*4171 Amounts received by officers and employees from a fund created by former stockholders of a corporation, out of the proceeds of the sale of their stock, held to be taxable income.
*202 In these proceedings, which have been consolidated for hearing and determination, the petitioners seek a redetermination of their income-tax liability for the calendar year 1920, for which year the respondent construed certain sums received by the petitioners as income, rather than gifts, and determined deficiencies in the following amounts:
| C. D. Jones | $18,442.20 |
| S. J. Livingston | 16,289.52 |
| J. S. Sommerville | 14,152.45 |
| C. L. Patterson | 200.80 |
FINDINGS OF FACT.
The petitioners are all individuals, who at the time of the sale on March 15, 1920, of substantially all the stock of the East Broad Top Railroad & Coal Co. and the Rockhill Iron & Coal Co. for a total consideration of $3,029,400 had been for some time in the service of one or the other of these companies as an officer or employee.
C. D. Jones entered*4172 the employ of the East Broad Top Railroad & Coal Co. in 1905 in the capacity of an auditor at $1,500 per year and advanced by successive stages to the office of vice president and secretary in 1918 at an annual salary of $10,000, which was received in 1919 and 1920. In addition to his salary, he received certain bonuses at the end of the years 1917, 1918, 1919, and 1920 in the amounts of $1,500, $1,500, $5,000, and $2,000, respectively. His salary and bonus were fixed by the board of directors and were received by him in full payment for services rendered. His duties *203 were the management and operation of the properties of the corporation. The salary and bonus received in 1919 and 1920 were adequate compensation for the services rendered.
S. J. Livingston entered the employ of the Rockhill Iron & Coal Co. in 1899 in a clerical capacity and became vice president in 1918 at an annual salary of $10,000, which was received during the years 1918 and 1919 and for the first four months of 1920. In addition to salary he received certain bonuses. His salary and bonus were fixed by the board of directors and paid to him in full payment for services rendered the company. During*4173 1919 and 1920 until the sale of the Rockhill Iron & Coal Co. stock, when Mr. Livingston severed his connection with the company, his principal duties were the overseeing of coal sales of the mining company.
John S. Sommerville entered the employ of the Rockhill Iron & Coal Co. in 1909 as general superintendent and became general manager in 1913, which position he held during 1920. During 1919 and 1920 his salary was $7,500 per annum, which was fixed by the officers of the company. In addition there were bonuses during the war years amounting to $1,500 in one year and $2,000 in another. He considered the salary and bonus to be in full payment for services rendered to the company. He continued in the employ of the company for three years after the sale of the stock at a salary of $10,000 per annum without bonus.
C. L. Patterson was employed by the Rockhill Iron & Coal Co. during 1920 as assistant general manager and as such received a monthly salary of $275, which was increased to $295 per month in February, 1920. His salary was determined by the general manager, who considered it adequate for services rendered.The stock of the East Broad Top Railroad & Coal Co. and the*4174 Rockhill Iron & Coal Co. was owned and controlled substantially by the same interests. On February 7, 1920, and on March 15, 1920, 46,687 shares of the preferred and common stock of the two companies were outstanding, 18,774 being shares of the East Broad Top Railroad & Coal Co. and 27,913 being shares of the Rockhill Iron & Coal Co.
The stockholders of the two companies first indicated their desire to sell the properties in 1907 or 1908 when a proposal was entertained to which the majority holders consented. Other proposals were made in 1912 and 1913 but a contract for the sale of the stock was not made and no sale was consummated. Prior to 1913, the stockholders had agreed upon a selling price of $10 per share but no offers for the stock were received. In 1919 an offer was made to purchase all the stock of both companies at a price which would net the stockholders approximately $63.50 per share. The offer was referred to the directors of both companies at a joint meeting. *204 At this meeting held April 30, 1919, Edward Roberts submitted a report of his negotiations, resulting in securing the offer and recommended its acceptance and in conclusion stated:
I would*4175 add that it has been deemed proper by the larger interests, that in consideration of such a sudden termination of the business association and in recognition of the efforts and devotion of the officers and certain old employees of the companies over a long period of years, culminating in this conspicuous accession in the value of your securities, that the sum of $150,000 in each company be placed in the hands of its Presidents to be awarded according to their discretion.
