Katherine F. Miller v. Commissioner of Internal Revenue, Joseph M. Detota v. Commissioner of Internal Revenue

WATERMAN, Circuit Judge.

Petitioners appeal from adverse decisions of the Tax Court entered in consolidated eases on December 7, 1962, upholding the Commissioner of Internal Revenue’s assertion of federal income tax deficiencies against them for the years 1957, 1958, and 1959. 39 T.C. 505. Jurisdiction to review these Tax Court decisions is conferred upon this court by Section 7482 of the Internal Revenue Code of 1954.

Petitioners argued before the Tax Court that the receipts upon which the alleged deficiencies had been based did not constitute income within the meaning of Section 61(a) of the Internal Revenue Code of 1954, because they were gifts expressly excluded from gross income by Section 102(a) of the Code. The Tax Court rejected this argument and ruled that the receipts in question had not been gifts but had been payments of a compensatory nature. We are in agreement with this ruling.

During the years of the claimed deficiencies both petitioners were employees of the Genesee Valley Club, a membership corporation in Rochester, New York, which is a social club offering to members and guests various party and recreational facilities. Petitioner Miller was the club’s head bookkeeper and petitioner DeTota was a headwaiter. The deficiencies asserted against petitioner Miller amounted to $94.11, $111.04, and $122.18 for the years 1957, 1958, and 1959 respectively. Petitioner DeTota’s claimed deficiencies for these years were $116.27, $122.18, and $119.33 respectively.

The asserted deficiencies were based upon sums of money both petitioners had received from the identical source and had failed to report as income. The source was a Christmas fund which the Genesee Club had maintained for its employees for many years. Financed solely through voluntary contributions solicited from members by club officials, the fund was kept by the club in a separate bank account. Shortly before Christmas each year every employee of the club was awarded a portion of the money in the fund. Not every employee received the same amount of money, however, for the size of each payment was determined by a formula that took into account each employee’s regular salary and his length of service with the club. While some employees who received distributions from the Christmas fund performed tasks which brought them into direct contact with club members, many did not.

Formal authority for the maintenance of the fund, and the procedure to be followed in making payments to employees out of it, were recited in certain rules of the club’s House Committee. The pertinent part of the rules relating to the fund and its distribution provided:

J. The solicitation of contributions for the Employees’ Christmas Fund and their deposit in a separate bank account. The Chairman shall supervise the allocation and distribution of this Fund by the Manager, according to the following formula:

1. A Christmas bonus .shall be paid to employees from funds subscribed by members of the Club. Payments are based on points earned by each employee. Points are credited to each full-time regular employee * * * on the basis of:

(a) Length, of employment— * *

(b) Salary— * * * ******

4. Notification of payment of bonus:

(a) Not later than December 10 of each year, the Chairman of the House Committee, after determining the point value, should send a letter to each employee outlining the basis for the bonus, and showing the number of points earned by him during the year, and the value per point. This letter should be an expression of appreciation and encouragement.

(b) Actual payment of the bonus should be made in check on December 15.

******

6. Changes in the Bonus Plan.

(a) Inequalities in any individual case which may arise in the application of this formula should be adjusted between the Chairman of the House Committee and the Manager prior to the payment of the Bonus.

In order to raise money for the fund, the club traditionally sent a notice to each of its members at Christmas time, setting forth a list of all club employees, their occupations and their years of service. Accompanying the notice was the following message:

“The Christmas Season approaches and with it the Spirit of Giving. We are sure you will welcome the opportunity to make your annual contribution to the Employees’ Christmas Fund. This Fund is maintained and augmented at this time and throughout the year in order to provide tangible recognition at Christmas time of the faithful and efficient service rendered by our employees.

“Will you kindly designate the amount you wish to give on the enclosed card.

Board of Governors.”

As is apparent from this message, no member was required to contribute; and contributions were not required to be based on the the amount of time a member used club facilities, or the amount of club bills he had accumulated during the year.

One of the rules of the Genesee Club required that members and guests refrain from tipping club employees, with the pertinent rule also calling attention to the Christmas Fund:

“Rule 7. No member or visitor shall give money or any gratuity to an employee of the Club. The gratuity fund provides an opportunity for all contributions.”

Determining whether specific transfers are gifts within the meaning of the Internal Revennue Code cannot be resolved by resort to any fixed and precise standard. Decision in a case like this depends upon the particular circumstances surrounding the transfers in question. For this reason, most cases require that a reviewing court such as ours give “primary weight” to the conclusions of the trier of fact. Commissioner v. Duberstein, 363 U.S. 278, 289, 80 S.Ct. 1190, 1199, 4 L.Ed.2d 1218 (1960); United States v. Stanton, 287 F.2d 876 (2 Cir. 1961).

