1946 U.S. Tax Ct. LEXIS 209">*209
The Commissioner determined that $ 3,000 of a $ 5,000 bonus payment made by a father to a son who was in his employ was not deductible by the father as a business expense on the ground that it constituted excessive compensation for services rendered. The son claimed that the $ 3,000 payment was a gift and should be excluded from his gross income.
6 T.C. 930">*930 OPINION.
This case arose out of a deficiency determined by the respondent in the income tax of petitioner for the year 1940 in the amount of $ 22.42. Petitioner claims an overassessment for that year according to his petition in the amount of $ 101.20, but according to the claim for refund filed it is in the amount of $ 118.80.
The petitioner is a resident of Burbank, California. His income tax return for the year 1940 was filed in the sixth district of California.
The question for determination is: When an employer, who is also the father of an employee, is disallowed a deduction as a business expense of part of an amount paid to his son, because that part was declared excessive compensation for the services rendered, is such excessive compensation taxable income to the son, or is it to be treated as a gift not includible in the son's taxable income?
All of the facts in this1946 U.S. Tax Ct. LEXIS 209">*211 case are stipulated. They are as follows:
That Clyde W. Wood is the father of Stanley B. Wood, the petitioner in the above-entitled action.
6 T.C. 930">*931 That Clyde W. Wood operated a general contracting business as an individual in Los Angeles, California, during the calendar year 1940.
That during the year 1940 the petitioner was in the employ of his father, Clyde W. Wood, for whom he worked as a superintendent and foreman on various construction and road building projects and was paid for his said services a regular salary of $ 2,435.63 for the year, and a bonus at the end of the year in the amount of $ 5,000, or a total amount of $ 7,435.63.
Petitioner reported $ 5,576.72, or three-fourths of the $ 7,435.63, as income for 1940 and paid to the Collector of Internal Revenue $ 138.99 as the amount of income and defense tax due on the $ 5,576.72. The remaining one-fourth, or $ 1,858.91 of said $ 7,435.63, was duly reported by petitioner's wife in her separate return, and an income and defense tax of $ 73.61 paid thereon.
Pursuant to an internal revenue agent's report of an examination of the return of Clyde W. Wood (the father) for the calendar year 1940, respondent disallowed $ 3,0001946 U.S. Tax Ct. LEXIS 209">*212 of the $ 5,000 bonus payment as excessive compensation, and the said Clyde W. Wood settled his tax liability in accordance with said adjustment.
On June 30, 1943, the petitioner filed a claim for refund of income taxes in the amount of $ 118.80 for the calendar year 1940. A copy of said claim for refund is attached hereto as a part hereof.
After the filing of said claim for refund an examination of petitioner's 1940 return was made and the examining officer made the following report: Claim was filed to request decrease in salary because $ 3,000.00 of the bonus paid by Clyde W. Wood was disallowed as a deduction to Clyde W. Wood, on the basis that it was excessive bonus. The claim is recommended for rejection because excessive compensation represents taxable income to the recipient, per Section 19.23 (a)- Personal exemption has been reduced from $ 1,800 to $ 1,400. The taxpayer was married about July 1, 1940. He claimed personal exemption of $ 400 for six months, his wife's single exemption of $ 400 for six months and the total joint exemption of $ 1,000 for the six months after marriage. Inasmuch as Mrs. Wood filed a separate return, her single1946 U.S. Tax Ct. LEXIS 209">*213 exemption for the period before marriage is deductible only on her return.
Upon the basis of said report a deficiency in income tax in the amount of $ 22.42 was determined, as shown in the notice of deficiency attached to the petition in this case as Exhibit A thereof.
Petitioner claims that the $ 3,000 bonus disallowed should be construed to be a gift to him and not taxable as income; respondent claims that the amount is taxable income to petitioner, as a matter of law and United States Treasury Department regulations having the effect of law.
These facts present the single question as to whether or not the $ 3,000 payment received by the petitioner should be included in his gross income or should be considered as a gift by petitioner's father to him. On the question of what should be included in gross income and of what disposition shall be made of amounts paid ostensibly as compensation for employment but which are declared to be in excess of allowable compensation, the Treasury has adopted regulations 1 on which the 6 T.C. 930">*932 respondent relies. Petitioner relies upon two decisions of the Board of Tax Appeals,
1946 U.S. Tax Ct. LEXIS 209">*215 It will be seen that there are two important points of distinction between the above cases relied upon by petitioner and the pending case:
(1) The two cases cited pertain to deductions by the payor and to the extent that the Board said that such deductions "may be regarded" partially as gifts, the remarks of the Board were
(2) In the cases cited, furthermore, it is noted that the respondent had determined that so far as the taxpaying petitioner was concerned, the payments were gifts. In the pending case the respondent has determined that the payments were not gifts. Thus, entirely aside and independent from the provisions of the regulations above referred to, it became the responsibility of the petitioner to overcome this assumption by a preponderance of the1946 U.S. Tax Ct. LEXIS 209">*216 evidence.
The available decisions on this question where overpayments are made and a family relationship exists between the payor and payee are not numerous. However, there seems to be an abundance of law on the basic principle involved in all cases where an overpayment is involved. That principle is that the
In the pending case, which involves a family relationship and in which the payment was made by a father to his son in a year in which the son was married, it would seem that1946 U.S. Tax Ct. LEXIS 209">*217 the intent on the part of the father to make a gift to his son might well have been established sufficiently strong to overcome the presumption raised by the respondent's finding in this case. But there is not a particle of evidence on this point and this Court can not, therefore, so find. It is the finding of the Court that the petitioner has not sustained the burden of proof in this case by showing that the overpayment to him by his father was intended by the father as a gift.
1. "Sec. 19.22 (a)-1 [Regulations 103].
Sec. 19.23 (a)-7.