The directors of both companies resolved that Mr. Roberts' recommendation be submitted to the stockholders with the approval of the two boards.
Following the joint meeting, the directors of each company met in separate meetings on April 30, 1919, and ratified the action taken at the joint meeting.
Printed notices were mailed to all stockholders on July 10, 1919, advising them of the sale and asking them to signify their assent to the sale and the distribution by depositing their shares with the Philadelphia Trust Co., Philadelphia, Pa. At that time the stockholders and bondholders were advised that:
After deducting from the $400,000 ($440,000) representing the Net Cash and Current Assets referred to above, *4176 the cost of Depository's services, Attorney Fees, etc., and the sum of $150,000.00 voted by your Board of Directors for distribution among the officers in consideration of their long and successful management resulting in so favorable a sale, the consummation of which will probably mean an early termination of their connection with the properties, there will remain a sum available for distribution among the Stockholders of not less than $5.00 per share. This, with the par value of $50.00 will make a total of $55.00 or more, per share to be received for the Stocks.
The stockholders' agreement authorized the trustee to deliver the stock to the purchaser, -
and to pay from the proceeds of said sale in excess of $55.00 per share, the proportionate part of the expenses incurred under the Agreement of Sale, including Depository's services, attorney fees, etc., and of the $150,000.00 as voted by the present Board of Directors for distribution among the present officers of the company.
Stockholders of both companies so deposited their stock and individually agreed to the terms of the sale and to the distribution of the sum of $150,000 in each company as recommended by the boards of*4177 directors. Sufficient shares were deposited to effect the sale. The prospective purchaser did not make settlement according to his agreement and the depositing stockholders were asked to extend the agreement under the terms until January 1, 1920, except that the net price was raised from a minimum of $55 to $57 per share. The stockholders extended the time for settlement until January 1, 1920, *205 under the foregoing terms. The prospective purchaser did not make settlement under the contract and forfeited his deposit of $100,000 which was distributed to the stockholders pro rata. At the time of distribution of the forfeited deposit a statement of the amount was sent to the stockholders and as there were several other parties interested in the purchase of the property they were asked to continue the deposit of their stock for sale on a basis not less than under the prior agreement. The stockholders signified their willingness to continue the deposit agreement for sale of their stock at a figure, which, after expenses and previously authorized disbursements ($150,000 fund from each company) would net them at $57least per share.
Percy Madeira appeared as a prospective*4178 purchaser in January, 1920, and on February 7, 1920, a written contract was executed by John Gilbert, acting for Madeira, Hill & Co., and Edward Roberts, acting under authority conferred upon him by depositing stockholders of the East Broad Top Railroad & Coal Co. and the Rockhill Iron & Coal Co., whereby Gilbert agreed to buy and Roberts to sell all the outstanding stock of the two companies for $2,729,400, provided, however, the seller should not be obligated to deliver more than 95 per cent or the purchaser obligated to take more than 95 per cent of such stock outstanding.
This contract provided:
It shall be a condition of the present transaction that prior to the settlement no dividends shall be declared by either Company and none of their assets shall be sold, encumbered or disposed of except in the usual course of business, except that each Company may make gifts to its officers of not to exceed One Hundred Fifty thousand dollars ($150,000).
A question arose as to the right of the corporation to make these gifts and purchaser preferred that his contract should not include a reference to the gift.
At a subsequent date another contract was executed by the same parties, *4179 Gilbert and Roberts, which did not refer to the matter of the gift, but since the assets were not to be depleted to the extent of said gifts of $300,000, the consideration for the purchase of the stock was accordingly increased a like amount to $3,029,400. In all other respects the contracts are identical.
The contract reciting a consideration of $3,029,400 for the purchase of the stock superseded the contract calling for a consideration of $2,729,400, and settlement was made by the parties under the contract calling for the higher amount.
Settlement was made and the purchase price was paid to the Trust Company in cash and securities, and the Trust Company then made distribution, to wit: it paid $9,882.25 on expenses and charges, a sum equal to $58.25 per share to depositing stockholders (46,687 *206 shares X $58.25 per share - $2,719,517.75), and the balance of $300,000 to old officers and employees of the two companies.
The shareholders in each company contributed the same amount per share as a contribution to $300,000 fund regardless of the number of shares in each company.
