Bounds v. United States

• Decision Date: 15 December 1958
• Docket Number: No. 7642.,7642.
• Citation: 262 F.2d 876
• Parties: Hilda BOUNDS, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

262 F.2d 876 (1958)

Hilda BOUNDS, Appellant, v. UNITED STATES of America, Appellee.

No. 7642.

United States Court of Appeals Fourth Circuit.

Argued November 4, 1958.

Decided December 15, 1958.

COPYRIGHT MATERIAL OMITTED

John A. Selby, Washington, D. C. (Henry Ravenel, Washington, D. C., on brief), for appellant.

S. Dee Hanson, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Melva M. Graney, Attorneys, Department of Justice, Washington, D. C., Leon H. A. Pierson, U. S. Atty., and Robert E. Cahill and J. Jefferson Miller, II, Asst. U. S. Attys., Baltimore, Md., on brief), for appellee.

Before SOBELOFF, Chief Judge, and SOPER and HAYNSWORTH, Circuit Judges.

SOBELOFF, Chief Judge.

In this suit for an income tax refund we are called upon to determine whether money paid by a corporation to the widow of a deceased executive constitutes a non-taxable gift or taxable compensation.¹

The taxpayer, widow of George C. Bounds, received in 1952 $20,000 from the Bounds Package Corporation "as recognition in part of the great contribution made by George C. Bounds, and, as additional compensation for services rendered to the Corporation by George C. Bounds during his lifetime * * *." The District Court concluded that the payments were intended to be and were additional compensation for services to the corporation rendered by the taxpayer's deceased husband and, consequently, taxable to the widow as ordinary income under Sec. 22(a), Internal Revenue Code of 1939. The taxpayer contends that the payments represent a gift, hence exempt from taxation under Sec. 22(b) (3), Internal Revenue Code of 1939.²

The facts were stipulated at the trial. George C. Bounds, a founder of the Bounds Package Corporation in 1940, since that time served as president and a director of the corporation until his death in September, 1951. Shortly after his death, the Board of Directors, at a special meeting, unanimously adopted the following resolution:

"Resolved: That the Corporation pay to Mrs. Hilda H. Bounds, widow of George C. Bounds, deceased, as recognition in part of the great contribution made by George C. Bounds to the success of the business of the Corporation, and, as additional compensation for services rendered to the Corporation by George C. Bounds during his lifetime, the sum of Twenty Thousand Dollars ($20,000.00) per year, payable quarter yearly on the first day of January, April, July and October of each year, beginning on January 1, 1952, and ending on October 1, 1953."³

Pursuant to this resolution Mrs. Bounds, the taxpayer, received in 1952 $20,000, which was equal in amount to her husband's annual salary from the corporation for the three years before his death. The corporation also paid to the estate of George C. Bounds $5,000, which represented his accrued salary for the third quarter of 1951 and was included as income in the return filed by the administrator.⁴ This item is not involved in the controversy. When the resolution was adopted, the taxpayer owned approximately 25% of the corporation's outstanding capital stock, but has never been an officer or employee of the corporation.

The board's action was voluntary, as the corporation was not obligated in any way to provide payments to Bounds' widow or estate. Never theretofore had the corporation made any payments to the estate or to members of the family of a deceased employee or officer except to the extent necessary to compensate the deceased for services rendered to the date of his death.

On its books the corporation recorded the payments as "compensation to officer's widow" and in its federal income tax returns claimed a deduction for them as a business expense. The taxpayer included this amount as gross income in her tax returns but filed a timely claim for refund of $3,190.89, on the theory that the $20,000 was a gift to her from the corporation and, therefore, not includible in her taxable income. However, neither she nor the corporation filed a federal gift tax return in respect of this transaction.

The District Court's determination that the payments were intended by the corporation to be and were compensation, having been drawn from stipulated primary facts, is a conclusion of law, or at least a determination of a mixed question of law and ultimate fact; and, as such, this court can, on review, substitute its judgment for that of the District Court as a matter of law if the record so warrants. We are not bound by the "clearly erroneous" rule, Rule 52(a) of the Federal Rules of Civil Procedure, 28 U.S.C.A. Bogardus v. Commissioner, 1937, 302 U.S. 34, 39, 58 S.Ct. 61, 82 L.Ed. 32; Simpson v. United States, 7 Cir., 261 F.2d 497; Fahs v. Taylor, 5 Cir., 1956, 239 F.2d 224, 226; Northup v. United States, 2 Cir., 1957, 240 F.2d 304, 307.

