*733 1. Petitioner received $20,000 from employer corporation as a "Christmas remembrance." Corporation distributed $316,429.28, approximately 75 percent of its gross earnings, in the taxable year among its employees and officers. Most employees received 50 percent of their salaries, but petitioner and officers received larger percentages. Distributions, denominated on corporate return "Xmas Bonus", were originally charged to expense, but in closing entries for the year were charged to surplus. Stockholders, as such, did not authorize or ratify these payments, but in January of the following year, the board of directors did. Held, the payment made to petitioner was a bonus or additional compensation for services rendered and should have been reported as income.
2. For lack of proof, deductions claimed for club, traveling and entertaining expenses, are denied.
*545 The petitioner in this proceeding contests a deficiency in income tax determined by the respondent in the amount of $5,355.78 for the calendar*734 year 1928. The issues raised by the pleadings are (1) whether the sum of $20,000 received by the petitioner from a corporation was a gift, bonus, or additional compensation; (2) whether the petitioner is entitled to a deduction for traveling expenses in connection with his business in the amount of $508.05; (3) whether the petitioner is entitled to a deduction for sums of money expended in clubs in the amount of $1,751.94; and (4) whether the petitioner may deduct in computing his net income, money expended in entertaining customers in the amount of $572.80.
FINDINGS OF FACT.
Petitioner is an individual and resident of Geneva, Illinois. During the year 1928 he was in the employ of A. B. Leach & Co., a large investment and underwriting corporation, with principal offices in New York City and Chicago. Over 90 percent of the stock of this corporation was owned by members of the Leach family.
Petitioner entered the employ of A. B. Leach & Co. in April 1927. His services were solicited by George T. Leach, the vice president of the company. Under the original agreement, which was oral, petitioner was to receive $1,000 per month for his services. Nine months later, when petitioner*735 received an offer of employment from a smaller concern, which he declined, his compensation was increased to $2,000 per month, retroactive from the time he became an employee.
Petitioner handled the industrial financing and consolidation of companies for his employer. It was his duty to investigate, solicit and carry on negotiations for such business.
A few days before Christmas, 1928, George T. Leach, the vice president of the company, walked into the office of petitioner and gave him a check for $20,000, saying, "Here is a little Christmas remembrance. This is a gift, and so recorded on the books of A. B. Leach & Company, Inc., and it will not be necessary for you to record this in any way whatsoever on your income tax." Petitioner learned from his auditors that this payment was treated as a gift on the books of the corporation, and on his income tax return for 1928 he treated it in a like manner.
In December 1928, A. B. Leach & Co. made payments similar to that received by the petitioner to other employees and to the officers of the corporation. Most of the employees received 50 percent of their salaries, but the petitioner, A. B. Leach, George T. Leach and some others*736 received a larger percentage. The amounts so disbursed were denominated "Christmas Gifts" on the books of A. B. Leach & *546 Co. and originally were charged to the expense account on the Chicago books. However, in the closing entries for the year, made at the New York office, they were charged to surplus.
In its return for 1928, A. B. Leach & Co. did not claim any deduction because of these payments, but under the heading "other debits to surplus" listed "Christmas Bonus" $316,429.28. The company made a net profit before adjustment of $426,175.41, and after adjustment, reported a net loss of $81,051.90 for the year 1928.
At a meeting of the board of directors of A. B. Leach & Co., on January 7, 1929, the following resolution was adopted:
Resolved, that the action of the officers in making gifts without consideration during the year 1928 to employees and officers as reported above, be, and the same is, hereby ratified and confirmed.
No action prior to the above is recorded in the minute book of the corporation. The stockholders, as such, did not formally authorize or ratify the transaction.
After petitioner left the employ of A. B. Leach & Co. on January 1, 1932, work*737 similar to that which he had performed, was done by Ralph Corey, whom he was instrumental in bringing to the company, at a salary of $6,000 per year.
Petitioner's work for the company required that he do considerable traveling. He contacted many of the company's customers in Michigan and Indiana at their places of business. He paid most of his traveling expenses, although some incidental items directly chargeable to the job he was on were paid by the company. In his income tax return for 1928 he deducted the amount of $4,942.46 for traveling expense in connection with business. The respondent determined that $508.05 of this amount represented personal expenses and was not deductible.
