Opinion
Docket Nos. 48567, 48568.
Filed February 29, 1956.
The Motion Picture Association of America, Inc., paid the sum of $38,270 to Stephen S. Jackson, upon the termination of his employment at the request of members of the association. The payment was made pursuant to Jackson's suggestion, and after he had executed a general release of all claims against the association, its officers, and members. It was charged by the association on its books of account to salary expense. Held, that said amount was subject to income tax under section 22 (a) of the Internal Revenue Code (1939), and was not a gift exempt under section 22 (b) (3).
Stephen S. Jackson, Esq., for the petitioners.
Robert L. Liken, Esq., for the respondent.
Respondent determined deficiencies in the income taxes of the petitioners as follows:
Taxable year Docket No. Petitioner ended Deficiency
48567 ....... Ruth Jackson ........ May 31, 1949 $6,119.75 48568 ....... Stephen S. Jackson .. May 31, 1949 6,119.75The two petitions filed with this Court are, in substance, identical; and the proceedings thereon have been consolidated.
The sole issue presented in each case is whether the sum of $38,270 received by Stephen S. Jackson from the Motion Picture Association of America, Inc., in July 1948, upon the termination of his employment with said association, is subject to income tax under section 22 (a) of the Internal Revenue Code (1939), or a "gift" exempt from income tax under section 22 (b) (3).
The respondent included one-half of the above-mentioned sum, or $19,135, in the gross income of each petitioner, for the reason that they were husband and wife domiciled in California, a community property State, and had filed separate returns.
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 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 chapter:
* * * * * * *
(3) GIFTS, BEQUESTS, DEVISES, AND INHERITANCES. — The value of property acquired by gift, bequest, devise, or inheritance. * * *
FINDINGS OF FACT.
Certain facts have been stipulated; the stipulation is incorporated herein by reference.
The petitioners, Stephen S. and Ruth Jackson, are husband and wife; and from April 1947 to December 1949, they resided together at Sierra Madre, California. Each filed an individual income tax return for the fiscal year ended May 31, 1949, with the collector of internal revenue for the sixth district of California.
In about 1942, Stephen S. Jackson (hereinafter sometimes called Jackson) was approached by representatives of the Motion Picture Association of America, Inc., and asked whether he would be interested in taking the position of director of the Production Code Administration, then held by Joseph I. Breen who was planning to retire. The Production Code is a self-regulating organization which passes upon the moral and suitable qualities of motion pictures for the motion picture industry. After certain preliminary arrangements had been made, Breen decided not to retire, and the negotiations with Jackson were terminated.
In about March 1947, Jackson was again asked whether he would be interested in taking the position of director of the Production Code Administration. He conferred regarding the matter with Eric Johnston, president of Motion Picture Association, and was told that Breen again wished to retire. The result of the conference was that, as of about April 1, 1947, Jackson was employed by the association to work with Breen at an annual salary of $30,000. No definite period of employment was agreed upon. Jackson thereupon terminated his law partnership in New York City, and moved to California with his wife and children. Breen subsequently left the Production Code; and thereafter in about July 1947 Jackson assumed many of Breen's duties, and served as acting director of the Code until July 22, 1948, when his services were terminated in the manner hereafter stated.
Early in July 1948 Jackson was summoned to New York City for a conference with Eric Johnston. Johnston there showed him a telegram received from the Motion Picture Producers Association, which stated that its members were unanimously opposed to Jackson's taking over the position which Breen had held as director of the Production Code. Jackson thereupon left New York City and returned to his duties in California; but a short time later, he again conferred with Eric Johnston in Washington, D.C., explained the plight in which he found himself by reason of the association's action, and told Johnston "what I thought I should get" by way of recompense. Johnston's reply was that Jackson had no right to anything, but that he (Johnston) would discuss the matter with the association's board of directors and see what could be done. Johnston added "I can not promise you anything."
On July 19, 1948, a meeting was had of the executive committee of the board of directors of the association. A portion of the minutes of that meeting is as follows:
Mr. Johnston related his conversations concerning Judge Jackson's further employment by the Production Code Administration in the event he was not designated as Director of the Production Code Administration to succeed Mr. Joseph I. Breen. Mr. Johnston told the meeting that Mr. Jackson had indicated his belief that he ought to be recompensed for the expenses he had been put to in giving up his law office in New York and dissolving the partnership he had formed just before he took employment with the Association on the West Coast and the expenses be faced in moving his family back to New York and reopening offices for the practice of law.