A study of the record persuades us that the payments to the widow constituted a gift. The taxpayer herself rendered no services to the corporation for which she should have been compensated. It is to be noted that the corporation paid the husband's accrued salary of $5,000.00 directly to his estate but made the further payment directly to the widow. To us this indicates that the corporation viewed the two payments as different in nature. Clearly, the lesser sum was compensation, and if the corporation regarded the $20,000.00 similarly, then to be completely consistent it should likewise have been paid to the estate. See Bausch's Estate v. Commissioner, 2 Cir., 1951, 186 F.2d 313, 314. Where the recipient has rendered services, it is reasonable to presume that the payment is compensation, Wallace v. Commissioner, 5 Cir., 1955, 219 F.2d 855, 857. But the converse is equally persuasive — where the recipient has not rendered services, the presumption is that the payment is a gift.

While it is true that some cases have held that for the payment to be taxable the payee need not have rendered the services, the element always present was an understanding, tacit or otherwise, by the one rendering the services that additional payments would or might be made to some third person. See Varnedoe v. Allen, 5 Cir., 1946, 158 F.2d 467, certiorari denied, 1947, 330 U.S. 821, 67 S.Ct. 771, 91 L.Ed. 1272, where a fireman's widow received payments pursuant to a statutory right, and Fisher v. United States, D.C.Mass.1955, 129 F.Supp. 759, 762, where a corporation paid the widow the unpaid balance of the retirement compensation it had already voted to pay the husband for one year. In the case at bar, however, nothing in the record indicates that the taxpayer's husband was ever led to believe that the corporation would provide compensation for his services over and above his fixed salary. Nor is there a showing that he had not in reality been fully compensated by the corporation during his lifetime.

We do not take issue with the principal that a voluntary payment can nonetheless be compensation, Old Colony Trust Co. v. Commissioner, 1929, 279 U.S. 716, 730, 49 S.Ct. 499, 73 L.Ed. 918, but the common element found in the cases cited by the Government, and conspicuously absent here, is a long-established policy of the employer to provide for the wife of a deceased officer for a limited period after his death. Even though it was never suggested in those cases that the widow had an enforceable legal right to the payments, the courts have recognized not only the "moral" obligation of the employer to continue the established practice but also the immediate benefits derived by the employer from such a plan. As the Seventh Circuit recently stated in Simpson v. United States, 7 Cir., 261 F.2d 497, 500:

"We find from the record that the corporation did derive a benefit from the payment. It was made in pursuance of a long-established plan consistently followed by the corporation. Adherence to the plan demonstrates that these payments to the widows of deceased executives were made for the purpose of encouraging living executives to continue in their employment by the corporation. The fact that these executives were retained by the corporation is evidence that it was to the interest of the corporation that they did not depart and take with them their training and experience in the company\'s affairs, developed during a long period of employment there. The plan was a means of retaining a valuable asset as long as possible. Insofar as the plan in question tended to deter the resignation of these key executives, it would be unrealistic to say that it was not for the benefit of the corporation.

* * * * * *

"While the resolution of 1950 attempted to protect the company from any legal obligation to make payments, it clearly imposed a moral obligation. As a practical matter, the company had to pay taxpayer in order to preserve its integrity in the eyes of the other executives whose wives were to receive similar payments in the future * * *."

It can be seen that payment to a widow pursuant to a long-established plan, although legally unenforceable, tends to overcome the gratuitous nature of the transaction. Where, however, the payment is in every sense voluntary and there is no ensuing benefit to the corporation, the donative intent is apparent. Such is the case here. Undoubtedly, the courts which have treated payments to widows as compensation have been influenced in large measure by the employer's established practice to provide for widows of deceased executives. See Bausch's Estate v. Commissioner, 2 Cir., 1951, 186 F.2d 313, 314. This feature distinguishes Simpson v. United States, supra, relied on by the Commissioner, from the instant case. Indeed, Simpson held that the taxpayer's reliance on Luntz v. Commissioner, 1958, 29 T.C. 647 was unfounded because the employer (in Luntz) had established no pension plan. Also see Fisher v. United States, D.C.Mass.1955, 129 F.Supp. 759, 762, which distinguished Hahn v. Commissioner, 13 T.C.M. 308, CCH Dec. 20, 249(M) because there "the employee continued to work...