*1227 INCOME - PAYMENTS MADE BY A CORPORATION TO ITS OFFICERS AND DIRECTORS. Additional amounts paid to the petitioners by a corporation of which they were all officers and directors, to reimburse them for the amount of State and Federal income taxes paid by reason of the salaries received from the corporation, held to be income to them. Old Colony Trust Co. v. Commissioner,279 U.S. 716">279 U.S. 716.
*889 In these proceedings, which have been consolidated, the petitioners seek a redetermination of their income-tax liability for the years 1927 and 1928, for which years the respondent has proposed the following deficiencies:
| Petitioner | Year | Deficiency |
| Charles Bispham Levey | 1928 | $2,018.38 |
| James P. Shea | 1928 | 38.42 |
| C. E. Newton, Jr | 1927 | 1,896.32 |
| C. E. Newton, Jr | 1928 | 1,932.49 |
| George A. Smith | 1927 | 2,076.09 |
| George A. Smith | 1928 | 3,603.84 |
All the amounts represented by the above deficiencies are in controversy, except certain minor adjustments made by the Commissioner in the incomes of petitioners*1228 Newton and Smith for the year 1928, the correctness of which they do not contest.
The same question is presented for our consideration in each appeal, and that is, Were the amounts received by the petitioners from their employer, the Frederick H. Levey Company, during the years in controversy, additional compensation for services rendered and taxable as such, or were they gifts by the corporation to petitioners and as such not taxable? There are no other issues.
*890 FINDINGS OF FACT.
The petitioners are individuals, residing in or about New York City. The Frederick H. Levey Company is a New York corporation, with its business office at 59 Beekman Street, New York City. During the years 1927 and 1928 the petitioners were officers, directors and stockholders in the corporation. George A. Smith was its president; C. E. Newton, Jr., vice president; Charles Bispham Levey, treasurer; and James P. Shea, secretary.
The shares of the Frederick H. Levey Company outstanding at the close of 1927 and 1928 amounted to 50,000, representing a total capitalization of $1,000,000. The holdings of capital stock by petitioners in 1927 and 1928, according to the stock ledger, were*1229 as follows: Levey, 4,750 shares; Shea, 640 shares; Newton, 2,105 shares; and Smith, 3,500 shares.
At a meeting of the board of directors held January 24, 1927, the following resolution was adopted:
On motion unanimously adopted, it was resolved that the annual compensation of each of the officers of the corporation be and is hereby fixed as follows for the year 1927:
| Chairman of the Board of Directors | Frederick H. Levey | $50,000.00 |
| President | George A. Smith | 40,000.00 |
| Vice-President | Arthur B. Newton | 35,000.00 |
| Vice-President | C. E. Newton, Jr | 30,000.00 |
| Secretary and Treasurer | Chas. Bispham Levey | 30,000.00 |
And it was
Further resolved, That the Frederick H. Levey Company, Inc., pay to the Chairman of the Board, the President, the two Vice-Presidents, and the Secretary and Treasurer, five officers in all, the amount their salaries caused them to pay a Federal and State Income Tax for year 1926; this as a gift from the Company, and not as an extra compensation for services rendered.
At a meeting of the board of directors of the corporation held January 23, 1928, the following resolution was adopted:
On motion unanimously adopted, it was resolved*1230 that the Annual compensation of each of the officers of the corporation be and is hereby fixed as follows for the year 1928:
| Chairman of the Board of | ||
| Directors and Treasurer | ||
| of the Company | Chas. Bispham Levey | $70,000.00 |
| President | George A. Smith | 70,000.00 |
| Vice-President | A. B. Newton | 37,500.00 |
| Vice-President | C. E. Newton, Jr | 32,500.00 |
| Secretary | James P. Shea | 12,000.00 |
And it was
Further resolved, that the Frederick H. Levey Co., Inc., pay to the Chairman of the Board, the President, the two Vice-Presidents, and the Secretary and Treasurer, five officers in all, the amount their salaries caused them to pay a *891 Federal and State Income Tax for year 1927; this as a gift from the Company, and not as an extra compensation for services rendered.
The following amounts were received by the petitioners in accordance with that part of the resolutions referred to above relating to the payment of income taxes:
| Year | Amount | |
| George A. Smith, president | 1927 | $8,304.35 |
| 1928 | 14,170.37 | |
| C. E. Newton, jr., vice president | 1927 | 7,621.24 |
| 1928 | 7,553.12 | |
| Charles Bispham Levey, treasurer | 1928 | 8,073.56 |
| James P. Shea, secretary | 1928 | 454.22 |
*1231 Similar resolutions and similar payments as the above were made covering all years between 1924 and 1930, inclusive. These payments were limited to the officers named.
The minutes of the corporation show that all acts of the directors and officers of the corporation for the preceding year were approved by resolutions of the stockholders at their annual meetings.
Payments of the foregoing amounts were made direct to the individuals by checks from the corporation and were based on the amount of income tax the petitioners had to pay the state and Federal Governments on the salaries they received from the corporation.
The books of account in which these transactions were entered are the cash journal, general ledger and journal. After the checks had been prepared, entry was made of the payments to the various petitioners in the cash journal as "Donations, Contributions & Gratuities," the total amount paid on the particular day being extended under the columnar headings "Net Cash" and "General," the word "General" indicating that the item was to be made of record in the general ledger. The cash journal entry was charged to "Donations, Contributions and Gratuities Account" in*1232 the general ledger. At the close of the year the aggregate total of the "Donations, Contributions and Gratuities" account was credited to profit and loss, an entry for such purpose having been made in the "Journal." A final journal entry was made to transfer profit and loss to surplus.
