357 F.2d 37 | 2d Cir. | 1966
Lead Opinion
Once again in this post Commissioner v. Duberstein
The facts upon which this appeal is predicated are largely undisputed; but, typical of these cases, the inferences which flow from them are the subject of contention. Prior to July 1957,
Husting’s last day of work was June 22, 1957; he was in his early fifties and in apparent good health. Shortly, thereafter, he entered Passavant Hospital in Chicago for surgery to remedy an undisclosed ailment. The day before his operation was scheduled to be performed, Husting spoke to one of his co-directors, William T. Young, Jr., who indicated that Husting was confident and in good spirits. Quite suddenly, Husting died the following day before the surgery had even commenced.
Less than three and a half weeks later, the Board of Directors of Burnett met to record its shock and bereavement at Husting’s passing and to consider an appropriate corporate memorialization. The President of the company, Richard Heath, offered the following resolution which was unanimously adopted:
Be It Resolved that the Board of Directors of the Leo Burnett Company, Inc., officially record the passing on July 7, 1957 of Charles 0. Husting, a fellow director, and pay tribute to his memory as follows:
“With deepest sorrow we mark the death of Charles 0. Husting — friend, counsellor, major contributor to the progress of our company. Chuck was one of our ‘old timers.’ He will be remembered with affection and respect.”
Be It Resolved by the Board of Directors of the Leo Burnett Company, Inc., that this corporation pay to Mrs. Jane Husting the sum of $17,500.00 as a salary continuation for her late husband Charles O. Husting in equal monthly installments beginning July 31, 1957, and ending December 31, 1958.
The District Judge’s findings constitute a full exposition of the facts culled from the depositions and the documents which we have read with care. Before we discuss the legal contentions, it would be helpful to recite these findings. At the time Burnett resolved to make the $17,500 disbursement, Husting had been fully compensated and the corporation was not indebted nor obligated in any other fashion to Husting’s widow. The sum of $17,500 voted by Burnett’s Board was paid to Mrs. Husting
I.
In affirming Judge McLean’s holding that the payment of $17,500 to Mrs. Husting constituted a nontaxable gift, we approve not only the result but the factor-by-factor analysis he employed in reaching it.
Commissioner v. Duberstein, supra, although not altogether free from criticism,
Duberstein implicitly recognizes that nontaxable gifts can be made in commercial settings and can even serve some business purpose. The fact-finder is directed, however, to search out the “dominant reason” for the donative transfer and to disregard peripheral considerations. And, we are told that if the “dominant reason” is sufficiently divorced from its business background, a nontaxable gift results. See United States v. Kasynski, 284 F.2d 143 (10th Cir. 1960) and Poyner v. Commissioner, 301 F.2d 287 (4th Cir. 1962).
II.
The government contends that the payment of the $17,500 to Mrs. Husting was too closely tied to the commercial setting which produced it and, therefore, constitutes taxable income to the widow. The
Austin L. Wyman, Burnett’s attorney and a director who knew Husting only professionally, also testified by deposition that the directors voted for the payment because “they all respected him [Husting] and liked him” and out of concern that his sudden death would leave his widow and children in a financially embarrassed condition as a result of the high standard of living to which they had become accustomed while the decedent had been alive. Richard N. Heath, the President of Burnett, and the sponsor of the resolution that the company make the payment in issue, stressed that the disbursement had been approved in the light of Husting’s “long and loyal association with the company” and that it was the “proper and right thing to do, the fair and decent thing to do.” And William Tyler, also a director, stated that he voted in favor of the resolution to “'ease the emotional burden” of Mrs. Husting’s sudden loss. In. light of this testimony, we cannot say Judge McLean did not have ample evidence in the record to support his finding that the payment to Mrs. Husting was predominantly motivated by genuine donative impulses and was sufficiently divorced from the peripheral business purposes it may also have served.
