Graybar Electric Co. v. Commissioner , 29 T.C. 818 ( 1958 )

Graybar Electric Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent

Graybar Electric Co. v. Commissioner

Docket No. 57058

United States Tax Court

29 T.C. 818; 1958 U.S. Tax Ct. LEXIS 262;

February 11, 1958, Filed

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Decision will be entered under Rule 50.

"Special Death Benefits" paid by a corporation to estates or beneficiaries of deceased stockholder-employees held not to constitute compensation for services previously rendered, and accordingly are not deductible under section 23 (a) (1) (A), I. R. C. 1939. Estate of Albert L. Salt, 17 T. C. 92, distinguished.

Paul L. Peyton, Esq., and John J. Fogarty, Esq., for the petitioner.

Charles B. Markham, Esq., for the respondent.

Raum, Judge.

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RAUM

Respondent determined the following deficiencies in petitioner's income and excess profits taxes:

Year	Tax	Deficiency
1947	Income tax	$ 46,690.24
1948	Income tax	35,420.46
1949	Income tax	45,241.91
1950	Income and excess profits taxes	87,240.63
Total		214,593.24

Of this total deficiency, $ 138,115.19 remains in controversy. At issue is the deductibility of payments made by petitioner as "Special Death Benefits."

FINDINGS OF FACT.

Substantially all of the facts have been stipulated and are incorporated herein by this reference.

The petitioner, Graybar Electric Company, Inc. (hereinafter sometimes referred to as Graybar), is a New York corporation. It filed its returns for the calendar years 1947 through 1950 with the then collector of internal revenue for the third district of New York.

Graybar was incorporated on December 11, 1925, to take over the wholesale supply department of Western Electric Company, Incorporated, and has, since that date, continued to engage in the distribution of electrical apparatus and supplies throughout the United States.

The original capitalization of Graybar was $ 15,000,000, represented by 150,000 shares of common stock. Each share had a par value of $ 100. Until November 5, 1928, Electrical Research Products, Inc. (hereinafter sometimes referred to as Products), owned all of the Graybar common stock.

On November 3, 1928, Graybar Management Corporation (hereinafter sometimes referred to as Management) was formed to acquire all of the Graybar common stock from Products, and the employees of Graybar were granted the opportunity to purchase the capital stock of Management, represented by voting trust certificates, at $ 100 per share, as hereinafter more fully set forth.

Graybar's original $ 15,000,000 capitalization was reduced on November 5, 1928, to $ 9,000,000 in the following manner: In accordance with an agreement dated November 5, 1928, between Graybar, Products, and Management, Products surrendered to Graybar 60,000 shares of Graybar common stock, exchanged an additional 60,000 shares of that stock for 60,000 shares of Graybar preferred stock ($ 100 par value per share), and sold its remaining 30,000 shares of Graybar common stock to Management. Graybar had not previously issued any preferred stock.

The agreement of November 5, 1928, further provided that Graybar would redeem its preferred stock in various amounts over the succeeding years if it had sufficient surplus, until all of the preferred stock had been redeemed. The agreement also gave Products the option to repurchase the Graybar common stock so long as any of the Graybar preferred stock remained unredeemed. It was originally contemplated that all of the preferred stock would be redeemed within 10 years. As the preferred stock was redeemed during subsequent years the capitalization of Graybar was decreased from $ 9,000,000 (represented by 60,000 shares of preferred and 30,000 shares of common) to 22,000 shares of preferred and 30,000 shares of common on December 30, 1939, or a capitalization at that time of $ 5,200,000.

Management was originally capitalized at $ 5,000,000 represented by 50,000 shares of capital stock, of $ 100 par value for each share. This was reduced in 1933 to 32,500 shares, in 1934 to 30,000 shares, and in 1938 to 23,326 shares, which was the amount of Management stock outstanding on December 30, 1939. Prior to December 30, 1939, all of the capital stock of Management was at all times held under voting trust agreements of November 5, 1928, and July 15, 1938, and all of the voting trust certificates with respect thereto were owned by employees, pensioners, or the estates of deceased employees or pensioners of Graybar.

The voting trust certificates of Management held under the voting trust agreement dated November 5, 1928, or under the later voting trust agreement dated July 15, 1938, by employees, pensioners, or the estates of deceased employees or pensioners of Graybar were issued to the said holders thereof in accordance with the stock purchase plan dated November 1, 1928, and the second and continuing stock purchase plan dated March 1, 1929, whereunder employees of Graybar became entitled to subscribe for shares of Management stock and receive voting trust certificates therefor. The amount of stock that an employee was eligible to purchase under these plans depended upon his annual compensation, length of service, and, in some instances, upon his position with the company.

