Carson v. United States

• Decision Date: 10 May 1963
• Docket Number: No. 252-59.,252-59.
• Parties: Nell W. CARSON v. The UNITED STATES.
• Court: U.S. Claims Court

317 F.2d 370 (1963)

Nell W. CARSON v. The UNITED STATES.

No. 252-59.

United States Court of Claims.

May 10, 1963.

John D. Heckert and John McClure, Washington, D. C., for plaintiff. McClure & McClure, Washington, D. C., were on the briefs.

Theodore D. Peyser, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner, and Philip R. Miller, Washington, D. C., were on the brief.

Before JONES, Chief Judge, REED, Justice (Ret.), sitting by designation, LARAMORE, DURFEE, and DAVIS, Judges.

DURFEE, Judge.

Plaintiff brings this action for refund of her payment of additional income taxes assessed for the years 1952 through 1956 by the Commissioner of Internal Revenue. The assessment was upon the basis that annual payments made to the widowed plaintiff by a corporation in honor of her deceased husband were not nontaxable "gifts" but were taxable as ordinary income. We are asked by plaintiff to reverse this ruling.

Under section 22(b) (3) of the Internal Revenue Code of 1939 and section 102(a) of the Internal Revenue Code of 1954, "the value of property acquired by gift" is excluded from gross income and consequently exempt from income taxation.

"* * * The meaning of the term `gift\' as applied to particular transfers has always been a matter of contention. Specific and illuminating legislative history on the point does not appear to exist. * * The meaning of the statutory term has been shaped largely by the decisional law. * * *" Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 284, 80 S.Ct. 1190, 1196, 4 L.Ed.2d 1218.

The Court there reviewed the general principles governing "gifts" in its decision as follows (p. 289, 80 S.Ct. p. 1198):

"* * * Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal\'s experience with the mainsprings of human conduct to the totality of the facts of each case. The nontechnical nature of the statutory standard, the close relationship of it to the data of practical human experience, and the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each, confirm us in our conclusion that primary weight in this area must be given to the conclusions of the trier of fact. * * *"

This refusal of the Supreme Court to set more definite criteria as requested by the Government for determination of a gift caused Justice Frankfurter to remark in his concurring opinion, "What the Court now does sets fact-finding bodies to sail on an illimitable ocean of individual beliefs and experiences." Before setting sail on such a voyage we shall first examine any available aids to navigation.

Foremost in mind is what the Supreme Court stated as "the most critical consideration * * * the transferor's `intention'". There must be an objective inquiry as to whether what is called a gift amounts to it in reality. The proper criterion is one that inquires whether the basic reason for the donor's conduct was in fact the dominant reason that explained his action in making the transfer, in the words of Duberstein.

What was the basic reason, the dominant reason, of the directors of the Bottling Works for making the annual payments to plaintiff for the years 1952 to 1956 inclusive?

The initial resolution by the directors of the company in 1938, shortly after the death of their President, John F. Carson, provided as follows:

"* * * Salary to be paid to Nellie W. Carson in 1939 or in any later year is in recognition of services rendered by her husband John F. Carson deceased in 1938."

Thereafter, plaintiff was reelected vice president each year through 1956. She performed no duties for the company in this capacity, and was only nominally a corporate officer. Her salary was specified each year at amounts ranging from $13,200 to $17,160. For the years 1952 through 1955, the minutes of the directors' meetings eliminated the provision for salary, and stated:

"Resolved: that as in past years, in behalf of the stockholders of this corporation, a gift of $17,160.00 be voted to Nellie W. Carson."

This change of phraseology in the resolution occurred as a result of a suggestion of the company's tax advisors with representatives of the Internal Revenue Service concerning the manner in which the Bottling Works should treat such payments for tax purposes. However, the payments were not deducted from gross income in the company's Federal income tax returns from 1943 through 1956, following a settlement of tax liability with the Commissioner of Internal Revenue, on this question for the years 1941 and 1943. In any event, "the taxing statute does not make nondeductibility by the transferor a condition on the `gift' exclusion." Duberstein, supra, p. 287, 80 S.Ct. p. 1198.

