Respondents Brief — Bogardus v. Commissioner

'

II

Cases—Continued. . Page

Hall v. Commissioner, 89 F. (2d) 441_..---.---------- 9, 11, 26

Heiner v. Colonial Trust Co., 275 U. 8; 232__...-.-------- 29

Bidering +. Biles, THB U. G. 144... . 2... .22206-5.-6+--- 18

Helvering v. J. L. Brandeis & Sons, 75 F. (2d) 487- ~~ ---- 21

Helwering v. Morgan’s, Inc., 293 U. 8. 121_-..----------- 29

Helvering v. Tex-Penn Oil ., Sen OU. & Oh cn. snes 10

Jones v. Commissioner, 31 F. (2d) / pee neienc aos 20

‘Levey v. Helvering, 68 F. (2a) 401_.--.----------- 10, 16,19, 30 .

Liberty Hosiery Mills v. Commissioner, 31 B. T. A. 64_---- 21

Lougee v. Commissioner, 63 F. (2d) 112__--.------------ 10

Lucas v: Oz Fibre Brush Co., 281 U. 8. 115-------------- 21

_Lunsford.v. Commissioner, 62 | Seer rs 26

» McDonald v. Napier, 14 Ga. 89. .....-.---------------- 16

Merchants’ L. & T. Co. v. Smietanka, 255 U. 8. 509......- 21

Millsaps College v. Jackson, 275 U.S. 129_-------------- 29

Murphy Oil Co. v. Burnet, 287 U. S. 299__:------------- 18

Sesto. Pecet, 14 8. C0) G66.......~..-~.-4..-.---...-- 13, 14

Old Colony Tr. Co. v. Commissioner, 279 U. S. 716_------- 18,20 °

Olsen v. Helvering 88 F. (ed) 650_-_-..----------------- 9

eek ¢, , Te B.C Gnd nec acesncnncbsncanny 29

Regere v. A, 306 U. G. O68... ...... 2-24... 226-5 ,---. 14

Rose v. Grant, 39 F. (2d) 338, petition for certiorari dis-

missed, 283 U.S. PF napa nim am nnn Bean ng mae == 29

Schumacher v. United States, 55 F. (2d) Scie at ekneas 10,

12, 19, 22, 28, 24, 30

Simpkinson v. Commissiongr, 89 F. (2d) 397__ 9, 11, 12, 16, 26, 31

Southern Power & Mfg. Co. v. Commissioner, 82 F. (2d)

i ee ic ck is hd eR de an ee ea Stein tem 17

United States v. "McCormick, fat | eee ee 19

United States v. ‘Merriam, Oh Oe Eieks wdc uadaceden 29

Walker v. Commissioner, 88 F. (2d) 61_------------ 9, 12, 19, 25

Weagant +. Doware, S7 ¥. (34) G79......-.....-.-.------- 19

Zellerbach Paper Co. v. — - Be De : Seppe’ Paeee 18

Statute: , ‘

Revenue Act of 1928, c. 852,45 Stat. 791: ‘

ena he ee a anna Solan 32

; eee a ne no oo + + ee -- -e-- 30

Miscellaneous: j

Bouvier’s Law Sheskeniiee. Third Revision ee vol. |

ae ee caus ony seeecne 16

Webster’s Unabridged Dictionary. “REE AN are ag----- 16

Treasury Regulations 45 (1920 Ed.):

Bc Ok Aca eACLRR DASE ACh OAR Kamae 18

PE FE oo eat nke nae hare ack dnesensienene dane am : 18

Treasury Regulations 62

Ra ons het aecaean> ghia in es chim inne fail a 18

te Wes ee te eee LEED Laer hyp OS . 18°

Treasury Regulations 69 ,

Be sa ek did ee anseaeeenecemenaees 18

Ant. 106...... Pe suauleabieamal Sie ckinmmae.. ae

a

re

Miscellaneous—Continued.

Treasury Regulations 74:

oS SKE ESKRERESD RO OHARA ESE SSE SESE AQ SeSeS

SMM MS Bh OSD SSSA RH OOS SSF SS SSS

é

ecw nwmemwew ew were eceocewom wooo oer ere rererrcre

: La eee sene

baa ee MRegulations 86:

Inthe Supreme Court of the United States

‘OCTOBER TERM, 1937

—~N oO. 15

ARTHUR G. BoGARDUS, PprTTIONER

| v.

Guy T. HELVERING, COMMISSIONER OF INTERNAL

REVENUE -

‘ON WRIT OF CERTIORARI TO THE UNITED STATES ort Gfiir

COURT OF APPEALS FOR THE SECOND CIRCUITS

BRIEF FOR THE RESPONDENT

OPINIONS BELOW

The mem@randum opinion of the United States

Board of Tax Appeals (R. $22) is not reported.

The opinion and dissenting*opinion of the ‘Circuit

Court of Appeals (R. 63-69) are reported in 88 F. .

(2a) 646.

J URISDICTION

The judgment of the Circuit Court of Appeals .

was entered March 15, 1937 (R. 72). Petition for

a writ of certiorari was filed March 20, 1937, and

(1)

. - gasoline. dLater it acquired other patents and

ot

‘ 7

was granted April 26, 1937 (R. 73). The jurisdic-

tion of this Court is invoked under Section 240 (a)

of the Judicial Code, as amended by the. Act of

February 13, 1925. :

QUESTION PRESENTED

_ Whether the sum of $10,000 paid to the peti-

tioner by the Unopco Corporation in 1931 consti-

tuted: compensation for personal services or a gift.

STATUTE AND REGULATIONS INVOLVED

The statute and regulations: involved will be

found in the Appendix, infra, pp. 32-83.

STATEMENT

The facts as found by the Board of Tax Appeals .

(R. 10-14) are substantially as follows a

The petitioner was formerly an employee of the.

Universal Oil Products Company, a South. Dakota

corporation, organized in 1914, and hereinafter

referred to as Universal (R. 10).

At the time of its organization the only asset of:

Universal was an application for a patent on a

process for refining petroleum and manufacturing

jicensed them to various producers on a royalty te

basis. From 1922, when it received its first royalty

payments of a few thousand dollars, its business

improved rapidly, and its royalties had by 1930

“become very large. Early in the year 1931 all of its

stock was sold:to the United Gasoline Corpora-

3

- tion, hereinafter called United, for $25,000, 000,

‘under an agreement. dated. J anuary 2--1931.- - CR.

10-11.) :

In anticipation of a sale of -the: stock of »

Universal, the Unopeo Corporation, hereinafter

. called Unopco, had been organized. As part of the

agreement of January 2, 1931, certain ‘‘liquid as-,

‘sets,’’ including cash, securities, and accounts re-

ceivable, of a value of approximately $4,100,000

were transferred to Unopco before the consumma- '

tion of the sale of Universal stock. It was pro-

vided in the sale agreement that a part of the

proceeds of the sale of Universal stock and a cer-

tain amount of the assets transferred to Unopco,

should be held as a “‘guarantee fund’’ for payment

- of Universal’s unsettled liabilities. (R. 11, 30.)

Unopco had been engaged 1 in no business activi-

ties up to the time of thé sale of the Universal

stock, and since that time its only business has been

the investment and management of the assets ac-

quired from Universal. All of the former stock-

holders’ of Universal became stockholders of

Unopeo, with the same proportionate stockhold-

ings. ‘All the Universal stock was sold to United

for cash, and none of the Unopeo stockholders

_ thereafter held any stock in Universal or United.

- Universal continued to carry on the same business

'. after its stock had been acquired by United. (R.