Article XIV of Management's certificate of incorporation, dated November 2, 1928, provided in part as follows:

XIV. The shares of capital stock of this corporation are to be issued and held by each and every stockholder upon and subject to the following terms and conditions:

(a) No holder of capital stock other than a holder who shall have retired from the corporation or from a subsidiary corporation on a pension allowed by the corporation or by such subsidiary corporation, shall sell, transfer or otherwise dispose of any shares of such stock to any party other than the corporation without first offering to sell said shares to the corporation at the price for which said shares were issued by the corporation plus interest thereon at the rate of six per cent. (6%) per annum compounded quarterly, from the date the stock was issued to the date of purchase by the corporation, less an amount equal to the dividends paid on such stock, and interest on such dividends at the rate of six per cent. (6%) per annum compounded quarterly, from the respective dates when such dividends were paid down to the date of purchase of said stock by the corporation and tendering to the corporation the certificates therefor duly endorsed in proper form for transfer, and the corporation is hereby given an option to purchase all the capital stock held by such holder at the price aforesaid good from the date of such offer and tender until the expiration of thirty (30) days after said date. * * *

(b) The corporation is hereby given an option in the event of the death of the holder of any shares of capital stock of the corporation to purchase from his estate all such shares at the price per share provided in subdivision (a) of this Article XIV, at any time from and after the expiration of one year from the date of his death until thirty days after such shares shall have been offered for sale to the corporation at the said price and certificates for said shares of stock endorsed in proper form for transfer shall have been tendered to the corporation, provided, however, that the board of directors shall have authority in its discretion either at the time of any such purchase or at any time subsequent thereto to add to said purchase price an amount equivalent to the excess if any over and above the price per share provided in subdivision (a) of this Article XIV of the value of said shares as determined by the board of directors as of the last day of the month prior to which the stockholder died, together with interest on such excess at the rate of six per cent. (6%) per annum compounded quarterly from the last day of the month prior to that in which the stockholder died to the date in which such excess is paid to the estate of the stockholder. The option in this subdivision (b) given to the corporation, however, is subject to the provision that in the event the estate of any deceased stockholder shall offer to sell and shall tender to the corporation at any time before the expiration of the period of one year from the date of death of such deceased stockholder any stock held by his estate, the option shall terminate unless within thirty (30) days from the time said stock is presented to the corporation for purchase, the corporation shall purchase said stock at the purchase price per share in subdivision (a) of this Article XIV provided; and in the event of any such purchase the board of directors shall have authority to add to the purchase price as above provided.

* * * *

(c) In the event that any holder of capital stock ceases to be an employee of the corporation, or of a subsidiary corporation, for any cause other than death or retirement on a pension allowed by the corporation or by such subsidiary corporation, the corporation is hereby given an option to purchase all the capital stock held by such stockholder, at the price provided in subdivision (a) of this Article XIV good from the date such holder ceases to be an employee as aforesaid until the expiration of thirty (30) days after he has made an offer to the corporation to sell said stock at said price and a tender of the certificates therefor duly endorsed in proper form for transfer.

(d) No holder of capital stock of the corporation who shall have been retired on a pension allowed by the corporation or by a subsidiary corporation, shall sell, transfer or otherwise dispose of any shares of such stock to any party other than the corporation without first offering to sell said shares to the corporation at the purchase price per share provided in subdivision (a) of this Article XIV, and tendering to the corporation the certificates therefor duly endorsed in proper form for transfer, and the operation is hereby given an option to purchase at said price all the capital stock held by such holder good from the date of such offer and tender until the expiration of thirty (30) days after said date, provided, however, that the board of directors shall have authority in its discretion either at the time of any such purchase or at any time subsequent thereto to add to said purchase price an amount equivalent to the excess, if any, over and above the price per share provided in subdivision (a) of this Article XIV of the value of said shares as determined by the board of directors as of the last day of the month prior to that in which such stock was purchased, together with interest on such excess at the rate of six per cent. (6%) per annum compounded quarterly from the last day of the month prior to that in which such stock was purchased to the date in which such excess is paid to the stockholder. ^{*271 The original stock purchase plan dated November 1, 1928, gave employees of Graybar an option to purchase shares of Management at par. The number of shares that an employee could purchase under this plan was to be determined in the following manner:}

One share of stock for each $ 100, or fraction thereof, of the amount obtained by applying the following percentages to the annual salary and extra compensation * * * [of the employee].