In preparing the income-tax returns of the corporation for 1927 and 1928, the total amount of "Donations, Contributions & Gratuities" for the particular year was entered as Item 13(a) under Schedule L, the schedule provided on the blank for the special purpose of taking care of all nontaxable income items and unallowable deductions in order that the taxable income might be reconciled with the net profit shown by the books.
The corporation's return for 1927 contains an entry of $42,125.74 as Item 13(a). This item includes the payments for taxes made to as Item 13(a). This item includes the payments for tsxes made t 0 *892 petitioners Newton and Smith in 1927. The corporation's return for 1928 contains an entry of $42,560.24 as Item 13(a). This item includes the payments for taxes made to petitioners Shea, Levey, Newton and Smith in 1928.
In computing the net income of the corporation*1233 for the years 1927 and 1928, the corporation, therefore, did not claim as expenses or deductions the items referred to as gifts.
OPINION.
BLACK: We think our decision on the sole issue involved in these proceedings is controlled by the decision of the Supreme Court in . In that case the resolution adopted August 3, 1916, under which the income-tax payments for 1919 and 1920 were made by the American Woolen Company for its president, William M. Wood, read as follows:
Voted: That this company pay any and all income taxes, State and Federal, that may hereafter become due and payable upon the salaries of all the officers of the company, including the president, William M. Wood; the comptroller, Parry C. Wiggin; the auditor, George R. Lawton; and the following members of the staff, to-wit: Frank H. Carpenter, Edwin L. Heath, Samuel R. Haines, and William M. Lasbury, to the end that said persons and officers shall receive their salaries or other compensation in full without deduction on account of income taxes, State or Federal, which taxes are to be paid out of the treasury of this corporation.
This resolution*1234 was amended on March 25, 1918, as follows:
Voted: That, referring to the vote passed by this board on August 3, 1916, in reference to income taxes, State and Federal, payable upon the salaries or compensation of the officers and certain employees of this company, the method of computing said taxes shall be as follows, viz:
The difference between what the total amount of his tax would be, including his income from all sources, and the amount of his tax when computed upon his income excluding such compensation or salaries paid by this company.
The only difference of any note, so far as we can see, between the foregoing resolution under which the payments were made by the American Woolen Company of state and Federal income taxes of its officers and the resolution involved in the instant case under which the Frederick H. Levey Company made payments to its officers to reimburse them for state and Federal income taxes paid on their salaries, is that the resolution involved in the instant case contains this language: "This as a gift from the company and not as an extra compensation for services rendered." This language the resolution in *1235 , did not contain. But we do not regard this circumstance as of controlling importance.
In , in which was involved a determination of whether a certain distribution to the *893 principal stockholders, not in proportion to holdings, was a dividend or a gift, we said:
Obviously, it will not do to say that a corporate distribution to its principal stockholder may be taken free from tax because the directors choose to call it a gift and explain it by their gratitude for services and devotion of one of them. This would enable the taxpayers to determine their own tax liability by the mere use of words * * *.
And so in the instant case we do not think the mere use of words is controlling. We do not think the circumstances surrounding the payments made to the petitioners in the instant case are sufficient to sustain petitioners' contention that the payments made were gifts, although denominated "gifts" in the resolution. These payments were made every year for a period of seven years covering the period 1924 to 1930, inclusive. Gifts are usually not made in that systematic*1236 manner and covering that long a period of time, especially by corporations, for, as said by the court in ; certiorari denied, :
It needs neither argument nor citation of authority to establish the proposition that the directors were without authority to give away the corporate assets, and that for them to make several of their members and other persons a gift of a large sum of money from the corporate assets would be neither "wise" nor "proper" and would amount to an illegal misapplication of corporate funds. We must assume that the directors did not intend such a flagrant violation of their trust.
It is a very significant circumstance, we think, that each year when the directors of the Frederick H. Levey Company, fixed the salaries of the officers for the ensuing year by resolution, they also provided for the payment by the corporation of state and Federal income taxes on the salaries of the prior year, and, although it was provided in said resolutions that such payments were gifts from the company and not as extra compensation for services rendered, nevertheless, in view of the decision of the Supreme*1237 Court in , we think we must hold that the payments were in the nature of extra compensation and therefore taxable. Said the Supreme Court in :
Coming now to the merits of this case, we think the question presented is whether a taxpayer having induced a third person to pay his income tax or having acquiesced in such payment as made in discharge of an obligation to him, may avoid the making of a return thereof and the payment of a corresponding tax. We think he may not do so. The payment of the tax by the employer was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor. * * * The certificate shows that the taxes were imposed upon the employee, that the taxes were actually paid by him and that the employee entered upon his duties in the years in question under the express agreement that his income taxes would be paid by his employer. This is evidenced by the terms of the resolution passed *894 August 3, 1916, more than one year prior to the year in which the taxes were imposed. The taxes were paid upon a valuable consideration, *1238 namely, the services rendered by the employee and as part of the compensation therefor. We think therefore that the payment constituted income to the employee. * * *
Cf. .
Petitioners cite several Board and court cases in support of their contention that the payments in question were gifts and not taxable as income, but we think those cases can be distinguished on the facts from those of the instant case and are not controlling.
Decision will be entered for the respondent.