The opinion of the court was delivered by: DIMOCK
This action to recover income tax is based upon the theory that the fund taxed was a gift and thus exempt under section 22(b)(3) of the Internal Revenue Code of 19398 as amended, 53 Stat. 10, 26 U.S.C. § 22(b)(3) (1946).
The amount in question was paid to plaintiff Betty Rodner after the death of her husband Harold Rodner by his employer Warner Bros. Service Corp. She included the amount as taxable income in an income tax return for the year in which the payment was received. This was a joint return covering her income for the entire year and her husband's income for that part of the year during which he lived. The tax was paid in full and this suit is brought by the widow and the decedent's executors for a refund of the tax upon the amount of the alleged gift.
The plaintiff Betty Rodner is the widow of Harold Ronder who died on June 3, 1952. At the time of his death Harold Ronder was Vice President of the Warner Bros. Service Corporation, a wholly-owned subsidiary of Warner Bros. Pictures, Inc. Rodner's salary at the time of his death was $ 500 a week. Mr. Rodner had been employed by Warner Bros. Service Corporation from 1946. Prior to 1946, he had been employed by other affiliates and subsidiaries of Warner Bros. Pictures, Inc. for about 18 years. On June 9, 1952 Mrs. Rodner received a check for $ 13,000 from the Circuit Settlement Corporation, which was the disbursing agent for the Warner Bros. Service Corporation and various other subsidiaries and affiliates of Warner Bros. Pictures, Inc. This $ 13,000 which was paid to Mrs. Rodner was taken as a deduction from gross income -- as an expense for business management and not as wages or salaries -- by Warner Bros. Pictures, Inc. in the consolidated corporate income tax return which it filed with the Collector of Internal Revenue for the fiscal year ending August 31, 1952.
The decision to make the $ 13,000 payment to Mrs. Rodner was reached by the following officers of Warner Bros. Pictures, Inc.: Mr. Schneider, Vice President; Mr. Carlisle, Assistant Treasurer; Mr. Martin, Auditor; and Mr. W. Stewart McDonald, Assistant Treasurer.
One of those officers testified that in reaching the decision they agreed that they respected the decedent and would like to make a payment to his widow. They took into consideration as well his length of service, the character of the services that he had rendered, his loyalty to the organization and the importance of his position. There was no testimony that they took into account the needs of his widow.
The payment to Mrs. Rodner was never authorized by the Board of Directors of Warner Bros. Service Corporation or by the Board of Directors of the parent corporation, Warner Bros. Pictures, Inc. It was never authorized or ratified by the stockholders of the Service Corporation or of the parent corporation, Warner Bros. Pictures, Inc. The amount to be paid to Mrs. Rodner was fixed with reference to Mr. Rodner's salary at the time of his death; the lump-sum payment was equivalent to Mr. Ronder's salary for 26 weeks.
For the period between September 1, 1946 and August 29, 1953, Warner Bros. Pictures, Inc. and its theatre subsidiaries made the following payments to widows of deceased officers and executives:
Date of at Time of
Name Death of Death Payment
/-- /-- /-- /--
John J. Payette 7-31-48 Zone Manager $ 35,000.00
Charles H. Ryan 1-13-51 District 500.00
John Hesse 8-16-53 District 1,500.00
Thomas J. Fordham 4-18-48 District 3,000.00
Ray C. Brown 3-1-51 District 700.00
Abel A. Vigard 3-25-47 Legal 5,600.00
Leonard S. Schlesinger 3-29-48 President of 15,000.00
Warner Bros. 12,051.82 n.*
Harold Rodner 6-4-52 Vice President 13,000.00
of Warner Bros.
Frank N. Phelps 6-15-53 Labor Relations 2,500.00
* Payment to Estate of Leonard S. Schlesinger, Deceased.
Mr. Leonard S. Schlesinger was the only corporate officer of Warner Bros. Pictures, Inc. and its theatre affiliates and subsidiaries, other than Harold Rodner, who died during this period. Mr. John J. Payette was the only zone manager who died during this period. Mr. Charles H. Ryan, Mr. John Hesse and Mr. Thomas J. Fordham and Mr. Ray C. Brown were the only district managers who died during this period. Mr. Abel A. Vigard was the only lawyer employed by the Legal Department and Mr. Frank N. Phelps was the only professional employee of the Labor Relations Department who died during this period.
The plaintiffs, Betty Rodner and Joseph Quittner and Herman Levine, as Executors of Harold Rodner's estate, filed a joint income tax return for the calendar year 1952, in which they reported the $ 13,000 received by Mrs. Rodner as taxable income. The total income disclosed in the return was $ 28,301.31. On this amount, the plaintiffs paid a tax of $ 6,834.72. On November 21, 1954, plaintiffs filed with the Commissioner of Internal Revenue an amended claim for refund in which they sought to recover $ 4,622.24 -- a portion of the taxes paid and interest -- on the theory that Warner Bros. Pictures had made a gift of $ 13,000 to Mrs. Rodner.
The payment made to decedent's widow and the payments made to the widows of other executives above referred to were entirely voluntary. There was no plan under which such payments were made other than can be inferred from the fact that they were made. Decedent's salary was paid in full up to the date of his death and decedent's widow rendered no services to his employer or any of its affiliates.
The Income Tax Laws beginning with the 1913 Act have always exempted gifts. 38 Stat. 114, ch. 16, Sec. II, par. B, p. 167.
Just as consistently, the Income Tax Laws have always levied a tax upon 'salaries, wages or compensation for personal service * * *', e.g. 38 Stat. 114, ch. 16, Sec. II, par. B; section 22(a) of the Internal Revenue Code of 1939.
The line between gifts and compensation was drawn by the Supreme Court in Bogardus v. Commissioner, 302 U.S. 34, 58 S. Ct. 61, 82 L. Ed. 32, where payments were held to be gifts. The Court said in 302 U.S. on page 44, 58 S. Ct. 66, 'A gift is none the less a gift because inspired by gratitude for the past faithful services of the recipient.' The Court remarked, 302 U.S. on page 43, 58 S. Ct. on page 65, that the facts indicated that the intention of the persons who decided that the payments should be made 'was to make gifts in recognition of, not payments for, former services'.
Payments by an employer to an employee or his estate are strongly presumed to be made for services and consequently not gifts. Willkie v. Commissioner, 6 Cir., 127 F.2d 953, 955.
Payments made by an employer to a beneficiary of an employee, if made pursuant to an enforcible contract between employer and employee, are not gifts even though the beneficiary has done nothing to earn them.