11, 30.) :

A few days after the ~e of Diiveial stock the

stockholders of Unopco, who were the former

\

a

stockholders of Universal, held a meeting at whiclr

it was proposed that they show their appreciation

for the loyalty and support of some of the em-

ployees of Universa making them a ‘‘gift’’ or

“honorarium” (R. 11-12). Such resolution was

formally adopted at a meeting of the Board of

Directors of Unopeo on January 9, 1931, and a

similar resolution was adopted by the stockholders

on January 10, 1931 (R. 12). The latter resolu-

tion was as follows (R. 12):

Resolved, That the following recommenda-

tions made by the Board of Directors to the

stockholders of this Corporation in the meet-

ing of the Board of Directors held on Janu-

ary 9, 1931, viz. :

That the sum of Six Hundred Seven

Thousand Five Hundred Dollars ($607,500)

be appropriated, paid and distributed as a

bonus to sixty-four (64) former and present ~ .

employees, attorneys and experts of Uni-

versal Oil Products Company (the corpora-

tion of that name referred to in the meeting

of this Corporation held on the fifth and

_ sixth days of January, 1931) in recognition

of the valuable and loyal services of said em- -

ployees, attorneys and experts to said, Uni-

versal Oil ‘Products Company; such sum to

be distributed among ~said sixty-four (64)

employees, attorneys and experts in such

amounts to:each employee, attorney and ex-

pert as the Board of Directors of this cor-

poration shall determine;

5

be and the same are hereby i in all things ap-

proved ; and

Resolved further, That this Creporeiion

do appropriate, pay and distribute the-said

_ sum of Six Hundred Seven Thousand Five

Hundred Dollars ($607,500) as a bonus to

sixty-four (64) former and present em-

ployees, attorneys and experts of said Uni- »

versal Oil Products Company; in recogni-

tion of the valuable and loyal services of said

employees, attorneys and experts to said

~ Universal Oil Products Company ;.said sum

to be distributed among said sixty-four (64)

employees, attorneys and experts in such

. amounts‘to each employee, attorney and ex-

pert, as the Board of Directors of this Cor-

poration shall determine.

Thereafter, a list of those who were to receive

the payments authorized under the resolution was

prepared by the officers of Unopco. The payments

ranged from $500 to $100,000, and each recipient

. Was or had been an employee, attorney, or expert

of Universal, except one who was the sister of an

employee who had been killed in an accident.

‘None had ever been employed by Unopco or by any

of the former stockholders of Universal. It was

stipulated that neither Unopco nor any of its stock-

holders, nor any. of the stockholders of Universal,

were under any legal or other obligation to pay

any salary, compensation or consideration of any

kind to any of the recipients of the distributed

amounts. (R. 12-13.)

_ 20162—37——2

6

In making these payments by checks the presi-

dent of Unopco advised the recipients that.the pay-

ments were gifts from the stockholders of the cor-

poration and need not be reported in income tax

returns (R. 13, 43-49). Neither Unopco nor

- Universal nor United, nor any of the stockholders

of those companies, ever made or claimed any de-

duction in their income tax returns for these dis-

.- tributions. On the books of Unopco the payments

were charged to surplus account in January, 1931.

(R. 13.) |

SUMMARY OF ARGUMENT

A. The sole“question in this case is whether. the

payment made to the petitioner in 1931 pursuant

to resolutions of the directors and stockholders of

Unopco represented ‘eompensation for services or

agiftto him. The court below affirmed the Board’s

decision that it was compensation, and three other

Circuit Courts of Appeals have rendered the same

decision in cases involving other taxpayers who re-

' ceived distributions from Unopco at the same time,

under identical circumstances, and whose cases

were consolidated with this case before the Board.

The question as to whether the payment by Unopco

to the petitioner constitutes compensation or a gift

cannot, in view of the decision of this Court in Hel-

vering v. Tex-Penn Oil Co., 300 U. S. 481, certainly

be said to be one of fact alone. However, in-

tent or motive is largely controlling and, as four

Circuit Courts of Appeals have affirmed the Board

3

7

of Tax Appeals in determining the payments to be

compensation, of which three of, those courts

reached that conclusion upon an independent ex-

amination of the facts, the concurrent decision of

the Board and appellate courts as to the intent; of:

the payer should be highly persuasive uponThis |

Court and should not be disturbed unless clearly;

inconsistent with the findings of primary facts.

B. The evidence shows that the payments were

made as compensation. They were made pursuant

to resolutions of the Board of Directors and stock-

holders - of Unopeo which contained. language

clearly indicating an intent to compensate.

C. The fact that the payment in this case was

voluntarily made does not prevent its being re-

garded as compensation. Section 22 (a) of the

Revenue Act of 1928, infra, provides for the taxa-

tion of ‘‘compensation for -personal service, of

whatever kind. and in whatever form paid”, and

the regulations promulgated under that Act, as well

as those promulgated under previous and subse-

quent Acts, recognize that voluntary payments for

services are taxable. These regulations have the

force and effect of law. Moreover, in cases in-

volving questions substantially the same as the one

here involved the courts have repeatedly held that

where an employer intends to pay additional com-

pensation for services rendered, the fact that the

payment was voluntary does not prevent its being

treated as compensation: The few early decisions

8

‘ to the contrary are against the weight of authority

ot have been overruled. — ,

D. It is also immaterial that the compensation -

—was paid by Unopeo for services refdered directly

to Universal. Unopco acquired part of the assets ©

of Universal and had the same stockholders. Both

these stockholders.and Unopco had derived sub-

stantial benefit from the services of the petitioner ;

they recognized that the compensation hitherto:

paid him had not been commensurate with the

value of his services and made the additional pay-

- ment to him, not from a motive of affection but

from a desire to do justice. Under the decided

cases an additional sum paid with the motive of

compensating one whose services have benefited

the payer, even though indirectly, constitutes com- ,

pensation and not a gift:

The decision involves no, conflict with Section

22 (b) (3), infra, providing that the value of prop-

erty acquired by gift shall not be included in gross

income. That section contains no definition of the

word ‘‘gift’’, arid it cannot be construed independ-

ently of Section 22 (a), which provides for the tax-

ation of all compensation. The court ‘below has

drawn a logical line of division between the: two.

E. The fact that Unopco did not deduct the

~ amount as compensation in its return also is unim-

portant, especially since the statutory provisions

which permit the allowance of deductions for com-

pensation are not identical with those requiring

compensation to be reported as income.

9

ARGUMENT

THE PayMENT BY UNopco T0 THE PETITIONER. Was

COMPENSATION AND NoT A GIFT, AND Was Tax-

ABLE UNDER THE STATUTE

A. THOUGH THE QUESTION BE NOT SOLELY ONE OF FACT,

INTENT OR MOTIVE IS LARGELY CONTROLLING, AND THE

BOARD OF TAX APPEALS AND FOUR CIRCUIT COURTS OF

APPEALS CONCUR IN THE CONCLUSION THAT THE PAY-

MENT WAS INTENDED TO COMPENSATE FOR PAST

SERVICES

‘The sole question in this case is whether the pay-

ment made to the petitioner in 1931 pursuant to

resolutions of the directors and stockholders of

Unopco represented compensation for services or

agifttohim. The court below affirmed the Board’ S.

determination that it was compensation and tax-

able income. Three other Circuit Courts of Ap-

peals have rendered the same decision in cases

involving other taxpayers who received distribu-

.tions from Unopeco at the-same time and under the

identical circumstances. Walker v. Commissioner,

88 F. (2d) 61 (C. C. A. 1st) ; Simpkinson v. Com-_

misstoner, 89 F. (2d) 397 (C. C. A. 5th); Hall v.

Commissioner, 89 F. (2d) 441 (C. C. A. 4th). To

the same effect is Olsen v. Helvering, 88 F. (2d)

650 (C. C. A. 2d), decided by the same Circuit

Court of Appeals as the instant case”

It was the position of the respondent in his brief

in opposition, No. 830, October Term, 1936, that

1In the Olsen case the appellant was the administrator‘of

the deceased distributee of Unopco. The merits of the case

were decided on the authority of the instant case, but pro-

cedural questions not here involved were also discussed.

: | 10

the question whether the payments by Unopco to

the employees, experts, and attorneys of Universal

eonstituted compensation or gifts was purely one

of fact, and that the court below would have been

powerless to substitute its own judgment for that

of the Board of Tax Appeals’ had it.been so in-

clined. The brief in opposition was written after

the decision of this Court in Elmhurst Cemetery

Co. V. Commissioner, 300 U. S. 37, and before the

decision in Helvering v. Tex-Penn Oil Co., 300 U.

s: 481. In view of the decision in the latter case

(p. 491) that the ultimate finding or-conelusion of

fact that Tex-Penn received cash as well as stock

in consideration for its assets was ‘a conclusion of

law or at least. a determination of a mixed question

-of law ayid fact,” we feel unable to press the con-

tention made in the brief in opposition that the

question of the nature of the payments must neces-

sarily be viewed as one of fact alone.’