Continuous Service
	Per cent
Six months or more and less than 5 years	25
Five years or more and less than 10 years	35
Ten years or more and less than 15 years	45
Fifteen years or more and less than 20 years	60
Twenty years or more and less than 25 years	80
Twenty-five years or more	100

The employees listed below shall be entitled to increase their subscriptions to shares of stock, based on the foregoing schedule, by the following percentages:

	Per cent
President and vice presidents	100
General department heads reporting to vice presidents	100
Managers of main distributing houses	100
Members of house committee for 100 per cent of their time,
other than managers	50

Purchasers under this plan were required to deposit the shares with voting trustees, and would, in turn, receive voting trust certificates. Subsections (a) and (c) of section (4) of the plan were, insofar as it is here relevant, substantially similar in effect to subsections (a) and (c) of article XIV of Management's certificate of incorporation. Section 4 (b) of the plan provided:

SECTION 4. DISPOSAL OF STOCK.

* * * *

(b) Death of Stockholders.

In the event of the death of a holder of a voting trust certificate, such certificate standing in his name may be held by his estate for a period not exceeding one year from the date of his death and on or before the end of said period his estate must deliver to Management said voting trust certificate, endorsed in blank in proper form for transfer, and within thirty (30) days thereafter Management shall purchase the certificate at the price provided in Section 4 (a) hereof, provided, however, that at any time during said year his estate shall have the option to deliver to Management said certificate endorsed as aforesaid, and within thirty (30) days thereafter Management shall purchase said certificate at the price provided in Section 4 (a) hereof, and in addition thereto Management will allow and pay to the Estate an amount representing the excess, if any, over and above One Hundred Dollars ($ 100) per share of the value of Management's stock represented by such certificate as determined by Management as of the last day of the month prior to that in which the holder died, together with interest on such excess at the rate of six percent (6%) per annum, compounded quarterly, from the last day of the month prior to that in which the holder died to the date such excess is paid. Such excess shall be paid on the date of such purchase, if at that time all of the preferred stock of Graybar shall have been redeemed while Management is the owner of the common stock, or if at the date of such purchase any preferred stock of Graybar shall be outstanding, then such excess shall be paid at the time when all such preferred stock shall have been redeemed while Management is the owner of the common stock.

Subsection (d) extended to pensioners the same pricing method as that contained in subsection (b).

A voting trust was created by an agreement dated November 5, 1928. This trust was to last for 10 years, and was to be the depository for stock purchased under the 1928 stock purchase plan. The trust agreement provided that, among other things, article XIV of Management's certificate of incorporation was to appear on the back of all voting trust certificates. The voting trustees were also executives of Management.

A second stock purchase plan (referred to as the second and continuing stock purchase plan) dated March 1, 1929, gave employees of Graybar another opportunity to purchase Management's stock. This plan in its relevant aspects was similar to the plan dated November 1, 1928. The voting trust created by the agreement dated November 5, 1928, was the depository for stock purchased under the 1929 stock purchase plan.

During 1933 the 6 per cent interest rate used in computing the option price of voting trust certificates was reduced to 4 per cent for years subsequent to December 31, 1933.

By agreement dated July 15, 1938, a new 10-year voting trust was set up to succeed the trust created by the agreement dated November 5, 1928. Article Eighth of the new agreement provided:

Eighth: * * *

The Voting Trustees are specifically authorized, in the exercise of their unrestricted discretion, in respect of any and all stock subject to this agreement, and without limiting the generality of the foregoing, to vote for or consent to any or all or any part of one or more of the following actions, when and if the said Voting Trustees, in their unrestricted discretion, shall deem such action or actions to be desirable:

* * * *

(b) The amendment of the certificate of incorporation of the Corporation so as to change the provisions of subdivisions (b), (d) and (e) of Article XIV thereof, so that the said subdivisions shall read as set forth in Exhibit A which is hereto annexed and hereby made a part of this agreement;

* * * *

EXHIBIT A.

