Dasteel v. Rogan

• Citation: 41 F. Supp. 836
• Decision Date: 14 November 1941
• Docket Number: No. 1539-Y.,1539-Y.
• Parties: DASTEEL et al. v. ROGAN.
• Court: U.S. District Court — Southern District of California

41 F. Supp. 836

DASTEEL et al. v. ROGAN.

No. 1539-Y.

District Court, S. D. California, Central Division.

November 14, 1941.

Joseph H. Dasteel, of Los Angeles, Cal., for plaintiffs.

Wm. Fleet Palmer, U. S. Atty., and Edward H. Mitchell, Asst. U. S. Atty., both of Los Angeles, Cal., for defendant.

YANKWICH, District Judge.

Plaintiff, J. H. Dasteel, seeks to recover $396.52 which he and his wife, under a joint income tax return, paid as income tax on the sum of $7,200, received by him on August 27, 1936, from the Union Oil Company, upon termination of his employment with them as manager of their service stations department. A claim for refund, seasonably made, has been denied. Recovery is sought upon the ground that at the time he severed his employment, the plaintiff had been amply compensated for his services to the company, which extended over a period of twenty-three years, and that the sum so paid to him was a gift, deductible as such, under Section 22(b) (3) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev. Code, § 22(b) (3).

Despite a first impression to the contrary, I am of the view that the plaintiff has not sustained the burden of proving that he is entitled to have this sum exempt from the income which he received during the taxable year 1936.

A study of the cases leads to the conclusion that, with the exception of Bogardus v. Commissioner, 1937, 302 U. S. 34, 58 S.Ct. 61, 82 L.Ed. 32, the various circuit courts — taking their lead from Old Colony Trust Co. v. Commissioner, 1929, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918, and some of them even anticipating it — have taken the view that "the payment for services, even though entirely voluntary", is none the less taxable income.

And this is true although the payment be actually denominated a gift, bonus or honorarium.

The elements which courts take into account in determining whether separation allowances are to be considered gifts or compensation for past service are usually these: (1) Did the employer have the power to make a gift of the money? (2) If he did not, as is the case with corporations, was the payment approved by the stockholders? (3) Was the amount charged on the books as payment on salary? (4) And was deduction made for the amount so claimed by the employer from his income tax during the taxable year?

If the first two questions are answered in the negative and the last two in the affirmative, the payment is not considered a gift.

Rather does it conform to the test laid down by Mr. Justice Brandeis in the dissenting opinion in Bogardus v. Commissioner, 302 U.S. 34, 45, 58 S.Ct. 61, 66, 82 L.Ed. 32: "Has it been made with the intention that services rendered in the past shall be requited more completely, though full acquittance has been given? If so, it bears a tax." (Italics added).

A review of the evidence leads to the conclusion that these conditions exist here. And that the case falls within the rule laid down in Noel v. Parrott, 4 Cir., 1926, 15 F.2d 669; Fisher v. Commissioner, 2 Cir., 1932, 59 F.2d 192; and Botchford v. Commissioner, 9 Cir., 1936, 81 F.2d 914, 110 A.L.R. 281, in which the doctrine laid down in the two cases just cited, and others, is specifically approved by the Circuit Court of Appeals for the...