Bausch v. Commissioner

*1433 These proceedings have been consolidated. Docket No. 20744 involves a deficiency in the income tax of Estate of Edward Bausch, deceased, for the year 1945 of $ 6,175.35. Docket No. 20745 involves a deficiency in the income tax of Estate of William Bausch, deceased, for the year 1945 of $ 8,525.06.

In the determination of the foregoing deficiencies the Commissioner made several adjustments to the net income as disclosed by the returns. None of these adjustments is in dispute except one in each case. The one in Docket No. 20744 is the addition to the net income reported on the return of "(a) Salary $ 10,500.00". This adjustment is explained in the deficiency notice, as follows:

(a) Salary of $ 10,500.00 received during the taxable year from the Bausch and Lomb Optical Company is held to be includible in taxable income.

The adjustment in docket No. 20745 is "(a) Salary $ 15,000.00" and*145 this adjustment is explained in the deficiency notice in the same manner as adjustment (a) in Docket No. 20744.

Adjustments (a) explained above are contested by appropriate assignments of error in each proceeding.

FINDINGS OF FACT.

The stipulated facts are adopted as a part of these findings and incorporated herein by reference.

*1434 The petitioners M. Herbert Eisenhart and Joseph F. Taylor are the executors of the estate of Edward Bausch, deceased, who died on July 30, 1944, and are also the executors of the estate of William Bausch, deceased, who died on October 19, 1944, each of said decedents being at the time of his death a resident of the City of Rochester, New York.

Each of the decedents, at his death, had been in the employ of Bausch & Lomb Optical Company upwards of 50 years, the decedent Edward Bausch having been vice president for a great many years prior to his becoming president in 1926 and subsequently chairman of the board of directors in 1935, and the decedent William Bausch having been secretary of the company for many years prior to his becoming vice president in 1935 and thereafter succeeding Edward Bausch as chairman of the board of directors upon the latter's*146 death. The decedent Edward Bausch was chairman of the board of directors at the time of his death, and the decedent William Bausch was likewise chairman of the board of directors at the time of his death.

Each decedent was receiving a salary of $ 1,500 per month at the time of his death. In the case of each of said decedents, Bausch & Lomb Optical Company paid to his estate the sum of $ 1,500 per month for a period of 12 months following his death. During the calendar year 1945, such payments to the estate of Edward Bausch amounted to $ 10,500 and to the estate of William Bausch amounted to $ 15,000.

Neither of the decedents was married at the time of his death. The decedent Edward Bausch left as his closest surviving relatives his brother William Bausch (the decedent in Docket No. 20745), his sister Annie B. Drescher, and three nieces and a nephew. The decedent William Bausch left as his closest surviving relatives his sister Annie B. Drescher and the aforesaid three nieces and nephew.

The decedent Edward Bausch left a last will and testament and a codicil thereto which were duly admitted to probate in Surrogate's Court, Monroe County, New York on September 12, 1944, pursuant*147 to which, after making provision for specific bequests to various individuals and charitable organizations, the residue of his estate was disposed of outright, four-fifths to the decedent's nieces and a nephew and one-fifth to the nephews and nieces of the decedent's deceased wife.

The decedent William Bausch left a last will and testament which was duly admitted to probate in Surrogate's Court, Monroe County, New York on November 3, 1944, pursuant to which, after provisions were made for specific bequests to various individuals and charitable organizations, the residue of his estate was disposed of in equal shares outright to his aforesaid nieces and nephew and to a nephew of his deceased wife.

*1435 Similar payments to the heirs or estates of deceased officers had been made by the company in the past, specifically the following: In 1932 three months' salary was paid to the estate of Adolph Lomb, a vice president who died in that year, the decedent having left no surviving spouse; in 1937 a year's salary was paid to the widow of William A. E. Drescher, a vice president who died December 30, 1936; in 1937 and 1938 a year's salary was paid to the widow of Hartwell H. Williamson, *148 assistant secretary, who died in 1937; and in 1939 and 1940 a year's salary was paid to the estate of Carl F. Lomb, a vice president who died in 1939, the decedent having left no surviving spouse.

There was no agreement between the company and the decedents William and Edward Bausch to make the payments here in question. The decision to make such payments was made by the president and treasurer of the company and other principal officers, and in each case was made shortly after the death of the decedent.