The government informs us, as it did Judge McLean, that between 1952 and 1964, twenty-one employees of the company had died and total payments in excess of $110,000 were made by Burnett to widows or other survivors of these deceased employees. We are asked to conclude from this history that either Husting or his spouse, or both, reasonably expected that Burnett would make a generous financial gesture at the time of Husting’s death. But, this argument takes in too much in this case and glosses over several important features. See Estate of Olsen v. Commissioner, 302 F.2d 671 (8th Cir.), cert. denied, 371 U.S. 903, 83 S.Ct. 208, 9 L.Ed.2d 165 (1962). First, Husting died in 1957, and, at that time, only five employees of Burnett had predeceased him. Consequently, even if it could be said that by 1964 Burnett had developed a practice or plan of making payments to the survivors of deceased employees, such a policy cannot be retroactively inferred to 1957. Indeed, Husting was the first Burnett director
Much is made of the “salary continuation” language in the resolution authorizing the disbursement to Mrs. Husting and Burnett’s deduction as a business expense;
We are also told that because of Mrs. Husting’s alleged wealth, the directors could not have been motivated by generosity and the desire to have her retain her standard of living. See Tomlinson v. Hine, 329 F.2d 462 (5th Cir. 1964). But the depositions of the directors do not establish any knowledge of the amount Mr. Husting bequeathed to his widow. In fact, Wyman stated that the directors were prompted, in part, by concern that Husting failed to accumulate a substantial amount of wealth in view of his early death. And, Tyler acknowledged that although Mrs. Husting was not in immediate financial need at the time of her husband’s passing, he did not believe that Husting had made her “independently secure for the rest of her days.”
III.
Finally, we are unpersuaded by the government’s contention that this case is controlled by our recent decision in Gaugler v. United States, 312 F.2d 681 (2d Cir. 1963), affirming the District Court’s determination that the disbursement involved was not a gift within the meaning of Section 102. That case involved the payment by a large public corporation of $72,727.27 to the widow of its
Affirmed.
. 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1959).
. Int.Rev.Code of 1954, § 102(a) provides: General Rule. — Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.
. Burnett is a non-public corporation capitalized by voting preferred stock all of which is held by Leo Burnett individually and by non-voting common stock which is owned by “key employees” and which upon death or other severance from the company must be sold to the corporation.
. The appellee, Mrs. Jane M. Fanning, will be referred to by her name when she was widowed — Busting.
. The first $5,000 Mrs. Husting received was exempted from income pursuant to Int.Rev.Code of 1954, § 101(b). It is significant that in 1962, the Commissioner abandoned the contention that § 101(b) modified § 102 and set $5,000 as a maximum limit upon the non-taxable amount a corporation could give to a beneficiary of a deceased employee. See Rev. Rul. 62-102, 1962-2 Cum.Bul. 37, modifying Rev.Rul. 60-326, 1960-2 Cum.Bul. 32.
. The remainder of the $17,500 was paid to Mrs. Husting in 1959 and was not in issue before the District Court.
. Jurisdiction was invoked pursuant to 28 U.S.C. § 1346(a) (1).
. See Klein, “An Enigma in the Federal Income Tax: The Meaning of the Word ‘Gift,’ ” 48 Minn.L.Rev. 215, 216-217 and articles cited in notes 12 and 15 (1963).f
. The chjal motivation of at least one of the directors in voting for the payment to Mrs. Husting is highlighted by other testimony of Young that the disbursement was made “Out of consideration for his [Husting’s] services, and to be generous.” Young also noted that he was “interested” in protecting the company’s position that the $17,500 payment constituted a deductible business expense. The District Judge did not overlook that the testimony of company executives may have been colored by their anxiety to sustain this deduction, nor can we ignore this factor.
. For example, the five employees died between July 1952 and January 1956 and their salaries were $2,280, $4,200, $8,000, $22,500 and $7,200, respectively (as compared with Husting’s $35,000), resulting in rather inconsequential payments to the survivors in four instances of $5,-625, $2,975, $2,266, and $1,151. Moreover, in at least one instance, and possibly a second, the corporation withheld the prescribed amount for income tax purposes.
