BOYLAN-PEARCE, INC.
v.
William A. JOHNSON, Commissioner of Revenue of the State of North Carolina.
No. 449.
Supreme Court of North Carolina.
July 10, 1962.*497 T. W. Bruton, Atty. Gen., and Peyton B. Abbott and Lucius W. Pullen, Asst. Attys. Gen., for defendant-appellant.
Lassiter, Leager & Walker, Raleigh, for plaintiff-appellee.
BOBBITT, Justice.
Based solely on a general exception "(t)o the signing of the foregoing judgment," appellant assigns as error "the action of the trial court in finding that the payments made to the widow of Dallas Holoman did not constitute gifts and subject to gift tax but were ordinary and necessary business expenses deductible by plaintiff corporation for corporate income tax purposes, and in signing the judgment as appears of record."
Plaintiff's allegation that the payments to Virginia B. Holoman "were made by reason of the death of the said Dallas Holoman and in recognition of services rendered by the said officer and employee, Dallas Holoman, prior to his death, and the said payments are reasonable in amount," was categorically denied by defendant. Defendant alleged said payments were gifts.
"Where jury trial has been waived and evidentiary facts stipulated, if more than one inference can be drawn from these facts, it is permissible for the court to find the ultimate determinative facts from the evidence stipulated." Piedmont Canteen Service, Inc. v. Johnson, Comr. of Revenue, 256 N.C. 155, 159, 123 S.E.2d 582, 584.
The court, from the stipulated facts, determined, inter alia, "that the payments by the plaintiff Boylan-Pearce, Inc. to the widow of Dallas Holoman, the deceased former president of the plaintiff corporation, in the aggregate amount of $36,000, made as stipulated pursuant to the corporate resolution * * * were intended to be, and were, payments to the widow of Dallas Holoman, the plaintiff's deceased officeremployee, made by the said employer by reason of the death of said officer-employee, as salary or compensation of the said deceased officer-employee, paid for a period of not more than twenty-four months after the officer-employee's death (the equivalent of his annual compensation for two years), and made in recognition of services rendered by the said Dallas Holoman prior to his death; and that the said payments to the said widow were reasonable in amount (counsel for the defendant Commissioner of Revenue having stated in open Court during the arguments that the defendant was making no issue or contention that the amounts paid to the widow were not reasonable)." (Our italics)
If different inferences can be drawn from the stipulated facts, the court, as indicated, *498 has resolved the crucial factual issue raised by the pleadings in favor of plaintiff.
Appellant, in his brief, states the question presented on this appeal in these words: "Are payments made to a widow of a corporate officer upon resolution of the remaining officers and directors of a family corporation, adopted some thirteen months after the death of the deceased officer, properly regarded as a gift to the widow and not deductible from the gross income of the corporation as an ordinary and necessary business expense for income tax purposes where there has been no previous contract, resolution of the board of directors, or custom of the corporation in making such payments?"
In addition to the matters referred to in defendant's said statement, defendant stresses these undisputed facts: (1) Plaintiff was not legally obligated to Dallas Holoman for the $36,000.00 or any part thereof, and (2) plaintiff was not indebted to Virginia B. Holoman on account of services rendered or otherwise.
For the reasons indicated, defendant contends the stipulated facts establish, as a matter of law, that the payments to Virginia B. Holoman were gifts and therefore taxable under G.S. § 105-188 and were not allowable as deductions under G.S. § 105-147 in computing plaintiff's net income.
Unquestionably, under the statutory provisions in effect prior to July 1, 1957, defendant's position would be correct. Indeed, this fact is of significance in determining the legislative intent when the General Assembly, by the enactment of Chapter 1340, Session Laws of 1957, amended the Revenue Act in respects set forth below. The Tax Study Commission, appointed pursuant to joint resolution adopted by the General Assembly in 1955, included in its comprehensive report to the General Assembly of 1957, the following:
"6. IT IS RECOMMENDED that provision be made to permit the deduction by employers of payments made to the estate or to the beneficiaries of a deceased employee, paid by reason of the death of the employee, if the amount of the payment is reasonable and is related to the service of the employee and that Federal regulations and Tax Court decisions be used by the Commissioner of Revenue in determining the amounts which are reasonable in each case.
"IT IS FURTHER RECOMMENDED that such income in the hands of the person receiving the payment be considered as income and be taxable as such, except that an aggregate amount of $5,000 of such income paid in respect to the death of any one employee be excludable from gross income. The provisions to be patterned after the Federal Code.
"Present Provision. The present law contains no reference to `employee death benefits.' The amounts paid to the beneficiaries of an employee by reason of the death of the employee are considered to be gifts and as such are not deductible by the employer nor are such amounts includible in the gross income of the beneficiary. (Citation: G.S. 105-141(2) (c); G.S. 105-147(1))
"Explanation. It is considered to be desirable to encourage such payments. Such encouragement is best accomplished by a tax deduction to the employer. It is not believed to be desirable, however, to allow unlimited deductions of this type.
