# Respondents Brief — Bogardus v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0214%3A6 ## Record - **Collection:** Supreme Court brief - **Document type:** Respondents Brief - **Published:** January 1, 1937 - **Citation:** 302 U.S. 34 ## Text ' 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 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 ‘ 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0214%3A6. Public record. Not legal advice.