T.C. Summary Opinion 2005-179
UNITED STATES TAX COURT
JOHN F. AND MICHELE L. HAJEK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19369-03S. Filed December 6, 2005.
John F. and Michele L. Hajek, pro se.
Shirley M. Francis, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
1
Unless otherwise indicated, section references hereafter
are to the Internal Revenue Code in effect for the years at
issue.
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Respondent determined deficiencies of $3,818 and $4,275 in
petitioners’ Federal income taxes for 1999 and 2000,
respectively.
The sole issue for decision is whether payments to John F.
Hajek (petitioner) from his employer, in addition to his regular
salary as an employee, constituted compensation for services
rendered under section 61(a)(1), or whether such payments
constituted a gift under section 102(a).
Some of the facts were stipulated. Those facts and the
accompanying exhibits are so found and are incorporated herein by
reference. Petitioners’ legal residence at the time the petition
was filed was Sandy, Oregon.
Since 1993, petitioner was the general manager of a
corporation, Starwheel, Inc., which later changed its name to
Star Stamping and Manufacturing (the corporation). The
corporation’s principal activity was a wheel tool and die
business that made spoke wheels for cars and dies. The latter
activity was described as “tooling to make all * * * different
kinds of parts”. The corporation was owned solely by
petitioner’s father-in-law, Roger Marchisset. Petitioner Michele
L. Hajek, the daughter of Mr. Marchisset, had also worked for the
corporation from 1995 to 1998. She was not an employee of the
corporation during the years at issue.
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For the years at issue, 1999 and 2000, petitioner’s wages
from the corporation were $20,200 and $15,600, respectively. On
their joint Federal income tax returns for 1999 and 2000, these
amounts were reported as income. However, in addition to his
wages, petitioner also received from the corporation, generally
on a weekly basis, payments that totaled $25,441 and $27,025,
respectively, during 1999 and 2000. Over the years, petitioner
received more than $150,000 in such payments beginning in 1995.
The payments received in 1999 and 2000 were not included as
income on petitioners’ income tax returns for these years. It is
these payments that are at issue in this case. Petitioners
contend these payments were gifts and, therefore, do not
constitute gross income. Respondent determined otherwise in the
notice of deficiency.
For several years prior to 1999, the corporation experienced
financial problems due largely to foreign competition. Mr.
Marchisset had, from time to time, contributed additional moneys
to keep the corporation afloat; however, over time, the
corporation was unable to survive and ceased doing business in
2001. Before arriving at that point, however, in 1995, in an
attempt to bolster the corporation’s finances and in order to pay
petitioner a salary commensurate for his services, Mr. Marchisset
made an additional infusion of capital to the corporation that
was identified or maintained as a separate account on the
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corporation’s books. Based on a recommendation of the
corporation’s accountant, petitioner was allowed to draw out of
this account on a weekly basis amounts that were to be considered
as a gift by the corporation to petitioner. No formal agreement
was executed to evidence the character of these payments. The
belief was that, since these payments or draws were gifts and
coming directly from funds that had been advanced by Mr.
Marchisset, the payments would not constitute a wage or salary to
petitioner; therefore, the corporation would avoid payroll taxes
on the distributions, and, in addition, petitioners would enjoy
the benefits of tax-free income, since the payments were believed
to be gifts. Respondent’s examination, however, did not result
in that hoped-for conclusion. In the notice of deficiency,
respondent determined that these payments constituted
compensation for services rendered and, therefore, are gross
income under section 61(a). Petitioners differ with that
determination.
Section 61 provides that gross income includes “all income
from whatever source derived,” unless otherwise provided. The
Supreme Court has consistently given this definition of gross
income a liberal construction “in recognition of the intention of
Congress to tax all gains except those specifically exempted.”
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955).
All realized accessions to wealth are presumed taxable income,
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unless the taxpayer can demonstrate that an acquisition is
specifically exempted from taxation. Id. Moreover, section
1.61-2(a)(1), Income Tax Regs., provides that “Wages, salaries,
commissions paid salesmen * * * are income to the recipients
unless excluded by law”.
Section 102(a) provides: “Gross income does not include the
value of property acquired by gift”. A payment constitutes a
gift if it is given in a spirit of “‘detached and disinterested
generosity’” and not as compensation for services. Commissioner
v. Duberstein, 363 U.S. 278, 285-286 (1960) (quoting Commissioner
v. Lo Bue, 351 U.S. 243, 246 (1956)). The intent of the
transferor determines whether the payment constitutes a gift.
The amounts petitioner received from his employer
represented payments for his services. Those amounts represented
compensation for services rendered. The moneys came from
corporate funds. Those amounts are includable in gross income
including that portion of the payments that came out of the
amounts advanced to the corporation by Mr. Marchisset. None of
the payments can even be remotely connected to a situation that
could be considered as being “excluded by law” under section
1.61-2(a)(1), Income Tax Regs., or as a gift under section
102(a). All the moneys paid to petitioner came out of the
corporate bank account, and there was no written agreement that
would have characterized those payments as anything but
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compensation for services rendered. Respondent, therefore, is
sustained on this issue.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.