Hall v. Commissioner of Internal Revenue

• Decision Date: 06 April 1937
• Docket Number: No. 4121.,4121.
• Citation: 89 F.2d 441
• Parties: HALL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

89 F.2d 441 (1937)

HALL v. COMMISSIONER OF INTERNAL REVENUE.

No. 4121.

Circuit Court of Appeals, Fourth Circuit.

April 6, 1937.

William D. Whitney, of New York City (Richard H. Wilmer, of Washington, D. C., and George G. Tyler and Cravath, DeGersdorff, Swaine & Wood, all of New York City, on the brief), for petitioner.

John J. Pringle, Jr., Sp. Asst. to Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

PARKER, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals; and the question involved is whether a payment of $50,000 made to taxpayer was a gift or additional compensation for services rendered. Taxpayer is a patent attorney who over a period of years had rendered services to the Universal Oil Products Company, a corporation whose chief property consisted of certain patents and patent rights. In 1931 the stockholders of that corporation sold their stock for $25,000,000 to the United Gasoline Corporation. Shortly prior to the transfer, however, and in accordance with the terms of sale, the Universal Oil Products Company transferred liquid assets to the value of $4,100,000 to the Unopco Company, a corporation whose stock was held by the stockholders of Universal in the same proportion in which they held the stock of the latter corporation. Within a few days after the sale and transfer, the $50,000 in question was paid to taxpayer by the Unopco Company pursuant to resolutions of its directors and stockholders appropriating $607,500 to be distributed as a "bonus" to sixty-four former and present employees, attorneys, and experts of Universal "in recognition of the valuable and loyal services of said employees, attorneys and experts" to Universal, in such amounts to each employee, attorney, and expert as the board of directors of Unopco should determine.

The foregoing resolutions of the directors and stockholders of Unopco were adopted pursuant to a suggestion made at a meeting of those who had been stockholders of Universal and were then stockholders of Unopco, to the effect that they show their appreciation of the loyalty and support of some of the employees of Universal by making them a "gift" or "honorarium"; and when checks were delivered to those to whom the directors determined that distribution should be made, the recipients thereof were notified that the amounts thus received were gifts or gratuities and were not subject to income tax. It appears that no claim was made, either by Unopco or Universal, for any deduction for income tax purposes on account of the distribution made pursuant to the resolutions, and that no return of same as income was made by any of the recipients.

The Board of Tax Appeals held that the payments made pursuant to the resolution were additional compensation in consideration of services rendered to Universal, and not tax free gifts. ___ B.T.A. ___. Its decision has been affirmed by the Circuit Courts of Appeals of the First and Second Circuits, one judge dissenting in each case, on the hearing of petitions for review filed on behalf of the estate of William H. Walker, and by Arthur G. Bogardus, Walker, and Bogardus having received the sum of $10,000 each from Unopco pursuant to the resolutions to which we have referred. Walker v. Com'r (C.C.A.1st) 88 F.(2d) 61; Bogardus v. Helvering (C.C.A.2d) 88 F. (2d) 646.

We think that the finding of the Board is amply supported by the testimony. The stockholders of Unopco were the same persons who had been stockholders in Universal when the persons to whom payments were made rendered services to that corporation, and they held the same proportionate interests in the stock of Unopco that they had held in the stock of Universal. The assets of Unopco had been transferred to it by Universal, and the payments made from these assets were not essentially different in character from what they would have been if they had been made from Universal's assets before the transfer of the stock. In other words, Universal had made large profits while in the hands of the original stockholders, in part, we may assume, as a result of the services of those to whom the payments in question were made; those who had profited felt that additional compensation should be paid to those who had served the corporation in the making of the profits; and such additional compensation did not lose its character as such merely because it was paid by a corporation owned by the original stockholders of Universal to which a part of the assets of that corporation had been transferred, instead of being paid by Universal itself. If the payments had been made by Universal before the transfer to Unopco, the assets transferred to the latter corporation would have been less by the amount of the payments; and we cannot see that it makes any difference that they were made from the assets of Unopco after the transfer instead of from the assets of Universal beforehand. Where motive and intent are determining factors, we should look to the substance of transactions and not to the form in which the parties have clothed them.

The case is not different in principle from Bass v. Hawley (C.C.A.5th) 62 F. (2d) 721, 723, where the additional compensation there in question was paid by a holding company of the employing corporation, and where in holding that the payment thus received was not to be treated as a gift but as taxable income the Circuit Court of Appeals of the Fifth Circuit, speaking through Judge Sibley, said:

"Again it is objected that the employer was not the Holding Company or its stockholders, but was the Railroad Company, and that the Railroad Company alone could make additional compensation; that a voluntary payment by any one else is necessarily a gift. The objection would have force where the third person had no interest in the employment and no cause to feel obligated to compensate the service. But in this case although the stockholders authorized the payment, it was made out of funds really belonging to the Holding Company as...