Court Opinion

ID: 4601141
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:26:59.805246+00
Date Added: 2024-06-11T07:52:26.388800
License: Public Domain

SAMUEL POORMAN, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Poorman v. CommissionerDocket No. 102994.United States Board of Tax Appeals45 B.T.A. 73; 1941 BTA LEXIS 1177; September 12, 1941, Promulgated 1941 BTA LEXIS 1177">*1177  Under the evidence it is held that the payment of a substantial sum to the petitioner by his former employer constituted additional income rather than a gift.  Bogardus v. Commissioner,302 U.S. 34">302 U.S. 34, distinguished.  Samuel Poorman, Jr., Esq., pro se.  Byron M. Coon, Esq., for the respondent.  MELLOTT45 B.T.A. 73">*73  This proceeding involves a deficiency in income tax for the calendar year 1937 in the amount of $708.92.  The issue is, Did the respondent err in including in petitioner's gross income $8,394.92 received by him from his former employer under the circumstances hereinafter set out?  FINDINGS OF FACT.  Petitioner is resident of Los Angeles, California.  He filed his income tax return for the year 1937 on the basis of cash receipts and disbursements with the collector of internal revenue for the sixth district of California.  Petitioner is an attorney at law, employed by the city of Los Angeles and assigned to duty with the department of water and power.  For a period of approximately 17 years preceding January 31, 1937, petitioner had been employed in the legal department of the Los Angeles Gas & Electric Corporation. 1941 BTA LEXIS 1177">*1178  For approximately 10 years prior to the termination of petitioner's employment by this corporation he had been exclusively engaged in defending and working upon litigation which had been instituted by the city of Los Angeles and by the city of Pasadena against it.  The general purpose of the litigation was to enjoin the corporation from using the cities' streets for the distribution of gas and electricity or for any purpose other than lighting.  During 1935 negotiations were begun looking to the sale of the electric properties of the corporation.  This culminated in the execution of a final agreement in October 1936, under which such properties were sold to the city as of January 31, 1937, for approximately $46,000,000.  In connection with the sale approximately 840 employees of the corporation, chiefly those who had been engaged in the operation of the electric properties, were transferred to the department of water and power of the city of Los Angeles.  Petitioner was one of those transferred, although he did not enter the employ of the city department until March 1, 1937.  The transferred employees constituted about one-third of the personnel of the corporation.  After the sale1941 BTA LEXIS 1177">*1179  of the electric properties 45 B.T.A. 73">*74  the corporation engaged solely in the gas business.  In May 1937 it was merged with the Southern California Gas Co.  On May 30, 1937, petitioner, whose salary from 1929 forward had been $1,000 a month, was paid in full by the Los Angeles Gas & Electric Corporation for all services rendered and to be rendered by him during the month of January 1937.  He had theretofore been paid in full by the corporation for all services rendered by him prior to January 1, 1937.  Attached to the check by which such payment for services for January 1937 was made, was a voucher containing the following statement: Statement of Account.  In full settlement of which payee has accepted Los Angeles Gas & Electric Corporation check, annexed hereto: Samuel Poorman, Jr., January 30, 1937, services as attorney during the month of January, 1937, - $1,000.00.  Payee will detach and retain this statement.  In September of 1932 the corporation and several other public utility companies in southern California established a "Uniform Pension and Benefit Plan" for their employees.  A booklet was printed explaining the details of the plan, which in general provided: That each1941 BTA LEXIS 1177">*1180  employee should contribute by pay roll deduction each month 3 percent of his current wages, to be "used solely to provide a portion of his total retirement income." The company was to pay the entire balance of the net cost of the employees' retirement income and in addition provide and administer at its own expense the death and disability benefits.  The printed announcement states: "The companies believe in this plan so firmly that their contract with the insurance company provides that the companies' contributions, one made to these funds, must be used for employee benefit only and not diverted to any other purpose.  In other words, the companies' payments, as well as the employees' deposits, are dedicated solely to the cause of employee benefit." All employees who had completed two or more years of continuous service prior to September 1932 were eligible to participate in the plan.  Employees completing 10 or more years of continuous service prior to normal retirement date (65 for men and 60 for women) were entitled to receive a monthly pension of $1 per month for each $1,000 of wages earned during continuous service subsequent to September 1, 1930, the minimum pension for those1941 BTA LEXIS 1177">*1181  who completed 20 or more years of continuous service at normal retirement date being $45 per month.  