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Smith v. Commissioner of Internal Revenue

decided: June 28, 1962.


Author: Staley

Before STALEY, HASTIE and SMITH, Circuit Judges.

STALEY, Circuit Judge.

The question on this appeal is whether the Tax Court's finding that certain payments made by a corporation to the widow of a deceased officer did not constitute a gift is clearly erroneous.

Mildred W. Smith, petitioner on this appeal, is the remarried widow of Norman F. Wiss, who died on September 15, 1954. Prior to his death, deceased had been an employee of J. Wiss & Sons Co. ("corporation") for thirty-five years. Pursuant to a resolution passed by its board of directors, the corporation paid petitioner $38,841.37 in 1955 and $33,008.04 in 1956.*fn1 Petitioner failed to report these payments as income.

The Commissioner concluded that the payments constituted ordinary income and assessed a deficiency against petitioner which the Tax Court upheld.*fn2 The Tax Court found as a fact that the "dominant motive behind these payments was to give tangible recognition (by way of additional compensation) to the highly valuable services rendered by the decedent over a long period of time," and that the payments were not made as a gift to petitioner.

On appeal, petitioner contends that the Tax Court erroneously concluded that the Supreme Court in Commissioner v. Duberstein, 363 U.S. 278, 80 S. Ct. 1190, 4 L. Ed. 2d 1218 (1960), changed the law regarding the criteria relevant in resolving the factual inquiry as to whether the payments constituted a gift, and that when the facts of this case are considered in light of the criteria before Duberstein, the payments clearly were gifts.*fn3 The Commissioner, on the other hand, contends that under Duberstein the question is purely factual, and the Tax Court's findings here must be affirmed unless they are clearly erroneous.

Because of the importance that the parties attach to Commissioner v. Duberstein, supra, we think it advisable to review in some detail the facts and holding of that decision. Duberstein involved two separate appeals.*fn4 In one, the taxpayer had received an automobile from a business associate which he failed to report as income, deeming it to be a gift. The other appeal involved payments made by an employer to an employee who had resigned his position. The Supreme Court concluded that the Tax Court's finding that the transfer of the automobile did not constitute a gift was not clearly erroneous, and remanded the other appeal to the trial court for more explicit findings of fact as to whether the payments constituted a gift. The Court refused the Commissioner's invitation to spell out a new test for resolving the question of gift versus income. What ultimately controls, it said, is the intention of the transferor. In making this determination, the proper criteria are those that logically disclose the reason for the transferor's action - "the dominant reason that explains his action in making the transfer." 363 U.S. at page 286, 80 S. Ct. at page 1197. The mere absence of a moral or legal obligation to make the payments does not establish a gift, and a voluntary transfer of property without any consideration or compensation, therefore, although it constitutes a common law gift, is not necessarily a gift within the tax statutes. Reviewing prior decisions, the Court, at 363 U.S. 285, 80 S. Ct. at 1197, said: "A gift in the statutory sense, on the other hand, proceeds from a 'detached and disinterested generosity,' * * * 'out of affection, respect, admiration, charity or like impulses.'" If the payment proceeds, however, primarily from a moral duty or legal obligation, or finds its genesis in an anticipated benefit that is economic in nature, it is not a gift. But the presence or absence of economic benefit is irrelevant where the transfer is made in return for services rendered.

The Commissioner contended in Duberstein that payments made by an employer to an employee are by and large taxable as income, and that the concept of a gift is inconsistent with the payments being deductible as business expenses, and that since a gift involves personal elements, a business corporation cannot make a gift of it assets. The Court refused to adopt these so-called "principles" or "presumptions," saying:

"Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case. The nontechnical nature of the statutory standard, the close relationship of it to the data of practical human experience, and the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each, confirm us in our conclusion that the primary weight in this area must be given to the conclusions of the trier of fact." 363 U.S. at 289, 80 S. Ct. at 1198.

United States v. Kaiser, 363 U.S. 299, 80 S. Ct. 1204, 4 L. Ed. 2d 1233 (1960), was decided the same day as Duberstein. In Kaiser, the jury determined that strike benefits by way of room rent and food vouchers, rendered by a labor union to striking members, constituted a gift. The trial judge, however, entered judgment n. o. v. in favor of the government, concluding that the assistance constituted income as a matter of law. In concluding that the jury's finding should not have been put aside, the Court reviewed the facts and unmistakably delineated the scope of appellate review:

"* * * the jury could have concluded that assistance, rendered as it was to a class of persons in the community in economic need, proceeded primarily from generosity or charity, rather than from the incentive of anticipated economic benefit. We can hardly say that, as a matter of law, the fact that these transfers were made to one having a sympathetic interest with the giver prevents them from being a gift. * * *

"We need not stop to speculate as to what conclusion we would have drawn had we sat in the jury box rather than those who did. The question is one of the allocation of power to decide the question; and once we say that such conclusions could with reason be reached on the evidence, * * * our reviewing authority is exhausted * * *." (Emphasis supplied.) 363 U.S. at 304-305, 80 S. Ct. at 1207.

In summary, determination of whether a transfer constitutes a gift is a factual one, which must be made on a case-by-case approach, resting with the trier of fact which is to make it in light of all the relevant facts and circumstances. Thus, under Duberstein and Kaiser, such a determination must be affirmed unless it is clearly erroneous.

A review of the record convinces us that the Tax Court did not rely on irrelevant facts and circumstances, that its finding is a permissible one and is not clearly erroneous. In 1948 and again in 1953, the board of directors considered the adoption of a pension plan for its employees that was to be supplemented by payments to the officers' widows. One of the reasons given for not adopting the program of supplemental payments was that the board thought it inappropriate to make arrangements for officers that the corporation could not afford for other employees. Between 1951 and decedent's death, the corporation made death payments to the widows of four employees. The payments, as here, were made monthly for varying periods, although in amounts substantially less than petitioner received. The four deceased employees were, however, salesmen, not executives, but received salaries in excess of $10,000. The deceased, on the other hand, received an annual salary of $80,000 at ...

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