Alden D. Stanton and Louise M. Stanton v. United States

268 F.2d 727, 4 A.F.T.R.2d (RIA) 5071, 1959 U.S. App. LEXIS 3526

• Court: Court of Appeals for the Second Circuit
• Decided: July 6, 1959
• Docket: 329, Docket 25569
• Status: Published

Opinions

HAND, Circuit Judge.

The plaintiffs sue to secure a refund of $15,056.29 representing income taxes (principal and interest) paid for the year 1943, which they allege were illegally collected. In 1933 or 1934 the plaintiff, Mr. Stanton, had been retained to manage the real property of Trinity Church in New York. Trinity Operating-Company, Inc. was organized to take over this work and Mr. Stanton became its president and a member of its board of directors. Although he was also “Comptroller” of the church, he was never a vestryman or warden; and all his time was occupied in caring for its real estate; his salary was $22,500. In November, 1943, he voluntarily resigned as Comptroller, and as president and director of the Operating Company, and a few days previously the Operating Company had passed a resolution that “in appreciation of the services rendered by Mr. Stanton as Manager of the Estate and Comptroller of the Corporation of Trinity Church throughout nearly ten years, and as President of Trinity Operating Company, Inc., its subsidiary, a gratuity is hereby awarded to him of Twenty Thousand Dollars * * * provided that, with the discontinuance of his services, the Corporation of Trinity Church is released from all rights and claims to pension and retirement benefits not already accrued up to November 30, 1942.” The plaintiffs — Mr. Stanton and his wife — filed joint income tax returns for the years 1942 and 1943, and in their return for 1943 admitted the receipt of the “gratuity” but did not include it in their income because it was a “gift.” The Commissioner of Internal Revenue decided that it was income and assessed a deficiency for the year 1943 in the amount of $10,629.57. The plaintiffs eventually paid this with accumulated interest, $15,066.29, and filed a claim for refund upon whose denial they filed this action; and after a trial without a jury Judge Byers granted judgment in their favor.

It is clear in the decisions, perhaps especially in this circuit, that in such situations the test of “compensation” is not whether the donor is under any legal obligation to make the payment; but that it may be his “income” although the donee had no right to enforce its payment. The last of our decisions in Carragan v. Commissioner, 2 Cir., 197 F.2d 246, 248, so declares and in Nickelsburg v. Commissioner, 154 F.2d 70, we said (at page 71) that the test was whether “what was added was by way of more compensation for a deserving employee or merely to satisfy the employer’s desire to become a benefactor.” That is indeed not an exact standard, but unhappily it is about as good as any that has been made. Bogardus v. Commissioner, 302 U.S. 34, 58 S.Ct.. 61, 82 L.Ed. 32, is the only decision of the Supreme Court on the subject and it held for the taxpayer by a vote of five to four. The “bonus” or “honorarium,” as the donor there called it, was given by a corporation, called “Unopco,” which, had the same shareholders as the Universal Oil Products Company, which had been the employer of the donee. The-shareholders of “Universal” had sold all their shares to another corporation, United Gasoline Company, reserving only $4,000,000 for “Unopco,” a corporation whose “only business was the investment, and management of the assets thus acquired.” “Unopco” made a general distribution as a “gift” or “honorarium” of $600,000 to all the former employees of “Universal,” of which the plaintiff’s, share was $10,000. Although the shareholders of “Unopco” had been the same as those of “Universal,” the donees were not continued as employees of “Unopco,” but remained in the employ of “Universal.” The Supreme Court seemed to set store upon the fact that “Unopco” was a separate venture, for Justice Sutherland repeated this circumstance as an important factor in the result. We have-no warrant for supposing that, if “Universal” had continued its business, the-results would have been the same. In the case at bar the business of the Operating Company continued after Mr. Stanton had resigned; moreover, his was a single payment made in “appreciation” of his particular services, and was not. part of a free-handed distribution to all employees. Furthermore, as we have-said, the resolution contained a proviso-that Mr. Stanton should abandon all rights to “pension and retirement benefits.” It is true that the uncontradicted testimony was that in fact he was. thought to have no such rights; but. nevertheless the conclusion is inescapable that the proviso was “to make assurance doubly sure,” and it cannot be-disregarded in deciding whether the payment was made wholly from generosity, for when that is the case such a proviso-is certainly an incongruous addition.

It is impossible to reconcile the decisions, and before Bogardus v. Commissioner, supra, at times it appears to have been supposed that the test was whether the payment discharged an enforceable •obligation. For example, the Third Circuit certainly assumed that this was true in Cunningham v. Commissioner, 67 F.2d 205. Moreover in these situations, although not here, there may be an implied promise, which, though not expressed, could support an action in contract; as, for example, if it had been the established practice of the donor to give an “honorarium” to all employees who voluntarily resigned. Probably, we should suppose that, whenever an employee has discharged his duties with outstanding fidelity and capacity, any “honorarium” results from mixed motives: (1) the employer feels that the employee has given more than the bare measure of service required, and that the employer has therefore received more than he could legally have exacted; and (2) that the employer feels friendship, perhaps even affection, for the employee. We are disposed to believe that this accounts for the apparent uniformity with which courts have treated as gifts “honoraria” to clergymen. In such cases the parishioners are apt to be largely moved by gratitude for spiritual direction, kindness and affection and do not think in quantitative terms of whatever financial gains the pastor may have contributed to the corporation. Schall v. Commissioner, 5 Cir., 174 F.2d 893; Mutch v. Commissioner, 3 Cir., 209 F.2d 390; Abernethy v. Commissioner, 94 U.S.App.D.C. 41, 211 F.2d 651. We cannot say positively that in the case at bar this second factor may not have had any place in the action of the board of directors of the Operating Company; but, since Mr. Stanton’s duties were exclusively financial and there is no evidence that personal affection did enter into the payment, we should not assume that it did. Indeed, the resolution was “in appreciation of the services rendered” by him in the conduct of the business, and it is safe to assume that the “honorarium” for practical purposes was the result of the satisfaction of the Operating Corporation for the success of his real estate ventures. The Supreme Court has several times said that a taxpayer has the burden of proving that the Commissioner’s determination is wrong. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212; Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 79 L.Ed. 623; his decision is prima facie correct; Wickwire v. Reinecke, 275 U.S. 101, 105, 48 S.Ct. 43, 72 L.Ed. 184. Certainly the taxpayers in the case at bar did not prove that to any substantial degree the “honorarium” was more than an expression of gratitude for exceptional services rendered.

We are indeed acutely aware that such a test goes far to leave the issue always in the hands of the taxing authorities, but it is, as we have tried to show, inherently incapable of exact definition, and we can think of no better standard.

Judgment reversed and cause remanded for further proceedings not inconsistent with this opinion.