_ #Jt should, however, be noted that most of the courts which

have decided substantially similar“questions have considered

the question to be one of fact depending upon the intent or

_ motive of the payer. See Fisher v. Commissioner, 59 F. (2d)

192 (C. C. A. 2d) ; Schumacher v. United States, 55 F. (2d)

1007 (C.-Cl.) ; Bass v. Hawley, 62 F. (2d) 721 (C. C. A.

bth) ; Botchford v. Commiéssioner, 81 F. (2d) 914 (C. C. A..-

9th); Levey V. Heluering, 68 F. (2d)-401 (App. D. +

Lougee v. Commissioner, 63 F. (2d) 112 (C.C. A. Ist). If

the rule of the Zea-Penn case should not be taken to be one

of general application, and if the present question,is viewed

as one of fact alone, this Court need examine no other ques-

tion in the present case. It is not argued (see Br. for. Pet.

30-82) there was no <ubstantial evidence to support the:

determination of the Board. ©

11

However, we point out that the court below and

the three other Circuit Courts of Appeals which

_have reviewed the circumstances of the transaction

out of which the present question arises have sus-

tained the Board’s finding that the payments were

intended as compensation and not as gifts; in this

ease and in the Hall and Simpkinson cases, supra, ~

the courts have:reached the same conclusion upon

an independent examination of the facts. This

conclusion of the, Board and of four Cireuit Courts

of Appeals as to the intent of the payer, even if

this harrow question is not viewed as one of fact

aloné, should be highly persuasive upon this. Court

and should not be disturbed unless clearly incon-

sistent with the findings of primary facts.

B. THE EVIDENCE SHOWS THE PAYMENTS WERE MADE AS

COMPENSATION

We submit that the stipulated facts and the tasti- |

- mony of the petitioner’s witnesses establish that

the payments made to the petitioner and others

- were made with the motive of compensating the in-

dividuals receiving them and not as gifts. It is

true that it was stipulated that none of the pay-

ments made by Unopco to the petitioner and others

was made ‘‘in payment for or in consideration of

any services rendered or ever to be rendered, or of

any consideration of any kind or character r paid or

given, or ever to be paid or given by any of said

employees, attorneys" or exper ia * * * won

Unopco Corporation” (R. 40) ; and that ‘‘the pay-

ascies i

12

ments’ were not made or intended to be made by

said Uniopco Corporation or any of its stockholders

as payment or compensation for any services ren-

dered or to be rendered or for any consideration

given or to be given by any of said employees, at-

torneys or experts to said Unopco Corporation or

to any of its stockholders”’ (R. 41) ; but these state-

ments mean merely that no services were direttly

rendered to Unopco or to‘ its stockholders, and

not that they had not received benefits for the

services which were directly rendered to another

company. With the exception of one payment

to the sister of a deceased employee, all the pay-

ments were made to former employees of Uni-

versal or to attorneys and experts who had ren-

dered services to that company (R. 31-33). The

stockholders of Unopeo had all been stockholders

of Universal (R. 36), and the president of Uni-

versal became the president of Unopco (R. 30-31).

The payments were made pursuant to resolutions

of the Board-of Directors and of the stockholders,

supra, pp. 4-5, which provided for the distribution

of certain amounts as a ‘‘bonus’’ and ‘‘in recogni-’

tion of the valuable.and loyal services”’ of the dis-

tributees. The latter phrase clearly ‘indicates an

intention to compensate, and, as the court below

pointed out (R. 67), the use of the word ‘‘bonus’”’

is itself significant ; neither ‘‘bonus”’ nor ‘*recogni-

tion of * * * services’? suggests a pure dona-

tion. See the Simpkinson, Walker, Schumacher,

13

and Bass cases, supra, and Noel v. Parrott, 15

F. (2d) 669 (C. C. A. 4th). In the case of Bass v.

Hawley (C. C. A. 5th), the court said (62 F. (2d)

721, 723) :

That only is a gift which is purely such, not

intended as a return of value.or made be-

cause of any intent to repay another what

is his due, but bestowed only because of per-

- sonal affection or regard or pity, or from

general motives of philanthropy or charity.

Those payments made because of past serv-

ices, but over and above what was contracted

and compellable to be paid, have been called

-

additional compensation and bonuses, and =

are taxable income to the recipient. * * *

The meaning in this connection of addi-

tional compensation as a payment for serv-

ices above what is demandable is clear.

Bonus has a parallel meaning: ‘‘Something

given in addition to what is ordinarily re-

ceived by or strictly due to the recipient;

money _ in addition to an agreed com-

pensation.’? Webster’s International Dic-

tionary. Bearing in mind the proper mean- |

ing of these terms in looking at the docu-

ments that attended these payments we are

at once impressed that in nd case were they

called gifts, but in every instance compen-

sation, additional compensation or bonuses

to employees was the term used. Even the

card which accompanied each says, ‘‘In ap-

preciation’’, which connotes that something

. has been appraised and its value is ac-

knowledged. —

20162—37——3

14

In Noel v. Parrott, supra, holding that a distri-

bution of assets of a corporation to its officers and

employees was not a gift, the court said (15 F. (2d)

669, 671): |

~ If we look to the resolutions of July 14,

1919, it appears that the appropriations from

eae the assets was for distribution to ‘‘certain

officers and employees of the company’’, and

that the exeeutive committee was authorized

to make such distributions as they might

deem ‘‘wise and proper.’’ This negatives

the idea that a gift was intended ; for the dis-

tribution was to be made to ‘those who had

rendered services to the company; i. e., to

. those from whom the company had received

a consideration in the past. It was to be

made as the executive committee might deem

wise and proper; i. e., in accordance with the

interests of the corporation and the deserts

_ of the persons to be benefited by the distribu-

tion. The distribution was thus to be in the

nature of a bonus, which ‘“‘is not.a gift or

gratuity, but a sum paid for services, or -

upon a consideration in addition to or in ex-

-eess of that which would ordinarily be >

given.” Kenieott v. Wayne County, 16

Wall. 452, 471 (21 L. Ed. 319); Payne v.

United States, 50 App. D. C. 219, 269 F. 872.

Rogers v. Hill, 289 U. S. 582, 591-592, held that

the payment to a cerporation’s cificer of percent-

ages of profits under a standing -by-law enacted by

the stockholders may, where business rapidly in-

creases, become so great that the bonus has no rela-

15

tion to the value of the services and is a gift, or

spoliation of the corporate property. It is cited

by petitioner in ‘support of the statement that the

word “‘bonus” in a corporate resolution is not con- |

clusive that a payment to an employee is additional

-_eompensation rather than a gift, but the opinion

does not, it should be noted, indicate that the word

‘<bonus’” does not ordinarily imply compensation.

The petitioner relies upon testimony of A. F.

Reichmann (R. 30-31) to the effect that the presi-

dent, H. J. Halle, characterized the payments as

gifts. This testimony was admitted over the ob-

jection of the attorney for the Commissioner (R.

29), but in any event it is conflicting and tends to

show that Mr. Halle labelled the payments as gifts

because he assumed that any payments made vol-

. untarily were gifts—an assumption which is erro-

neous for reasons herein stated—and not. because

they were not intended as compensation. Thus,

this testimony is to the effect that in broaching the

subject to the stockholders, Mr. Halle stated that

Universal had been phenomenally ‘successful and

_ had profited all of them very largely ; that its suc-.

cess was attributable in part to the loyal services

of a number of employees; and that it would be a

nice and a generous thing for the stockholders to

show their appreciation and remember the em-

ployees in the form of ‘‘a gift or honorarium.’’

The word ‘‘honorarium’’ used by Mr. Halle sug-

gests compensation, as the court below pointed out.

16

See, also McDonald v. Napier, 14 Ga. 89, 105; Bou-

vier’s Law Dictionary, Third Revision (1914),

Vol. 2, p. 1456; Webster’s Unabridged Dictionary.

See, contra, Cunningham v. Commissioner, 67 F.

(2d) 205 (C. C. A. 3d), discussed infra, p. 20. .

