MacFarlane v. Comm'r of Internal Revenue

• Decision Date: 09 October 1952
• Docket Number: Docket No. 27259.
• Citation: MacFarlane v. Comm'r of Internal Revenue, 19 T.C. 9 (T.C. 1952)
• Parties: ALICE M. MACFARLANE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

19 T.C. 9

ALICE M. MACFARLANE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 27259.

Tax Court of the United States.

Promulgated October 9, 1952.

Willis D. Nance, Esq., and Ann Bechley, Esq., for the petitioner.

William Schwerdtfeger, Esq., for the respondent.

Two months after death of petitioner's husband in 1944, the company he had long served in an executive capacity departed from its usual policy and paid to the petitioner the approximate amount of bonus her husband would have received if he had survived.Held, on the facts, payment was not compensation for services but was a gift to the widow, excludible from gross income under section 22(b)(3) of the Code.

The Commissioner determined a deficiency in income tax for the year 1944 in the amount of $41,579.61.The only question to be decided is whether $51,580, a payment made to the petitioner by a corporation for which the petitioner's deceased husband worked, which was paid to the petitioner after her husband's death was a gift to the wife, not taxable to her, or represented compensation for services of the deceased husband rendered to the corporation.

The petitioner concedes that one adjustment made by the respondent is correct.The respondent originally, in the deficiency notice included $66,955 in petitioner's income for 1944, representing all of the payments made by the Tribune Company to the petitioner after her husband's death.Of that amount, $15,375 represented the continuation of the deceased husband's salary, and the respondent now concedes that he erred in including the above amount in petitioner's income because it had not been earned at the date of death.Accordingly, the balance, $51,580, only, is in issue.Effect will be given under Rule 50 to the respective concessions of each party.

FINDINGS OF FACT.

The facts which have been stipulated are found as facts.The stipulation is incorporated herein by reference.

Petitioner is a resident of Chicago, Illinois.She filed her income tax return with the collector for the first district of Illinois.The petitioner reports her income on a cash basis.

The petitioner is the widow of W. E. Macfarlane, who died on October 9, 1944, at the age of 62.

Tribune Company is a corporation which publishes newspapers, and it is located in Chicago, Illinois.Colonel Robert R. McCormick is the president of the Tribune Company.WGN, Inc., a wholly owned subsidiary of Tribune Company, operates in Chicago a radio station, WGN.Macfarlane was employed by the Tribune Company during most of his working life, and from about 1928 until the time of his death, he was an executive of Tribune, business manager, and assistant secretary.For many years prior to his death, Macfarlane was, also, a vice president of WGN.

There was never any employment contract, written or otherwise, between Tribune and Macfarlane, and employment was terminable at the will of either party.

In addition to their basic salaries, Tribune employees and executives are eligible annually to receive a bonus.The rank and file employees are paid a bonus, economic conditions permitting, according to a blanket formula based on amount of salary and years of service.This is called the X or percentage bonus.The determination of an annual bonus for executives, known as the Z bonus, is left to the president, who has full authority with respect to whom and in what amounts bonuses shall be paid.Such authority has customarily been delegated to the president by resolution of the board of directors.In 1944, such a resolution was adopted on November 20 and provided as follows:

RESOLVED, that Colonel McCormick be and he is hereby authorized to pay year-end bonuses for 1944 and salaries for 1945 to such officers and employees of the Company and in such amounts as he may determine and as are permitted by law.

With respect to the X bonus, if one employee receives it for a given year, all are paid.In the case of the executive or Z bonus, the situation is otherwise.Some might receive a bonus while others get none.Moreover, if paid at all, the amount might be greater, less, or the same as in the previous year, depending entirely upon Colonel McCormick's determination at the end of each year.Employees of the Tribune, including executives, were informed at the time of being hired, and were advised periodically thereafter, that the company was not obligated to pay bonuses, that bonuses were not an assured part of the employees' income, and that they might or might not be paid in a given year.

In 1944, as in other years, upon the contingency that bonuses would be paid, and as a matter of conservative accounting, current entires were made monthly upon the company's books setting up an estimated bonus reserve account in the form of a credit and a counterbalancing estimated bonus expense account as a debit.Adjustments were made at the year-end to conform to amounts actually awarded and paid.In 1944, the estimated reserve and expense accounts which had been set up were $39,907.06 short of the total bonuses as finally paid.

For the years 1938 to 1944, the salary and bonus paid to Macfarlane by Tribune and WGN, Inc., were as follows:

+--------------------------------------------------+
                ¦    ¦Salary    ¦Bonus     ¦Salary    ¦            ¦
                +----+----------+----------+----------+------------¦
                ¦Year¦Tribune   ¦Tribune   ¦WGN,      ¦Total       ¦
                +----+----------+----------+----------+------------¦
                ¦    ¦Co.       ¦Co.       ¦Inc.      ¦            ¦
                +----+----------+----------+----------+------------¦
                ¦1938¦$50,000.00¦$42,500.00¦$17,500.00¦$110,000.00 ¦
                +----+----------+----------+----------+------------¦
                ¦1939¦50,000.00 ¦61,419.79 ¦17,500.00 ¦128,919.79  ¦
                +----+----------+----------+----------+------------¦
                ¦1940¦50,000.00 ¦44,406.49 ¦17,500.00 ¦111,906.49  ¦
                +----+----------+----------+----------+------------¦
                ¦1941¦50,000.00 ¦57,821.00 ¦17,500.00 ¦125,321.00  ¦
                +----+----------+----------+----------+------------¦
                ¦1942¦50,000.00 ¦56,362.00 ¦17,500.00 ¦123,862.00  ¦
                +----+----------+----------+----------+------------¦
                ¦1943¦50,000.00 ¦53,692.50 ¦17,500.00 ¦121,192.50  ¦
                +----+----------+----------+----------+------------¦
                ¦1944¦38,611.11 ¦None      ¦13,513.89 ¦1  52,125.00¦

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