"The Federal government permits the deduction of reasonable amounts paid as continuation of the salary of the employee for a limited period. There is no fixed limit. There is a limit of $5,000, however, upon the exclusion by the beneficiaries of the payment.
"In order to follow the policy of conformity to the Federal Code wherever practicable, and in order to prevent the use of `employee death benefits' *499 as an instrument of tax evasion while encouraging such payments by corporations, it is the thinking of this Commission that the Federal Code should be followed and the payments defined as gross income to the recipient rather than as gifts, with an exclusion of up (to) $5,000 permitted.
"Effect upon Revenue. The effect upon revenue of the enactment of this proposal is believed to be negligible."
In said 1957 Act (Section 4, Subsection (au)), the General Assembly amended G.S. § 105-147 (now codified as G.S. § 105-147(23)) by providing that, in computing net income, the following item shall be allowed as a deduction:
"As to employers, the amount of the salary or other compensation of an employee which is paid for a period of not more than twenty-four months after the employee's death to his estate, widow, or heirs provided such payment is made in recognition of services rendered by the employee prior to his death and is reasonable in amount."
In said 1957 Act (Section 4, Subsection (q)), the General Assembly amended G.S. § 105-141, which defines "gross income," the provision now codified as the last paragraph of G.S. § 105-141(a), to wit:
"The words `gross income' include any payments received by the estate, widow or heirs 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. Provided, that such payments may be excluded from gross income to the extent of five thousand dollars ($5,000.00) with respect to the death of any one employee regardless of the number of employers making such payments, except that such exclusion shall not apply to amounts with respect to which the employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living (other than total distributions payable to a distributee by a qualified stock bonus, pension, or profit-sharing trust or under an annuity contract within one taxable year of the distributee by reason of the employee's death)."
As indicated, defendant's counsel, at the hearing below, stated defendant "was making no issue or contention that the amounts paid to the widow were not reasonable."
Undoubtedly, as defendant contends, plaintiff has undertaken to bring itself within the provisions of G.S. § 105-147, as amended, with reference to the payments it made to Virginia B. Holoman. Indeed, the Tax Study Commission based its recommendation that such amendment be adopted on the ground it was "considered to be desirable to encourage such payments" and "(s)uch encouragement is best accomplished by a tax deduction to the employer." Moreover, it may be inferred that, absent the 1957 amendment, plaintiff would not have authorized such payments.
Defendant's contention that payments by an employer are allowable as deductions only when a legal obligation to make such payments exists would seem to render meaningless the 1957 amendment. Prior to the 1957 amendment, payments by an employer in discharge of its legal obligations to compensate its employees were deductible under G.S. § 105-147.
The 1957 amendment makes no reference to a previous or pre-existing "contract, resolution of the board of directors, or custom," of the corporation with respect to such payments. Ordinarily, payments made in accordance with a pre-existing contract, plan or policy would be payments for which the employer would be legally obligated.
We attach no legal significance to the fact there was no pre-existing plan or policy, or to the fact the resolution authorizing the payments was not adopted until June 26, 1959, or to the fact plaintiff is a so-called "family corporation." At most, these facts are of evidentiary significance *500 in determining the nature of the employer's payments.
In our opinion, and we so decide, the stipulated facts, and inferences that may be reasonably drawn therefrom, support the court's determination of the crucial factual issue raised by the pleadings. Hence, the conclusion reached is that, based on the court's said determinations, plaintiff's payments to Virginia B. Holoman were authorized and allowable as deductions under G.S. § 105-147, as amended by the 1957 Act, in computing its net income, and were not taxable as gifts under G.S. § 105-188.
Our attention is directed to the following portion of Section 101(b) of the Internal Revenue Code (26 U.S.C.A. § 101(b)), viz.:
"(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."
Federal decisions cited by defendant relate to whether, under the quoted portion of Section 101(b) of the Internal Revenue Code, the payments involved in these cases constituted "gross income" of the recipient. While these decisions have been considered, they do not control decision here for the reason, among others, the Internal Revenue Code contains no provision analogous to G.S. § 105-147(23).
In Federal Income, Gift and Estate Taxation, § 14.13(5), by Rabkin and Johnson, the statement appears: "There is no statutory correlation between the employer's deduction and the taxability or exemption to the employee's estate or beneficiary." In this connection, see 36 N.C.L.R., pp. 163-165.
Whether Virginia B. Holoman was entitled to deduct said payments as gifts in her 1959 and 1960 State income tax returns is not presently before us. Suffice to say, in our Revenue Act, there appears to be a statutory correlation between G.S. § 105-147(23) and the last paragraph of G.S. § 105-141(a).
For the reasons stated, the judgment of the court below is affirmed.
Affirmed.