The purpose for making the payment to the estate of Adolph Lomb referred to above was that he had been connected with the company for a great many years, and it was decided to continue the payment of his salary for the remaining three months of the year following his death. The purpose for making the payment to the widow of William A. E. Drescher was that he was one of the four principal officers of the company who constituted the actual active management for nearly 50 years and, in view of the fact that his estate was not in very good shape, it was thought that it would be only fair and reasonable, in recognition of his years of service, to pay something to his widow. The purpose*149 for making the payment to the widow of Hartwell H. Williamson was that he died at an early age, leaving a widow and three children with no means from his estate, and it was thought only reasonable to continue his salary for a year to his widow. The purpose for making the payment to the estate of Carl F. Lomb was that he was likewise one of the four principal officers constituting the actual active management of the company for over 50 years, and in view of the agreement to pay the widow of William A. E. Drescher his salary for one year, it was thought reasonable to do the same thing in the case of Carl F. Lomb. There was no agreement or contract, oral or otherwise, between the company and the heirs of Adolph Lomb, William A. E. Drescher, Hartwell H. Williamson, or Carl F. Lomb to make the payments referred to above.

The purpose for making the payments to the estates of Edward Bausch and William Bausch, which are here in question, was that the company had the double precedent of having paid a year's salary to the widow of William A. E. Drescher and to the estate of Carl F. Lomb who, together with Edward Bausch and William Bausch, had been with the company for over 50 years, had been*150 responsible for its *1436 growth, and had drawn the same salaries, and it was, therefore, thought reasonable by the officers of the company to do as well for Edward Bausch and William Bausch as had been done for the other two.

The company does not have, nor did it ever have, any agreement with any of its officers or employees to continue their salaries for a year, or for any other period, following their deaths.

In addition to the payments made to the various officers referred to above, the company from time to time made payments to the estates or heirs of other employees, specifically the following: One month's salary to the estate of Herman Kellner, principal scientist of the company, who had been with the company for 21 years when he died in 1926; six month's salary to the widow of Joseph Hammele, sales manager and director, who died in July, 1926; salary paid to the estate of William L. Patterson, manager of the Technical Bureau, for the balance of the month of February, 1932, in which he died; seven weeks' salary to the widow of Edward Scheibe, purchasing agent, who died in 1932; three months' salary to the widow of Carl A. Yaeger, factory accounting manager, who died in*151 1935; six weeks' salary to the estate of Harry S. Moody, industrial relations manager, who died in May, 1943; and salary paid for the balance of the year to the widow of William B. Raton, who died in October, 1946. All of the individuals referred to above had been with the company for more than 20 years and none were officers.

The board of directors of Bausch & Lomb Optical Company did not adopt any resolution relating to the payments here in question made to the estates of Edward and William Bausch. Bausch & Lomb Optical Company deducted those payments on its corporation income tax returns for the years in which such payments were made.

OPINION.

So far as we can see there is no real controversy between the parties as to the facts in the instant case. The controversy is as to payments of $ 10,500 which the estate of Edward Bausch received and $ 15,000 which the estate of William Bausch received from the Bausch & Lomb Optical Company in the year 1945. Both of these decedents had served the company in important capacities for a period of 50 years, and at the time of their death each was receiving $ 1,500 a month. By direction of the president and treasurer of Bausch & Lomb Optical*152 Company these salaries were continued for 12 months after the date of the death of each decedent and were paid to the legal representatives of each decedent.

The Commissioner has determined that the amounts received by each of the estates in 1945 are taxable to the respective estates under sections 22 (a) and 126 of the Internal Revenue Code. Section 22 (a)*1437 is so familiar that it need not here be quoted. Section 126 is printed in the margin. ¹

*153 Petitioners contend that the amounts in question are not taxable under the provisions of section 22 (a) and section 126 relied upon by respondent but represented gifts made by the company to the estate of each decedent and are exempt from taxation under section 22 (b) (3), which excludes from taxable income: "The value of property acquired by gift, bequest, devise, or inheritance." Petitioners rely strongly on our recent decision in Louise K. Aprill, 13 T. C. 707. In that case we held that payments, made to the taxpayer Louise K. Aprill by a corporation, Frerichs Lumber Co., Ltd., which was formerly managed and directed by her deceased husband Anthony Aprill, without obligation on the part of the corporation to make such payments and intended by it, in reliance on I. T. 3329, as gifts to her individually, were not taxable to Louise as either compensation for personal services or distribution of profits. I. T. 3329, 1939-2 C. B. 153, to which we referred in that case, held that 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 *154 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 concluding part of such ruling by the Commissioner reads:

The amounts constitute gifts to B and are therefore not taxable income to her. With respect to the sum received by her in 1938, the fact that it is termed "pension" does not exclude it from consideration as a gift since the terms "pension" and "gift" are not mutually exclusive. 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.

