Court Opinion

ID: 9636755
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:41:41.438712+00
Date Added: 2024-06-11T18:09:48.909052
License: Public Domain

EVANS, Circuit Judge
(dissenting).
For two reasons I find myself unable to accept the conclusion of the majority of the court.
(1) Plaintiff failed to bring its claim for deduction within section 23(a), Reve*822nue Act 1928, 26 U.S.CA. § 23 and note, or article 128 of Regulations 74.
(2) If. the payment of- a bonus is established it was deductible in 1925 and not in 1929, as claimed.
(1) In reaching conclusion No. 1, I assume (a) that the burden is upon the taxpayer to prove facts upon which the deduction depends and (b) all the essential facts were stipulated and were covered by the court’s thorough and specific findings. These covered the detailed transactions which are 'briefly set forth in the statement appearing in the majority opinion. They raise a question of law.
The precise question may be stated thus: Do the facts as stated show the payment of a reasonable allowance for salaries or other compensation for personal services actually rendered by the fifteen employees of plaintiff? In answering this question it must be, and is, assumed that “bonuses” are deductible when they are reasonable and are paid in good faith and as additional compensation for services actually rendered by the employees.
The execution of notes by the fifteen employees and the pledging of the stock which the notes purchased, to secure the payment of their notes, conclusively negatives the existence of a gift of such stock as a bonus to said employees. The transaction was doubtless motivated by a worthy desire, namely, to distribute stock among faithful employees. This motive was not, however, determinative of the grant of a bonus, the essential feature of which is a gift or reward for services rendered. The instant transaction was like unto one where the owner of a farm conveys it to another and takes back a note and mortgage. Here the employees gave their notes for- the stock which was issued to them and then assigned the stock as collateral to secure their notes. The rate of interest or the absence of any interest provision in the notes has no bearing on the nature of the transaction. Positive, unequivocal written documents evidencing an absolute liability such - as those before us speak for themselves and establish a status which cannot and should not be set aside in order that on.e of the contracting parties may thereafter avoid or lessen its Federal income tax.
(2) Equally persuasive, is the second reason. If bonuses were found to have been given, they were given in 1925 and not in 1929.
The transaction which is the basis of the asserted payment of a bonus or additional compensation occurred in 1925. There was a modification of the 1925 agreement in 1929 but the modification did not affect the facts which alone determined the existence or non-existence of a bonus grant in 1925. Solid substantiation of the conclusion that the stock was sold in 1925 appears in the fact that the employees thereafter received the dividends on said stock. In,truth, the modification of the agreement in 1929 which accompanied the stock dividend of that year called for new notes which drew interest to replace the old notes which did not draw interest.
If we appraise the transactions as plaintiff contends, we have the execution of notes by employees but with the verbal understanding that they were not enforceable and were void as between the parties'! In 1929, however, the employees gave new notes which were enforceable and drew interest. Such a modification was not a gift, — a bonus to the employees. The 1929 transaction was favorable to the employer and it could make no valid deduction for it in its income tax return.
If plaintiff’s position be upheld, then a taxpayer may choose the year when he will claim his bonus deductions. That is to say, a solemn, unequivocal written agreement made by employer and employee for the sale of stock, the delivery of notes therefor, and the pledging of the stock to secure the purchase money notes, may, notwithstanding the employer pays and the employee receives cash ' dividends for several years, be nullified by an oral agreement of the parties to the effect that the written documents were unenforceable and void, but may become binding and valid if and when the company has an abnormal income and a correspondingly large Federal income tax which it is desirous of reducing by deductions of a so-called bonus. In other words, a bonus agreement may be a nudum pactum during a lean-year but a deductible bonus in a prosperous ji-ear.
The plan has the merit of ingenuity, and it has more than mere ingenuity if it succeeds in permitting the taxpayer to reduce its income in a year when its profits are very large.