This evidence shows clearly that the stockholders

were making the payments in appreciation for

past services and not as pure gratuities. There

were also introduced in evidence, over the objec-°

tion of the attorney for the Commissioner (R. 29),

letters of Mr. Halle which characterized the pay-

‘ments as gifts which were not-sabject to tax. Some

of these, however, stated that the payments were

made in appreciation of the old relationship, asso-

ciation or support (R. 43-49). In any event, as

the Circuit Court of Appeals for the Fifth Circuit

stated in the Simpkinson case (p. 399), more sig-

nificance should be attached to the resolutions of

the Board of Directors and of the stockholders

than to the statements of the president.’ In that

_ ease the court said (89 F. (2d) 397, 399) :

=

The minutes thus speaking are the best evi-

dence of the corporate act and intention. °

8 The petitioner cites Levey v. Helvering, 68 F. (2d) 401

(App. D. C.), as authority for the proposition that the lan-

guage of the corporate resolution is not controlling. But in

that case the court held that the payment constituted com-

pensation, notwithstanding that it was characterized in the

resolution as a gift. A corporation may regard any payment

in addition to agreed compensation as a gift and incorrectly

label it as such, but it would not be likely to label as compen-

. sation a payment intended as a gift. ,

“i-

17

The president could not alter them by his

expressions in carrying out the corpora-

tion’s directions. It, not he, was making the

benefactions. What he said indeed smacks

somewhat of an after thought.

See, also, Anderson v. Commissioner, 31 B. shag

- 197, affirmed, per curiam, 79 F. (2d) 979 (C. C.

2d), and Southern Power & Mfg. Co. v. ae ;

sioner, 82 F. (2d) 104, 105 (C. C. A. 5th).

_ We submit, therefore, that the evidence sus-

tained the Board’s determination that. the pay-

- ments were intended as compensation and not as —

gifts. a :

C. THAT THE PAYMENT WAS VOLUNTARY DOES NOT NEC-

_ ESSARILY CONSTITUTE IT A GIFT

- The question whether the fact that the payments

were voluntary prevents their being regarded as

anything other than gifts, notwithstanding that

they were intended as compensation, presents no

difficulty. The decisions of the courts and the long-

continued administrative construction of the taxing

statute establish that the voluntary character of the

payments is immaterial. |

Section 22 (a) of the Revenue Act of 1928 (Ap-

pendix, infra, p..32) provides that the gross in-

come shall include income derived from ‘‘salaries,

wages, or compensation for personal service, of —

whatever kind and in whatever form paid.”’ Ar- |

ticle 52 of Regulations 74, infra, p. 32, provides ©

_ that. tips, marriage fees paid to clergymen, and

other amounts which are obviously voluntary pay-

18

ments for services, constitute income to the recip-

ient. Article 128, Regulations 74, infra, p. 33, like-

wise provides that bonuses paid to employees will

constitute allowable deductions to the employer

when such payments are made in good faith and as

additional compensation for services actually ren-

dered by the employees, provided they do not ex-

ceed a reasonable compensation for the services |

rendered. Similar regulations have been in effect

under previous and subsequent Revenue Acts. See

~ Articles 32 and 107 of Regulations 45 (1920 Kd.) . -

and Regulations 62; Articles 32 and 108 of Regu-

Jations 69; Articles 52 and 128 of Regulations.

77; Articles 22 (a)-2 and 23 (a)-7 of Regulations -

86. There has been no material change in the

. statutory provisions with respect to which these

regulations have been issued. Hence they have the

force and effect of law. Brewster v. Gage, 280

U.S. 327, 337; Helvering v. Bliss, 293 U. S. 144,

151; Zellerbach Paper Co. v. Helvering, 293 U. S.

172, 179-180; Murphy Oil Co. v. Burnet, 287 U.S.

299, 302-308, .

In Old Colony Tr. Co. v. Commissioner, 279 U. 8.

716, the Court held that income taxes paid by an

employer for his employee constituted ineome to

the employee, and said (p. 730) :

Nor can it. be argued that the payment of

the tax in No. 130 was a gift. The payment

for services, even though entirely voluntary,

was nevertheless compensation within the

statute.

19

The contention that payments which were wholly

voluntary on the part of the employer are not to

be treated as compensation to the employee has

repeatedly been rejected by other courts. Fisher

v. Commissioner, 59 -F. (2d).192 (C. C. A. 2d);

Levey v. Helvering, 68 F. (2d) 401 (App. D. C:) ;

Botchford v. Commissioner, 81 F. (2d) 914

(C. C. A. 9th) ; ‘Davis v. Commissioner, 81 F. (2d)

137 (C. C. A. 6th) ; Bass v. Hawley, 62 F..(2d) 721

(C. C. A. 5th); and Schumacher v. United States,

55 F. (2d) 1007 (C. Cls.). See, also, Weagant v.

Bowers, 57 F. (2d) 679 (C. C. A. 2d); United

States v. McCormick, 67 F. (2d) 867 (C. C. A. 2d).

_ The petitioner emphasizes that in this case it was

stipulated that the payments were made. without

“legal or other obligation.’’ (R.41.) But that

is merély stating that they were voluntary. In

Walker v. Commissioner (C. C. A. 5th), one of the

companion cases to this case, the court said (88 F.

(2d) 61, 62-63) :

- In Old Colony Trust Company v. Commis- .

stoner, 279 U. 8. 716, 730, 49 S. Ct. 499, 504,

73 L. Ed. 918, there-is a dictum to the effect

that ‘‘the payment for services, even though

entirely voluntary lis] nevertheless compen-

sation within the-statute.’’ [Italics sup-

plied.] Here, according to the resolution,

the ‘money “‘paid and distributed as a bonus —

_ to sixty-four (64) former and present em-

_. ployees, attorneys, and experts of: Univer-

sal’’ was ‘‘in recognition of the valuable and

loyal services of said employees, attorneys,

weg

20

and experts to said Universal.’’ And if the

dictum in the Old Colony Trust Company

case states the law governing the matter,

the payment and distribution, though en-

tirely voluntary, being for ‘‘valuable and

loyal services’? was, nevertheless, compen-

sation within the statute, and, if so, taxable

to the recipients. The phrase “entirely vol-

‘untary” payment for services used in that

opinion means substantially the same as the

stipulation of the parties in this case that

‘‘neither Unopco nor any of its stockholders,

nor the stockholders of Universal were at

any time under any legal or other obligation

‘to pay any of said employees, attorneys, or

experts, including petitioners, any salary,

- compensation, or consideration of any

kind.’ ’’ [Italics supplied.] .

The petitioner cites (Br. 15) Jones v. Commis-

sioner, 31 F. (2d) 755 (C. C. A. 3d), Blair v. Ros-

seter, 33 F. (2d) 286 (C. C. A. 9th), and Cunningham

v. Commissioner, 67 F. (2d) 205 (C. C. A. 3d), as

opposed to these contentions. The Jones case was

decided before, and the Rosseter case shortly after,

Old Colony Tr. Co. v. Commissioner, supra, and -

that decision was not mentioned in the Cunning-

ham case, which was decided by the same court as

the Jones case. It also appears-that the Circuit

Court of Appeals for the Ninth Circuit, which de-

cided the Rosseter case, has more recently decided

Botchford v. Commissioner, supra, which takes a

contrary view and may be taken to have overruled

21

the earlier decision on that point. In any event, —

these decisions are against the clear weight of

authority. ‘It not only has been held that the re-

cipient of a voluntary payment may be taxed on it,

but also that the taxpayer making it may claim a |

deduction if the ¢ompensation is reasonable.

Lucas v. Ox Fibre Brush Co., 281 U. 8. 115. See

also Helwering v. J. L. Brandeis & Sons, 75 F.

(2d) 487 (C. C. A. 8th) ; Liberty Hosiery Mills v.

Commissioner, 31 B. T. A. 64; Article 128, _—

tions 74, infra, p. 33.