Such pension payments were to commence on the last day of the month following retirement and continue during the life of the employee.  Each employee's contribution under the plan was to be paid over to the insurance company and used to provide a portion of his retirement income.  The amount was returnable to the employee in cash if he should leave the employ of the company or to his beneficiaries in cash if he should die prior to reaching retirement age.  45 B.T.A. 73">*75  The company obligated itself to pay the entire balance of the net cost of the employee's retirement income and in addition to provide and administer at its own expense the death and disability benefits.  The death benefit was to be an amount equal to one year's wages, with a minimum of $2,000 for full-time employees.  The disability benefits were to be "3 percent per month of the total death benefit in effect at the date the disabled employee leaves work on account of disability", payments at this rate to continue for 12 months.  For the next 48 months payments were to be made at the rate of 2 1/2 percent per month of1941 BTA LEXIS 1177">*1182  the total death benefit.  The maximum monthly disability benefit was not to exceed 50 percent of the monthly salary in effect at the date the employee should leave work on account of disability.  The disability payments were to be "inclusive of any disability payments made pursuant to the Workmen's Compensation, Insurance and Safety laws of the State of California, and/or any laws of said State providing disability compensation." For employees who would have completed 20 or more years of continuous service at normal retirement date, the minimum disability benefit or disability retirement income was to be $45 per month, and employee contributions were to cease during the period of disability.  If an employee withdrew or was released from service prior to normal retirement age, he had the option of converting his death benefit into any of the regular life insurance policies issued by the insurance company, except them insurance, at the rate applicable to his then attained age and class of risk.  Such conversion could be effected without medical examination, provided application be made within 31 days after termination of service.  The company reserved the right to discontinue or change1941 BTA LEXIS 1177">*1183  the plan at any time.  "Discontinuance or change, however, will neither deprive any employee of any right with respect to his contributions nor affect retirement annuities which have been purchased prior to the date of discontinuance or change.  The Companies' contributions, once made, will be used for employees' benefits and for no other purpose." When it became obvious that the sale would be consummated and a substantial number of the corporation's employees would be transferred, serious consideration was given by the corporation's officers to the effect of the transfer upon the right of the employees under the "Uniform Pension and Benefit Plan." It was recognized that the employees were losing various rights in leaving the service of the corporation and that "severance of employment meant sacrifice of pension rights." The officers wanted to do something for the employees who were to be transferred "in consideration of the fact that they were going to lose their pension rights by termination of service." They first considered the possibility of obtaining from the insurance company which had underwritten the plan some sort of continuing benefit 45 B.T.A. 73">*76  under it.  The representatives1941 BTA LEXIS 1177">*1184  of the insurance company told them this would be impossible, and that they "had just better forget any such thing as that, and do directly for the departing employees whatever the company could and desired to do." After much discussion and study, the corporation decided in the latter part of November or early in December 1936 to make a payment to each of the transferred employees based upon his or her age, length of service with the company, and wages received during period of employment.  The "tax angle" was taken into consideration also, and it was decided to make the payment in such a manner that it would be a proper deductible expense of the corporation in computing the net profit from the sale.  Careful consideration was given to the language describing the payments in the checks to be issued and in letters to be sent to the transferred employees.  It was decided that the words "additional compensation" would accurately describe the payments "inasmuch as the extra compensation was based on the length of past service, that is, service prior to January 31, 1937, [and] upon the rate of the pay received by the employee during all that period." On or about January 25, 1937, the1941 BTA LEXIS 1177">*1185  Los Angeles Gas & Electric Corporation sent two letters to each of the employees to be transferred.  