The opinion of the court was delivered by: LEVET
This is a civil action arising under the Internal Revenue Code of 1939, §§ 22(a), 22(b)(3), 26 U.S.C.A. (I.R.C.1939) §§ 22(a), 22(b)(3). The Court has jurisdiction of the subject matter and of the parties to this action. 28 U.S.C. § 1346(a)(1).
The parties have agreed that the claim in question is for $ 61,482.58 together with interest from the 15th day of March, 1953, and the costs and disbursements of this action. (Pre-trial Order, filed February 13, 1962).
The Court, after considering the pleadings, evidence, exhibits, briefs and stipulations of the parties, now makes and files herein its Findings of Fact and Conclusions of Law, separately stated.
FINDINGS OF FACT STIPULATED
1. The plaintiff, Eva L. Gaugler, is a citizen of the United States and until June, 1961 resided in Westchester County which is within the Southern District of New York. She was born May 4, 1892 and was married to Raymond C. Gaugler on November 26, 1914. She does not have a social security number. Her husband, Raymond C. Gaugler, died a resident of the Village of Larchmont, County of Westchester, State of New York on January 11, 1952, leaving a Last Will and Testament wherein plaintiff was named and appointed Executrix. This Last Will and Testament was duly admitted to probate by the Surrogate of the County of Westchester and letters testamentary were duly issued to the plaintiff, who had qualified according to law on or about January 23, 1952, and the plaintiff has ever since that time acted as such Executrix.
2. Raymond C. Gaugler was born August 3, 1892 and had had approximately thirty-four and one-half (34 1/2) years of service with American Cyanamid at the time of his death. In 1928, he was Comptroller of the Company; in 1929, Treasurer; 1932, Vice President, and 1951, President. The cause of his death was cerebral hemorrhage and his physical condition for the six months prior to his death appeared to be good. His annual compensation for the years 1942-1952 was as follows:
YEAR SALARY BONUS TOTAL
/-- // - /-- /--
1942 $ 36,000.00 $ 23,821.45 $ 59,812.45
1943 36,000.00 33,260.68 69,260.68
1944 36,000.00 33,458.33 69,458.33
1945 36,000.00 28,898.73 64,898.73
1946 38,500.00 42,904.99 81,404.99
1947 42,000.00 43,922.68 85,922.68
1948 42,000.00 65,304.00 107,304.00
1949 60,000.00 93,314.00 153,314.00
1950 60,000.00 113,255.00 173,255.00
1951 74,857.00 250,000.00 324,857.00
1952 2,272.73 (1/1/52-1/11/52) 2,272.73
The bonus set forth opposite each year is the amount based on that year's operations although it was actually received by Mr. Gaugler in the subsequent year.
3. The aggregate amount of the aforesaid salary and bonus so paid to or due Raymond C. Gaugler constituted all of the compensation to which he had a legally enforceable right against American Cyanamid Company.
4. Amounts totalling $ 72,727.27 were paid to the plaintiff in her individual capacity by American Cyanamid Company in the year 1952. This amount is equal to the amount Raymond C. Gaugler would have received in salary had he remained in the employ of the company for the balance of the year 1952.
5. At the time of his death, there were $ 4,174,966 shares of common stock of American Cyanamid Company outstanding. Three Hundred Six (306) shares were owned by plaintiff and 2,907 shares by her husband. Neither plaintiff nor her husband held any of the preferred stock of American Cyanamid Company as of January 11, 1952.
6. On January 16, 1952, the following resolution was unanimously adopted by the Executive Committee of American Cyanamid Company:
'RESOLVED: That, for the period commencing January 11, 1952 and ending December 31, 1952, this Company make voluntary payments to Mrs. Eva L. Gaugler, the widow of Mr. R. C. Gaugler, late President of this Company, at the times and equal to the salary which would have been payable to Mr. Gaugler for that period at his salary rate in effect at the time of his death.'
7. Pursuant to such resolution, the aforesaid payments totalling $ 72,727.27 were paid to the plaintiff in her individual capacity. Said payments were deducted from ordinary income on the Federal income tax returns of the American Cyanamid Company.
8. Plaintiff has never owned more than a fraction of a per cent of American Cyanamid's outstanding common stock and has never owned any of its preferred stock. She has never been a director, officer or employee of American Cyanamid, has never rendered any services to it.
9. For the calendar year 1952, plaintiff and Raymond C. Gaugler, by plaintiff, his Executrix, filed a joint income tax return prior to March 15, 1953 with the District Director of Internal Revenue, Upper Manhattan District and paid to said District Director a joint tax of $ 141,338.82.
9A. The Commissioner of Internal Revenue included in plaintiff Eva L. Gaugler's taxable income for said taxable year the aforementioned $ 72,727.27.