Petitioner held memberships in about seven clubs, which cost him between $6,000 and $7,000 in 1928. He joined several of these clubs prior to his employment by A. B. Leach & Co. He made no segregation of the amounts spent at these clubs when he was alone and when he was entertaining customers. In his income tax return for that year he deducted as a "club expense" the amount of $1,751.94. The deduction was disallowed by the respondent on the ground that this amount had not been sufficiently*738 substantiated as an expense incurred in trade or business.
In his 1928 return petitioner also deducted, in computing his net income, the amount of $572.80 as expense of entertaining customers. This deduction was disallowed by the respondent on the ground that it did not represent a business expense.
*547 OPINION.
MELLOTT: The first question to be decided in this proceeding is whether the $20,000 payment made to the petitioner in December 1928 was a gift, or a bonus or additional compensation.
The petitioner contends the evidence shows that the intention of A. B. Leach & Co. was to make a gift. In support of this contention he points out that at the time the payment was made, George T. Leach said it was a gift; that in the bookkeeping records and the resolution of January 7, 1929, the payment was denominated a gift; that the payment was charged to surplus and not to operating expenses; that the Leach Co. did not claim any deduction because of this payment in its income tax return for 1928; that the petitioner could not legally have demanded the delivery of the $20,000; and that the man who succeeded him in the position he filled was paid only $6,000 per annum. Respondent*739 contends that the payment was additional compensation and should have been reported by the petitioner as income.
It is well settled that to constitute a gift there must be, not only a transfer of possession and an acceptance by the donee of the thing given, but an intention to make a gift. The transfer must also be without consideration or compensation therefor. See , and cases cited therein. "Whether a payment in a given case shall be deemed taxable compensation or a gift exempt from tax depends upon the intention of the parties, and particularly that of the employer, to be determined from the facts and circumstances surrounding the transaction." . But - "The mere fact that the employer was under no legal duty to pay is not conclusive that the payment was a nontaxable gift."
The fact that George T. Leach, vice president of the company, called the transaction a "gift" at the time that the check was delivered to petitioner, and that it was designated on the company's books and in the corporate resolution of January 7, 1929, as*740 a "gift", while persuasive, is not controlling. Tax liability is not determined by the mere use of words or even by book entries. We must analyze the whole transaction and look through the form to the substance. As said by the court in , "In a case like this where neither corporation nor stockholder is the taxpayer, and motive and intent is the question, the substance of the matter should be looked to."
During the year in question the company made distributions aggregating $316,429.28, which was approximately 75 percent of its total *548 earnings. It designated such distributions on its return as "Christmas Bonus." These distributions were confined to employees and officers of the corporation, most of the employees receiving 50 percent of their salaries while the officers and more important employees, such as the petitioner, received larger percentages.
In (certiorari denied, ), the Circuit Court of Appeals for the Fourth Circuit said:
Although it is held that the motive accompanying a gift is not material, gifts usually proceed from the*741 generosity of the giver; and, where there is any doubt as to the nature of the transaction, the absence of such motive is a pertinent circumstance for consideration. It is an essential characteristic of a gift, however, that it be a transfer without consideration.
* * *
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 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.
But petitioner argues "that a friendship of long standing existed * * * between George Leach and the petitioner, and * * * had it not been for this long continuing friendship * * * petitioner would never have received the gratuity in question." This argument is not persuasive. The payment in question was not made from George Leach's funds, but from the funds of A. B. Leach & Co. It is difficult to see what, if any, bearing individual*742 friendships could have had upon the making of it. Surely it would not be contended that the vice president of the company would give away corporate funds in token of his friendship for petitioner.
Again, the record wholly fails to show that the corporation was motivated by pity, philanthropy or charity toward petitioner. Indeed, all of the evidence points to the contrary. Petitioner stated that he found that he "was apparently valuable in the investment banking business to A. B. Leach & Co." It was at this time that the company retroactively doubled his salary. Petitioner "was not particularly interested in the compensation" received as his "income was sufficient, in addition to that." He reported a total income of $177,352.50, exclusive of the $20,000 here in question. Manifestly, there was no need for pity, philanthrophy or charity.