Edward Roberts, president of the East Broad Top Railroad & Coal Co., indicated the amount*4180 which was to be paid to each officer and employee of the two companies. Mr. Roberts designated the distributees in the fund in a letter dated March 15, 1920, addressed to the Philadelphia Trust Co., the depositary, which stated:
In accordance with authority and resolutions now on file with you, relating to the distribution of $300,000 provided for in the agreements of sale of the Stocks and Bonds of The East Broad Top R.R. & Coal Co. and The Rockhill Iron & Coal Co., I hereby direct that distribution of said amount be made as follows, in lieu of instruction given you under dates of July 22, 1919 and August 7, 1919. (Italics ours.)
The officers and employees to whom this distribution was made, their respective positions and the amounts received by each were as follows:
| Name | Position | Amount |
| Edward Roberts | President, R.R. Co | $75,000 |
| S. J. Livingston | Vice President, Coal Co | 56,000 |
| C. D. Jones | Vice president, R.R. Co | 56,000 |
| G. T. Roberts | President, Coal Co | 35,000 |
| J. S. Sommerville | General manager, Coal Co | 50,000 |
| E. C. Hall | General manager, R.R. Co | 7,500 |
| G. W. Dilkes, Jr | Salesman, Coal Co | 6,000 |
| C. C. Hahn | Auditor, R. R. Co | 3,000 |
| C. L. Patterson | Asst. general manager, Coal Co | 3,000 |
| H. M. Covington | Secretary, Coal Co | 2,000 |
| P. F. Yeager | Chief clerk, R.R. Co | 1,500 |
| Wm. Annesley | Clerk, Coal Co | 1,500 |
| Eloise Almsted | Stenographer, Coal Co | 1,200 |
| Theresa E. Janson | Stenographer, Coal Co | 500 |
| Edith Lindberg | Stenographer, Coal Co | 500 |
| Lydia M. Roesler | Stenographer, R.R. Co | 500 |
| Bessie E. Clifton | Stenographer, R.R. Co | 500 |
| E. C. Dalbow, Jr | Clerk, Coal Co | 300 |
| 300,000 |
*4181 None of the petitioners had anything whatever to do with securing a purchaser for the properties.
All of the negotiations for the sale of the stock in 1919 and 1920 were carried on by Edward Roberts. Jones and Livingston took no part therein except to furnish information required by Edward Roberts. Sommerville took no part whatever in the negotiations.
Edward Roberts indicated the amounts to be distributed, but Jones was consulted as to subordinate clerks, stenographers, bookkeepers, etc., and Livingston was consulted as to employees of the Rockhill Iron & Coal Co.
The purchaser acquired all of the stock but the holdings of two interests were acquired independently of the sale agreement. In *207 one case the holder of seven shares sold his stock directly for a price which is not disclosed in the record. In the other case, the trustees of the G. B. Markle Estate, which owned approximately 3,800 shares in the two companies, 2,300 in the Rockhill Iron & Coal Co. and 1,500 in the East Broad Top Railroad & Coal Co., refused to come in under the agreement. However, the living Markle interests did enter into the deposit agreement and one Markle, who was a trustee of*4182 said estate, sold his personal holdings under the agreement, but refused to enter into the agreement as a trustee and said he did not believe the trustees of the estate had the right to make a gift. The Markle Estate sold its stock under a separate agreement for $58.25 net, which was the exact net amount received by the stockholders under the deposit agreement.
C. D. Jones owned 184 shares in the East Broad Top Railroad & Coal Co. and 106 shares in the Rockhill Iron & Coal Co.S. J. Livingston owned 102 shares in the East Broad Top Railroad & Coal Co. and 148 in the Rockhill Iron & Coal Co.
John S. Sommerville owned 26 or 27 shares in the Rockhill Iron & Coal Co.
G. Theodore Roberts owned stock in both companies.Edward Roberts was a stockholder in the East Broad Top Railroad & Coal Co.
None of the other distributees of the $300,000 fund was a stockholder in either of the above-mentioned companies.
The amounts received by the petitioners in the distribution of the fund of $300,000 were considered as gifts from the stockholders and in consequence were not included by them in their taxable income for 1920. The respondent has construed the amounts to be taxable*4183 income and accordingly has determined deficiencies as follows: C. D. Jones, $18,422.20; S. J. Livingston, $16,289.52; J. S. Sommerville, $14,152.45; and C. L. Patterson, $200.80.
