*291 Decision will be entered for the respondent.
A railway company paid to one of its officers, who had served it for 4 1/2 years and resigned for reasons of health, a sum equivalent to 6 months' salary, which it called a "gift" to be paid in two equal installments "as a token of appreciation for his loyalty to the best interests of the Company during the period of his employment." The company charged the payments to operating expense, and deducted them on its income tax returns. Held, that the amount received by the officer was "compensation" subject to income tax under section 22 (a) of the Internal Revenue Code (1939), and not a "gift" exempt under section 22 (b) (3).
*833 Respondent determined a deficiency in petitioners' income tax for the year 1951 in the amount $ 77.12. The petitioners have conceded that two issues raised in their petition, respecting an increase in dividend income and the amount of a deduction for medical expenses, need not be considered.
The sole issue for decision is whether the sum of $ 5,500 received by the petitioner, L. Gordon Walker, from the Pittsburgh & West Virginia Railway Company in January 1951, following the acceptance of his resignation as a vice president of that company, due to the state of his health, is "compensation" subject to income tax under section 22 (a) of the Internal Revenue Code (1939), or a "gift" exempt from income tax under section 22 (b) (3).
FINDINGS OF FACT.
The petitioners, L. Gordon Walker and Elizabeth E. Walker, are husband and wife. They filed a joint income tax return for the calendar year 1951 with the collector of internal revenue for the district of Virginia.
L. Gordon Walker (hereinafter called Walker) entered the employment of the Pittsburgh & West Virginia Railway Company (hereinafter sometimes *293 called Railway Company) on December 1, 1945, as vice president -- operations and maintenance; and he continued to serve in such capacity until September 30, 1950. His initial salary was $ 15,000 per annum. He had previously been employed by the Pennsylvania Railroad Company for about 6 1/2 years, and his salary at the termination of such previous employment was $ 10,000 per annum. The Pittsburgh & West Virginia Railway Company, at the time of his employment, had operated at a loss for the previous 6 months and had not paid dividends for approximately 16 years. About 1 1/2 years later, the company resumed the payment of dividends; and at about that time, it increased Walker's salary to $ 20,000 per annum -- an increase which he regarded to be in recognition of merit. In 1950 his salary was further increased to $ 22,000 per annum, to reflect a 10 per cent raise given by the Railway Company to all its employees by reason of higher living costs. Walker regarded his salary to be adequate for the services rendered, and also higher than that paid to comparable executives of other railroads having comparable mileage and traffic density. He was not a stockholder or director of the Railway*294 Company, but, in the course of his duties, he attended meetings of the executive committee of its board of directors.
*834 In the fall of 1947 Walker suffered a nervous breakdown which made it necessary for him to be away from his office for 5 or 6 months. Thereafter he recovered and continued to serve the Railway Company until the late summer of 1950 when his health again began to fail and he went to Virginia. On September 26, 1950, he was requested to meet at a hotel in Washington, D. C., with B. F. Pepper, who was a member of the Railway Company's board of directors and executive committee, and also president of another corporation which owned most of the Railway Company's stock. A discussion was there had respecting Walker's financial condition, and as to whether he could go away and rest for a year and still support his family. At the conclusion of this meeting, Walker wrote out his resignation on a piece of hotel stationery and delivered it to Pepper who took the same with him to Pittsburgh. Walker's financial condition at this time was not such that he could support his family while out of work for an extended period.
On September 29, 1950, the Railway Company's executive*295 committee met in Pittsburgh. The minutes of the meeting, so far as here material, read as follows:
At the request of the Chairman [Mr. Graham] Mr. Pepper reported to the Committee concerning a meeting he had with Mr. L. G. Walker, Vice President -- Operations & Maintenance, in Washington, D. C., on Tuesday, September 26, 1950. Mr. Pepper stated that during the course of the meeting Mr. Walker handed Mr. Pepper his written resignation as Vice President -- Operations & Maintenance of The Pittsburgh & West Virginia Railway Company effective at the pleasure of the Board. Mr. Pepper further reported that this resignation should be accepted due to the state of Mr. Walker's health.
Mr. Pepper further stated that he thought that Mr. Walker merited some gift from the Company in recognition of his loyalty to the interests of the Company during the period of his incumbency. After some discussion, it was, on motion duly made and seconded, unanimously:
Resolved, That the resignation of Mr. L. G. Walker as Vice President -- Operations & Maintenance of The Pittsburgh & West Virginia Railway Company be accepted, with regret, effective at the close of business September 30, 1950.
