The opinion of the court was delivered by: WEINFELD
These are cross-motions for summary judgment in an action to recover alleged income tax overpayments. The controversy revolves about the nature of payments made by a corporation to the widow of an employee. The facts are stipulated and are supplemented on this motion by affidavits of the widow and the directors of the corporation who voted in favor of the resolution pursuant to which the payments were made.
Isidore Wilner, the husband of the taxpayer plaintiff, at the time of his death in June 1955, had been in the employ of Henry Glass & Co., a corporation, for over forty years. His annual salary for the five years preceding his death had been $ 28,000. He also had been a director, vice president and stockholder for many years. Wilner owned 800 out of a total of 3650 shares of common stock, and 212 out of 2441 preferred shares. Except for a nephew who owned 870 shares of common stock, he and another were the largest individual stockholders. The plaintiff widow herein was never an officer, director or employee of the corporation, and, until her husband's death, was not a stockholder.
On July 5, 1955, the Board of Directors passed a resolution directing the payment to Wilner's widow of a sum equal to one year's salary, spread over a two-year period. Pursuant thereto, the corporation paid Wilner's widow $ 7,000 in 1955, $ 14,000 during 1956 and $ 7,000 in 1957. The only payments involved in this litgation are those made in 1955 and 1956.
The payments were entered on the books of the corporation as 'Administrative Expenses' under the capition of 'Payment to Widows of Former Employees,' and were deducted by the corporation as ordinary and necessary business expenses for income tax purposes. On two previous occasions, one in 1945 and another in 1946, pursuant to corporate resolutions, payments of one year's salary were made to the widows of deceased officers. The payments were entered on the corporate books in the same manner as those in the instant case. However, in the only other instances where officers of the corporation passed away while in office, in 1916 and 1939, no payment was made to the widows.
No gift tax was paid on the moneys received by the plaintiff widow. In fact, she reported the sums as income on her 1955 and 1956 income tax returns, and after a deduction of $ 5,000 pursuant to section 101(b) of the Internal Revenue Code of 1954, 26 U.S.C. 101(b), paid the taxes due thereon. Thereafter, she filed a claim for refund, contending that the payments were gifts and hence tax exempt. Upon rejection of her claim, the instant suit was filed.
Two separate issues are presented -- (1) whether, as plaintiff contends, the payments constituted a gift, excludable from gross income under section 102(a)
of the Internal Revenue Code of 1954, 26 U.S.C. 102(a), and (2) whether, as the Government urges, even if the payments qualify as gifts under section 102(a), nonetheless they are excludable from gross income only up to $ 5,000 under section 101(b) of the 1954 Code,
since they were paid to the widow by the employer 'by reason of the death of the employee.' Essentially, the Government's position, however variously stated, is that as to such payments the general exclusion of gifts from gross income contained in section 102(a) is now controlled by the specific limitation of section 101(b). This view, if upheld, would be dispositive of the entire case; accordingly, we consider it first.
The Government acknowledges, as has also been recognized by the Internal Revenue Service,
that under the Internal Revenue Code of 1939 voluntary payments to widows by their deceased husbands' employers, which qualified as gifts under section 22(b)(3) of the Code, 26 U.S.C. 22(b)(3), were excludable without limitation from gross income and not subject to income tax.
But it contends that this was changed by the employees' death benefit provision, section 101(b) of the Internal Revenue Code of 1954, which revised section 22(b)(1)(B), the comparable section of the 1939 Code.
Section 22(b)(1)(B) of the 1939 Code
provided that death benefits paid under a contract of employment to the beneficiary of a deceased employee were taxable only to the extent that they were in excess of $ 5,000. However, the benefit of the $ 5,000 exemption did not apply to like payments when made by the employer, not under the force of a legal commitment, but voluntarily, and which did not qualify as a gift. Section 101(b)(1) of the 1954 Internal Revenue Code omitted the reference to the contractual obligation, and generally provided for a $ 5,000 exclusion from gross income on 'amounts received * * * by the beneficiaries ficiaries or the estate of an employee, if such amounts are paid by or on behalf of an employer and are paid by reason of the death of the employee.'
The Government contends that this change in the 1954 Code manifests a congressional purpose to treat as gross income all payments, in excess of $ 5,000, made by an employer to a beneficiary by reason of the death of an employee, whether or not such payments would otherwise qualify as gifts under section 102(a) -- in short, that the latter section excluding gifts from gross income is inapplicable in those instances where payments are made by reason of the death of an employee.
To adopt this construction would mean that gifts, the motivation for which sprang from a deceased employee's relationship to an employer, would become taxable income (beyond $ 5,000), whereas all other gifts would continue to enjoy, as previously, full tax exemption. Apart from a serious constitutional issue which would arise if such discriminatory treatment were recognized,
neither the statutory language of section 101(b), nor the legislative history, supports the Government's position.
We start with the proposition that the various revenue acts -- beginning with the Act of 1913
-- have consistently excluded gifts from gross income and recognized them as nontaxable. Similarly, section 102(a) of the 1954 Code left unchanged the comparable provision of the 1939 Code, section 22(b)(3).
The Government would deny force to this exclusion provision simply because a gift has its origin in the employer-employee relationship; it would abandon the dichotomy between a gift, and those payments which do not qualify as gifts, merely because both are made 'by or on behalf of an employer and are paid by reason of the death of the employee.' Thus, indirectly, it would make the business motive the test of whether such payments qualified as gifts -- a criterion which it unsuccessfully sought to persuade the Supreme Court to adopt.
To buttress its position, the Government relies upon the rule of statutory construction, that 'general language of a statutory provision, although broad enough to include it, will not be held to apply to a matter specifically dealt with in another part of the same enactment.'
However, its reliance is misplaced, for the rule is inapplicable in the instant situation. Gifts are declared excludable from gross income under section 102(a) without limitation or exception. The term is all-inclusive. On the other hand, gifts are neither mentioned nor 'specifically dealt with' in section 101(b), and neither section makes any reference to the other. Nothing in the language of either provision indicates that Congress singled out for special treatment gifts which an employer is moved to make upon the death of an employee 'out of affection, respect, admiration, charity or like impulses.'
Moreover, the legislative history of section 101(b) abundantly demonstrates that it had no relationship to the 'gift-compensation' controversy -- on the contrary, it was enacted to eliminate discriminatory treatment against those recipients of payments from employers which were made on a voluntary basis, but which did not qualify as gifts under section 102(a).
As already noted, the $ 5,000 exemption under section 22(b)(1)(B) of the 1939 Code, came into play only when the payments were made under a contract between the employer and the deceased employee. This produced anomalous and inequitable results. Many employers made payments to widows or other beneficiaries of such employees, not under the compulsion of a legal commitment, but on a voluntary basis. Consequently, those receiving such payments were subject to income tax on the full amount. Leaders of finance, industry and professional groups appeared before the congressional committee conducting hearings on the proposed 1954 Revenue Code, ...