OPINION.
SIEFKIN: In these proceedings the petitioners allege that the respondent erred in asserting additional income taxes for the year 1920. These petitioners received certain amounts out of a $300,000 fund out of the proceeds of the sale of stocks of the East Broad Top Railroad & Coal Co. and the Rockhill Iron & Coal Co., for the purpose of distribution to certain old employees on account of the sudden termination of the business association and in recognition of the efforts and devotion of these officers and employees in the accession in the value of the stockholders' property. The amounts so received were regarded by the petitioners as gifts and excluded from gross income in their returns. The respondent construed these *208 amounts to be compensation for services rendered and is asserting additional income and excess-profits taxes.
We are unable to distinguish this proceeding in principle from the case of *4184 Noel v. Parrott (C.C.A. 4th Cir.), 15 Fed.(2d) 669, sustaining this Board in the Appeal of John H. Parrott,1 B.T.A. 1">1 B.T.A. 1. In that case the general superintendent of a corporation received $35,000 by virtue of certain resolutions adopted by the executive committee of the corporation and approved by the board of directors. The first of such resolutions directed the officers of the company to secure a bid for the physical properties of the company or for the shares of stock and authorized them to sell the shares of the directors at $57 per share at any time subsequent to the distribution of $25 per share. The second resolution provided:
Resolved that a gratuitous appropriation equal in amount to $3 per share on the outstanding stock of the company be set aside out of the assets for distribution to certain officers and employees of the company, and that the executive committee be authorized to make such distribution as they deem wise and proper.
Immediately upon the approval of such resolutions by the board of directors, the executive committee passed a resolution directing that the appropriation authorized by the resolution last quoted be distributed*4185 as follows: $45,947 to the president of the corporation who was also a director, $45,947 to the treasurer and auditor, $35,000 to Parrott, $7,500 to the secretary, $5,000 to the assistant treasurer, and $6,400 to three clerks.
Later a contract was entered into between a purchaser and certain stockholders of the company providing for the purchase and sale of at least a majority and possibly all of the stock of the company at a fixed price. The contract of sale stated "it being understood and agreed that the said coal company may, in addition to the dividend hereinabove provided for, distribute a further sum in an amount equal to $3 per share on 48,598 shares of the outstanding stock, in such manner and for such purpose as the directors may by resolution decide in addition to the current expenses of the company." Practically all of the stockholders turned in their stock and accepted the price offered by the purchaser and Parrott received $35,000 derived from the fund set up by the corporation pursuant to the resolution above quoted.
In this proceeding, although the first steps taken closely parallel the steps taken in the Parrott case, the transaction was completed in a different*4186 manner. Instead of the companies setting up the fund for the officers and employees, as was done in the Parrott case and was first proposed in this case, the purchasers, who previously had agreed to buy the shares of the stockholders for $2,729,400 under a contract providing for a "gift" of $150,000 from the assets of each company *209 before the shares were taken over by the purchaser, agreed to pay $3,029,400 without such contract.
The entire proceeds of the sale of stock, $3,029,400, were paid to the Philadelphia Trust Co. to be distributed as follows: $9,982.25 for expenses incident to the sale; $2,719,517.75 to stockholders, representing 46,687 shares at $58.25 per share; and the balance of $300,000 to be distributed to the old officers and employees of the two companies. Out of this fund the petitioners received the amounts in question here.
Just as in the Parrott case, the officers and employees received the amounts in controversy because of an agreement with the purchaser. Whether the purchasers permitted the company, the shares of which they purchased, to pay such amounts direct to the officers and employees or whether, a difficulty having been encountered*4187 with this method, a method was adopted by which the purchasers increased the purchase price by such amounts and the entire purchase price was paid in to the trustee and by it distributed, -
in accordance with authority and resolutions now on file with you, relating to the distribution of $300,000.
The result obtained is identical and leads to the conclusion that the stockholders were not recipients of the additional $300,000 in any manner that would give them the right of free disposition of that amount. All that the stockholders were entitled to by their agreements depositing the stock was a minimum of $57 a share. The excess was to be used to pay the expenses of the sale and to pay the $300,000 to officers and employees. When these amounts were paid, and only when so paid, were the stockholders entitled to more than the $57.
