Bogardus v. Helvering

• Decision Date: 08 March 1937
• Docket Number: No. 230.,230.
• Citation: 88 F.2d 646
• Parties: BOGARDUS v. HELVERING.
• Court: U.S. Court of Appeals — Second Circuit

88 F.2d 646 (1937)

BOGARDUS v. HELVERING.^*

No. 230.

Circuit Court of Appeals, Second Circuit.

March 8, 1937.

Cravath, de Gersdorff, Swaine & Wood, of New York City (Richard H. Wilmer, of Washington, D. C., and George G. Tyler and William D. Whitney, both of New York City, of counsel), for petitioner.

James W. Morris, Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and John J. Pringle, Jr., Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

L. HAND, Circuit Judge.

This case involves the question whether the taxpayer, Bogardus, received "compensation for personal service" under section 22 (a) of the Revenue Act of 1928 (26 U. S.C.A. § 22 and note), when in 1931 the Unopco Corporation paid him $10,000 in the following circumstances. He had been in the employ of the Universal Oil Products Company; how long and in what capacity the record does not disclose; his salary for the year 1930 had been $6,000 and he had received a bonus of $2,000 at the end of the year. The company had been extraordinarily successful in its business, which consisted of granting licenses under patents for methods of oil refining; its revenues, beginning in 1922, had by the end of 1930 become very large, and its assets extremely valuable. Very early in the year 1931, its shareholders sold all their shares to the United Gasoline Corporation for $25,000,000, having just before withdrawn $4,100,000 from their treasury, which they transferred to a new company, organized for the purpose, and called the Unopco Corporation, whose shares they issued to themselves in the old proportions. This new company had no other assets, and its only business was to manage and invest the fund transferred. The shareholders had no interest in the United Gasoline Company, and had of course parted with all interest in the Universal Oil Products Company. The former employees of that company remained in its employ — Bogardus among them. A few days after these transactions were completed the president of the Unopco Corporation at a meeting of shareholders declared that "during these years while we were struggling and moving forward, we had had the loyal support of a number of employees most particularly, and he thought it would be a nice and generous thing for us to show our appreciation and to remember them in the form of a gift or honorarium; * * * all of the stockholders acquiesced and were glad to do it; and the result was that it was understood that we would come forward and make these presents or gifts to these employees that were to be slated for it." The beneficiaries comprised patent attorneys, solicitors and experts — some of them not retained since 1922 or 1923 — engineers and chemists; and one was the sister of an employee who had been killed by an explosion. The resolution adopted by the board of directors was that the company "pay and distribute the said sum of Six Hundred Seven Thousand Five Hundred Dollars ($607,500) as a bonus to sixty-four (64) former employees, attorneys and experts of said Universal Oil Products Company, in recognition of the valuable and loyal services of said employees, attorneys and experts to said Universal Oil Products Company" in such sums as the directors should decide. The Unopco Corporation made no effort to deduct these payments as an expense of its business in its income tax return, and the donees did not charge themselves with what they received. The Board has held them all liable for a tax calculated upon the payments as income, and the Circuit Court of Appeals for the First Circuit has affirmed the ruling as to one, Judge Morton dissenting. Walker v. Helvering, 88 F.(2d) 61.

Such payments may be at once "gifts" under section 22, subdivision (b) (3), 26 U.S.C.A. § 22 and note, and "compensation for personal service" under subdivision (a). Subdivision (b) was indeed entitled "Exclusions," and since it declared that the prescribed items "shall be exempt from taxation," it would perhaps not be unnatural to assume that, but for that exemption, they would have been within subdivision (a). Nevertheless it is evident upon reflection that some of them at least could by no possibility be "gains or profits," or among any of the specific items which that subdivision enumerated; for example, life insurance; compensation for sickness or injury; and "inheritances" as well — unless in a very remote possibility. In these cases at any rate, the "exclusions" were not exceptions from gross income, and must have been included out of abundant caution. Furthermore, subdivision (b) (3) did not exempt under all conditions the specific items which it contained; for example, though a bequest or device to executors merely for qualifying is not "compensation for personal services" (United States v. Merriam, 263 U.S. 179, 44 S.Ct. 69, 68 L.Ed. 240, 29 A.L.R. 1547), it becomes such, if it is conditional on performance. Ream v. Bowers, 22 F. (2d) 465 (C.C.A.2); Rose v. Grant, 39 F. (2d) 338 (C.C.A.5). And indeed in all the cases where the taxability of bonuses and the like has been mooted, the payments have been legal gifts; except as they were, the taxpayer's position would not have been even plausible. The question has been whether, though gifts, they were also "compensation for personal services"; decisions like Old Colony Trust Co. v. Commissioner of Internal Revenue, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918, proved that they could be both. When the donor is not an obligor, that is, when he is under no legal sanction to make the payment, the decision must therefore depend upon his intent — perhaps more properly upon his motive — and so the courts have very generally put it. Fisher v. Commissioner, 59 F.(2d) 192 (C.C.A.2); Schumacher v. United States (Ct.Cl.) 55 F.(2d) 1007, 1011; Bass v. Hawley, 62 F.(2d) 721 (C. C.A.5); Botchford v. Commissioner, 81 F.(2d) 914 (C.C.A.9).

We have, however, not found much help in learning what that intent or motive must be, and, while the issue remains unsettled, it seems scarcely profitable to catalogue the evidence; we rather need a test by which to determine what evidence is relevant. We agree that a man may make a gift to an old employee without meaning it as "compensation"; though probably such cases will be uncommon, especially if he declares that the payment is "in recognition of" past services. We will assume that the gift would be nothing more, if for instance the donor believed that what he had paid in the past was the full measure of anything that the employee was then "entitled to"; that in fairness he did not "owe" a cent; and that anything he might give was not only beyond what the law would exact, but what the employee could in justice demand. Even so the past services would be the cause of the gift in the sense that except for them the donor would never have been moved to spontaneous generosity, but the gift would not pay for the services. On the other hand, employers sometimes feel that their employees have never been paid in full; that their services deserved more than they have received; that the account between them is not quite in equitable balance. Such gifts are "compensation"; they are not only the result of the past relation, but they are a return specifically allocated to the donee's services. For example, a patient may increase his surgeon's bill; it would be "compensation," though a gift; yet, if he made him a present only because his skill, solicitude and kindness had bound them in a warm friendship, it would not be. A donor must not be moved to satisfy some uneasiness, some scruple, some sense that there is an outstanding claim which those would recognize to whose opinion he is sensitive: something which makes the payment more...