In the Aprill case, in our findings of fact, we pointed out that the corporation, Frerichs Lumber Co., Ltd. had been advised by its auditor *1438 of I. T. 3329 and that in voting the payments to Mrs. Aprill after her husband's death, it was the intention to follow the language and requirements of I. T. 3329 and make a gift to her. The payment was voted by the board of directors of the corporation and ratified by the stockholders.

The question we have to decide *155 is whether Louise K. Aprill, supra, is controlling here. We do not think it is. The distinction between the two cases may be a narrow one but, nevertheless, we think it exists. Neither Edward Bausch nor William Bausch left a widow -- they were unmarried at the time of their deaths. The payments in question were made to their respective estates.

The Commissioner in support of his contention that the amounts in question are taxable to petitioners under section 22 (a) and section 126 of the Code strongly relies on Estate of Edgar V. O'Daniel, 10 T. C. 631, affd., 173 Fed. (2d) 966. In that case the decedent had been employed by a company which had a bonus plan in which the decedent had participated for a number of years. No employee had any enforceable right to any allotment for the current year under the plan until his share was designated by the proper officer. No share of the bonus for 1943 was designated for the decedent until March 14, 1944, several months after his death. It amounted to $ 28,143.65 and was paid to his estate on March 16, 1944. The estate did not report that amount as*156 income on its return for 1944, but the Commissioner added it to the estate's income in determining the deficiency for that year. The Tax Court held that the Commissioner acted correctly even though the decedent never had any legally enforceable right to the bonus during his life. Our decision was affirmed by the Second Circuit, the court stating in its opinion:

* * * It is true that the decedent would not have had a legally enforceable right to receive the foregoing amount until it was allocated by the American Cyanamid Company, but the payment clearly represented compensation for his services and any right to receive it that was realized by his estate was acquired through him and never arose in any other way or through any other source. * * *

It is true, as the petitioners contend, that the facts in the instant case are not the same as the facts in the O'Daniel's Estate case, supra. In the O'Daniel's Estate case the payment to the estate was the amount of a bonus voted to decedent after his death. In the instant case the payments to the respective estates were for the continuation of salaries for each decedent for a 12-month period after his death. Notwithstanding*157 these differences in facts, we think the controlling principle is the same. Here, as in the O'Daniel's case, the payments were made to the estates of decedents and would undoubtedly have been taxable to decedents as compensation for past services if they had been living *1439 when the payments were made. Here the payments were not made to decedents' widows, as in the Aprill case, supra, but were made to the legal representatives of decedents' estates. Cf. Brayton v. Welch, 39 Fed. Supp. 537, 28 AFTR 43 (U. S.D. C.Mass.).

The Brayton v. Welch case involved the question whether payments made by three corporations to the estate of a deceased officer and director were compensation for services rendered and consequently taxable as income or whether such payments represented gifts and were not taxable to the administratrix of the estate. The United States District Court for the District of Massachusetts held that such payments represented taxable income to the estate. The court, in so deciding, said, among other things, as follows:

The real intention of the directors in making the discussed payments is a question*158 of fact determinable on all the circumstances surrounding the transaction. In the present case, the language of the vote; the failure of the directors to submit the vote to the stockholders for ratification; the confirmation of the intention to make the payments as salaries as expressed in the vote by the deductions claimed in the corporate income tax returns; 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 and which contributed so much to the success of the respective enterprises. These considerations to my mind far outweigh the testimony of the directors who testified at the trial that the payments were intended as gifts.

With reference to Brayton v. Welch, petitioners say in their reply brief as follows:

* * * The only distinction between the instant case and the Aprill case is that in the instant case the decedent left no widow and, therefore, the payments were made to his estate. It is submitted that this is a distinction without a difference, and if that*159 was the ground for taxing the payments in the case of Brayton v. Welch, * * * then the Brayton case was wrongly decided.

We do not think Brayton v. Welch was wrongly decided but that, on the contrary, it was decided in accordance with the weight of authority. We think there is a distinction between payments made to the estates of deceased officers of a corporation such as we have in the instant case and was present in Brayton v. Welch and payments made to the widow of an officer of a corporation under the circumstances which existed in the Aprill case, supra. The distinction, as we have already said, may be a narrow one; nevertheless, it is one which has been recognized.

We think that the weight of authority supports respondent's determination that such payments as we have here represent taxable income to petitioners and we so hold.

Decisions will be entered for the respondent.