Under such circumstances we can not adopt the contention of the petitioners that the relation was merely one of donor and donee between the stockholders and the petitioners. Whether or not a consideration flowed from the petitioners to the stockholders or to the corporation, we believe the existence of the agreements negative the contention that the*4188 receipt of the moneys constituted a gift. A gift is not dependent upon agreement but upon the voluntary act of the donor only. See Pickslay v. Starr,149 N.Y. 432">149 N.Y. 432.
As said in the opinion of the Circuit Court of Appeals in Noel v. Parrott, supra:
When the sale was actually made, the terms of sale were so fixed that the officers and employees named in the resolution would receive the compensation therein provided. The payment to them, therefore, was not without consideration, as in case of a gift. The consideration was their previous service to the company, the relinquishment of their position, the sale of their stock, and the efforts which they, or some of them, put forth to bring about the sale of all *210 of the stock of the corporation. If the payment to plaintiff and the other officers and directors had been concealed, it might have been subject to attack as a secret profit; but it appears that the facts were fully and fairly disclosed to the stockholders, and that they ratified the action taken, by the sale of their stock under the terms proposed. The $35,000 thus appears to have been additional compensation and profit*4189 legitimately realized by plaintiff, with the knowledge and consent of the other stockholders of the corporation.
The court concluded in the Parrott case that the amount received was not a gift but was taxable income.
We conclude that the transaction giving rise to the payments in question here do not satisfy us that a gift was intended and that the payments are of a taxable character under the very broad definitions of income in the Sixteenth Amendment, the Revenue Act in question, and decisions of the Supreme Court. Stratton's Independence v. Howbert,231 U.S. 399">231 U.S. 399, 415; Doyle v. Mitchell Bros. Co.,247 U.S. 179">247 U.S. 179, 185; Eisner v. Macomber,252 U.S. 189">252 U.S. 189, 207. We also base our opinion upon the similarity in all essentials with what was done in Noel v. Parrott, supra.
Reviewed by the Board.
Judgment will be entered for the respondent.
GREEN, dissenting: The respondent relies on the case of Noel v. Parrott (C.C.A. 4th Cir.), 15 Fed.(2d) 669, sustaining the United States Board of Tax Appeals in Appeal of John H. Parrott,1 B.T.A. 1">1 B.T.A. 1,*4190 and that case is followed in the majority opinion. The facts in that case are not similar to those in the instant case.
In this case it is clear that the compensation previously paid was adequate. Here, contrary to the situation in the Parrott case, there was no diminution of corporate assets as the result of the payment. Here it was clear that the corporation would continue in existence, and equally clear that there were no secret profits such as the Circuit Court said might have been present in the Parrott case. Here it is clear that the amounts paid were not in satisfaction of any obligation of the corporation, because clearly all obligations to the employees had been fully satisfied.
The facts herein show that the $300,000 fund was created by the selling stockholders of the East Broad Top Railroad & Coal Co. and the Rockhill Iron & Coal Co. The sale was not a sale by the corporation. It is true that in preliminary negotiations a similar fund was proposed in which the fund was to be handled through the two corporations. In the plan that was finally consummated the entire proceeds of the sale of the stock, $3,029,400, was paid to the Philadelphia Trust Co. to*4191 be distributed as follows: $9,982.25 for expenses incident to the sale; $2,719,517.75 to stockholders, representing 46,687 shares at $58.25 per share; and the balance of $300,000 to be distributed to old officers and employees of the two companies.
*211 The essentials of a "gift" are intent to deliver gratuitously and without legal consideration, and a delivery, either actual or constructive, both purpose and execution of purpose being essential.
The petitioners herein were all officers or employees of one or the other of the two corporations which were sold. They had been fully paid by these corporations for all services rendered. They did not assist in any way in the negotiations relative to the sale. Their relations at all times had been with the corporations. There is no theory upon which consideration, as between the petitioners and the stockholders, can be established. On the other hand, the amounts received by these petitioners were paid, not by the corporation by which they had been employed, but by the stockholders of the corporations, with whom the petitioners had no contractual relationship. The situation is precisely the same as it would have been if*4192 the stockholders had made the payment to the employees of the corporations months before or months after the sale. The result reached in the majority opinion can only be arrived at by completely ignoring corporate entities. Judgment should be entered for the petitioners.