XIV. * * *

(b) the corporation is hereby given an option in the event of the death of the holder of any shares of capital stock of the corporation to purchase from his estate all such shares at the price per share provided in subdivision (a) of this Article XIV, at any time from and after the expiration of one year from the date of his death until thirty (30) days after such shares shall have been offered for sale to the corporation at the said price and certificates for said shares of stock duly endorsed in proper form for transfer shall have been tendered to the corporation, accompanied by any other papers necessary or proper to effect a valid transfer. The option in this subdivision (b) given to the corporation, however, is subject to the provision that in the event the estate of any deceased stockholder shall offer to sell and shall tender to the corporation at any time before the expiration of the period of one year from the date of death of such deceased stockholder any stock held by his estate, the option shall terminate unless within thirty (30) days from the time said stock is presented to the corporation for purchase, the corporation shall purchase said stock at the said purchase price. With respect to any purchase from the estate of any holder who shall have died prior to September 1, 1938, the board of directors shall have authority in its discretion either at the time of any such purchase or at any time subsequent thereto to add to such purchase price an additional amount representing the excess, if any, over and above the aforesaid price of the value of the stock represented by the certificates so purchased as determined by the board of directors as of the last day of the month prior to that in which the holder died, together with interest on such excess from the last day of the month prior to that in which the holder died to the date on which such excess is paid, such interest to be computed at the rate of six per cent. (6%) per annum, compounded quarterly, for all periods to and including December 31, 1933, and at four per cent. (4%) per annum, compounded quarterly, for all periods subsequent to December 31, 1933. * * *

Exhibit A also contained a potential amendment to article XIV of Management's certificate of incorporation which would reduce the option price to be paid pensioners to the price set out in subsection (a) of that article.

A letter, dated August 31, 1938, signed by Management and the voting trustees, sent to the holders of voting trust certificates contained among others the following two paragraphs:

The directors and voting trustees have also reached the conclusion that there should be a change in the stock purchase plans under which the voting trust certificates are held with respect to the prices to be paid for stock of Management upon its resale to Management by pensioners or estates of deceased pensioners or of deceased employees. Under the present plans such holders at the time of the resale of the stock receive their money back subject to the adjustment of dividends and interest, but in the event that Management retires all its preferred stock while it is still the owner of the common stock of Graybar Electric, they also become entitled to receive such additional amount as represents the difference between the amount computed as above stated in this letter and the value of the stock as determined by the directors of Management. The experience of the last ten years has shown that due to the extensive and rapid fluctuations in business conditions this arrangement may work out unfairly to other stockholders. During and immediately after a period of prosperity the stock may have a substantially increased value which to a greater or less extent may shrink during a subsequent period of depression. This means Graybar Management and its remaining stockholders may suffer severe losses with respect to the stock purchased from pensioners and estates during or immediately following periods of prosperity.

After consideration of various proposals the directors of Management have considered it advisable to recommend amendments to the two stock purchase plans the effect of which will be that no additional amount shall be paid upon any repurchase from the estate of any holder who dies on or subsequent to September 1, 1938, or from any pensioner. If these changes in the plans become effective there will be paid to each voting trust certificate holder assenting thereto an amount equal to $ 1.00 for each share represented by voting trust certificates held by him.

The recommendations of the signers of this letter were carried out by an agreement between the holders of voting trust certificates, Management, and the voting trustees, dated July 15, 1938, and by an amendment to Management's certificate of incorporation, dated October 26, 1938.

Accordingly, the respective certificate holders received $ 1 per share, and the amendment to Management's certificate of incorporation was substantially similar to that quoted from the trust agreement dated July 15, 1938.

The value of each share of Management's stock, arrived at in pursuance of article XIV of Management's certificate of incorporation and the various stock purchase plans, and the estimated book value, on the dates indicated were as follows:

	Value per	Estimated
	share fixed	book value
	by board	per share
December 31
1930	$ 136	$ 143.06
1931	136	138.99
1932	136	121.34
1933	100	64.83
1934	100	134.82
1935	$ 100	$ 138.60
1936	148
1937	200
1938	210

The minutes of the board of directors do not disclose any book value for Management's stock in the years 1936-1938.

By August 31, 1938, Western Electric Company, Inc., had succeeded to the rights of Products under the agreement of November 5, 1928, referred to above.

As of December 30, 1939, Management was consolidated with Graybar. As a result of the consolidation, holders of voting trust certificates representing shares in Management became holders of voting trust certificates representing shares in Graybar. For each share of Management stock exchanged by the voting trustees they were given 5 shares of Graybar common stock having a par value of $ 20 per share. The voting trust held all of the issued and outstanding Graybar common stock.

