*45 Decision will be entered under Rule 50.
Payments made to petitioner by the corporation formerly directed by her deceased husband without obligation on the part of the corporation and intended by it, in reliance on I. T. 3329, as a gift to her individually, held not taxable as either compensation for personal services or distribution of profits.
*707 By this proceeding petitioner contests respondent's determination of a deficiency of $ 1,313.81 in income tax for the year 1944. The only question is whether $ 4,000 received by petitioner is excludable from taxable income as a gift as petitioner contends, or is taxable as determined by respondent as either compensation for services or distribution of profits. Other adjustments are not contested.
FINDINGS OF FACT.
Petitioner filed a Federal income tax return for the year 1944 with the collector of internal revenue for the district of Louisiana. She is the widow of Anthony Aprill, who was an organizer of Frerichs Lumber Co., Ltd., in 1908 and became its president in 1925. The company was dissolved in 1936, *46 and for a time its business was carried on by a partnership composed of Aprill and Edward G. Boh, operating as Frerichs Lumber Co. The partnership was dissolved in April 1940, when its assets were acquired by Frerichs Lumber Co., Inc.Frerichs, incorporated under the laws of Louisiana, had a capitalization of 1,100 shares of $ 100 par value common stock which were held as follows: *708
| Aprill | 824 shares |
| Boh | 275 shares |
| Bessie M. Fee | 1 share |
The three stockholders constituted the board of directors, and each continued to perform the same type of services for the corporation as for the partnership and its predecessor. Bessie M. Fee was cashier, bookkeeper, secretary, and treasurer. Aprill was president, and devoted most of his time to office and factory management, personnel problems, and the financial requirements of the corporation. Boh, vice president, was an expert in "wood piling" and did much of his work in the woods, buying and selling, and supervising the expediting of jobs.
At the time of Frerichs' incorporation in 1940, the following yearly salaries were agreed upon:
| Aprill | $ 16,000 |
| Boh | 10,000 |
| Fee | 2,100 |
Mrs. Fee's salary was increased in *47 1942 to $ 2,400 per year. In addition to the above salaries, the company has carried out a bonus plan whereby it pays its employees yearly bonuses which are based solely upon the value of each employee's services in earning the corporate profits for that year. The amount of bonus is determined at annual board meetings held shortly before March 31, the close of the company's fiscal year. At these meetings the company's auditor presents a statement of profits for the year and a report of the activities of each employee, and participates in discussions with the directors concerning what bonus should be paid the employees. The amount of bonus is determined without regard to the question of tax savings by the corporation.
Boh's employment with the corporation began in about 1931. His compensation at that time, and while employed by the partnership, consisted of a regular salary plus a bonus dependent on the year's profits. For the fiscal years ended March 31, 1941, to March 31, 1947, the following amounts were paid to Boh as bonuses:
| 1941 | $ 1,000 |
| 1942 | 10,000 |
| 1943 | 10,000 |
| 1944 | 10,000 |
| 1945 | 10,000 |
| 1946 | 7,500 |
| 1947 | 10,000 |
Aprill died on January 6, 1942, and petitioner inherited*48 his 824 shares of stock. On February 11, 1942, petitioner became a director and president of Frerichs. Subsequent to Aprill's death but prior to March 31, 1942, the company's auditor called Boh's attention to I. T. 3329, C. B. 1939-2, p. 153, which ruled in summary as follows:
*709 Payments made in 1937 and 1938 by the M Company to the widow of an officer-stockholder who died in January, 1937, though not required to be made by any contractual obligation, are deductible by the corporation as business expenses. Such amounts are gifts to the widow, and, therefore, are not taxable income to her.
The auditor advised Boh that by complying with the above I. T. the company could over a limited period deduct payments to petitioner of amounts which would have been paid as salary to Aprill if he were alive, and that the payments would not be taxable to petitioner. Frerichs was not obligated under any agreement with Aprill to make payments after his death to petitioner.
At a meeting of the board of directors on March 30, 1942, attended by petitioner, Boh, and Mrs. Fee:
On motion of Mrs. B. M. Fee, seconded by E. G. Boh, and unanimously carried, it was resolved:
That, whereas, the salary*49 of Mr. Anthony Aprill, our President, who died on January 6th, 1942 was fixed by minutes of April 15th, 1940 at $ 16,000.00 per year, that this Corporation continue to pay his widow, Mrs. Louise Klar Aprill $ 1,333.33 per month, for the months of January, February, and March 1942 and for each month during the ensuing fiscal year of this Corporation; commencing April 1st, 1942 and ending March 31st, 1943 Mrs. Louise Klar Aprill be paid the sum of $ 1,333.33 per month in recognition of the services rendered by Mr. Aprill to this Corporation, making a total for the three months ending March 31st, 1942 of $ 4,000.00 and a total for the fiscal year ending March 31st, 1943 of $ 16,000.00, which would be the amount of salary Mr. Anthony Aprill would have been paid by this Corporation had he lived, and that the above amounts as paid, be charged as an expense of the business.
The resolution was ratified by the stockholders at a meeting on March 31, 1942.
Frerichs made the payments to petitioner pursuant to the above resolution, and at a board meeting on March 30, 1943, attended by the three directors, it was resolved:
* * * that this corporation continue to pay his widow, Mrs. Louise Klar*50 Aprill, $ 16,000.00 per year, or $ 1,333.33 per month during the fiscal year ending March 31, 1944.
The resolution was ratified by the stockholders at a meeting on March 31, 1943, and pursuant thereto Frerichs paid petitioner about $ 16,000 in its fiscal year ended March 31, 1944. Of that amount, $ 4,000 paid during calendar 1944 is in issue in this proceeding.
