Court Opinion

ID: 5373140
Source: CourtListenerOpinion
Date Created: 2022-01-08 08:22:29.590075+00
Date Added: 2024-06-11T08:30:02.234979
License: Public Domain

Bliss, J. (dissenting).
We have here no dispute of fact. The question is one of law. Was the transfer of part of its own stock by the corporation through the trustees under the profit-sharing agreement to its officers and employees at less than its value reasonable compensation for personal services actually rendered? It is undeniable that the participating employees were enriched to the extent of their beneficial interest in the stock thus transferred (Old Colony Trust Co. v. Comr. of Int. Rev., 59 Fed. Rep. [2d] 168; Olson v. Comr. of Int. Rev., 67 Fed. Rep. [2d] 726; certiorari denied, 292 U. S. 637; Gross v. Comr. of Int. Rev., 92 Fed. Rep. [2d] 621), and that the corporation had parted with an amount equal in value. (Comr. of Int. Rev. v. Texas Pipe Line Co., 87 Fed. Rep. [2d] 662; Gross v. Comr. of Int. Rev., 92 Fed. Rep. [2d] 621.)
For several years reasonable additional compensation to employees by way of bonuses or profit-sharing have been deductible in computing net income. (Lucas v. Ox Fibre Brush. Co., 281 U. S. 115.)
*100It is argued that not the corporation but its stockholders presented the employees with this stock because the value of every other share .of stock was diminished proportionately by the transfer. The answer is found in the fact that stockholders had at their special meeting, consented that the corporation carry out the profit-sharing plan and make such transfer and waived their right to subscribe to their proportionate shares of such new stock. Thus the corporation made the transfer direct from its treasury at less than the actual value of new stock. The same argument might be made if the profits had been shared in cash or any other property. Ultimately the stockholders would have to bear the loss and their stock would be proportionately diminished in value. But it could not be denied that the corporation made the payment. So here it was the corporation which parted with its own stock to the trustees.
We may assume that the stockholders expected to receive their return in increased interest in their work on the part of the employees and in the added incentive to continue with the corporation, and that this would compensate them by increasing the value of their stock or the dividends to be declared thereon.
The State argues that the transaction occasioned no expense, loss or diminution of assets to the corporation when the corporation removed this new stock from its treasury and issued it to the trustees. It was then compelled to set up on the liabilities side of its balance sheet an increased amount of stock outstanding. The corporate assets represented by the new stock had passed from the corporation to the trustees. And the transfer was final. Under no circumstances could the corporation recover back the stock thus parted with at less than value, The State also argues that the trust company was acting throughout simply as an agent for the stockholders to carry out the profit-sharing plan. The same is true of every other transaction of a corporation. It is always acting for its stockholders but it is also a separate entity and the transactions are its own.
Had this stock been sold on the market for its full value and any portion of the proceeds turned over to the employees or trustees for their benefit there would be no question but that such amount would be deductible, if reasonable. I see no difference in principle between delivering the stock or the cash. Either is a payment of extra compensation by the corporation to its employees.
Finally, it was stated upon the argument and not denied that the Federal taxing authorities have allowed the deduction here *101in question. This is a potent argument for its allowance by the State. (People ex rel. Mosbacher v. Graves, 254 App. Div. 438; affd., 279 N. Y. 793.)
This issue came to rest in the Federal courts some time ago. It would serve no useful purpose to indulge in copious quotations from Federal opinions or repeat the reasons there adopted. Suffice it to say that their logic is sound and the arguments here presented by respondents were there rejected.
The determination of the State Tax Commission should be annulled and the deduction allowed.
Hill, P. J., and Sohenck, J., concur with Heffernan, J.; Bliss, J., dissents, in opinion with which Foster, J., concurs.
Determination of the State Tax Commission confirmed with fifty dollars costs and disbursements.