The petitioner cites (Br. 24-30) a group of Eng-

lish cases holding that voluntary payments for past

services are gifts. We do not think these cases re-.

quire discussion in view of the many Federal de-

eisions dealing with the question and the many

differences between the Federal and the English

tax laws. See Merchants’ L. & T. Co. v. Smie-

tanka, 255 U. S. 509, 521-522. |

The petitioner suggests (Br. 18) that in the cases |

holding that voluntary payments-made by a cor-

poration constituted compensation, one of these

three facts appeared: (1) the stockholders had not

ratified the payments; (2) there was legal consid-

eration for the payments; or (3) the corporation

had deducted the payments in the return. We do

not see that any of these factors is necessary for a

payment to be compensation. It is true that in

some of the cases these facts have been given some

weight, but no court has stated that the existence of _

22

‘one of them was indispensable.. None of these three

elements was present in Bass v. Hawley, 62 F. (2d)

721 (C. C. A. 5th), or in Schumacher v. United

States, 55 F. (2d) 1007 (C. Cls,) The distinction

which the petitioner seeks to draw, between this

case and. the Schumacher and Bass cases, on the -

ground that in the latter cases the stockholders’

resolutions did not authorize the payment of gifts

while in the instant case they did, is not sound. In

the Schumacher atid Bass cases, both of which in-

volved the same facts, the Board of Directors wrote

to the stockholders requesting that the Board be

~ authorized ‘‘in recognition of the long and faithful

service of the officers and employees” to pay them

“‘additional compensation’’ not in excess of a cer-

tain sum. Enclosed with this communication.was

a letter to be signed by each stockholder and which

was signed by each, containing a blanket ratifica-

_tion of what the Board of Directors had provosed

in relation to this and other matters and stating

that they understood that there were certain un-

settled. expenses—‘‘bonuses to employees’’—to be

“paid. See the Schumacher case, at page 1008. -

- Thus it will be seen: that the word ‘‘bonuses’’ was

used in the stockholders’ authorization. In the

instant .case the stockholders authorized the pay-

ment of a certain amount as.a ‘‘bonus’’ ‘‘in recogni- ©

tion of valuable and loyal services.’’ The. stock-

holders did not authorize the making of a gift in

this case any more than they did in the Bass and

Schumacher cases.

23

The petitioner apparently concedes that there

need be no legal obligation to make the payment

‘but claims that there must be at least a moral.

obligation to do so, and emphasizes that in this case

there was a stipulation’ (R. 41) that neither a legal

nor other obligation existed. But the same thing

was ue in the Bass and Schumacher cases. See

also Botehford v. Commissioner, supra.

Thus the fact that the payments to the employees

were voluntary, notwithstanding that they. were

‘intended as compensation, does not, under the

statute involved and the applicable cases, make the

payments gifts, nor does it — them from be-

ing compensation. d

¢

D. THAT THE PETITIONER: WAS NOT EMPLOYED BY UNOPCO

DOES NOT PRECLUDE THE PAYMENT FROM BEING COM-

PENSATION

It cannot be said as a matter of law that one does

not derive any income from services unless he di-

rectly rendérs the services to the payer of the com-

pensation. The statute taxes compensation for

personal services of whatever kind and in whatever

form paid. Section 22 (a), Revenue Act of 1928,

infra. The,motive to compensate existed in this

case, even though Unopco was not directly the ben-—

eficiary of the ser vices. Indirectly it and its stock-

holders received a benefit from the services already

rendered to Univer sal, for the reason that the —

stockholders had received increased dividends as

the result of those services and they had helped to

a

e-

.

24

build up the assets which Unopco acquired. As the

Board stated (R..19), Unopeo ‘occupies the same

economic position with reference to the recipients

-as Universal had occupied; it assumed the reason

and motive to give bonuses to the former employees

of Universal just as it assumed the obligation to

pay its unsettled liabilities (R. 19). The fact that

the organization of Unopco had been completed

and the economic interests of the former stock-

holders of Universal had been adjusted without

providing for these, payments does not negative

this conclusion. It merely shows that Unopeco and

its stockholders tardily recognized that everyone

except the former employees of Universal had been

taken care of and that in justice they were entitled

to recognition.

A similar question arose in Bass v. Havwley,.

supra, and Schumacher v. United States, discussed —

supra, p. 22. Those cases both involved the same

facts. A holding company had made payments to

the employees of its operating company, but both

courts held that the payments represented compen-

sation. In Bass v. Hawley the court said (62 F.

(2d) 721, 723):

Again it is objected that the employer was

not the Holding Company or its stockhold-

ers, but. was the Railroad Company,. and

that the Railroad Company alone could make

additional compensation; that a voluntary

payment by any one else is necessarily a

gift. The objection would have force where

25

thé.third person had no interest in the em-

ployment and no cause to feel obligated to

compensate the service. But in this case,

although the stockholders authorized the

payment, it was made out of funds recently

belonging to the Holding Company as the

proceeds of the sale of its assets, and the

Holding Company was the sole owner of

the Railroad Company.

As the court below pointed out, the fact that the

recipients of the bouus had not been employees of

Unopco or its shareholders does not mean that the

shareholders had not benefited. from their services.

ah, ae the same issue in Walker v. Com-

oner, supra, the court said (88 F. (2d) 61,

The petitioners insist that because Unopco

was a separate corporation from that of

‘Universal as a matter of law it could not

/ compensate the past employees of Universal

for services rendered that company. But

the services that were rendered Universal.

‘before the sale were rendered to the very

same stockholders who voted the additional

payments, and the assets of Unopco were a

part of the assets of Universal which had

been enhanced by such services. We see no

reason why the stockholders of Unopeo, ap-

‘preciating the value of those services to.them

and that without such services Unopeo

might have had no assets, could not grant

compensation therefor. Buss v. Hawley

(C. C. A.) 62 F. (2d) 721.

26

The H all and Simpkinson cases, supra, had lan-

- guage to the same effect, the court in the latter case

saying (89 F. (2d) 397, 399):

_ But it is argued that since Kerr and. the

other beneficiaries were not and never had

been employees of Unopeo, or of its stock-

holders as individuals, the resolutions im re-

warding their service to another corpora-

tion necessarily authorized only gifts. That

contention was made and rejected in the

| Bass and Schumacher Cases, supra. The

same persons in the same proportion owned

both Universal Oil Products Company and

Unopeo. Unopeco was in fact the residuum >

of Universal Oil Products Company, the

administrator of its affairs reserved from

the sale. This payment from the reserved

assets was in recognition of a felt moral ob-_

ligation of the old business. From Kerr’s

standpoint he received it for his past serv-

ae and it was immaterial whether paid

technically by the one corporation or the |

other. |

The case of Lunsford V. Commissioner, 62 @.

(2d) 740 (C. C. A. 6th), relied upon by the peti-

tioner, is not opposed to these decisions. Luns- |

ford, the recipient of the payment in that case, was

local manager of some properties of the Fordson

Coal Company, which was controlled by the Ford

Motor Company, and represented the coal com-

pany in negotiations that culminated in the pur-

chase of the properties of the Pond Creek Coal

ne

O87

. Company. The Pond Creek Coal Company con-

sidered the deal very satisfactory and informed

Lunsford that it would like to make him a gift,

if this action would meet with the approval of the

Ford Motor Company. After obtaining the ap-

“proval of the latter ‘company, Lunsford accepted

the payment. At no time had he-been employed

by or rendered any services, directly or indirectly,

to the Pond Creek Company; im his only contact

with that company his interest had been adverse,

and the payment was made “‘in token of friend-

ship and esteem’’.and not in recognition of past

services. The instant case is distinguishable.

. Here the payment by Unopco was intended as com-

pensation for services which had benefited the

- gtockholders of Unopco when they were stockhold-

ers of Universal and which, by assisting Universal

in its great success, had contributed to the assets

acquired by Unopco. While in this case there was

‘‘no legal or other obligation” to make the payment —

to the petitioner and-other employees, and there

was no direct consideration to Unopeo for the pay-

ment, there was a strong inducement to do so, based

not upon the fact that the stockholders of Unopco .

had a personal affection for the recipients who had —

once been associated with them in business, but

upon a recognition that the petitioner and the

others had contributed to the financial success of

the stockholders and had helped make the creation

28°

of Unopco possible without having received com-

pensation commensurate with the value of this

contribution. .

The petitioner argues (Br. 14) that, if this rea-

soning is carried to its logical conclusion it must

follow that there never can be a gift by an employer

to an employee, for the reason that a payment to

an employee must always be made in recognition

of services. We do not concede that that is true.

We agree with the court below that an employer

may make a gift to an employee without meaning

it as compensation, although, because of the very

nature of the relationship, such cases are rare.

Article 52 of Regulations 74, infra, recognizes that

this is true. The employer may, for example, give

“an employee money to meet unusual family ex-

penses, without implying or feeling that the serv-

ices of the employee ‘have not been fully paid for.

Such a payment would clearly be a gift. But _

where the employer recognizes ‘that the agreed

compensation paid to the employee was not com-

‘mensurate with his proven value to the business,

we think that an additional sum paid in recogni-

tion of that fact is just as clearly compensation.