The certificate of consolidation dated December 30, 1939, signed by representatives of Graybar, Management, and the Western Electric Company, Inc., contained the following provisions relative to the repurchase by Graybar of its common stock:

Article IV.

* * * *

B. * * *

(a) No holder of common stock shall sell, transfer, or otherwise dispose of any shares of such stock to any party other than the corporation without first offering to sell said shares to the corporation at the price for which said shares were issued by the corporation * * * plus an amount equal to dividends accrued on said stock from the beginning of the calendar quarter to be paid at the close of such calendar quarter only if a dividend for said quarter is declared, and tendering to the corporation the certificates therefor duly endorsed in proper form for transfer, and the corporation is hereby given an option to purchase all or any part of the capital stock held by such holder at the price aforesaid good from the date of such offer and tender until the expiration of thirty (30) days after said date. * * *

(b) The corporation is hereby given an option in the event of the death of the holder of any shares of common stock of the corporation to purchase from his estate all or any part of such shares at the price per share provided in paragraph (a) of this Section B of Article IV * * *

(c) In the event that any holder of common stock ceases to be an employee of the corporation, or of a subsidiary corporation, for any cause other than death or retirement on a pension allowed by the corporation or by such subsidiary corporation, the corporation is hereby given an option to purchase all the common stock held by such stockholder, at the price provided in paragraph (a) of this Section B of Article IV * * *

At all times since December 30, 1939, all of the issued and outstanding common stock of Graybar has been represented by voting trust certificates. Said voting trust certificates were at all said times issued and held upon and subject to the same terms and conditions upon which the common stock of Graybar was issued and held.

Since December 30, 1939, all of Graybar's outstanding common stock (or voting trust certificates connected therewith), not outstanding upon the date of the consolidation, has been issued at the price of $ 20 per share pursuant to various stock purchase plans. Subscribers, under these plans, have been limited to Graybar employees. Stock purchase plans in effect through December 31, 1950, were:

Stock purchase plan of April 1, 1940

Stock purchase plan of May 1, 1945

Stock purchase plan of February 1, 1947

Stock purchase plan of May 1, 1948

Stock purchase plan of October 1, 1950

The factors determining the amount of stock purchasable by an employee under all of these plans were length of service, total compensation, and position.

A prospectus issued in connection with the 1940 stock purchase plan contained, among other things, one section headed "Common Stock" and another headed "Extra Compensation Plans." Under the former heading was a subsection entitled "Option Provisions" which dealt with the company's rights and obligations in connection with the repurchase of its common stock. "Extra Compensation Plans" were described under that heading, and the following is taken from the introductory material thereunder:

The extra compensation plans of the Company consist of plans established for the management and employees of the Company's General Department in New York, and for the management and employees of each of the Company's distributing houses, with special provisions for outside salesmen, and a special additional plan for district managers in charge of more than one Main House.

The minutes of a meeting of the board of directors of Graybar, dated May 16, 1941, contain the following resolution:

Resolved, That the officers of the company be authorized to formulate an amendment to the Certificate of Incorporation of the company and to the stock purchase plans to provide that in the case of stock of the company purchases [sic] from the estates of deceased employees or of deceased pensioners, there be paid by the company, in addition to the repurchase price now provided for, additional amounts over a limited period of five years equivalent to any dividends that may be paid upon a number of shares of stock in the company equal to the number of shares repurchased for a period of five years from the last dividend date preceding the date of repurchase and to submit such plan to the stockholders for their approval.

This resolution was rescinded on June 25, 1941.

The following two paragraphs are taken from the minutes of the board of directors' meeting dated June 25, 1941:

The president stated that since the last meeting of the Board, the Committee under Graybar's Plan for Employees' Pensions, Disability Benefits and Death Benefits, several members of the board and he as president of the Company had been giving study to the question of amending such plan so as to increase the death benefits payable to estates of deceased employees or pensioners who die while holders of shares of stock of the Company and who are compelled to resell such stock to the Company on or before the expiration of one year from the date of death.

The matter was discussed at some length. It was pointed out that this would give greater death benefits to those who are stockholders than to those who were not. It was the consensus of opinion of those present that it would be fair to pay some additional death benefit upon the death of an employee or a pensioner who as a stockholder had furnished part of the working capital of the Company during his lifetime and whose estate by reason of his death is compelled to surrender his stock to the Company.

