Opinion
No. M-26.
February 8, 1932.
Action by Thomas M. Schumacher against the United States.
Petition dismissed.
The question at issue in this case is whether a payment of $100,000 received by the plaintiff from the El Paso Southwestern Company on January 2, 1925, was a gift exempt from taxation under section 213(b)(3) of the Revenue Act of 1924, 26 USCA § 954(b)(3) and note, or whether the payment represented compensation for services rendered, and is subject to the tax under section 213(a) of the said act ( 26 USCA § 954(a).
This case having been heard by the Court of Claims, the court, upon a stipulation of facts, and the evidence, makes the following special findings of fact:
1. At all times hereinafter mentioned, the plaintiff was and still is a resident and citizen of the United States with his principal place of business at 37 Wall street, New York, N Y
2. On or about April 12, 1926, the plaintiff duly filed with the United States collector of internal revenue for the Second district of New York, his income tax return for the calendar year 1925, reporting a tax payable in the amount of $50,807.23. The Treasury Department, in correcting a mathematical error in said return, on or about April 26, 1926, reduced the amount of the tax payable by $5,215.00.
3. The amount of the corrected tax liability was duly paid in four installments as follows:
On or about April 12, 1926, together with interest in the amount of $63.50, $12,701.80.
On or about June 12, 1926, $10,963.48.
On or about September 14, 1926, $10,963.48.
On or about December 14, 1926, $10,963.47.
Said payments were made by the plaintiff under protest, to the representative of the defendant, the collector of internal revenue for the Second district of New York.
4. There was included in the gross income set forth in said return for said taxable year an item of $100,000, representing an amount received by the plaintiff pursuant to a resolution adopted by the directors of the El Paso Southwestern Company, a holding company owning all of the issued capital stock of the El Paso Southwestern Railroad Company, as follows: "The directors of the El Paso and Southwestern Company request that the stockholders of the company authorize them, in recognition of the long and faithful services of the officers and employees of the railroad, to pay the officers and employees to be designated by the board of directors, and that they be authorized to set aside for such compensation a sum not to exceed one million dollars."
5. During the period from January 1, 1924, to October 31, 1924, the plaintiff was employed as president of the El Paso Southwestern Railroad Company. He was paid in full the salary due him as an employee of that railroad company up to the conclusion of his employment by that company on October 31, 1924, and thereafter performed no further services for that company. The stock of this corporation was owned by the El Paso Southwestern Company, with offices at 99 John street, New York. On November 1, 1924, the El Paso Southwestern Company, hereinafter sometimes referred to as the holding company, transferred the capital stock of the El Paso Southwestern Railroad Company to the Southern Pacific Company in exchange for certain securities of the latter company.
6. Subsequent to the transfer of the capital stock of the El Paso Southwestern Railroad Company, to wit, on November 10, 1924, the secretary of the El Paso Southwestern Company addressed a letter to the stockholders of the holding company which, among other matters, summarized the plan of reorganization whereby the stock of El Paso Southwestern Railroad Company was transferred to Southern Pacific Company in exchange for securities in the latter company; in this letter the directors also requested the stockholders to approve, ratify, and confirm the plan of reorganization and all the acts of the directors in carrying out the same. This letter contained the further statement: "* * * The directors of the El Paso Southwestern Company request that the stockholders of the company authorize them, in recognition of the long and faithful service of the officers and employees of the railroad, to pay to officers and employees, to be designated by the board of directors, additional compensation to be decided by the board of directors, and that they be authorized to set aside for such compensation a sum not to exceed $1,000,000.00. * * *"
7. Inclosed with the aforementioned communication to the stockholders of the El Paso Southwestern Company was a letter which said stockholders were requested to sign and return to the company's secretary; this letter contained the following statement:
"As a stockholder of the El Paso Southwestern Company, I hereby ratify, approve, and confirm the plan of reorganization and the actions of the board of directors and the officers, as set forth in said plan of reorganization, and the documents accompanying your letter.
"I understand that there are certain unsettled expenses, obligations to the Southern Pacific Company, bonuses to the employees, agreed upon by the board of directors, estimated at about $1,000,000.00, and other debts, expenses, and liabilities incidental to the plan of reorganization and otherwise."
8. There was also inclosed with the communication from the secretary of the holding company to the stockholders a proxy form appointing George Notman, U.M. Van Varick, and W.K. Flora, committee, to act for the stockholders of the holding company.
9. At a meeting of the committee on November 20, 1924, A.C. James was appointed chairman, U.M. Van Varick, secretary, and W.K. Flora, assistant secretary. Upon motion, the committee adopted a resolution which provided, inter alia, for borrowing of funds with which to make the payments, including the payment to the plaintiff.
10. At the same meeting the secretary was authorized to send a letter to the stockholders and bondholders of the holding company, which letter, inter alia, informed the addressees that some of the Southern Pacific Company bonds would have to be sold in order to secure funds with which to make the payments previously authorized, including the payment to the plaintiff.
11. Pursuant to the resolution of the board of directors of the holding company and the authorization from its stockholders, the committee began functioning without further formal action. On December 23, 1924, the committee's records disclose the following motions:
"Upon motion duly seconded and carried, the secretary was authorized to release the checks in payment of certain bonuses to amount of $893,690.00 as per memo on file.
