Greely v. United States, Civ. No. 2435.

• Decision Date: 28 October 1965
• Docket Number: Civ. No. 2435.
• Citation: 247 F. Supp. 37
• Parties: Laura H. GREELY, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Montana

247 F. Supp. 37

Laura H. GREELY, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 2435.

United States District Court D. Montana. Great Falls Division.

October 28, 1965.

Church, Harris, Johnson & Williams, Great Falls, Mont., for plaintiff.

John B. Jones, Jr., C. Moxley Featherston, Jerome Fink, and W. Forbes Ramsey, Dept. of Justice, Washington, D. C., and Moody Brickett, U. S. Atty., Butte, Mont., for defendant.

JAMESON, District Judge.

This is an action for the recovery of federal income taxes for the calendar year 1960 in the amount of $1,865.27. Plaintiff did not include in her return the sum of $13,000 paid to her by Greely Elevator Company after the death of her husband, M. J. Greely, who had been president of the company. Upon audit of her return, the Internal Revenue Service determined that $5,000 was excludable under the provisions of section 101 (b) of the Internal Revenue Code of 1954,¹ and the remaining $8,000 was treated as additional income to the plaintiff. The deficiency assessed was paid by the plaintiff, followed by timely claim for refund and suit.

The sole question presented is whether the payment of the $13,000, or any part thereof, should be excluded from plaintiff's gross income as a gift under section 102 of the Internal Revenue Code of 1954.² The case was submitted on an agreed statement of facts.

M. J. Greely died on October 19, 1959. At the time of his death he had served as president of the company at least five years. Plaintiff was not employed by and was not receiving any compensation from the company. She was, however, financially independent from other sources.

At a special meeting of the Board of Directors of Greely Elevator Company on June 27, 1960, the following resolution was adopted:

"WHEREAS, the Board of Directors realizes that M. J. Greely, deceased, was a valuable employee of said corporation for many years last past; and

"WHEREAS, the said M. J. Greely was employed by this Corporation in the capacity of president up to and including the time of his death on October 19, 1959; and

"WHEREAS, during all the years that the said M. J. Greely was with the said Corporation he performed valuable services for and on behalf of the Corporation apart from the usual duties and responsibilities of his position;

"NOW, THEREFORE, BE IT RESOLVED that the Company pay to Laura Harriet Greely, widow of M. J. Greely, formerly president and director of this Company and recently deceased, the sum of $13,000.00, said $13,000.00 to be paid to Laura Harriet Greely within the next six months' period from the date of this resolution at such time or times as may be convenient to the Company.

"BE IT FURTHER RESOLVED that at such time of final payment of said amount set forth above to the widow of M. J. Greely, said benefits shall cease and no further payments shall be made by the Company for this purpose."

The salary of M. J. Greely had been paid to the date of his death. For the four years preceding his death, he was paid at the rate of $21,000 annually. For the years 1954 to 1958 he had received an annual bonus of $14,000 and at the close of the corporate fiscal year on June 30, 1959, a bonus of $20,000. He did not receive any bonus for the period July 1, 1959 to October 19, 1959. During the years 1954 through 1961 the corporation never paid less than $72,702.58 or more than $123,550 total bonus to 35 or 40 employees. During the same period the corporation declared $8.00 per share dividend each year.

There were no obligations outstanding on the books of the corporation reflecting any indebtedness to M. J. Greely. At the time of his death Greely owed the company $12,835.87, which was paid by his estate on January 9, 1961.

Greely was a minority stockholder. Of 3,340 shares of stock outstanding, M. J. and Laura Greely were the owners of 476 shares, and their son and daughter each owned 273 shares.

The $13,000 was paid to plaintiff on August 26, 1960. It was recorded on the general ledger of Greely Elevator Company as follows:

Debit — Voluntary Death Benefit $13,000.00 Credit — Expenses Payable — Laura H. Greely $13,000.00

The company deducted the payment on its corporate federal income tax return for the fiscal year ending June 30, 1960, as a business expense. It was allowed as a business expense in a subsequent IRS audit.

Plaintiff became a director of Greely Elevator Company following the meeting of the directors held June 27, 1960. She received no compensation for her services and at no time has held any office.