. No death payment was made in the case of one employee because although he ceased working in March 1955 his salary was paid to him until the end of that year. He died in January 1956.
. The propriety of the corporation’s tax deduction of the full $17,500 as a business expense was not before the District Court and is not before us on this appeal.
. The government also urges that the fact that the disbursement to Mrs. Husting totaled 50% of her husband’s annual salary establishes that the directors were thinking in compensatory terms when they resolved to make this payment. We find this contention unconvincing. While the payment to Mrs. Husting may have been calculated on the basis of six months of her late husband’s salary, it is significant that it was disbursed to her over a period of a year and a half. Moreover, in the case of the four employees who predeceased Husting and whose survivors received death benefits, disbursements were made in the same amount and at the same intervals as the decedent’s salary had been paid.
. But see, Miller v. Commissioner,, 327 F.2d 846 (2d Cir. 1964).
. Whether the “clearly erroneous” doctrine is applicable despite the trial on depositions is of little -importance in this case because we did not restrict our-af-firmance to that ground. In any event, Justice Brennan’s language in Duberstein on this score is enlightening: “One consequence of this is that appellate review of determinations in this field must be quite restricted.” 363 U.S. at 290, 80 S.Ct. at 1199. And, “[t]he rule itself applies also to factual inferences from undisputed basic facts * * *, as will on many occasions be presented in this area.” Id. at 291, 80 S.Ct. at 1200.
Dissenting Opinion
(dissenting):
I dissent.
In these often litigated gift versus salary cases, “(w)here the trial has been by a judge without a jury, the judge’s findings must stand unless ‘clearly erroneous.' ” Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1200, 4 L.Ed.2d 1218 (1960); Gaugler v. Commissioner, 312 F.2d 681 (2 Cir. 1963). I feel that the decision of the lower court is clearly erroneous and must be reversed since, although there is some evidence to support the lower court, on the entire record I am left with the definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Company, 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).
The majority bases its affirmance on the grounds that: (1) several Burnett directors stated that the payments were made as “an act of fairness and generosity,” because it was the “proper and right thing to do” and to “ease the emotional burden” of Mrs. Husting’s sudden loss, and (2) that there was no written or traditional policy of making such payments to deceased employees’ families. Because these factors outweighed other elements in the case which they deem peripheral, the majority concludes that “the payment to Mrs. Husting was predominantly motivated by genuine dona-tive impulses and was sufficiently divorced from the peripheral business purposes it may also have served.”
The principal inquiry for determination by the district court was the “dominant reason” for the transfer from the employer to the employee’s family. Commissioner v. Duberstein, 363 U.S. at 286, 80 S.Ct. 1190. But this does not mean that all the district judge need do is to utter the Duberstein words — “detached and disinterested generosity” and “out of affection, respect, admiration, charity or like impulse,” 363 U.S. at 285, 80 S.Ct. at 1197 — and that we are bound to affirm if he makes obeisance to those words.
Young, one of the directors, stated that in the advertising business, “our main
From 1952 through 1964, payments of approximately $110,000 were made to the families or relatives of deceased Burnett employees. Although Husting was the first officer to die, the fact that payments had been made to the families of five
While not per se decisive, I am also influenced by the fact that Burnett took a tax deduction for the payments to Mrs. Husting, by the fact that the payments were called “salary continuation” and by the fact that the payments equalled exactly one-half of Husting’s annual salary. If on this record the district court is left free to call the payment to Mrs. Husting a gift, it is difficult to imagine just what kind of payment could not be treated as a gift.
In sum, I fail to see how the lower court could have concluded that the “dominant purpose” of the transfer was donative. Since I feel it was clearly erroneous so to hold, I vote to reverse and to enter judgment for the Commissioner.
. Sue footnote 11 in majority opinion.