1960 U.S. Tax Ct. LEXIS 50">*50
35 T.C. 65">*65 OPINION.
The Commissioner determined a $ 1,376.22 deficiency in petitioners' 1960 U.S. Tax Ct. LEXIS 50">*51 1956 income tax, resulting from his addition to their taxable income of "salary continuation payments" in the amount of $ 4,910.05, explained by him as follows:
(a) It is held that salary continuation payments of $ 9,910.05 paid to Mrs. Pierpont in 1956 by the Loewy Drug Co. in consideration of her deceased husband's services to that corporation constitutes taxable income to the extent of $ 4,910.05, computed as follows:
Salary continuation payments | $ 9,910.05 |
Less amount excludible under Section 101(b) of the Internal | |
Revenue Code of 1954 | 5,000.00 |
Increase in taxable income | $ 4,910.05 |
The parties have filed a stipulation of all the facts, which, apart from references to the exhibits which are incorporated herein by reference, is as follows:
1. The petitioners Ernest L. Poyner and Union Trust Company of Maryland, a body corporate organized and existing under the laws of the State of Maryland, whose addresses are 26 South Street, Baltimore 2, Maryland, are the Executors of the Estate of Mervin G. Pierpont, Deceased, late of Baltimore City, Maryland (hereinafter called the "Decedent"). The Decedent died on January 31, 1956 and the aforesaid petitioners were duly1960 U.S. Tax Ct. LEXIS 50">*52 appointed Executors of his Estate by an Order of the Orphans' Court of Baltimore City dated February 9, 1956. The petitioner, Lallah R. Pierpont, whose address is Broadview Apartments, 116 West University Parkway, Baltimore 10, Maryland is the surviving wife of the Decedent. The joint income tax return of the Decedent and the petitioner, Lallah R. Pierpont, for the period here involved was filed by the petitioners with the District Director of Internal Revenue for the District of Maryland.
2. The Loewy Drug Company of Baltimore City was engaged in the wholesale drug supply business from the date of its incorporation on January 25, 1907 until December 30, 1957 when it was liquidated.
3. Mervin G. Pierpont, deceased, was in the employ of the company for approximately 38 years and served as its president and as a director over the entire 35 T.C. 65">*66 period. He owned 66 2/3% of the outstanding common stock of the aforementioned company throughout his employment and at his death. Morton L. Lazarus owned the remaining 33 1/3%.
4. On January 31, 1956 Mervin G. Pierpont died. At the time of his death the company was paying him a salary of $ 20,000.00 a year.
5. Immediately prior to the 1960 U.S. Tax Ct. LEXIS 50">*53 death of Mervin G. Pierpont, the Loewy Drug Company had paid to him all amounts owed to him for services rendered up until that time. At the time of the Decedent's death the company was not legally obligated to pay anyone any amount as compensation for services rendered by the Decedent to the company.
6. On March 22, 1956 the Board of Directors of the Loewy Drug Company met. A portion of the minutes of this meeting is as follows:
"Consideration also was given to the continuation of salary payments to the widow of Mervin G. Pierpont and was deferred pending completion of audit and consideration of audited statements. The following resolution was adopted by the Board:
'RESOLVED: That in recognition of the services rendered by the late Mervin G. Pierpont, this Corporation pay to his widow as a continuance of his salary the sum of Three Thousand, Two Hundred Forty-Five Dollars and Fourteen Cents ($ 3,245.14); such amount to be paid by transferring to her the 1954 Cadillac automobile now owned by this Corporation, plus $ 64.91 to cover transfer costs, and that further consideration be given this matter by this Board of Directors after the audited statement is available.'"
7. On April1960 U.S. Tax Ct. LEXIS 50">*54 27, 1956 the Board of Directors of the Loewy Drug Company again met. The minutes of that meeting are as follows:
"The following Resolution was unanimously adopted by the Board in connection with the continuation of Mr. Mervin G. Pierpont's salary to his widow, Lallah R. Pierpont:
'RESOLVED: That in addition to the sum of $ 3,310.05 paid pursuant to the resolution adopted at the meeting of this Board on March 22, 1956, this Corporation pay to the widow of the late Mervin G. Pierpont as a continuation of his salary the sum of $ 600.00 per month commencing with the month of February, 1956 and continuing until further action of this Board or until such monthly payments aggregate the sum of $ 20,000, whichever shall first occur, this Board reserving the right to terminate said monthly payments at any time.'"