On its books Frerichs treated the payments to petitioner as expenses and claimed them as deductions in its returns prepared on an accrual basis. The Commissioner did not disallow the deductions for the years ended March 31, 1942 and 1943, but disallowed the deduction of payments to petitioner for the final five months of the year ended March 31, 1944, stating in the notice of deficiency:
*710 Taxpayer deducted on return as compensation of Officers, Amount paid to widow of former President. Payment does not represent compensation for services rendered, but additional compensation paid in recognition of the many year [sic] of valuable service of Mr. Aprill rendered to the organization.
| Amount deducted on return | $ 16,099.96 |
| Allowed | 10,733.31 |
| Excessive | 5,366.65 |
Frerichs paid the deficiency based*51 upon the Commissioner's action.
Prior to April 1, 1944, petitioner did not render any services to Frerichs or its predecessors and except for dividends on her stock, the only amounts she received from Frerichs were the payments pursuant to the above resolutions. At a meeting of the board of directors on March 29, 1944,
Upon motion by Mrs. B. M. Fee, seconded by Mr. E. G. Boh, and unanimously carried, it was agreed between the Corporation and Mrs. Louise Klar Aprill, the Company's President, that she would devote part of her time during the next fiscal year ending March 31, 1945 to the Company for a compensation to be paid to her by the Corporation of $ 250.00 per month.
Since April 1, 1944, petitioner's services to Frerichs have consisted of coming to the office once or twice a month for about two hours to go over bills and make out checks.
Frerichs' returns disclosed net income which after deducting taxes for the fiscal years ended March 31, 1942, to March 31, 1945, was as follows:
| 1942 | $ 23,439.69 |
| 1943 | 17,259.48 |
| 1944 | 14,948.61 |
| 1945 | 16,312.69 |
For the fiscal years ended March 31, 1941, 1942, 1943, and 1944, Frerichs paid the following cash dividends to its stockholders: *52
| Stockholder | 1941 | 1942 | 1943 | 1944 |
| Aprill | $ 13,500 | |||
| Petitioner | $ 9,000 | $ 9,000 | $ 9,000 | |
| Boh | 4,500 | 3,000 | 3,000 | 3,000 |
In her return for the calendar year 1944, petitioner did not report as income the $ 4,000 received by her from Frerichs as payments for the first three months of that year. She reported $ 2,375 as income, being her salary from Frerichs subsequent to April 1, 1944. In his notice of deficiency respondent increased petitioner's taxable income by the $ 4,000:
* * * which you contend is exempt from Federal income tax. Your contention is hereby denied, and it is held that such amount is taxable to you as a distribution of earnings and profits received from that corporation.
*711 The $ 4,000 was received by petitioner as a gift from Frerichs, and not as compensation for services or as distribution of profits.
OPINION.
Our ultimate finding of the gratuitous character of the amounts paid to petitioner by the corporation which her husband had directed disposes in her favor of the only adjustment in issue.
Under either theory by which respondent opposes exclusion of the payments, the present inquiry must be directed to the purpose which motivated the*53 corporation in making them. Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34. Any services for which compensation could have been intended must have been those of petitioner or her husband. We can not perceive even a remote connection between the payments and services rendered by petitioner, who began employment only after all the payments in issue had been made. "When an allowance is paid by an organization to which the recipient has rendered no service, the amount is deemed to be a gift or gratuity and is not subject to Federal income tax in the hands of the recipient." I. T. 3329, 1939-2 C. B. 153, supra. And no obligation of any kind existed to compensate petitioner further for her husband's past services. Cf. Brayton v. Welch (U. S. Dist. Ct., Mass.), 39 Fed. Supp. 537. 1
*54 The facts that the corporate resolution referred to the payments as "in recognition of his [Anthony Aprill's] services," cf. Thomas v. Commissioner (C. C. A., 5th Cir.), 135 Fed. (2d) 378, with Blair v. Rosseter (C. C. A., 9th Cir.), 33 Fed. (2d) 286, and that Frerichs deducted the payments as salary expense on its books and in its returns (which incidentally was disallowed), see Willkie v. Commissioner (C. C. A., 6th Cir.), 127 Fed. (2d) 953; certiorari denied, 317 U.S. 659">317 U.S. 659; Noel v. Parrott (C. C. A., 4th Cir.), 15 Fed. (2d) 669; certiorari denied, 273 U.S. 754">273 U.S. 754, are satisfactorily explained by the desire of its officers to comply with I. T. 3329, in which identical language was used and identical treatment authorized.
Respondent's contention that the payments were distributions of profits similarly fails of factual support. His theory is that the bonuses paid to Boh and the payments to petitioner were parts of a plan to distribute profits. But the bonuses to Boh are shown by the evidence*55 to have been actual earned compensation in accordance with a practice which antedated the existence of the corporation and in fact of Boh's status as a stockholder. The practice continued after the payments to petitioner ceased. And since we can not find that his bonuses were in the nature of a distribution of profits, it is unreasonable *712 to assume that he as a stockholder would have acquiesced in the distribution of the corporation's profits to his fellow stockholder without insisting on the receipt of his aliquot share. Cf. Golfro Realty Corporation, 20 B. T. A. 426; General Water Heater Co., 14 B. T. A. 4; affd. (C. C. A., 9th Cir.), 42 Fed. (2d) 419. This seems to us adequately to dispose of the hypothesis that the payments to either petitioner or Boh constitute a disguised dividend.
Decision will be entered under Rule 50.
Footnotes
1. "* * * and the form of the payments, i. e., to the estate of the deceased and not members of the family↩, point to the conclusion that the directors, in making the payments, intended them as additional payment for faithful services already performed by the deceased * * *"