Mr. Johnston said that he had told Mr. Jackson that he would recommend to the Board of Directors that the Association pay to Mr. Jackson the amount of $30,000, which amount was equal to his salary for a period of one year, and added his own views that if the Directors agreed with him, an additional payment to Mr. Jackson under all the circumstances would not be unwarranted. After discussion, it was moved, seconded and unanimously adopted that the President be authorized to enter into an agreement with Mr. Jackson whereby Mr. Jackson's employment by the Association would be terminated and Mr. Jackson would release the Association, the Association of Motion Picture Producers, Inc. and the officers and directors of both Associations from all claims for money damages upon the payment to Mr. Jackson of an amount equivalent to his current salary for a period of one year, plus an amount not to exceed $10,000. Mr. Johnston was empowered to execute such an agreement for and in the name of the Association and the Secretary was authorized to duly attest and affix thereto the corporate seal of the Association.
On July 22, 1948, following the above-mentioned executive committee's meeting, Jackson was requested by a representative of the association to sign, and he thereupon did sign, a memorandum of agreement which provided as follows:
In consideration of the premises and of the mutual covenants hereinafter contained, it is agreed:
1. Any existing agreement, contract or understanding, of any nature relating to the employment of Mr. Jackson by the Association, is rescinded, canceled and annulled.
2. The employment of Mr. Jackson by the Association shall terminate effective July 22, 1948.
3. The Association agrees to pay Mr. Jackson the sum of $38,270.00 upon execution of this instrument.
4. Mr. Jackson agrees that any information which came into his possession by reason of his employment shall be considered strictly confidential and that he will not communicate or publish such information without the prior consent and approval of the President of the Association.
5. Mr. Jackson does hereby remise, release and forever discharge the Association, the Association of Motion Picture Producers, Inc., their directors, officers and members, and each of their successors and assigns, and heirs, executors and administrators, of and from all and all manner of action and actions, cause and causes of actions, suits, debts, demands, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions claims and demands whatsoever, in law or in equity, which he ever had, now has, or which his heirs, executors or administrators can, shall or may have against the Association, the Association of Motion Picture Producers, Inc., their directors, officers and members, upon or by reason of any matter, cause or thing whatsoever, from the beginning of the world to the date hereof.
IN WITNESS WHEREOF, the Association has caused its corporate name to be hereto signed by its President or Vice-President, thereunto duly authorized, and its corporate seal to be affixed thereto, duly attested by the Secretary, and Mr. Jackson has hereunto set his hand and seal the day and year above written.
MOTION PICTURE ASSOCIATION OF AMERICA, INC.
By (Signed) Eric Johnston LS President
(Signed) Stephen S. Jackson STEPHEN S. JACKSON
Attest (Signed) Sidney Schreiber Secretary.
Pursuant to the above agreement, Jackson's employment with the association was terminated, effective July 22, 1948; and on July 23, 1948, he received from the association a payment of $32,529.50, representing a gross payment of $38,270, after deduction of withholding tax in the amount of $5,740.50. Said $38,270 was charged by Motion Picture Association of America, Inc., on its books of account to "Production Code Administration salary expense."
Both petitioners reported, on their respective income tax returns for their fiscal years ended May 31, 1949, the receipt by Jackson of the above-mentioned payment of $38,270; but they treated the same as nontaxable income.
The respondent, in his notices of deficiency, determined that said amount constituted taxable income, and he included one-half thereof in the gross income of each petitioner.
OPINION.
The contention of petitioners is that the sum of $38,270 paid to Jackson by the Motion Picture Producers Association upon the termination of his employment, was an exempt "gift," and not taxable income. In support of this position, they assert that the payment was made without legal consideration for the reasons that Jackson had already been amply paid for his services, and had not been employed for any specific term in respect of which additional compensation could be claimed. They submit that the payment must, therefore, have been made by the executive committee of the association through a feeling of pity for Jackson, and should be regarded as a gift.