There is nothing in Section 22 (b)(3), infra,

p. 32, which is inconsistent with this view. That

section merely provides that the value of property

acquired by gift, bequest, devise, or inheritance ~

shall not be included in gross income. There is no

definition of the word “‘gift’’ in this section. More-

over, it grants an exemption from tax and is to be

29

strictly construed. Heiner v. Colonial Trust Co.,

275 U. S. 232, 235; Millsaps College v. Jackson,

275 U. S. 129, 132; Bowers v. Lawyers Mortgage

Co., 285 U. S. 182, 187. The provision cannot be

construed without regard to other provisions of the

Act. Alexander v. Cosden Co., 290 U. S. 484, 496;

Helvering v. Morgan’s, Inc., 293-U. S. 121, 126. It

is necessary to adopt such a construction of the

word ‘‘gift’’ in that section as can be reconciled

with the provisions of Section 22 (a) providing

for the inclusion in gross income of ‘‘compensation

for personal service, of whatever kind and in what-

ever form paid’’.. The problem of drawing a line

between a gift and compensation is similar to that

involved in United States v. Merriam, 263 U. S.

179, Ream v. Bowers, 22 F. (2d) 465 (C. C, A. 2d),

and Rose v. Grant, 39 F. (2d) 338 (C. C. A. 5th),

petition for certiorari dismissed, -283 U. S. 867,

where the courts found it necessary to distinguish

between nontaxable bequests to executors on the

one hand and compensation fixed by will for serv-

ices rendered by the executor on the other. We be-

lieve that the court below has laid down a logical |

_ rule for distinguishing between gifts and compen-

sation in cases of ‘this character and that no con-

flict between the two sections of the statute is

involved in that rule.

E. THAT UNOPCO DID NOT DEDUCT THE PAYMENT AS BUSI-

NESS EXPENSES DOES NOT CONSTITUTE IT A GIFT

Finally, while the fact that the employer has de-

ducted the payments as compensation has been re-

garded as being in the nature of an admission that

30 .

he intended to pay compensation ‘(see ‘Fisher V.

Commissioner, supra; Botchford v. Commissioner,

supra; Anderson v. Commisstoner, supra), the fact

that he has not deducted them is not a clear indi-

ation to the contrary (Bass v.-Hawley, supra;

Schumacher v. United States, supra; Levy v. Hel-

vering, supra). The test as to what constitutes

compensation within tWe broad language of Sec-

tion 22 (a), infra, does not necessarily determine

what constitutes an allowable business expense un- ,

der Section 23 (a) of the 1928 Act. Apart from

the fact that a taxpayer cannot control the appli-

cation of a Revenue Act by a failure to claim allow

able deductions, Section 23 (a) provides only for

the deduction of ‘‘ordinary and necessary expenses

paid or incurred during the taxable year in car-

rying on any trade or business, including a reason-

able allowance for salaries or other ‘compensation

for personal services actually rendered.”’ It might

be argued against the allowance of such a claim

in this case that the recipients of the bonus -were

not employees of Unop@ and hence that no de-

- duction is allowable under Section 93 (a). On the

- other hand, it might be urged that the claim would

be allowable for the reason that the stockholders,

who were in reality the employers to whom the

past services had been rendered, themselves chose

to brush aside the separate corporate entities in

- recompensing those who had labored for them

under a different corporate name. Whatever

theory should be adopted as to the deductibility of

the amounts by the corporation would have no

-

p-

31

bearing on the question whether they constituted

income to the recipients. Simpkinson v. Commis-

stoner, supra.

We think it unnecessary to speculate as to

whether the corporation might have been required

to pay a tax on these payments under a gift tax

statute, for the reason that there was no gift tax in

effect during the taxable year here involved; and

that in any event the question as to whether a tax

should be imposed on the employer under the par-

ticular provisions of a gift tax statute would not

determine whether the employee could be made sub-

“ject to an income tax. We know of no case, how-

ever, in which a gift tax has been imposed on pay-

ments similar to those here involved and the

petitioner has cited none. |

CONCLUSION

The decision of the court below should be

affirmed..

Respectfully submitted.

STANLEY REED,

Solicitor General.

JAMES W. Morris,

| Assistant Attorney General.

SEWALL Key,

| Heten R. CaRvoss,

_ | A. F. PRescort, :

Special Assistants to the Attorney General.

STEPHEN M. F'ARRAND,

: Attorney.

_OoToBER 1937,

*

APPENDIX

Revenue Act of 1928, ¢. 852, 45 Stat. 791:

Src. 22. GRoss INCOME.

(a) General definition —** Gross ineome’”’

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 in-

come derived from any source whatever.

(b) Exclusions from gross income.—-The

following items shall not be included in gross

ineome and shall be exempt from taxation

under this title:-

7. * > * ”

* P

(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) ; 7

* * * "1 * *

Treasury Regulations 74:

RT. 52. Compensation for personal serv-

ic Commissions paid salesmen, compen-

sation for services on the basis of a percent-

age of profits, commissions on insurance

premiums, tips, pay of persons in the mili-

tary or naval forces of the United States,

e (32) ;

33

retired pay of Federal and other officers, and

pensions or retiring allowances paid by pri-

vate persons or by the United States (except

pensions exempted by section 22.(b) (6), are

income to the recipients; as are also mar-

riage fees, baptismal offerings, sums paid for

saying masses for the dead, and other con-

tributions received by a clergyman, evan-

gelist, or religious worker for services ren-

dered. However, so-called pensions awarded

by one to whom no services have been ren-

dered are mere gifts or gratuities and are

not taxable. The salaries of Federal officers

and employees are subject to tax. But see

section 116 (a). See section 31 and articles:

311 and 312 for special provisions relative to

eredit against the tax on account of earned

income, and article 643 as to compensation

of State officers and employees.

_ Art. 128. Bonuses to employees.—Bonuses

to employees will constitute allowable de-

ductions from gross income when such pay- °

ments are made in good faith and as addi-

tional compensation for the services actually

rendered by the employees, provided such

payments, when added to the stipulated sal-

aries, do not exceed a reasonable compensa-

tion for the services rendered. It is imma-

terial whether such bonuses are paid in cash

or in kind or partly in cash and partly in

kind. Donations made to employees and

others, which do not have in them the element

of compensation or are in excess of rea-

sonable compensation for services, are not

deductible from gross income.

U. S. GOVERNMENT PRINTING OFFICE: 1937

-

SUPREME COURT OF THE UNITED STATES.

No. 15.—OcrToBer TERM, 1937.

-*

Arthur G. Bogardus, Petitioner, On Writ of :Certiorari to .

| ‘the United States Cir-

euit Court of Appeals

Commissioner of Internal Revenue. for the Second Circuit.

vs.

[November 8, 1937.] ~

Mr. Justice SUTHERLAND delivered the opinion ofthe Court.

The question for decision is whether a sum of money received by

petitioner in January, 1931, was ‘‘compensation’’ subject to the fed-

eral income tax, or a ‘‘gift’’ exempt therefrom. The commissioner >

held it to be compensation, constituting -part of petitioner’s gross

income, and declared a deficiency. The Board of Tax. Appeals

sustained the determination of the commissioner; and the court

below, upon review, affirmed the order of the Board. 88 F. (2d)

646. : -

The decisions of other courts of appeal upon the question under

review are conflicting. Upon the one side, the First Cireuit

(Walker v. Commissioner, 88 F. (2d) 61, Judge Morton dissenting),

the Fourth (Hall v. Commissioner, 89 F. (2d) 441), and the Fifth

(Simpkinson v. Commissioner, 89 F. (2d) 397) lend definite sup-

port to the decision of the court below. Upon the other side,

more or less definitely to the contrary, are to be found the deci-°

sions of the Third Circuit (Jones v. Commissioner, 31 F. (2d) 755;

Cunningham v. Commissioner, 67 F. (2d) 205), the Sixth (Lwns-

ford v. Commissioner, 62 F. (2d) 740), and the Ninth (Blair v.

