(after stating the facts as above). The sole question involved in this case is whether the $35,000, paid to plaintiff under the circumstances above set forth, is taxable as income under the Revenue Act of 1918. The plaintiff contends that it is not so taxable, his position being that it was a gift, and, as such, expressly exempted from taxation as income under the act. The defendant collector contends that it was not a gift, and, if not treated as “compensation for personal service,” is at least a “gain” or “profit” which under the- statute must be included in the return of gross income.
The pertinent provisions of the statute in question are as follows:
“Sec. 213. That for the purposes of this title (except as otherwise provided in section 233) the term ‘gross income’—
“(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or *671 gains or profits and income derived from any source whatever.- The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer; * * * but
“(b) Does not include the following items, which shall be exempt from taxation under this title: * * *
“(3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income).” Comp. St. § 6336%ff.
We are satisfied that the $35,000 was not a gift to plaintiff within the meaning of the statute, but is to be regarded either as compensation paid him for services previously rendered and for loss sustained in the termination of his employment, or as profit realized on the sale of the stock to Atwater & Co., and that, in either view, it was taxable as income under the act. A gift is a voluntary transfer of his property by one to another, without any consideration or compensation therefor. Gray v. Barton,
There is some controversy as to whether the character of the payment to plaintiff should be determined by reference to the resolutions of July 14,1919, or by reference to the contract of April 24, 1920, and the subsequent letter of April 26th, to the stockholders, and their sales of stock pursuant thereto; but, no matter which of these is looked to, or whether all are considered together, it is clear that the transaction was not a gift.
If we look to the resolutions of July 14, 1919, it appears that the appropriation from the assets was for distribution to “certain officers and employees of the company,” and that the executive committee was authorized to make such distributions as they might deem “wise and proper.” This negatives the idea that a gift was intended; for the distribution was to be made to those who had rendered services to the company; i. e., to those from whom the company had received a consideration in the past. It was to be made as the executive committee might deem wise and proper; i. e., in accordance with the interests of the corporation and the deserts of the persons to be benefited by the distribution. The distribution was thus to be in the nature of a bonus, which “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.” Kenicott v. Wayne County,
If we look only to the transactions surrounding the sale of stock to Atwater
&
Co., the $35,000 paid plaintiff was not a gift, but a profit realized by him, on the sale of the stock. Stripped of verbiage, the contract with Atwater & Co. provided that, in consideration of obtaining 25,000 of the outstanding shares of stock at $75 per share, they would consent that assets of the cor
*672
poration to the extent of $145,794 he distributed to such persons as the then directors might designate. "When the sale was carried through on this basis, the directors paid plaintiff $35,000 as his part of this fund. The law regards substance and not form; and, when the plaintiff, as the result of putting through the sale, received this $35,000 in addition to the $75 per share for his stock, it was as much a gain or profit which he had realized as it would have been if he had received the $35,000 direct from the purchasers. 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. It has been expressly decided that income, within the meaning of the Sixteenth Amendment and the Income Tax Acts passed pursuant thereto, is a gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital assets. Eisner v. Macomber,
When we view the resolutions of July 14, 1919, and the efforts to sell the stock or physical properties of the corporation in connection with what was done upon the sale to Atwater & Company (and, of course, this is the proper way to view the facts), it is apparent that the resolutions directing distribution to the' officers and employees named were passed in anticipation of a sale of either the stock or the physical properties of the corporation, and were intended, not to make a gift to the officers and employees named, but to grant them additional compensation for services theretofore rendered as well as compensation for bringing about the sale and for the loss of their positions expected to result therefrom. When the sale was aetully 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 positions, the sale of their stock, and the efforts whieh they, or some of them, put forth to bring about the sale of all 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 proposéd. The $35,000 thus appears to have been additional compensation and profit legitimately realized by plaintiff, with the knowledge and consent of the other stockholders of the corporation.
Lj no view of the evidence, therefore, can the $35,000 be regarded as a gift. It was either compensation for services rendered, or a gain or profit derived from the sale of the stock of the corporation, or both; and, in any view, it was taxable as income. It follows that there was error in the judgment of the learned district judge, and same is accordingly reversed, and the cause is remanded for further proceedings not inconsistent herewith.
Reversed.