have concluded and find that the property had on August 1, 1939, a value of $17,000, allocated $13,500 to buildings and $3,500 to land. Under Rule 50 the resulting ordinary loss and depreciation will be computed on that basis. The parties have agreed to compute depreciation on a 2 per cent rate.
The remaining problem is whether Bert P. Newton, on October 30, 1942, received the $5,000 from Standard Car Finance Corporation as a gift or as compensation. The petitioner relies primarily upon the application of Bogardus v. Commissioner, supra, the leading case on this question; and the respondent seeks to distinguish it from the situation there confronting us. Inasmuch as that case specifically points out the conflict in previous cases upon the subject, including many of those cited by either party here, we think it illogical to rely upon, and unnecessary to discuss, such previous cases. From the Bogardus case we derive certain basic considerations: That gift and compensation for personal service are mutually exclusive concepts; that merely because the stockholders of the paying corporation ‘had benefited by the past services of the recipients, it by no means follows that the distribution was not a gratuity‘; that it is material whether there was obligation or moral or legal duty to the recipients, or incentive of anticipated benefit, or whether full compensation for services of recipients had been made; and that intention governs, and the expressions used are of weight. After considering the Bogardus case and comparing its facts with those here involved, we are of the opinion that it controls us here, and that there was in this matter a gift. The factual parallel is striking. In both cases a later corporation paid. In both, the stockholders of both corporations were the same, but they had ceased to be stockholders in the corporation for which the employees had worked. In both cases the amounts paid were in the taxable years not claimed as expense deductions, or reported as income by the recipients. We attribute little weight to the fact that here, in 1929 and 1930, years before the payment here in question, deductions had been claimed and allowed (and claimed but not allowed in 1931 and 1932) for payments for pensions to others than the petitioner, made by a predecessor company, not immediately connected with the payor here involved. The fact that no such deductions were taken after 1932 is of equal effect with the fact that prior thereto they were claimed, and in two years allowed. Apparently both the corporation then controlling the reserve, and the respondent in 1929 and 1930, thought compensation was paid; and equally apparent there was a different view and intention by the later corporations, including Finance, which paid the petitioner here in 1942.
It is such later intent which is of prime importance here. Nor do we agree with the respondent that the Bogardus case is distinguished by the stipulation therein, and relied on, that ‘said payments were not made or intended to be made by Unopco corporation or any of its stockholders as payment or compensation for any services rendered or to be rendered or for any consideration given or to be given by any of said employees * * * to said Unopco corporation or any of its stockholders.‘ Respondent views this language as an agreement there that settled the matter, while here no such agreement appears. We do not read the stipulation so broadly, for to ascribe to it the meaning desired by the respondent would be to say that the whole question of gift or compensation was there settled by stipulation. We construe the language in the light of its context, and think the Supreme Court so construed it, as agreeing that the payments were not made or intended by Unopco, the payor, for services to it or its stockholders as such, and not to agree that there was not payment for services to a former corporation wherein the same people had formerly been stockholders. Had the latter been the meaning of the stipulation, we can not see why litigation would continue— as it did. That the agreement was not given the interpretation advocated by respondent is plainly indicated by the Court's language in the same paragraph to the effect that the recipients ‘never were employees of the Unopco Company or any of its stockholders‘— though in fact such stockholders had most of the recipients had been employees. We conclude that the stipulation in the Bogardus case does not detract from its weight in this matter.
Since the stockholders on February 4, 1935, ratified earlier actions of officers and directors as to the reserve and payments, it may be that such payments were not gratuities, because not made by the stockholders. Noel v. Parrott, 15 Fed.(2d) 669.
The respondent suggests that in the Bogardus matter the stockholders of the successor corporation made a single spontaneous ‘gift or honorarium‘ a few days after the organization of the new corporation, while here the setting up of a reserve of pensions and contingencies and the custom over a period of years of paying pensions and gratuities indicates design to compensate former employees for services; also, that there the payments were charged to surplus, while here, to a reserve. We are unable, in this, to see an essential or effective distinction. There appears equal spontaneity in both cases, and the fact that, in the instant matter the payments were made after a long period of time and successive changes in corporations, to us is, if anything, more indicative of gift than if payment had been made shortly after rendition of services. The fact that here reserves for pensions and for contingencies were set up in 1935, from which the reserve of Finance was, it is agreed, derived, is of little weight. The petitioner was never a pensioner, and it is stipulated that the reserve for contingencies set up in February 1935 had nothing to do with pensions. Prior to the $5,000 in 1942, the petitioner never received anything from such reserve. There seems no controlling or weighty difference between payment from the funds on hand in surplus in the Bogardus case, and payment in this matter from funds on hand in a reserve. The more important matter is the intent in making the payment. ‘ * * * intention must govern * * * ‘ the Court said in the Bogardus case, and gift could be intended from a reserve for that purpose, just as clearly as from funds not in a reserve. In the Bogardus situation it is specific that payments were ‘in recognition of valuable and loyal services of said employees,‘ but that element did not cause conclusion by the Court that there was gift; yet here the setting up of a reserve, if it means anything, does not appear to indicate anything more than such recognition of loyal services and intent ultimately to recognize them in a monetary way.