Rosseter, 33 F. (2d) 286). No useful purpose would be served by

reviewing these decisions; and we pass to a consideration of the

ease before us. The facts follow: °

_ The amount ($10,000) received by petitioner was part of a dis-

tribution, aggregating over $600,000 made by the Unopéo Corpora-

tion at the instance of its stockholders to petitioner and others

who had theretofore rendered service as employees or in some other

capacity to the Universal Oil Products Company. The Universal

company was a corporation organized in 1914. In the beginning,

id

2 Bogardus vs. Commissioner of Internal Revenue.

its only asset was an application for a patent for a process for

refining petroleum and manufacturing gasoline. It thereafter ac-

quiredother patents, which it licensed to various producers on a

royalty basis. Beginning in 1922, its business developed increas-

ingly until by 1930 its royalties amounted.to about $9,000,000. In

January, 1931, its entire stock was sold to the United Gasoline Cor-

‘poration for $25,000,000. Prior to the sale, ard in contemplation

of it, the Unopeo Corporation hag been organized for the purpose

of acquiring, and it did ‘acquire, certain assets of the Universal

company of the value of over $4,000,000. Up to the time of this

acquisition, the Unopeo company had never engaged in any busi-

_ hess activities, and thereafter its only business was the investment

- and management of the assets thus acquired.

All of the former stockholders of the Universal company became

stockholders of the Unopeo, with the same proportionate holdings.

None of them, after the sale of the Universal stock, held any stock

“th the Universal, or in the United Gasoline Corporation. Under its

new ownership, the Universal continued to carry on the same busi-

ness, retaining a large part of its assets. A few days after the sale

‘of the Universal company’s stock, the former stockholders, then -

stockholders of the Unopeo, held a meeting at which it was .pro-

posed that they show their appreciation of the loyalty and support

of some of the employees of the Universal company by making

them -a—‘‘gift-or-honorarium’’. - A- resolution to that effect was.

adopted at a meeting of the board of directors of Unopco on Janu-

ary 9, 1931, and by the. stockholders the following day. By tliese

resolutions, it was resolved that the sum of $607,500 be appropri-

ated, paid and distributed, as a bonus, to 64 former and present

employees, attorneys and experts of Universal Oil Products Com-

- pany, in recognition of the valuable and loyal services of said em-

ployees, attorneys and experts to said Universal Oil Products Com-

pany. Payments ranged in amount from $100,000 to $500. Some

of the recipients had been out of the employ of the Universal com-

pany for many years; and one of them was the sister of an em-

ployee-killed in an explosion about the year 1919.

At the meeting of: the former stockholders of Universal, the

former president of that company, then president of the Unopco

corporation, said that they had reason to egngratulate themselves

on their great good fortune in the Universal company, which

2

Bogardus vs. Commissioner of Internal Revenue. 3

“started with nothing and had been built up in a phenomenal way;

that they had profited largely; that during the years when they

were struggling and moving forward they had had®the loyal sup-

port of a number of employees, and he thought it would be a nice

and generous thing to show théir appreciation by remembering

them in the form of a gift or honorarium. All of the stockholders

acquiesced, with the result ‘‘that it was understood that we would

come forward and make these presents or gifts to the employees

that were to be slated for it.’’ The matter had theretofore never

been discussed among the old stockholders; and this was the first

time it had been brought up for consideration. None of the re-

cipients had ever been employed by Unopco or by any of the former

stockholders of the Universal. The parties stipulated that neither

the Universal company nor the United ‘‘was under any legal or

other obligation to pay said‘’employees . . . any additional

compensation’’ other than that which, they were paid by

the Universal company*; and that neither Unopco nor any of its

_ stockholders, nor any of the stockholders of Universal, was at any

time under any legal or other obligation to pay. any of said em-

ployees, attorneys or experts, including petitioner, any salary,

compensation or consideration of any kind. |

It was, further stipulated—‘‘said payments were not made or in-

tended to be made by said Unopco Corporation or any of its stock-

holders 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, attorneys or experts to said Unopeo Corporation

or to any of its stockholders.’’ None of the three corporations or

their stockholders ever made or claimed any deduction for federal

income-tax purposes in respect of the payments made to the peti-

tioner and the others. Payments were charged, in January, 1931,

not to expense but to surplus account on the books of the Unopeéo

company. :

., The distribution was made to petitioner and the other employees,

attorneys and experts by checks, delivered either personally or by

mail; and in each instance with the accompanying statement that

the moneys represented by such checks were given ‘at the instance of -

*The reference to additional compensation paid by the Universal company .

probably refers to a ‘‘bonus’’, which was clearly compensation, paid by that

company to its various employees, some 400 in number, in 1930.

Poa

ra

% |

‘

7

4 Bogardus vs. Commissioner of Internal Revenue.

. the stockholders of the Unopeo Corporation as a gift and gratuity,

and were, therefore, not subject to income tax‘ on the part of the .

recipients.

_ The Board of Tax Appeals concluded that, from a careful con-

sideration of al) the evidence, ‘‘the payments made by Unopco .

to the petitioners and others were additional compensation in con-

sideration of services rendered to Universal and were not tax-free,

-gifts.’’ This, as we recently have pointed out,-is ‘‘a conclusion .

of law or at least a determination of a mixed question of law and

fact. -It is to be distinguished from findings of primary, evi-

dentiary or circumstantial facts. It is subject to judicial review

and, on such review, the court may substitute its judgment for that

of the board.’’ ‘Helvering v. Tex-Penn Oil Co., 300 U. S. 481, 491;

Helvering v. Rankin, 295 U. S. 123, 131. If the conclusion of the

board be regarded as a determination of a mixed question of law

and fact, it has, as we shall presently show, no support in the pri-

mary and evidentiary facts. The ultimate determination, therefore,

should be overturned, under the doctrine of Helvering v.. Rankin, |

supra, as a matter of law.

The statutory provisions involved are very plain and direct. Sec-

tion 22 (a) of the appli¢able revenue act (45 Stat. 791) provides that

‘“‘gross income’’, among other things, includes ‘‘compensation for

personal service, of whatever kind and in whatever form paid.’’

Subdivision (b) (3), immediately following, provides that “‘the

value of property acquired by gift, bequest, devise or inheritance”’

shall not be included in gross income and shall be exempt from taxe-

tion under the income-tax title.

The court below thought that payments such as are here involved

smay be at once ‘gifts’ under § 22, subdivision (b) (3) and ‘com-

pensation for personal “service’ under subdivision (a).’’ Such a

view of the statute is inadmissible and confusing. The statute de-

finitely distinguishes between compensation. on the one hand and

gifts on the other hand, the former being taxable and the latter free

from taxation. The two terms ate,.and were meant to be, mutually

exclusive; and a bestowal of money cannot, under the statute, be

both a gift and a payment of compensation. The -court below went

on to say that decisions like Old Colony Trust Co. v. Commissioner

Int. Rev., 279 U. S. 716, proved that payments could be both gifts

' and compensation for personal services. The most casual reading

Bogardus vs. Commissioner of Internal Revenue. 5

of that case shows that it is authority for no such doctrine. There,

an employer had paid the income tax assessed uyvon: thé salary of an

employee. The employee had entered upon the discharge of his

- duties for the year in question under an express agreement to that

effect. Quite evidently the payment, so agreed upon in advance,

was in consideration of, services to be rendered and in no sense

a gift. It was a part of the employee’s compensation; and the

court so held. The idea that it could be a gift in any sense was

definitely rejected. We said (p. 730), ‘‘Nor can it be argued that

the payment of the tax in Wo. 130 was a gift. The payment for

services, even though ently voluntary, was nevertheless -com-

pensation within the statute.’

If the sum of money under consideration was a gift and not

compensation, it is exempt from taxation and cannot be made tax-

able by resort to any form of. subclassification. ‘If it be in fact |

a gift, that is an end of the matter; and inquiry whether it is a gift

of one sort or another is irrelevant. This is necessarily true, for

since all gifts are made non-taxable, there can be no such thing

. under the statute as a taxable gift. A claim that it is a gift pre-

sents the sole and simple question whether its designation as such

‘is genuine or fictitious—that is to say, whether, though called a gift,

it is in reality compensation. To determine that question we turn

to the facts, which we have already detailed.