Resolved, Further, *296 That a gift of Eleven Thousand ($ 11,000) Dollars, payable one-half in October, 1950, and one-half in January, 1951, be made to Mr. Walker as a token of appreciation for his loyalty to the best interests of the Company during the period of his employment.
This action of the executive committee was approved by the Railway Company's board of directors; and on November 1, 1950, a letter was sent to Walker which set forth the above-quoted portion of the minutes, including the resolutions. The minutes were prepared by the Railway Company's secretary and counsel, who were not present at the meeting, from rough notes delivered to them. There was no legal obligation on the part of the Railway Company to make the *835 payments. The payments would not have been approved if Walker had not been employed by the company.
On October 10, 1950, the Railway Company's vice president and secretary sent a letter to the company auditor, which read as follows:
Mr. Graham has instructed me to request a voucher in the amount of $ 5,500.00, payable to Mr. L. G. Walker, as a gift in appreciation for past services.
As you know, Mr. Walker recently resigned as Vice President -- Operations & Maintenance*297 of this Company due to ill health.
The Executive Committee of the Company has authorized the payment to Mr. Walker of a sum equivalent to six months' salary payable in two installments. Request for the second installment will be made later.
Please charge this out on a monthly basis so as not to unduly distort our accounts.
On January 9, 1951, another letter of similar character was sent to the auditor respecting the second installment of $ 5,500. In this, the auditor was requested to charge out such installment over the months of January, February, and March, 1951.
The two payments of $ 5,500 each were made to Walker by checks of the Railway Company, issued in October 1950 and January 1951, respectively. Attached to each check was a voucher which read as follows:
| For -- | Payment on account of gift, as directed by resolution of | |
| Executive Committee of Board of Directors of The Pittsburgh | ||
| & West Virginia Railway Company at a special meeting held | ||
| September 29, 1950 | $ 5,500 |
Notations written on the vouchers for the two checks were to the effect that the amounts thereof were to be cleared on a monthly basis, over the months of October 1950 to March 1951, inclusive.
*298 The Railway Company kept its accounts in accordance with the uniform system of accounts established for railroads by the Interstate Commerce Commission. The two payments to Walker were first charged to its "account 460 -- other expenses"; but later, at the suggestion of an examiner of the Interstate Commerce Commission, the 1951 payment was transferred to another account known as "account 457 -- pensions and gratuities." Both of these accounts were subdivisions of a general accounting group entitled "operating expenses, general."
The Railway Company designated the payments to Walker as "gifts" in its 1950 and 1951 annual information returns of salaries paid. In its corporate income tax returns for said years, it deducted the payments as operating expenses.
The record does not show what income tax treatment Walker accorded to the $ 5,500 which he received in 1950. In the joint income *836 tax return filed by him and his wife for 1951, he reported the $ 5,500 payment received in that year, as a nontaxable gift.
Respondent, in his notice of deficiency respecting the year 1951, determined that the payment received by Walker in that year constituted compensation for personal services*299 rendered and, as such, was taxable in accordance with provisions of section 22 (a) of the Internal Revenue Code (1939).
OPINION.
Whether a payment received from a former employer at or after the termination of the employment is "compensation" subject to income tax under section 22 (a) of the Internal Revenue Code (1939), 1 or a "gift" exempt from income tax under section 22 (b) (3), depends upon the intention with which the payment was made; and this is to be determined from all the facts and surrounding circumstances. Wallace v. Commissioner, (C. A. 5) 219 F. 2d 855, 857; Willkie v. Commissioner, (C. A. 6) 127 F.2d 953">127 F. 2d 953, 955, certiorari denied 317 U.S. 659">317 U.S. 659; Fisher v. Commissioner, (C. A. 2) 59 F. 2d 192, 193; N. H. Van Sicklen, Jr., 33 B. T. A. 544, 547. If the payment was made with the intention of compensating or rewarding the former employee more generously or completely for the services rendered, it is taxable. Section 22 (a) provides specifically that "gross income" includes income derived from "compensation for*300 personal service * * * of whatever kind and in whatever form paid." Even though a payment for services was entirely voluntary, was in addition to the agreed salary, and was made without legal obligation, it is "compensation" subject to income tax in the hands of the recipient, and not an exempt "gift," within the meaning of section 22. Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 730; Nickelsburg v. Commissioner, (C. A. 2) 154 F.2d 70">154 F. 2d 70; Fisher v. Commissioner, supra;Leon D. Hubert, Jr., 20 T. C. 201, 203, affd. (C. A. 5) 212 F. 2d 516.