The company did not have an established policy with regard to making payments to surviving spouses of deceased officers or directors. A payment of a "bonus" had been made to the "estate" of C. R. Greely in 1954.³ T. S. Greely testified in his deposition that there was a policy that if someone left the company he would be given compensation for past services and he thought a similar policy would exist as to death. He indicated that because M. J. Greely's salary had been paid to date of death and bonuses were not payable at the date of death, the payment must have been for past services. He denied that the payment had some relation to the bonus which would have been paid to Greely had he lived. On the other hand, he indicated that consideration was given to the amount of the debt owed by Greely at the time of his death in arriving at the amount to be paid to the widow.

A bonus was authorized by special meeting of the board of directors on June 15, 1959, to be paid to the estate of a deceased employee, Carl E. Peterson. In that instance it was stated that "the estate" would receive a full share in view of the employee's past services.

A letter to the Internal Revenue Service from Greely Elevator Company signed by T. S. Greely, dated September 4, 1963, stated that the payment to plaintiff was made pursuant to "instructions contained in the resolution made by the board of directors to compensate Mrs. Greely for past services rendered by Mr. Greely".

It was stipulated that the Internal Revenue Agent who made the audit would testify that twice during the audit T. S. Greely stated that the $13,000.00 payment was not intended by the corporation as a gift.

It was further stipulated that the accountant for the corporation and plaintiff would have testified in accordance with a letter he had written to the revenue agent and would also have testified that the payment "was in the approximate amount of a debt owed by M. J. Greely at the time of his death to the Greely Elevator Company, and that "this amount may have been a factor in arriving at the actual amount subsequently paid to Laura H. Greely".

The accountant's letter to the revenue agent stated that he deducted the payment to plaintiff from the corporate income tax return "because it was compensation for the services rendered to the corporation by its then deceased president, M. J. Greely". He further stated that on plaintiff's return, he "mentioned that she had received $13,000.00 compensation". By that he meant that the company "had compensated either M. J. Greely or his wife, Laura H. Greely, for the services he had rendered to the corporation. The fair value of these services was $13,000.00". He also stated on the return that he felt that "under recent Tax Court decisions this compensation was tax free". Previous to making the return he had spoken to G. F. Greely, who indicated "that the reason for making the $13,000.00 payment was to compensate either M. J. Greely or his wife for the services that he had rendered to the corporation".

T. S. Greely, the stepson of G. F. Greely, voted for the resolution requiring the payment to the widow at the suggestion of his stepfather. At the time of the passage of the resolution G. F. Greely was in active control of the corporation and formulated its management policies, including the resolution calling for the payment to the widow. T. S. Greely was a newly elected director without prior experience in the management of the corporation.

The parties agree that in deciding whether a payment is excludable from gross income as a gift under section 102, the court must determine the "dominant reason" for which the payment was made, after taking into consideration all of the relevant factors. Commissioner of Internal Revenue v. Duberstein, 1960, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218.⁴ A brief summary of the holding in Duberstein was set forth in United States v. Pixton, 5 Cir. 1964, 326 F.2d 626, 628, as follows:

"Commissioner of Internal Revenue v. Duberstein, 1960, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed. 1218, sic is the latest and leading Supreme Court decision on both the definition of a gift in a `gift v. income' case and the scope of appellate review of a trial court's application of that definition. In Duberstein the Supreme Court restated the principles established in Bogardus v. Commissioner of Internal Revenue, 1937, 302 U.S. 34, 58 S.Ct. 61, 82 L.Ed. 32, and emphasized that in order for a transfer to qualify as a gift, the transfer must not be motivated by a legal or moral obligation. It must not be a payment for services, past or future, and there must be no expectancy of future gain. Rather, `the dominant reason that explains the transferor's action in making the transfer' a gift must be a `"detached and disinterested generosity," * * * "out of affection, respect, admiration, charity or like impulses"'. 363 U.S. at 285, 80 S.Ct. at 1197, 4 L. Ed.2d 1218."

In Duberstein, the Court continued in part:

"And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's `intention'. Bogardus v. Commissioner of Internal Revenue, 302 U.S. 34, 43, 58 S. Ct. 61, 82 L.Ed. 32. `What controls is the intention with which payment, however voluntary, has been made.'

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Moreover, the Bogardus case itself makes it plain that the donor's characterization of his action is not determinative — that there must be

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