Walker v. Commissioner of Internal Revenue

• Decision Date: 24 March 1937
• Docket Number: No. 3197.,3197.
• Citation: 88 F.2d 61
• Parties: WALKER et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

88 F.2d 61 (1937)

WALKER et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 3197.

Circuit Court of Appeals, First Circuit.

February 12, 1937.

Rehearing Denied March 24, 1937.

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

John G. Remey, Sp. Asst. to the Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and Sewall Key and John J. Pringle, Jr., Sp. Assts. to the Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

BINGHAM, Circuit Judge.

This is a review of the decision of the Board of Tax Appeals holding there is due from the estate of William H. Walker, who resided at the time of his death at Bridgton, Me., a deficiency tax of $242.69 for the calendar year 1931, under and by virtue of the provisions of the Revenue Act of 1928 (45 Stat. 798, § 22 26 U.S.C.A. § 22 and note). The only question raised for consideration is whether the Board erred in determining that the sum of $10,000 received by William H. Walker in 1931 was compensation for services and not a gift.

The salient facts are that the Universal Oil Products Company was organized in South Dakota in 1914, having as its only asset an application for a patent on a process for refining petroleum and manufacturing gasoline, and since that time has been engaged in the business of developing that and other patents subsequently acquired and licensing them to various producers on a royalty basis; that it was so remarkably prosperous that the stockholders, after taking $4,100,000 from the liquid assets of the company, were able to sell their stock to a corporation known as United Gasoline Corporation for $25,000,000; that prior to this sale the stockholders of Universal organized another corporation known as the Unopco Corporation, to which was transferred the $4,100,00 above referred to, all the stockholders of Universal becoming stockholders of Unopco with the same proportionate holdings, and it was provided in the sale agreement of the Universal stock that a part of the proceeds of the sale and a certain amount of the assets transferred to Unopco should be held as a "guarantee fund" for payment of Universal's unsettled liabilities; that on January 9, 1931, after the sale, the board of directors of Unopco recommended to its stockholders that $607,500 "be appropriated, paid and distributed as a bonus to sixty-four (64) former and present employees, attorneys and experts of Universal Oil Products Company, * * * in recognition of the valuable and loyal services of said employees, attorneys and experts to said Universal Oil Products Company" the same to be distributed as the board of directors shall determine; that on the next day, January 10, 1931, the stockholders of Unopco met, and, following the above recommendation, passed a vote authorizing the distribution, using therein the same terms as above quoted; and by virtue of this authority the directors distributed the money to the 64 employees, attorneys, and experts, paying to Mr. Walker, who had been called in from time to time in consultation and who had given testimony in cases relative to patent infringements, the sum of $10,000.

It was in evidence that, prior to the passage of the vote, Mr. H. J. Halle, president of Unopco, had suggested to its stockholders that it "would be a nice and generous thing for us to show our appreciation and to remember them a number of employees in the form of a gift or honorarium; and he suggested that that be considered; and all of the stockholders acquiesced and were glad to do it; and the result was that it was understood that we would come forward and make these presents or gifts to these employees that were to be slated for it." The checks were distributed by Mr. Halle and in each instance, where given to the recipients personally, he stated that the moneys represented by said checks were given to them and each of them, by said Unopco Corporation, as a gift and gratuity, and were therefore not subject to income tax on the part of the recipients; and in the letters accompanying the checks sent by mail the same statement in substance was made.

The records of the Universal show that bonuses had been paid its employees every year from 1925 to 1930, inclusive.

"Whether a payment in a given case shall be deemed taxable compensation or a gift exempt from tax depends upon the intention of the parties, and particularly that of the employer, to be determined from the facts and circumstances surrounding the transaction." Fisher v. Commissioner (C.C.A.) 59 F.(2d) 192, 193. It seems to us that where an employee, although he has been paid his agreed salary, is given an additional sum or sums by his employer raises a strong presumption that such payments were compensations for services rendered, and should be given its...