*301 Ordinarily if services have been performed for the payor directly, the presumption is that the amount received is for the service and is not a gift. Michael Laurie, 12 T.C. 86">12 T. C. 86, 89; Willkie v. Commissioner, supra;Noel v. Parrott, (C. A. 4) 15 F.2d 669">15 F. 2d 669, 671, certiorari *837 denied 273 U.S. 754">273 U.S. 754. Payments made "in appreciation of services rendered" or "in recognition of the value of your past services" have been held to be in the nature of a bonus and to be taxable as additional compensation. Willkie v. Commissioner, supra;Poorman v. Commissioner, (C. A. 9) 131 F.2d 946">131 F. 2d 946, affirming 45 B. T. A. 73.
The fact that the parties may have called the payment a "gift," or on the other hand an "honorarium" or "bonus," is important but not conclusive, for, in the light of all the circumstances, it may be found that the term was loosely or inaccurately used. Bogardus v. Commissioner, 302 U.S. 34, 302 U.S. 34">43; Wallace v. Commissioner, supra;*302 Nickelsburg v. Commissioner, supra."The repeated reference to the payment as a gift does not make it one." N. H. Van Sicklen, Jr., supra, p. 549; Michael Laurie, supra.Where the payment actually has been measured by salary previously paid, or has been charged on the books to operating expense, or has been deducted as an expense on the payor's income tax return, there is strong indication that a gift was not intended. Levey v. Helvering, 68 F. 2d 401, affirming 26 B. T. A. 889; Botchford v. Commissioner, 81 F.2d 914">81 F. 2d 914, 916, affirming 29 B. T. A. 656; Willkie v. Commissioner, supra.See also Jesse S. Rinehart, 18 T.C. 672">18 T. C. 672.
Also, if the payment has been made by a corporation and has not been approved as a gift by the stockholders, the assumption is that a gift was not intended. As was said by the Court of Appeals for the Fourth Circuit in Noel v. Parrott, supra:
It *303 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 to 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 our opinion in the instant case, after giving consideration to all the evidence and applying the foregoing principles, that the payment here in question was intended to be and was paid to Walker as additional "compensation," not as a "gift," within the meaning of section 22 of the Code. Walker had, prior to his resignation, served the Railway Company for more than 4 1/2 years as vice president, attended the meetings of the executive committee, and received recognition through a salary increase for his part in improving the financial condition of the company. After his health had become impaired, the executive committee accepted his resignation, and concurrently therewith authorized the payment to him of*304 $ 11,000. This sum was equivalent to 6 months' salary, and was so described in instructions *838 sent to the auditor for issuance of the first check. Although it was called a "gift," the evidence as a whole indicates an intention of the committee to reward him more completely for his services to the company. The suggestion made to the committee was that Walker "merited" some gift from the company "in recognition of his loyalty to the interests of the Company during the period of his incumbency"; and the resolution authorizing the payments characterized them as "a token of appreciation for his loyalty to the best interests of the Company during the period of his employment." One of the members of the committee testified that the amount would not have been approved if Walker had not been employed by the company.
The payments were entered on the books of the Railway Company as operating expense; and, pursuant to two written requests of one of the officers to the auditor, they were charged out on a monthly basis over a 6-month period, in amounts equivalent to the salary which Walker would have received if he had continued to serve during such period. Thereafter the payments were*305 deducted as operating expense on the corporate income tax returns.
There is no evidence that the payments were approved as gifts by the stockholders; and the manner in which they were handled on the books and in the returns indicates that such approval was not given. The mere fact that one of the members of the executive committee was the president of another corporation which held most of the Railway Company's stock, does not warrant a conclusion that there was such stockholder approval.
In Bogardus v. Commissioner, supra, relied upon by petitioners, the recipients of the payments had never been employees of the payor corporation or of any of its stockholders, and the parties had stipulated that such payments were not made or intended to be made for any services rendered or to be rendered. Other cases cited by petitioners include Abernethy v. Commissioner, (C. A., D. C.) 211 F. 2d 651; Kavanagh v. Hershman, (C. A. 6) 210 F. 2d 654; Mutch v. Commissioner, (C. A. 3) 209 F. 2d 390; and Schall v. Commissioner, (C. A. 5) 174 F. 2d 893.*306 All of these involved payments to retired ministers or rabbis by grateful congregations, where the personal ties between the recipients and the members of their congregations were particularly close.
We hold that the payment here in question is includible in the gross income of the petitioners for the year 1951.
Decision will be entered for the respondent.
Footnotes
1. SEC. 22. GROSS INCOME.
(a) General Definition. -- "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, * * *
(b) Exclusions From Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
* * * *
(3) Gifts, bequests, devises, and inheritances. -- The value of property acquired by gift, bequest, devise, or inheritance. * * *↩