"Resolved: That the officers be authorized to secure a loan of $1,000,000.00 from the Hanover National Bank."
12. The amounts of the various checks to the railroad company's employees were determined by the following: Thomas M. Schumacher, president of the railroad company, the plaintiff herein; Hawley, general auditor of the railroad company; and Fox, vice president of the railroad company. They were guided in their determination by no set rule or formula, merely exercising their arbitrary discretion based on their knowledge of all the facts in connection with each individual case, some of the railroad company's employees being entirely omitted from consideration. The plaintiff, Thomas M. Schumacher, had nothing to do with the determination of the amount that was paid to him. Included among the checks which were released under the committee's resolution were the following checks to the plaintiff:
Check No. 663 dated December 26, 1924, for $75,000.
Check No. 664 dated January 2, 1925, for $100,000.
The checks were cashed in the month in which issued.
13. Each check was accompanied by a card upon which was printed: "With appreciation and best wishes of El Paso and Southwestern Company from committee appointed November 18th, 1924."
14. The plaintiff had not at any time a contract or understanding with the committee or the holding company or the stockholders of the holding company as to the payment of any portion of the fund distributed to the plaintiff and other officials who received the payments from the stockholders' committee. Neither was the plaintiff a stockowner in the holding company. On and after November 1, 1924, he was employed by the Southern Pacific Company as executive vice president and received from this company a salary for his services in that capacity.
15. The committee's statement of its finances, as submitted by its secretary at a meeting held at 99 John street, New York, on January 20, 1925, showed that the committee had procured loans totaling $1,155,000, and that its disbursements included, among other items, the following:
December 22, 1924, bonus, $619,940.
January 2, 1925, bonus, $273,750.
16. At the same meeting the committee authorized the sale of $1,500,000 par value of Southern Pacific Company 20-year 5 per cent. collateral trust gold bonds.
17. Under date of February 24, 1925, the committee submitted a letter to the stockholders of the holding company entitled "Interim report to stockholders of the El Paso and Southwestern Company by committee appointed by letter to George Notman, November, 1924"; this letter, inter alia, refers to the bonus payments previously authorized, among them being the payment to the plaintiff.
18. No deduction for tax purposes with respect to the distribution was taken by the committee, the holding company, any of the stockholders thereof, or the operating company.
19. On or about May 5, 1927, and within the time prescribed by law and by regulations of the Treasury Department then in effect, the plaintiff duly filed with the collector of internal revenue for the second district of New York a claim for refund based on the alleged erroneous inclusion in plaintiff's gross income for the calendar year 1925 of $100,000 received from the stockholders' committee of the El Paso Southwestern Company; said claim being in the amount of $25,000, or such greater amount as is legally refundable.
20. Thereafter, and on or about February 28, 1929, the plaintiff received a letter from the Commissioner of Internal Revenue in which he was informed that his claim would be rejected.
21. The Commissioner of Internal Revenue has refused and refuses to allow the plaintiff to exclude from said gross income of said taxable year the amount represented by check of January 2, 1925, referred to in finding 12.
22. The plaintiff has duly complied with all the requirements of all acts of Congress pertaining to the filing of claims for refund for the recovery of internal revenue taxes alleged to have been erroneously and/or illegally assessed and collected.
Joseph J. Klein, of Cleveland, Ohio (Myron A. Finke, of New York City, on the brief), for plaintiff.
R.C. Williamson, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (Bradley B. Gilman, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
The plaintiff in this case seeks to recover $25,000, with interest thereon, an alleged overpayment of his income taxes for the calendar year 1925.
The sole issue in the case is whether an amount of $100,000 received by the plaintiff from the stockholder's committee of the El Paso Southwestern Company in January, 1925, was income derived from compensation for personal services within the meaning of section 213(a) of the Revenue Act of 1924 ( 26 USCA § 954(a), or was a gift within the meaning of section 213(b)(3) of said act ( 26 USCA § 954(b)(3) and note).
The rule is that whether a payment is taxable compensation or a gift exempt from tax depends upon the intention of the parties and the facts and circumstances surrounding the transaction. The facts have been stipulated and briefly stated are:
Prior to October 31, 1924, the plaintiff was president of the El Paso Southwestern Railroad Company, the stock of which company was owned by the El Paso Southwestern Company, a holding corporation.
On November 1, 1924, the El Paso Southwestern Company transferred the capital stock of the El Paso Southwestern Railroad Company to the Southern Pacific Company and received in exchange therefor certain securities of that company. Upon the transfer of the El Paso Southwestern Railroad Company to the Southern Pacific Company the plaintiff's employment by the former company was terminated and he performed no further service for that company thereafter. The plaintiff was paid in full the salary due him as an employee of the El Paso Southwestern Railroad Company up to the conclusion of his employment.