One, dated January 25, 1937, signed by its president and general manager, was addressed: "To Employees about to be transferred from the service of our Company:".  It contained the following statement: Arrangements have been made to grant you additional compensation in recognition of the value of your past services.  The amount of this payment will be based upon your present attained age, your length of service with the Company, and the rates of wages received during your period of employment; but this extra compensation will not be paid to employees whose "employment date" is more recent than September 1, 1934.  Checks will be mailed to you as soon as possible after our electric properties have passed to the City.  The other letter dated, January 1937, was addressed "To Members of Uniform Pension and Benefit Plan Who Will Transfer to the Service of the City of Los Angeles concurrently with the Transfer@ of Our Electric System to the City:" and informed them that their membership in the uniform pension and benefit plan would cease with the termination of their service; that their1941 BTA LEXIS 1177">*1186  life insurance protection under the plan would continue for 31 days after termination of service; and that a check would be sent covering the amount of their contributions to the plan, together with interest thereon.  Petitioner received these two letters sometime after January 25, 1937.  On that date he was notified by the president of the Los Angeles Gas & Electric Corporation that his work with the corporation was finished and that he was to be transferred to the department of water and power of the city of Los Angeles.  In the course of this 45 B.T.A. 73">*77  conversation, the president of the corporation stated that the Pacific Lighting Corporation had arranged for the giving of a bonus to the employees who were to be transferred to the city department.  The Pacific Lighting Corporation was the holding company of which the Los Angeles Gas & Electric Corporation was the principal subsidiary.  The holding company owned all of the common stock of such subsidiary, and completely dominated the management and control of it.  At all times during the petitioner's employment by the subsidiary its earnings sufficed to cover several times its preferred stock dividends.  On or about February 19, 1937, the1941 BTA LEXIS 1177">*1187  petitioner received from the Los Angeles Gas & Electric Corporation a check for $8,394.92, to which was attached a voucher reading as follows: Additional compensation for services to and including January 31, 1937, in accordance with the President's letter of January 25, 1937.  No. 26, Total amount, $8,491.34.  Deductions, Federal O.A.B., $20.  State, U.I. $76.42.  Net amount, $8,394.92.  This statement constitutes a valuable record of your earnings and the contributions you have made toward future social security benefits.  We recommend that you keep it for your further reference.  Los Angeles Gas & Electric Corporation, detachable for presenting for payment.  The payments made by the Los Angeles Gas & Electric Corporation to the employees transferred to the department of water and power of the city of Los Angeles, in accordance with the letter of January 25, 1937, aggregated $475,546.32, and were charged to a ledger account designated "Sale of Electric Properties, Suspense Account." This account showed in black entries the total expenses in connection with the sale of the properties, and in red ink figures the amount received from the city for them, together with any other credits1941 BTA LEXIS 1177">*1188  necessary in order to arrive at the net profit.  On the books of the corporation the payments of $475,546.32 were treated as an expense incurred in connection with the sale of the electric properties.  In the corporation's income tax return for 1937 these payments were treated in the same manner and were deducted from the amount received from the city in computing the net profit realized from the sale of the electric properties.  No bonus or additional compensation whatsoever was paid to the employees retained by the Los Angeles Gas & Electric Corporation, and no extra payment other than the one here in question was ever made by the corporation to the petitioner.  The petitioner had nothing to do with the sale of the electric properties, nor did any other employee of the corporation who was transferred to the department of water and power and to whom the so-called additional compensation was paid.  In petitioner's individual income tax return for the calendar year 1937, the amount of $8,394.92 was reported in a schedule as nontaxable 45 B.T.A. 73">*78  income other than interest.  The following explanation was given: "Bonus received from Los Angeles Gas & Electric Corporation after leaving1941 BTA LEXIS 1177">*1189  its employ upon transfer of its electric system to The City of Los Angeles, (not having been paid or received as a consideration for services rendered, and the same constituting a gift, as held in ); * * * $8,394.92." Respondent determined that the $8,394.92 was additional compensation and added this amount to the net income shown in petitioner's income tax return for 1937.  OPINION.  