A letter from Graybar to holders of voting trust certificates representing shares in that company, dated June 30, 1941, contained the following:

At a meeting of Graybar's directors held on June 25, 1941, there was discussed a proposal to amend Graybar's Plan for Employees' Pensions, Disability Benefits and Death Benefits to provide for some additional death benefits upon the death of an employee or pensioner who as a stockholder during his lifetime has furnished part of the working capital and as an employee has assisted in building up the assets of the company and whose estate by reason of his death is compelled to sell back to the company his stock on or before the expiration of one year from the date of death.

* * * *

You will be pleased to learn that the holders of voting trust certificates representing over 99% of the common stock of the company have approved the proposed redemption or repurchase of the entire $ 1,000,000 par value of the company's preferred stock held by Western Electric Company, Inc., which is all the preferred stock outstanding, and that no dissent has been received. Such stock will be retired out of surplus on June 30, 1941. Steps will then be taken to cancel such shares together with other shares of preferred stock held in the treasury of the company and to eliminate all provisions with respect to preferred stock from Graybar's certificate of incorporation.

The last of Graybar's outstanding preferred stock was redeemed during 1941.

On August 22, 1941, the board of directors of Graybar added the following section to Graybar's "Plan for Employees' Pensions, Disability Benefits and Death Benefits":

Section 8. Special Death Benefits

In the event of the death of any employee or if any person receiving a service or disability pension under this Plan who at the time of death is a holder of shares of the Company, which the Company shall reacquire pursuant to any option or contract, the Committee shall upon the reacquisition of such shares by the Company authorize payments (hereinafter called "Special Death Benefits") during a limited period of five years from the last dividend date preceding the date of the reacquisition of such shares by the Company (in addition to any payments or benefits otherwise provided for in Section 7 of the Plan) in amounts equivalent to the dividends, if any, that may be paid during such limited period on a number of shares of the Company equal to the number of shares reacquired by the Company from the estate of such decedent. No such special death benefits shall be or become payable in any event except as dividends are declared and paid upon the shares of the Company during such limited period.

Such payments shall be made to the estate of the decedent or at the option of the Committee to such beneficiaries of the deceased employee or pensioner as would be entitled to receive Regular Death Benefits in the event any Regular Death Benefits should be payable, but if the payments are not made to the estate, any such beneficiary shall have full power to waive the right to receive any such payments or to nominate any other person whomsoever to receive the payments that the person so waiving might otherwise receive, and, subject to the foregoing, the Committee shall have the same powers to determine the beneficiary or beneficiaries who shall receive such payments and the share which each shall receive as the Committee has with respect to Regular Death Benefits under this Plan.

* * * *

Neither the provisions of this Section 8 nor any action pursuant thereto shall in any way affect any other provisions of the Plan except that notwithstanding the provisions of Section 10 of the Plan, the benefits created by this Section 8 may be terminated, suspended or reduced in whole or in part at any time either before or after the death of any employee or pensioner whose estate or beneficiaries might receive said benefits, solely by resolution of the board of directors of the Company.

The provisions of this Section 8 shall apply only to employees and all classes of pensioners whose death occurs on or after July 1, 1941.

Under this plan Graybar has had provisions calling for payment of "Regular Death Benefits" effective since January 1, 1930. Additionally, this plan includes among its provisions a "qualified" pension plan.

An amendment changing the wording of the section on special death benefits became effective September 26, 1947, and provided:

SECTION 8. SPECIAL DEATH BENEFITS.

In the event of the death of any employee or of any person receiving a service or disability pension under this Plan who at the time of death is a holder of shares of Common Stock of the Company which the Company shall reacquire pursuant to any option or contract, the Committee may recommend to the Board of Directors that the Board authorize payments (hereinafter called "Special Death Benefits") during a limited period of 5 years from the last dividend date preceding the date of the reacquisition of such shares by the Company (in addition to any payments or benefits otherwise provided for in Section 7 of the Plan) in amounts not exceeding the cash dividends, if any, that may be paid during such limited period on a number of shares of Common Stock of the Company equal to the number of such shares reacquired by the Company from the estate of such decedent. No such special death benefits shall be or become payable in any event except as such dividends are declared and paid upon the shares of the Company during such limited period and then only if and to the extent authorized by the Board of Directors pursuant to the recommendation of the Committee.