Such position is, in our opinion, without merit. The crucial factor, in determining whether a payment received from a former employer at or after the termination of employment is a "gift" within the meaning of section 22 (b) (3) of the Code (1939), is the intention with which the payment was made; and such intention must be determined from all facts and surrounding circumstances. Wallace v. Commissioner, (C. A. 5) 219 F.2d 855, 857; Willkie v. Commissioner, (C. A. 6) 127 F.2d 953, 955, certiorari denied 317 U.S. 659; Fisher v. Commissioner, (C. A. 2) 59 F.2d 192, 193; N.H. Van Sicklen, Jr., 33 B. T. A. 544, 547. If the payment was made with the intention of requiting past services or employment more generously or completely, it is taxable. Poorman v. Commissioner, (C. A. 9) 131 F.2d 946, affirming 45 B. T. A. 73; James H. Anderson, 31 B. T. A. 197, affd. (C. A. 2) 79 F.2d 979; Robert E. Binger, 22 B. T. A. 111; Willis L. Garey, 16 B. T. A. 274; Arnold J. Mount, 10 B. T. A. 1156. This is true even though the payment was entirely voluntary, was in addition to the agreed salary, and was made without legal obligation. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 730; Nickelsburg v. Commissioner, (C. A. 2) 154 F.2d 70; Leon D. Hubert, Jr., 20 T.C. 201, 203, affd. (C. A. 5) 212 F.2d 516; John F. Beggy, 23 T.C. 736. Also, if the payment was made to compensate the employee for loss of his position, it is taxable. Cf. Chauncey L. Landon, 16 B. T. A. 907; Georgia S. Williams, 36 B. T. A. 974. Likewise, payments made to an employee to compensate him for personal expenses incurred as an incident to accepting the employment, or expected to be incurred in seeking a new position after the employment has terminated, are, in our opinion, income subject to tax.
Section 22 (a) of the Internal Revenue Code (1939) provides specifically that "gross income" includes "compensation for personal service * * * of whatever kind and in whatever form paid * * * or gains or profits and income derived from any source whatever." The Supreme Court has held that such language was used by Congress to exert in this field "the full measure of its taxing power"; and that Court has given "a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted." Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).
Where the relationship of employer and employee has existed, and services have been performed in the course of such relationship, the presumption is that the amount received is for the services and is not a gift. Michael Laurie, 12 T.C. 86; L. Gordon Walker, 25 T.C. 832. And where the payment has been measured in relation to the salary previously paid, or has been charged by the employer on his books to salary or operating expense, there is a particularly strong indication that a gift was not intended. Levey v. Helvering, (C. A., D.C.) 68 F.2d 401, affirming 26 B. T. A. 889; Willkie v. Commissioner, supra; Botchford v. Commissioner, (C. A. 9) 81 F.2d 914, 916, affirming 29 B. T. A. 656; L. Gordon Walker, supra. Also, where the payment has been made by a corporation, and has not been approved as a gift by its stockholders, the presumption is that a gift was not intended; for the general rule is that officers and directors of a corporation are without authority to give away large sums of money from the corporate assets to private individuals, and it is not to be assumed that they intended a violation of their trust. Noel v. Parrott, (C. A. 4) 15 F.2d 669, 671, certiorari denied 273 U.S. 754.
In the instant case, it is our opinion, after giving consideration to all the evidence and applying the foregoing principles, that the payment here involved was not intended to be a gift, and was taxable income. Such payment obviously was made by reason of the employer-employee relationship. Of the total amount paid, $30,000 was characterized by the executive committee of the association as "an amount equivalent to his current salary for a period of one year"; and, although the reason for the additional amount of $8,270 is not disclosed by the evidence, it is reasonable to infer from the statement made by Johnston to the executive committee that such amount was intended to compensate Jackson for personal expenses, either incurred prior to the commencement of the employment or expected to be incurred after such employment had terminated. In either event. the payment is taxable as income.
Moreover, the payment was conditioned on Jackson's entering into an agreement, that the employment was immediately terminated, that he would keep confidential any information obtained during the course of the employment, and that he would execute a general release and discharge all claims against the association, its directors and officers. The amount was paid pursuant to Jackson's request that he be recompensed; and it was charged by the association on its books to salary expense. All these facts give indication of an arm's-length business arrangement; and they negative the suggestion that a gift was intended.
It is not material for income tax purposes whether Jackson's claim for recompense was based on moral or legal grounds, or whether he had any valid claim whatever. The determinative factor is that the payment was not made by the association's executive committee as a benefactor, but rather was made and treated on the association's books as additional compensation for past services.
Bogardus v. Commissioner, 302 U.S. 34, upon which petitioners principally rely, is distinguishable on its facts. There the recipients of the payments had never been employees of the payor corporation or of any of its stockholders, and the parties had stipulated that such payments were not made or intended to be made for any services rendered or to be rendered.
We approve the determinations of the respondent, and hold that the payment here involved constituted "gross income" within the meaning of section 22 (a).
Decisions will be entered for the respondent.