From these we learn that the recipients of the bounty here in.

question never were employees of the Unopco company, or of any of

_ its stockholders. The Universal company, in whose employ some of

the recipients then were, was at the time.in no way connected with.

the Unopeo company or any of its stockholders. Some of the recipi-

ents had not been in the employ even of the Universal company for _

many years, and one of them never. had been an employee. Neither

the Universal company nor any one else was under any obligation,

legal or otherwise, to pay any of the recipients, including peti-

tioner, any salary, compensation or consideration of any- kind. ~

Such is the express stipulation of the parties. And most signifi-

cant is the further stipulated fact that the disbursements were

not made or intended to be made for any services rendered or to be

rendered or for ‘any consideration “given or to be given by any of

said employees, attorneys or experts to said Unopco corporation or

to any of its stockholders. If the disbursements had been made by

6 - Bogardus vs. Commissioner of Internal Revenue.

the Universal company, or by stockholders of that company still

interested in its’ success and in the maintenance of the good will

and loyalty of its employees, there might be ground for the infer-

ence that they were payments of additional compensation. .Com-

pare Noel v. Parrott, 15 F. (2d) 669. But such an inference, even —

‘upon one of these suppositions, well might strain ‘the realities in

-the light of the foregoing+facts. However that: may be, the dis-

bursements here were authorized and the burden borne by persons

who were then strangers to the Universal company and ,its em-

ployees, under no obligation, legal or otherwise, to that company -

or to any of its present or former employees. There is entirely

lacking thesconstraining force of any: moral or legal duty as well ©

as the incentive of anticipated benefit of any kind beyond the

satisfaction which flows from the performance of a generous act. .

The intent is shown by the appeal made at thé stockholders’ meet-

_ ing to the effect that it would be a nice and generous thing for

these former stockholders of the Universal to show their apprecia ~

tion of the past loyalty of that company’s employees by remember-

ing them in the form of a ‘‘gift or honorarium’’, and by the

common understandjng then reached that the stockholders would

make the suggested ‘‘presents or gifts’’ to these employees. Quite-

evidently, none of these stockholders: had the slightest notion that -

a payment of compensation was to be made.

In sum, then, the case comes tp this: Tle stockholders of the

Unopeco, having at the time no connection with the Universal eom-

_ pany, but rejoicing in the fact of their own great good fortune,

and mindful of the former loyal support of a number of employees

of the Universal company, and desiring to remember them ‘‘in the

form of a gift..or honorarium’’, resolved to make through. the

Unopeo company the distribution in question. In doing so, they

were moved, as J udge Swan said i in his dissenting opinion below, to

an act of ‘‘spontaneous generosity. ” We agree with this dissent-

ing opinion of Judge Swan, and the dissenting opinion of Judge

Morton in Walker v. Commissioner, supra, as stating the correct

view of the matter.

The only facts which even seem to militate against this view are’

(1) that the Unopeco stockholders had benefited by the former serv- ,

cies of the recipients ; (2) that the stockholders at their meeting de-

scribed the payment as a gift or ‘‘honorarium’’;. and (3) that the —

Bogardus vs. Commissioner of Internal Revenue. 7

resolutions authorized the payment as a‘‘bonus . . .. in recog-

nition of the valuable and loyal services’’ of the employees, etc.

. 1. Because the Unopeo stockholders had benefited by the past

services of the recipients, it by no means follows that the distribu-

tion’ in question was not a gratuity. It nowhere appears in the

ecord that full compensation had not been made for these serv-

wees. There would scem to be a natural inference to the contrary ;

_ and the inference is made determinate by the stipulated fact that

‘compensation.’’ The

no one was under any obligation, legal or otherwise (and this wowd

include a moraf®bligation, bewever slight) ** pay ‘any additional

ceived andthe compensatio then paid for it were not equivalents.

2. It is said that the word ‘‘honorarium’’ always denotes a‘com-

pensatory payment. Withont-agreeing to this broad generaliza-

tion, it is enough to say that the word is not heré used by itself, but

coupled with the word ‘‘gift’’ in the phrase ‘‘gift or honorarium’’.

Presumptively, the user of the phrase must have known that the

word ‘‘gift’’ did not include a compensatory payment, and it is

hardly to be supposed that he would consciously nullity that

word by the immediate use of another meaning the opposite. The

phrase was used in an informal speech at the stockholders’ meeting

made by the president of the Unopeo company. The whole tone’

of the meeting indicates that the intention was to make gifts in

recognition of, not.pa¥ments for, former services. The conclusion in

‘which the stockholders acquiesced was thatythey would come for-

“ward and make these ‘presents or gi to the employees.’ In

the light of all the circumstances, the absence of moral or other

obligation and of any expectation of future benefit, it is reasonable

to conclude that the word ‘‘honorarium’’; if the court below cor-

rectly defined it, was loosely and inaccurately used.

3. The resolutions, which employ the. word ‘‘bonus’’, were

adopted to carry into effect the will of the stockholders expressed

at their meeting. -What occurred at that meeting, as we have al-

ready said, indicated their clear intention to make gifts. And since

intention. sinet Aovern, we must consider the word used in the

light of the intention. A similar question was before the Court of

Appeals for the District of Columbia in Levey v. Helvering, 68

F. (2d) 401. There, the corporate resolution characterized the

payments to be made to reimburse certain officers for income taxes

_ 6.

no Zround for sayi at the benefit re- ~

"7

8 Bogardus vs. eee weed of Internal Revenue.

paid on salaries as ‘‘gifts’’. But the court held this characteriza-

tion did not settle the matter,/It reviewed the facts and reached the

conclusion that in the lent of them what was intended was not a

gift but a bonus, and decided the case in accordance with that

view. In other words, the thing that was decided upgn and in-

tended, in that case as in this case, was misdescribed in the resolu-

tions to carry the decision and intention into effect. In Rogers v.

Hill, 289 U. S. 582, 591-592, we held, following the dissenting opin-

ion in the court below, that a bonus payment having no relation to

the value o for which it is given is in reality a gift in

part. tenn gg all the facts and circumstances in the case, ~

including the express stipulation of the parties, clearly show the _

making and the intent to make a gift, it cannot be converted into

a payment for services by inaccurately describing it, in the consum-

mating resolutions, as a bonus.

Some stress is laid. on the recital to the effect that the bounty is

bestowed in recognition of past loyal services. But this recital

amounts to nothing more than the acknowledgment of an historic

fact as a reason for making the gifts. A gift is none the less a gift

beeause inspired yhy gratitude for the past faithful service of the

recipient. Com Hobart’s Admr. v. Vail, 80 Vt. 152.

Judgment reversed.

SUPREME COURT OF THE UNITED STATES.

No. 15.—Octoser Term, 1937.

Arthur G. Bogardus, Petitioner On Writ of Certiorari to the

United States Cireuit Court

Commissioner of Internal Revenue.| °f Appeals for the Second

Circuit.

- [November- 8, 1937.]

Mr. Justice Branpeis, Mr. Justice Strong, Mr. Justice Carpozo,

and Mr. Justice BLack, dissenting. ~

A payment received as compensation for services is taxable as

income, though made without consideration, and hence: for many

purposes a gift. Old Colony Trust Co. v. Commissioner, 279'U. S.

716, 730. To hold, as the prevailing opinion seems to do, that every ~

payment which in any aspect is a gift is perforce not compensation,

and hence relieved of any tax, is to work havoc with the law. A

large body of decisions, whose provenance is Old Colony Trust Co.

v. Commissioner, would be, annulled by such a test. See e. g. Wea-

gant v. Bowers, 57 F. (2d) 679; Fisher v. Commissioner, 59 F.

(2d) 192; Bass v. Hawley, 62 F. (2d)-721; United States v. Me-

Cormick, 67 F. (2d) 867; Botchford v. Commissioner, 81 F. (2d)

, 914; Schumacher v. United States, 55 F. (2d) .1007. Cf. Lucas v.

Ox Fibre Brush Co., 281 U. S. 115. Their teaching makes it plain

that the categories of “‘gift’’ and ‘‘compensation’’ are not always

mutually exclusive, but at times can ov . What controls is not

the presence or absence of consideration. What_controls is

the intention with which payment, however voluntary, has been

made. Has it been made with thé ietunilan ee services rendered

in the past shall be requited more completely, though full ac-

quittance has been given? If so; it bears.a tax. Has it been made

to show good will, esteem, or kindliness toward persons who happen

to have served, but who are paid without thought to make ee

for the se ice? If so, it is exempt.

We there was a question of fact whether payment to this -

petitioner was made with one intention or the other. A finding

-——s

2 : Bogardus vs. Commissioner of Internal Revenue.

either in his favor or against him would have had a fair basis in the

evidence. It was for the triers of the facts to seek among com-

peting aims or motives the ones that dominated conduct. Perhaps,

if such a function had been ours, we would have drawn the ‘infer-

ence favoring a gift. That is not enough. If there was opportunity

for opposing inferences, the judgment of the Board controls. Elm--

hurst oat v. Commissioner, 300 U. S. 37; Helvering v. Tez-

Penn Oil Co., 300 U. S. 481.