8. Pursuant to the aforesaid resolutions of its Directors the Loewy Drug Company made payments in the year 1956 aggregating $ 9,910.05 to the Decedent's widow, the petitioner, Lallah R. Pierpont. She also received $ 7,800.00 in 1957 pursuant to the aforesaid resolution of April 27, 1956. Said payments made to the Petitioner, Lallah R. Pierpont, were not made pursuant to any contract, 1960 U.S. Tax Ct. LEXIS 50">*55 plan, policy, practice or understanding made or in effect prior to the Decedent's death.
9. The Loewy Drug Company sold its inventory, equipment and fixtures in 1957 and was liquidated. Liquidating distributions of $ 414,777.95 were made to its stockholders.
10. The Joint 1956 Income Tax Return of the Decedent and the petitioner, Lallah R. Pierpont, was filed with the District Director of Internal Revenue at Baltimore, Maryland and contained the following statement:
"
Mrs. Lallah R. Pierpont received during the year 1956 from the Loewy Drug Co., Inc. the sum of $ 9,910.05 as salary continuation payments in recognition of 35 T.C. 65">*67 her deceased husband's services to that corporation. The amount so received constituted a gratuity, and accordingly, is not includible in taxable income. If includible, the exclusion of $ 5,000.00 provided for in the 1954
11. On October 3, 1958 the Commissioner mailed a statutory notice of deficiency to the petitioners wherein he determined that the $ 9,910.05 paid to Mrs. Lallah R. Pierpont in 1956 by the Loewy1960 U.S. Tax Ct. LEXIS 50">*56 Drug Company constituted taxable income to the extent of $ 4,910.05, and that there was a deficiency in income tax of $ 1,376.22.
12. In its corporate 1956 income tax return the Loewy Drug Company under the caption "Payments to Widow of Deceased Officer", deducted as expenses of doing business the sum of $ 9,910.05. Similarly, in 1957 under an identical caption the corporation deducted the sum of $ 7,800.00.
We are faced at the outset with the question whether the amounts paid to the widow by her deceased husband's employer are excludible from gross income under
In the first place, the1960 U.S. Tax Ct. LEXIS 50">*58 Court noted that a voluntary transfer (
For the Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift.
And in footnotes 8 and 11 in the
the
* * * We take it that the proper criterion, established by decision here, is one that inquires what the basic reason for his conduct was in fact -- the dominant reason that explains his action in making the transfer. * * *
Turning to the facts of the instant case, we are faced with the problem of ascertaining the donor's intention in the light of the criteria discussed in the
Bearing in mind the foregoing considerations, we find nothing in the record that would lead us to conclude that the alleged gifts "[proceeded] from a 'detached and disinterested generosity' * * * 'out of affection, respect, admiration, charity or like impulses.'"
In view of the clarification of this general subject by the opinion in the
1960 U.S. Tax Ct. LEXIS 50">*63 Since we have reached the foregoing conclusion, we find it unnecessary to pass upon respondent's further contention that
35 T.C. 65">*70 Kern,
In view of respondent's determination "that salary continuation payments * * * paid to Mrs. Pierpont * * * by the Loewy Drug Co. in consideration of her deceased husband's services to that corporation constitutes taxable income," it is my opinion that we may fairly infer from the facts stipulated that the payments were in truth made "in recognition of the services rendered by the late Mervin G. Pierpont" as recited in the resolution of the company's board of directors, and not in consideration of any services rendered to the corporation by Lallah. In view of the stipulated facts that "the company was not legally obligated to pay anyone any amount as compensation for service rendered by the Decedent to the company" and "[said] payments made to * * * Lallah * * * were not made pursuant to any contract, plan, policy, practice1960 U.S. Tax Ct. LEXIS 50">*65 or understanding made or in effect prior to the Decedent's death," we may fairly infer that the company did not act in order to itself derive benefit from these payments. Cf.
A large number of cases decided by this tribunal and by the Courts of Appeals have held that payments such as those here involved are gifts and not taxable income to the payee widow. Among the more recent cases are
In the
It seems clear to me that the extant authorities would require a decision that under the facts of this case the payments made by the employer corporation to the widow of a deceased officer and employee constituted gifts, unless the recent opinion of the Supreme Court in 35 T.C. 65">*71
I, therefore, respectfully note my dissent.
1.
(a) General Rule. -- Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.↩
2. Similarly, no useful purpose would be served by discussing the various (and at times conflicting) administrative rulings and announcements in this field which were promulgated in prior years.
3.
(b) Employees' Death Benefits. -- (1) General rule. -- Gross income does not include amounts received (whether in a single sum or otherwise) by the beneficiaries or the estate of an employee, if such amounts are paid by or on behalf of an employer and are paid by reason of the death of the employee. (2) Special rules for paragraph (1). -- (A) $ 5,000 limitation. -- The aggregate amounts excludable under paragraph (1) with respect to the death of any employee shall not exceed $ 5,000.↩