* * * *

Neither the provisions of this Section 8 nor the action or inaction of the Committee or the Board of Directors as to the payment or nonpayment of a Special Death Benefit shall give rise to or create in any person any right whatsoever, either legal or equitable, against the Company, the Board of Directors, the Committee or any member thereof for the payment of any Special Death Benefit, and the action or inaction of the Committee or the Board of Directors, or both, as to the payment or non-payment of a Special Death Benefit in any case shall not constitute a precedent or give rise to any obligation to take similar action in any other case or instance.

No change in Graybar's certificate of incorporation has been made to reflect the provisions dealing with special death benefits.

The book value per share of Graybar common stock during the years from 1941 to 1950 was as follows:

As of December 31:
Year	Amount
1941	$ 43.92
1942	50.04
1943	55.62
1944	57.38
1945	54.57
1946	$ 73.49
1947	84.86
1948	107.87
1949	118.77
1950	94.94

On January 2, 1948, Graybar paid a dividend in shares of preferred stock to holders of record of common stock, or voting trust certificates therefor, at the close of business on December 12, 1947, at the rate of 1 share of preferred stock for each share of common stock. The preferred stock had a par value of $ 20 per share. The Commissioner of Internal Revenue, by letter dated March 18, 1948, ruled that no taxable income was realized by the recipients of the dividend.

On July 20, 1950, Graybar paid a dividend in shares of common stock, represented by voting trust certificates, to holders of record of common stock, or voting trust certificates therefor, at the close of business on June 23, 1950, at the rate of one-half share for each share of common stock outstanding. The dividend stock was of the par value of $ 20 per share. The dividend was treated by the holders of the common stock of Graybar, or voting trust certificates therefor, as a nontaxable distribution.

The stock distributed as dividends, referred to in the two preceding paragraphs, was subject to all of the provisions, restrictions, and qualifications set forth in the certificate of incorporation, as amended, which were applicable to the stock already outstanding.

In every instance since December 30, 1939, where an employee or pensioner has died owning voting trust certificates representing shares in Graybar they have been purchased by that company.

From July 1, 1941, to February 1, 1957, special death benefits have been paid in 189 cases and have not been paid in 4 cases.

The total number of Graybar employees compared to the distribution of ownership of trust certificates on various days during some of the taxable years was:

		Certificate holders
	Total number
Date	of employees
		Employees	Pensioners
			and estates
Apr. 1, 1947	3,103	1,608	166
July 1, 1948	4,034	1,913	174
Dec. 31, 1950	4,163	2,674	210

During the taxable years involved herein no person or entity held more than 1.8 per cent of the issued and outstanding voting trust certificates of Graybar.

Petitioner paid special death benefits during the taxable years here at issue in the following amounts:

1947	$ 77,812
1948	85,709
1949	77,294
1950	93,852

Petitioner deducted these amounts as ordinary and necessary expenses for the respective years. On its books Graybar carries a contingent reserve for death benefits in the amount of $ 100,000. Death benefit payments are made from Graybar's operating funds and are not charged against the contingent reserve.

The Commissioner disallowed as deductions the amounts paid by Graybar as special death benefits.

OPINION.

Petitioner contends that the so-called special death benefits represented compensation for services rendered and were therefore deductible under section 23 (a) (1) (A) of the Internal Revenue Code of 1939. *294 was required to be offered for sale to petitioner after the death of a stockholder. Accordingly, we must sustain the Commissioner's determination that the payments did not represent compensation for services rendered and are therefore not deductible under section 23 (a) (1) (A).

At the outset, it should be kept in mind that all of petitioner's stock was owned by its employees and pensioners, but not by all of them. To be sure, all of the employees had been given the privilege of purchasing stock, in amounts that were dependent upon length of service, total compensation, and position held. But a number of them did not avail themselves of the opportunity, with the result that, as shown by the evidence, only about 60 per cent became stockholders. Moreover, all of the stock was held by voting trustees and was subject to severe restrictions. It could not be sold, except to petitioner, and then only at its par value of $ 20 a share. After the death of a stockholder, the estate of the decedent was required to offer to sell the stock to the petitioner at $ 20 a share.

Obviously, as the true value of the stock might rise, by reason of enhanced value of corporate assets, increased earnings, surplus, or any other factor that is a relevant consideration in the determination of value, the owner of the stock would be disadvantaged by the restriction calling for the sale of his stock to petitioner at the fixed price of $ 20 a share. This unhappy situation affected every stockholder, and we are convinced that the system of so-called special death benefits was designed to mitigate the hardship caused by the sale of the stock at a price that was less than its true value.