The directors testified in this case that the purpose of this change in the resolution was to state, more clearly than the previous resolutions did, the intention with which they authorized the payments throughout. They also testified that the payments they designated as "gifts" were "in honor of," "in memory of," and "in appreciation for the services" of the deceased John F. Carson as founder and president of the company.

While due weight must be given to these expressions of intent, we must go further and consider what the Supreme Court described as "the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each, * * *." Duberstein, supra, p. 289, 80 S.Ct. p. 1199. This multiplicity of relevant factual elements and their various combinations becomes readily apparent from consideration of the decisions of other Federal courts on "gifts" under the taxing statute. Since Duberstein, there has been an apparent conflict in these decisions, with a resultant multiplicity of the criteria or tests that were applied. A consideration of these criteria, as applied to the facts in the present case, would appear to be next in order.

Recently, in Poyner v. Commissioner, 301 F.2d 287 (C.A.4, 1962), the Circuit Court of Appeals for the Fourth Circuit applied the five factors listed by the Tax Court in Florence L. Luntz, 29 T.C. 647, 650 (1958), (prior to the Duberstein case), as the "clearest formulation of relevant criteria:"

"(1) The payments had been made to the wife of the deceased employee and not to his estate;

"(2) There was no obligation on the part of the corporation to pay any additional compensation to the deceased employee;

"(3) The corporation derived no benefit from the payment;

"(4) The wife of the deceased employee performed no services for the corporation;

"(5) The services of her husband had been fully compensated."

Our findings of fact directly respond to every one of these five factors, as we have previously considered them under the principles set down in Duberstein, supra. In each instance, the response is favorable to the widow, as the Court of Appeals also found under the facts in Poyner, supra, except for the third finding that the corporation derived no benefit from the payment. We propose to deal with this separate question later in this opinion.

However, the Court of Appeals in Poyner, supra, also noted that since Duberstein, the Tax Court has considered it necessary to inquire into:

"(1) the widow\'s stock holdings in the company;

"(2) the knowledge of the Board of the widow\'s financial status following the death of her husband;

"(3) and of `the widow\'s needs.\'"

The Court of Appeals in Poyner accordingly remanded the case for further evidence as to these additional criteria, or any other factors that the Tax Court might consider relevant.

(1) In the present case, the widow never owned any stock of the company in her own name, but after her husband's death she held over one-third of the outstanding stock as trustee of her husband's estate from 1939 through 1956. She was not present at the meeting of the directors in 1938 when the first of the payments to her was authorized after her husband's death, but thereafter, attended most of the meetings from 1939 through 1956, and when present, she voted for the annual payments to be made to her, together with all the other directors.

(2) During each of the years 1939 through 1951, the Board of Directors of the Bottling Works consisted of three persons; Luther F. Carson, brother of the deceased John F. Carson; Lester R. McCool (not related) and plaintiff. Luther F. Carson and his wife also held over one-third of the total outstanding stock. From 1952 through 1956 the board consisted of five persons: the three just mentioned; Wallace Bishop, plaintiff's son-in-law and William Carson, a nephew of John and Luther Carson. Over two-thirds of the stock was held about equally over the entire period 1939 through 1956 between the family of the deceased John F. Carson and the family of his brother, Luther F. Carson. Within such a closely related board of directors, it can be concluded that they had knowledge of plaintiff's substantial financial status after the death of her husband.

(3) The directors, other than plaintiff, although indicating friendship and affection for her, testified that except for their desire to honor the memory of her deceased husband as founder and president of the company, they would not have voted for the payments to plaintiff.

The record does not reveal how the directors arrived at the amount of the annual payments, ranging from $15,000 to $17,160 a year over a period of 18 years, but these payments are closely comparable to the salary formerly paid to plaintiff's deceased husband. Apparently, the directors took some account of aiding plaintiff in maintaining a living standard comparable to her former married status when they determined the amount of the memorial payments. However, plaintiff reported taxable income for the years involved herein, 1952 through 1956, from $38,000 to...