On November 10, 1924, the secretary of the El Paso Southwestern Company addressed a letter to the stockholders of the holding company explaining in detail the plan of reorganization whereby the stock of the El Paso Southwestern Railroad Company was transferred to the Southern Pacific Company and asking on behalf of the directors of the El Paso Southwestern Company full approval, ratification, and confirmation of the plan and all the acts of the directors in carrying out the same. This letter contained the following statement: "The directors of the El Paso Southwestern Company request that the stockholders of the company authorize them, in recognition of the long and faithful services of the officers and employees of the railroad, to pay the officers and employees, to be designated by the board of directors, additional compensation to be decided by the board of directors, and that they be authorized to set aside for such compensation a sum not to exceed $1,000,000.00."
The secretary inclosed in this communication a letter which the stockholders were requested to sign and return to him. In this letter appears the following statement:
"As a stockholder of the El Paso Southwestern Company, I hereby ratify, approve, and confirm the plan of reorganization and the actions of the board of directors and the officers, as set forth in said plan of reorganization, and the documents accompanying your letter.
"I understand that there are certain unsettled expenses, obligations to the Southern Pacific Company, bonuses to the employees, agreed upon by the board of directors, estimated at about $1,000,000.00, and other debts, expenses, and liabilities incidental to the plan of reorganization and otherwise."
The stockholders approved the plan of reorganization and confirmed and ratified the action of the board of directors as set out in the letter of the secretary of the company. They also appointed five of their number as a committee "to pay the expenses, to compensate employees, to adjust and settle the accounts, to discharge and provide for the debts and liabilities of the company and generally to do every act and thing necessary or proper in pursuance of the provisions of the plan of reorganization * * *."
This stockholders' committee, on December 23, 1924, took the following action:
"Upon motion duly seconded and carried, the secretary was authorized to release the checks in payment of certain bonuses to amount of $893,690.00 as per memo on file.
"Resolved: That the officers be authorized to secure a loan of $1,000,000.00 from the Hanover National Bank."
Out of the $893,690 paid as bonuses to certain former officers and employees of the El Paso Southwestern Railroad Company, the plaintiff on January 2, 1925, received the $100,000 payment involved in suit.
Under the facts and circumstances shown we are clearly of the opinion this payment was not intended to be, and was not, a gift. The language employed by the secretary of the company in his letter to the stockholders "to pay to officers and employees, to be designated by the board of directors, additional compensation," negatives the contention a gift was being contemplated, as does the letter signed by the stockholders authorizing the payment "to compensate employees." That the stockholders did not understand a gift was being made to plaintiff and other employees is evident from the statement, "I understand that there are certain * * * bonuses to the employees, agreed upon by the board of directors, estimated at about $1,000,000 * * *." That the payment was not intended as a gift is further evidenced, and, we think, conclusively so, by the language of the resolution adopted by the stockholder's committee at the time the checks were released — "the secretary was authorized to release the checks in payment of certain bonuses."
The plaintiff suggests the use of the words "compensate employees" and "additional compensation," in the secretary's letter, "merely emphasizes that inartistic and unintentionally misleading language was employed to describe what was intended to be, and what actually were, gifts." We do not agree with plaintiff that these expressions are inartistic, or that they are misleading. The words "compensate employees," "additional compensation," and "bonus" have a precise and well-understood meaning, and in the absence of any fact or circumstance showing they were not used in their ordinary sense they must be accorded their usual signification. It is significant of the intention of the parties that the word "gift" nowhere appears in the entire transaction. When the payments are referred to, they are invariably designated as "additional compensation," "compensate employees," or "bonus," indicating beyond question that the payments were not gifts or gratuities.
It is an essential characteristic of a gift that it be a transfer without consideration. If there is a consideration for the transaction, it is not a gift. 28 C.J. 621. In this case there was a consideration for the payment made to plaintiff. It is stated in the resolutions of the board of directors, and in the letter of the secretary of the company to the stockholders, "in recognition of the long and faithful services of the officers and employees of the railroad." 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. Appeal of Parrott, 1 B.T.A. 1; Mount v. Commissioner, 10 B.T.A. 1156; Garey v. Commissioner, 16 B.T.A. 274; Binger v. Commissioner, 22 B.T.A. 111; Noel v. Parrott (C.C.A.) 15 F.2d 669.
We hold, therefore, that the payment of $100,000 to the plaintiff on January 2, 1925, by the stockholder's committee was intended to be, and was, additional compensation for services rendered and is subject to the tax under section 213(a) of the Revenue Act of 1924, 26 USCA § 954(a), which reads:
"Sec. 213. For the purposes of this title, except as otherwise provided in section 233 —
"(a) The term `gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid * * *."
It is immaterial that the payment received by the plaintiff was made by the holding company rather than by the company for which he had rendered services. The entire capital stock of the railroad company was owned by the holding company. The economic interests of the two companies were identical. The purchase price received from the sale of the railroad company went to the holding company. That the money received by the plaintiff was not paid directly by the railroad company but was paid by the stockholder's committee of the holding company does not change the essential character of the transaction, and make a gift out of what was intended to be, and in fact was, additional compensation for services rendered.
The petition is dismissed. It is so ordered.
BOOTH, Chief Justice, and LITTLETON and GREEN, Judges, concur.
WHALEY, Judge, took no part in the decision of this case on account of illness.