The respondent suggests also that in the Bogardus case the amounts paid were not based upon services rendered, while here the ‘so called gratuities‘ were apportioned according to the former employee's length of service and amount of compensation. This argument is peculiarly vulnerable in this case, in that the schedule based on length of service of employees with Standard to which respondent refers provides particularly that employees with service of less than ten years shall receive nothing— yet Newton, with less than ten years service with Standard, received $5,000. It is, however, further deprived of weight by the fact that the schedule applied only to payments granted by the president or treasurer, while the payment to the petitioner was granted pursuant to resolution of the board of directors. The distinction between the two kinds of disbursement was intentional, as shown by the fact that the letter of July 25, 1939, from Standard car to Finance, transferring the reserve and providing for the payments, after referring to the granting of gratuitous allowances by the president under the schedule of years of service with Standard, specifically provided ‘that any gratuitous allowances that do not come within said schedule be made only by authority of the Board of Directors. ‘ Newton's case very obviously did not, and could not, come within the schedule, and was necessarily passed upon by the board of directors, not the president, and thus it appears that length of service had nothing to do with the disbursement to him.
The respondent, in addition, expresses the view that in the light of Dobson v. Commissioner, 320 U.S. 489, ‘it may well be that the Dobson case impliedly overrules the Bogardus case * * * and that the decisions of the Board of Tax Appeals and the Circuit Court of Appeals * * * have been, since 1943, good law.‘ We see nothing in the Dobson case (so well known for its principles as not to require discussion) to justify the respondent's view, but, in any event, the Bogardus case was not expressly overruled, therefore the Supreme Court, and not we, should sustain the respondent's view if it so deserves.
The important elements of the Bogardus case, in addition to those above suggested, are that use of terms such as gift or honorarium indicates gift, not compensation; that the fact of disbursement to one never an employee of the disbursing company, or its stockholders, and the lack of obligation, legal or otherwise, to make such disbursement, and the lack of interest on the part of the paying corporation or its stockholders in the former employing corporation or its successor's good will and loyalty of its employees, weigh against the idea of compensation payment by the disbursing company, and that recognition of past loyal services indicates merely the reason for making gifts. All of these elements, in our opinion, are present in this case. The intent to make a gift, rather than to pay compensation, appears both in the language used and in the evidence of Drake, the officer largely in charge of the matter, from the initial transfer of the funds in 1930, to the disbursing resolution on October 16, 1942. He was not a participant in the fund and so appears without interest or bias. He regarded the amounts as outright gifts. He said, referring to Standard's reorganization with Pullman, that it was a good trade, a nice price was received for the property, and the purpose ‘was nothing more or less than to just make some gifts to these people.‘ This is in line with the entire record, and with the expressions ‘gratuitous allowance,‘ ‘gratuities,‘ and ‘gifts‘ used. It is in no essential matter different from the arrangement and intent found in the Bogardus case to indicate gift and not compensation. That case is not inapplicable on any ground that here the stockholders of Finance were stockholders in Pullman, through the reorganization in 1931, while in the Bogardus case the stockholders of Unopco had no stock in United Gasoline, to which all stock of Universal was sold. The respondent does not make the argument, but in any event it would offer no real distinction between the cases, for there is nothing here to indicate that stock in Pullman was still held by stockholders of Finance in 1942 when the payments here involved were made, or that they were interested in Pullman. Moreover, the payments were to former employees of Standard, not of Pullman; and Standard stockholders received only 560,000 shares out of 3,873,973 shares— a percentage so small as not to justify any idea that 12 years later Finance's stockholders would be so interested in Pullman as to compensate former employees who might conceivably (and outside this record) have entered the employ of Pullman.
Since the action of the board of directors of Finance was pursuant to authority of the stockholders, such cases as Noel v. Parrott, supra, have no application here. The fact that Securities and later corporations assumed liability for a pension reserve can have no weight here, since petitioner was never a pensioner and received disbursement, not from such a fund, but from a later fund for both pensions and gratuities, under circumstances convincing that to him there was gratuity. We conclude and hold that the $5,000 paid petitioner was a gift.
Reviewed by the Court.
Decision will be entered under Rule 50.