MELLOTT: Petitioner, in support of his contention that the $8,394.92 was a gift, relies principally upon . In that case, the taxpayer, prior to 1931, had been in the employ of the Universal Oil Products Co., the business and assets of which had greatly increased between 1922 and 1930.  Early in 1931, its entire stock was sold to the United Gasoline Corporation for $25,000,000.  Prior to the sale, and in contemplation of it, the Unopco Corporation had been organized for the purpose of acquiring, and it did acquire, certain assets of the Universal Co. of the value of over $4,000,000.  All of the former stockholders of the letter company became stockholders1941 BTA LEXIS 1177">*1190  of Unopco, with the same proportionate holdings.  None of them, after the sale of the Universal stock, held any stock in the Universal Co., or in the United Gasoline Corporation.  Under its new ownership, the Universal Co. continued to carry on the same business, retaining a large part of its assets.  A few days after the sale of the Universal Co.'s stock, the former stockholders, then stockholders of the Unopco Co., held a meeting at which it was proposed that they show their appreciation of the loyalty and support of some of the employees of the Universal Co. by making them a "gift or honorarium." At meetings of the board of directors and stockholders of Unopco resolutions were adopted that $607,500 be appropriated, paid, and distributed as a bonus to 64 former and present employees of the Universal Co., in recognition of their valuable and loyal services.  Bogardus continued to remain in the employ of the Universal Co. after the change of the ownership of its stock, and when the distribution was made by Unopco in 1931 he received $10,000.  The Supreme Court held that this payment was a gift and not additional compensation.  There are several differences between the facts in the1941 BTA LEXIS 1177">*1191 Bogardus case and those presently before us.  "The recipients of the bounty * * * were never employees of the Unopco Company, 45 B.T.A. 73">*79  or any of its stockholders." Petitioner and the other employees who received the payments from the corporation had been in its employ until the sale of the properties to the city.  "Neither the Universal Company nor any one else was under any obligation, legal or otherwise, to pay any of the recipients, including petitioner, any salary, compensation, or consideration of any kind." The Los Angeles Gas & Electric Corporation, however, was at least under a moral obligation to the employees whose services were being terminated through no fault of theirs.  It had agreed with them "to provide and administer, at its own expense, the death and disability benefits" and to pay a portion of the net cost of securing a "retirement income." Though the record does not disclose the exact amount which the company had contributed and which "once made, * * * [was to] be used for employees' benefits and for no other purpose", it must have been a considerable amount.  Petitioner's rights, for example, seem to have been to receive "retirement income" of at least1941 BTA LEXIS 1177">*1192  $76 per month, insurance of at least $12,000, and disability benefits $360of per month for 12 months and $300 per month for an additional 48 months.  "It was recognized", said the vice president of the company and chairman of the benefit committee, "that in accordance with the terms of the pension plan, severance of employment meant sacrifice of pension rights except, I would say not only pension rights, but all rights under the pension benefit plan, with the exception that the life insurance in accordance with the regular provisions always continued for 31 days after termination of service.  It was recognized that the employees were losing various rights in leaving the service of the corporation." For this reason "consideration commenced among the company officials as to what, if anything, could be done for the employees who were transferred to the city with the property * * * in consideration of the fact that they were going to lose their pension rights by termination of service." "Finally, after much discussion and study of the situation, the plan which was ultimately followed was worked out and a basis of compensation, additional compensation for past services, was formulated which, 1941 BTA LEXIS 1177">*1193  as stated in the President's letter, was in consideration of past valuable services and was based upon the present attained age of the employees, their length of service with the company, and the rates of wages which they had received during their period of employment." In the Bogardus case the payments were charged "not to expense but to surplus." In the instant proceeding the payments were charged to expenses in connection with the sale of the properties.  Here again the record is not very clear; but inferentially it seems that the charge could properly have been so classified only if it had 45 B.T.A. 73">*80  been necessary for the corporation to make the payments either to fulfill an obligation (even "a moral obligation, however slight",  ), or to regain possession of some of the money which had been put up with the understanding it would "be used for employees' benefits and for no other purpose." It is also not without significance that the payments in the instant proceeding were designated by the corporation "additional compensation" while those in the Bogardus case were referred to as part of a "gift or honorarium" to the1941 BTA LEXIS 1177">*1194  employees.  