We cannot accept petitioner's position that the so-called special death benefits were in fact paid for services rendered, notwithstanding the label placed upon them. Of course, we are not at liberty to rewrite contracts or to alter relationships that parties have established between themselves. But we are fully justified in examining such contracts or relationships to determine whether they are truthfully described by the labels which the parties have attached to them. And in this case, it is quite clear to us on this record that the payments in question were not in fact compensatory for services rendered.

In the first place, such payments were not made in the case of all deceased employees. They were explicitly limited to those who were stockholders. If there were two employees who had performed identical services over the years, only one of whom was a stockholder, the so-called special death benefits would be payable only to his estate or beneficiaries; no such payments were authorized on behalf of the other's estate or beneficiaries. Or, even if both had been stockholders but one had purchased a smaller amount of stock than the other, the payments in question would be geared to the amount of stock owned, and not to the services performed. Such payments were to be equal to the dividends over a 5-year period that would otherwise have been payable on the stock surrendered after the death of a stockholder.

We are not persuaded by the argument that the payments were intended as additional compensation for services. Petitioner had a comprehensive plan of extra compensation, pensions, disability benefits, and death benefits for its employees, wholly apart from the payments here in controversy. In contrast to the special death benefits, here involved, none of the benefits in the comprehensive plan is in any way conditioned upon stock ownership. It is a matter of no consequence that the provisions for special death benefits were incorporated in the general plan, for the label alone cannot change its true character. These provisions took that form as a result of a meeting of petitioner's board of directors on June 25, 1941. But far more illuminating is the evidence as to the minutes of a board meeting on May 14, 15, and 16, 1941, when it considered "the question of amending the Certificate of Incorporation and the Stock Purchase Plans to provide some increase in the purchase price in respect to stock purchased from estates of stockholders * * *" and approved a method for increasing the purchase price of the stock that was identical with that subsequently adopted under the "Special Death Benefits" label. The fact that the original plan adopted May 16, 1941, was rescinded shortly thereafter (June 25, 1941) and that on the same day a new and identical plan appeared under a different name persuasively suggests greater sophistication but not a difference in substance.

Nothing in the record before us forms the basis for a conclusion that the employees who were also stockholders rendered any special services justifying financial recognition that discriminated against other employees. We were not shown anything which tended to prove that the employees who took advantage of the stock purchase plans, and held the securities so purchased until their death, either contributed or were thought to have contributed more valuable services to Graybar than did other employees. The conclusion is irresistible that the payments in controversy were made in respect of the stock and not in respect of services rendered.

Petitioner has placed much stress upon the discretionary powers in distributing these special benefits. But it has presented no evidence that the exercise of such discretion was in any way influenced by the quality or nature of a decedent's past services. The evidence does show that special death benefits were not paid in the case of four deceased stockholders. But the circumstances surrounding those instances were not revealed to us, and, bearing in mind the fact that burden of proof was upon petitioner, we must dismiss those instances as being inconclusive with respect to the problem before us.

Great reliance has been placed by petitioner upon Estate of Albert L. Salt, 17 T. C. 92, which was concerned with Graybar stock subject to the very conditions and restrictions pertinent here. But that was an estate tax case, and the problem there was to fix the value of the stock in the gross estate of a stockholder. This Court held that it was to be included at the rate of $ 20 a share without regard to the special death benefits that might thereafter be paid. Obviously, in view of the discretionary character of these payments, they were properly excluded as an element of value as of the date of the decedent's death. But this conclusion is a far cry from holding that the payments were in fact made for services rendered, and petitioner has completely failed in carrying its burden here to show that the payments qualify for deduction under section 23 (a) (1) (A). The present case is to be sharply distinguished from the Salt case. Decision will be entered under Rule 50.

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Footnotes

• 1. The provisions applicable to capital stock were also made applicable to trust certificates. This was the case not only in the above-quoted instrument but also in subsequent relevant instruments which are quoted from herein.↩

• 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  (a) Expenses. --

  (1) Trade or business expenses. --

  (A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *↩

• 3. Moreover, although possibly not of crucial significance here, it is nevertheless true that not all of the facts before us -- particularly evidence as to the revealing minutes of the meeting of the board of directors on May 14-16, 1941 -- were before the Court in the Salt↩ case.