10. On or about February 9, 1956, plaintiff and Raymond C. Gaugler, by plaintiff, his Executrix, filed with the said District Director of Internal Revenue a claim for refund in the amount of $ 61,482.51, or such greater amount as may be legally refundable, together with interest. Thereafter, by registered letter dated September 5, 1957, the Director of Internal Revenue, Upper Manhattan District, rejected the aforesaid claim for refund.
11. In each case of payment to widows of deceased officers and employees American Cyanamid had paid the officer or employee, or his estate, all sums due as salary and bonus for services rendered. (See Schedule 'A' -- Appendix).
12. No payments were made to the plaintiff on account of the death of her husband under any pension, profit sharing, stock bonus, stock option or similar plan of the American Cyanamid Company, although the Company paid the premiums on $ 2,000. of a $ 20,000. policy with Prudential Insurance Co. of America on the life of the decedent, the full proceeds of which were payable and paid to the plaintiff. (Pre-trial Order, filed February 13, 1962).
13. George R. Martin, new director and executive president of American Cyanamid, with one George G. Allen, now deceased, and one Kenneth C. Towe, were members of the executive committee who passed the resolution (Pl. Ex. 1) in January 1952. (SM 7-8, 12).
14. The executive committee had all the powers of the board of directors when the board was not in session. (SM 9).
15. The executive committee decided that the amount that should be given to Mrs. Gaugler would be an amount equal to Mr. Gaugler's fixed salary over a period of the rest of 1952. (SM 14).
16. These payments were made semimonthly. Deceased had received a salary semi-monthly before. (SM 17).
17. There was no written plan concerning such payments. (SM 24).
18. The committee considered previous payments to widows. (SM 24-25).
19. The minutes of the executive committee contain the following statement:
'He (Mr. Towe) stated that it has been the practice in the event of the death of valued employees and officers with long service with the company to pay, for varying lengths of time, their widows amounts equal to their salaries.' (Gov't Ex. A).
20. Mr. Bell, a past president of the corporation, died in the latter part of December 1950, nd payments to the widow equal to what Mr. Bell's salary would have been for the balance of 1950 and for the full year of 1951 were authorized by the executive committee. (SM 28).
21. It was stipulated that if an officer familiar with the financial affairs of American Cyanamid were called he would testify 'That a payment was made to the widow of J. J. Murray, assistant treasurer, who died on November 25, 1958, and whose annual salary rate as of the date of his death was $ 13,500., and that the payment was in the sum of $ 8,044.' (SM 72).
22. Similar payments were regularly made concerning officers. The following payments were made:
DATE OF AMOUNT OF
OFFICER DEATH PAYMENT
/-- /-- /--
E. V. O'Daniel 11/ 4/43 $ 36,000.00
W. S. Landis 9/15/44 36,000.00
W. B. Bell 12/20/50 64,837.50
R. C. Gaugler 1/11/52 72,727.27
J. J. Murray 11/25/58 8,044.00
(Schedule A -- Appendix;
Findings of Fact "21")
23. There was a discussion at the committee meeting concerning Mrs. Gaugler's 'period of adjustment' that the committee thought she would go through due to the increased standard of living assumed by her husband when he became president. (SM 21).
24. The president was allowed to charge expenses incurred on behalf of the company to the company and would be reimbursed for such expenses. Such expenses could include entertainment at home. (SM 35-36).
25. There was no actual investigation by the committee of the needs of Mrs. Gaugler. (SM 28-29).
26. The questions and answers to interrogatories Nos. 2, 3 and 5 are as follows:
Q. '2. State whether all or any part of the aforesaid amounts totalling $ 72,727.27 were paid to the plaintiff specifically to provide for or in view of any living expenses or other requirements or needs which she could not otherwise then meet and found necessary to incur.
Q. '3. If all or any part of such payments were made for such expenses, needs or requirements of the plaintiff, specify in detail the exact amounts and date of each such payment for such reason, and the precise expense, need or requirement for which it was made.'
A. '2. and 3. Plaintiff alleges upon information and belief that through personal acquaintance with plaintiff the members of the Executive Committee of the Board of Directors of American Cyanamid Company believed that after the death of Mr. Gaugler Plaintiff would be required to adjust her scale of living to an income substantially less than that income received prior to his death. No attempt was made to investigate in detail the costs of living of plaintiff nor the exact amount of her income and accordingly payments were not made for any specific expenses incurred by plaintiff.'
Q. '5. State to what extent, if any, and in what manner the aforesaid living expenses, needs or requirements of the plaintiff were specifically made known to the American Cyanamid Company or to any officers, committee or board thereof, and in what manner any action was taken thereon.'
A. '5. See answers to questions 2 and 3.'
27. The committee considered the payment to the widow deductible by the company but not taxable to Mrs. Gaugler. (SM 23-24).
28. The parties stipulated that the payment to the widow was charged on the books of the corporation as administration ...