Regardless of the wording of the resolution of January 7, 1929, we seriously doubt that the Leach Co. gave away such a large part *549 of the corporate assets "without consideration." The fact that the amounts paid to most of its employees were measured by the salaries they received, strongly*743 indicates that the payments were in consideration of past services. Petitioner's services were considered to be of great value to the corporation. This is shown by its action in doubling his salary to induce him to continue in its employ when he received an offer from another firm; and this undoubtedly explains why he received a larger percentage of his salary than was paid to other employees.
The repeated reference to the payment as a "gift" does not make it one. We are convinced that it was a bonus, or additional compensation for services rendered. A bonus "is not a gift or gratuity but a sum paid for services, or upon a consideration in addition to or in excess of that which would ordinarily be given." . "Something given in addition to what is ordinarily received by or strictly due to the recipient; money given in addition to an agreed compensation." Webster's International Dictionary. "That only is a gift which is purely such, not intended as a return of value or made because of any intent to repay another what is his due, but bestowed only because of personal affection or regard or pity, or from general motives*744 of philanthropy or charity."
The fact that the payment was charged to surplus rather than to income, is not controlling. "It is not true that because a payment may not have been taken as a deduction by the payer that it cannot be taxed as income to the recipient." In this connection, it is significant that the corporation, without deducting the $316,000 paid to officers and employees, could still show a loss in filing its tax return.
Petitioner relies upon ; , and other court and Board cases. In the McCann case we had before us the question whether the transfer of certain property by a man to his wife constituted a gift or a trust. No such question is before us in this case. While the David R. Daly decision is in point, it should be noted that since it was promulgated, we have been given for our guidance such cases as *745 ;;, and ; . These decisions indicate that the provision exempting gifts being, as it is, "almost in verbal conflict with the broad provision that gross income shall include 'gains or profits and income derived from any source whatever'" (Paul & Mertens "Law of Federal Income Taxation", vol. 1, p. 147), should not be construed liberally *550 in favor of one claiming the exemption, but in such a way as to give the broad provision its proper effect.
The language used by the court in , might well be used here: "To call such a transaction a gift would do violence to the well-understood meaning of that word; and to hold that gains and profits realized in this manner are not subject to taxation as income would open the door to the grossest evasions of the law." In our opinion the respondent did not err in including the payment in petitioner's income for 1928.
The three issues relating to traveling expenses, money*746 expended for clubs, and amounts expended in entertaining customers, may be considered together. Petitioner had the burden of proof, and it was incumbent upon him to establish by evidence his right to deduct the items in question. The testimony offered in this connection was very meager and vague.
With reference to the clubs, he stated that he expended "between $6,000 and $7,000" and estimated that 90 percent of it was for business. He belonged to most, or all of the clubs, prior to his employment by A. B. Leach & Co. Some of them were golf clubs, while some were clubs at which he lived when in the city. He stated that he could not segregate the amounts expended while alone, from the amounts expended while entertaining customers.
As to the traveling expenses, the evidence is as follows:
Q. Who paid your traveling expenses?A. I paid almost all of my traveling expenses. Some incidental items directly chargeable to the job that I was on, were paid by Leach.
The above is the sole testimony introduced on this issue. We can not ascertain from it whether the Commissioner erred or not in refusing to allow $508.05 of the amount of $4,942.46 deducted by petitioner.
*747 There was no testimony whatever upon the item of "expense of entertaining customers", except petitioner's statement that he entertained customers. No names of customers, dates, amounts expended, or other substantial evidence was submitted. Under cross-examination he stated that he could not segregate the amounts so expended from his own personal expense.
Petitioner, therefore, has wholly failed to submit sufficient evidence to show that he is entitled to deduct the sums in question from his gross income.
It follows that respondent's determination of the deficiency should stand.
Reviewed by the Board.
Judgment will be entered for the respondent.