True, calling a payment a gift, bonus, bonorarium, additional compensation, or anything else does not change, or establish, its true characteristic; but it is at least a circumstance to be considered in determining the intention of the parties.  "Intention" said the Court in the Bogardus case, "must govern." The Court was referring to the intention of the one making the payment.  The Circuit Court of Appeals for the Ninth Circuit indicated in , that it felt that the intention of the employer was particularly important - a view evidently shared by other Circuit Courts, ; ; ; , and also by this Board.  Cf. e.g. . Then, too, as the court pointed out in , as a general rule directors of a corporation have no power or authority to give away any of its assets, cf. 1941 BTA LEXIS 1177">*1195 ; certiorari denied, ; and "if the directors could not give away this sum, and the books of the corporation show that it was not give away, it must be presumed that the payment was not a gift." Whether the payment to this petitioner was, or was not, a gift is a mixed question of law and fact.  Respondent determined that it was not a gift.  Petitioner, undertaking to overcome the presumption attaching to this determination, , has shown and it has been found as a fact that he, previous to the receipt of the sum in issue, had received all of his agreed salary.  He argues that the additional payment not only was not "additional" compensation, but that it could not even be "compensation", since he had already been compensated in full.  In , the court quoted with approval the following language used by the Circuit Court of Appeals for the Second Circuit in 1941 BTA LEXIS 1177">*1196 :The doctrine that bonus payments and gratuitous "additional compensation" for past services may constitute taxable income has been frequently recognized in decisions of the lower Federal courts and of the Board of Tax Appeals.  45 B.T.A. 73">*81  We do not interpret the Bogardus case as laying down any different principle.  Cf. . Petitioner also contends that, since the corporation saw fit to enter the payment made to him and to the other employees upon its books as an expense item in connection with the sale of its electric properties, and since the evidence shows that they, and especially he, had nothing to do with making such sale, it follows that the corporation erred in characterizing the payment as additional compensation.  There would be more substance to this contention if the respondent were required to prove that the payment was made in consideration of, and as compensation for, services rendered by petitioner in that particular transaction.  But he has no such burden.  He may rest upon the presumption of correctness attaching to his determination that the payment was not1941 BTA LEXIS 1177">*1197  a gift, ; Reinecke v. spalding,; and petitioner must prove that this determination was erroneous.  He has not sustained his burden merely by proving - if in fact he has proved - that it was improperly treated upon the books of the corporation.  In other words, it was incumbent upon petitioner to prove that the corporation was not discharging some obligation to him by making the payment in question.  The evidence indicates that the payments were made to compensate the employees for the loss of their rights under the "Uniform Pension and Benefit Plan" or to enable the company to withdraw the funds which had been put up with the insurance company in connection with such plan.  This, in our opinion, was sufficient consideration to prevent the payments being absolute gifts.  We therefore hold that the respondent committed no error in including the amount received by this petitioner in his gross income.  The only other error charged in the petitioner is the disallowance by the respondent of a deduction of $18.45.  This is not discussed upon brief.  The petition alleges that petitioner accidentally1941 BTA LEXIS 1177">*1198  broke a pair of eyeglasses with their frame and replaced them during the taxable year at a cost of $18.45; that he had been unable to ascertain either the date of the acquisition of the glasses so broken or their cost; and that according to his best recollection the date of acquisition was within a year or two prior to their replacement, the cost being in excess of $18.45.  At the hearing petitioner admitted he did not have any "very satisfactory proof" that he had sustained a loss through casualty.  (Sec. 23(e)(3), Revenue Act of 1936.) He testified that he had paid $3 of the $18.45 to a doctor for examination of his eyes, $15 for new glasses, and 45 cents as state tax.  This was the sole evidence offered.  The claim for the deduction has probably been abandoned; but, if not, this issue must be resolved against petitioner for failure of proof.  Decision will be entered for the respondent.