Bass v. Hawley

Citation62 F.2d 721
Decision Date12 January 1933
Docket NumberNo. 6589.,6589.
PartiesBASS v. HAWLEY.
CourtU.S. Court of Appeals — Fifth Circuit

John D. Hartman, U. S. Atty., of San Antonio, Tex., and Wright Matthews, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., for appellant.

Paul D. Thomas, of El Paso, Tex., for appellee.

Before BRYAN, SIBLEY, and HUTCHESON, Circuit Judges.

SIBLEY, Circuit Judge.

James W. Bass, collector of internal revenue, appeals from the judgment on a verdict directed against him in favor of A. L. Hawley for recovery of an income tax for the year 1925. The question is whether $16,250 received by Hawley that year was a gift or additional compensation for services. Hawley had for twenty-two years been the general auditor of the El Paso & Southwestern Railroad Company, all the stock of which was owned by El Paso & Southwestern Company. The latter had no active business, and was a mere holding company. We will call the former the Railroad Company, the latter the Holding Company. Negotiations beginning in the spring of 1924 culminated in the sale by the Holding Company of all the stock of the Railroad Company to the Southern Pacific Company. The railroad and its business were turned over to the purchaser on October 31, 1924, but the sale was as of May 1, 1924, and an accounting was to be had of operations meanwhile in which it was expected that the Holding Company would be found owing the Southern Pacific Company a substantial sum. The consideration of the sale was $28,000,000 of stock and $29,500,000 of bonds of the purchasing company, to be issued directly to the stockholders of the Holding Company. The Holding Company had no other assets, and since its liabilities remained to be settled, the bonds were deposited in a bank for the stockholders. The stockholders thus became stockholders in the Southern Pacific Company, and thereby retained an interest in the Railroad Company. On November 10, 1924, the directors of the Holding Company sent to each of its stockholders what was called a "Statement of Plan of Reorganization." It reviewed in detail the transactions above outlined, and referring to the possible debt to the Southern Pacific Company continued: "In addition to this sum the directors request that the stockholders of the Company authorize them in recognition of the long and faithful service of the officers and employees of the Railroad to pay to officers and employees to be designated by the directors additional compensation to be decided by the directors, and that they be authorized to set aside for such compensation a sum not to exceed $1,000,000.00," retaining to meet this and all liabilities of the Holding Company and expenses of the reorganization so much of the deposited bonds as might seem necessary. The appointment of a committee to finally dispose of the bonds was suggested. Each stockholder signed a reply, stating that he understood about the unsettled liabilities, expenses, and "bonuses to employes," and appointed a committee of five "to pay the expenses, compensate employes, to adjust and settle the accounts, etc.," charging it all against the deposited bonds. The committee set aside $1,500,000 of the bonds, borrowed money on them which was later repaid by a sale of the bonds, and on December 22d paid out according to their account "bonus $619,940.00," and on January 2d "bonus $273,750.00." There is testimony that some of the larger payments were divided so as to prevent the recipient getting it all in the same taxable year. The committee reported to the stockholders on February 24, 1923, their progress in meeting the "unsettled expenses, obligations to Southern Pacific Company, bonuses to employes, etc." The committee's report and statement of January 6, 1927, showed as paid out "compensation 1924, $619,940.00; 1925, $280,450.00; total $900,390.00." The payments were made only to old employees who were not members of any union, but there was no set formula, the representatives of the committee giving attention also to the financial and family condition of the employee. Each check was accompanied by a card, "With appreciation and best wishes of El Paso & Southwestern Company from Committee appointed Nov. 18, 1924." Hawley received $32,500, half of which went into his own and half into his wife's income tax return. He protested the tax on this item, and on payment asked for a refund, referring to it in his claim always as a bonus.

The Board of Tax Appeals and the Court of Claims have reached opposite conclusions as to the taxability of this distribution. Barnes v. Commissioner, 17 B. T. A. 1002; Schumacher v. United States (Ct. Cl.) 55 F.(2d) 1007. Hawley relies strongly on Jones v. Commissioner (C. C. A.) 31 F.(2d) 755, and Blair, Commissioner, v. Rosseter (C. C. A.) 33 F.(2d) 286. Each of these cases in holding payments to employees to be nontaxable gifts relies on the fact that there was no obligation to pay and the payments were over and above the wages and salaries due. The controlling importance of that fact has since been denied by the Supreme Court in Old Colony Trust Co. v. Commissioner, 279 U. S. at page 730, 49 S. Ct. 499, 504, 73 L. Ed. 918, where the question was whether the litigant owed a tax, saying: "The payment for services, even though entirely voluntary, was nevertheless compensation within the statute." Again in Lucas, Commissioner, v. Ox Fibre Brush Co., 281 U. S. 115, 50 S. Ct. 273, 74 L. Ed. 733, where the question was whether the litigant could deduct the payment as an expense of business, a like result was reached. Noel v. Parrott (C. C. A.) 15 F.(2d) 669, was approved. In Fisher v. Commissioner (C. C. A.) 59 F.(2d) 192, it was ruled that absence of legal duty to pay is not conclusive of a...

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    ...159 F.2d 44, 169 A.L.R. 1303; Walling v. Harnischfeger, supra; Corey v. Detroit Steel Corporation, D.C., 52 F.Supp. 138, 141; Bass v. Hawley, 5 Cir., 62 F.2d 721; Willkie v. Commissioner, 6 Cir., 127 F.2d 953; Thomas v. Commissioner, 5 Cir., 135 F.2d As Congress left the "regular rate" of p......
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    ...payment is compensation for services. Willkie v. Commissioner of Internal Revenue, 127 F.2d 953, 955 (6th Cir.1942) (citing Bass v. Hawley, 62 F.2d 721 (5th Cir.1933)). The intention of the parties, particularly that of the payor, as gleaned from the facts and circumstances surrounding the ......
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    ...Schumacher v. United States, 1932, 55 F.2d 1007, 74 Ct.Cl. 720; Weagant v. Bowers, 2 Cir., 1932, 57 F.2d 679; and see, Bass v. Hawley, 5 Cir., 1933, 62 F.2d 721, 732; Simpkinson v. Commissioner, 5 Cir., 1937, 89 F.2d 397, 399; Willkie v. Commissioner, 6 Cir., 1942, 127 F.2d 953, 955-956; Da......
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