This particular case, however, seems to us to present an instance where this court is properly entitled to review in full the conclusions of the Tax Court. This broader scope of review is called for here because the case below was tried on facts which were entirely stipulated, and the lower court’s conclusions were based entirely on documentary evidence. Under these circumstances, the factors which demand that heavy reliance be placed upon the findings of the trier of fact, see Commissioner v. Duberstein, 363 U.S. at 289-291, 80 S.Ct. at 1198-1200, 4 L.Ed.2d 1218, simply do not obtain. Here no testimony was taken, and the problem of observing the demeanor of witnesses and apportioning degrees of credibility was nonexistent. The only evidence upon which the decision below could have been based was of a type which this court is in a position to evaluate as ably as the court below. Therefore, we are permitted to review freely the decision which has prompted this appeal. United Nations Korean Reconstruction Agency v. Glass Production Methods, Inc., 291 F.2d 168, 172 (2 Cir. 1961).

Even when subjected to the more stringent test of full review, however, the Tax Court’s decision to refuse to label the transfers in question as gifts must be deemed correct. While we have already noted that no hard and fast rule has been established for deciding when a transfer is a gift within the meaning of Section 102(a) of the Code, some guiding principles were laid down by the Supreme Court in Commissioner v. Duber-stein, supra. According to the Duber-stein case, the voluntariness of a transfer is not determinative; what controls is the intent with which the transferor executed the transfer. If a payment of the kind involved in this case proceeds from a “detached and disinterested generosity,” out of “affection, respect, admiration, charity or like impulses,” it is a gift. If, on the other hand, a payment proceeds primarily from “the constraining force of any moral or legal duty,” or constitutes a reward for “services rendered,” or proceeds from “ ‘the incentive of anticipated benefit’ of an economic nature,” the transfer ought not to be deemed a gift. Commissioner v. Duberstein, supra, 363 U.S. at 285, 80 S.Ct. at 1196-1197, 4 L.Ed.2d 1218.

We agree with the Tax Court, that the transfers here in question were not gifts, but were, like tips or bonuses, of a compensatory nature and therefore taxable income under the internal revenue laws. If the sums which petitioners, received from the Christmas fund had been received directly from club members, as tips, they would have been payments, in reward for services rendered, and’, hence taxable income. E. g., Roberts v. Commissioner, 176 F.2d 221 (9 Cir. 1949); Andrews v. United States, 295 F.2d 819 (Ct.Cl.1961), cert. denied, 369 U.S. 829, 82 S.Ct. 846, 7 L.Ed.2d 794 (1962). We think that the stipulated facts in this case indicate clearly that the sums of money which petitioners received were just as compensatory as ordinary tips.

The club rule which prohibited tipping called attention to the existence of the Christmas fund and indicated that it provided “an opportunity for all contributions.” The rule thus stood as a direct request to members to put money they might otherwise expend in tips into the hands of employees via the Christmas fund. Members were, in other words, asked to respond to whatever motivations prompted tipping by making contributions to the Christmas fund instead. While we recognize that some club employees performed tasks which did not bring them into direct contact with members, this fact should not merit a finding that the contributions and payments proceeded from more.of a feeling of “detached and disinterested generosity” than otherwise would be the case. As the Tax Court noted, the Genesee Valley Club was, in effect, one huge service organization, and members were served just as assuredly by employees working behind the scenes as by those whose jobs brought them into direct contact with members.

Other circumstances surrounding these transfers are equally compelling as indicia of an intent to reward past services and encourage the faithful performance1 of duties in the future. The letter to club members soliciting contributions to the Christmas fund asked members to contribute in order to provide “tangible recognition * * * of the faithful and efficient service rendered by our employees.” Moreover, a rule of the club’s House Committee provided that the letter sent to employees explaining •the computation of payments from the fund “should be an expression of appreciation and encouragement.”

Finally, the method whereby the club computed the size of the payment each employee was to receive indicates that the purpose of the payment was to compensate employees for past services and encourage them to continue to perform their duties ably in the future. The size of the payments was based upon the regular salary and length of service of each employee, thereby tying fund distributions directly to services rendered to members of the club. Moreover, a rule of the House Committee provided for adjustments in the size of payments in the event of “inequalities” arising from the application of the distribution formula, indicating that employees earned the right to have payments they received compare somehow with payments which other employees received.

Petitioners also argue that we cannot rule that these payments were not gifts because the Tax Court failed to take testimony from contributors as to their reasons for contributing. While such testimony may have been helpful in determining the issue at hand, we believe that the other indicia of intent stipulated into the record more than support a finding as to the nature of the contributions. More importantly, however, since the burden of proof was on petitioners to show that they were entitled to exclude these payments from their gross income, Gaugler v. United States, 312 F.2d 681, 684 (2 Cir. 1963), it was they who should have offered to introduce such testimony in evidence if they felt it could have established an intent different from that indicated by the other evidence stipulated.

Finally, we cannot turn our decision on a 1945 ruling of the Commissioner of Internal Revenue which petitioners have called to our attention, I.T. 3726, 1945 Cum.Bul. 63. Assuming that the ruling does apply to this particular set of facts, petitioners here failed to show reliance upon it by anyone involved in this ease; and, at any rate, such a ruling does not commit the Commissioner, the Tax Court, or this Court, to any particular interpretation of the law. See Helvering v. N. Y. Trust Co., 292 U.S. 455, 468, 54 S.Ct. 806, 78 L.Ed. 1361 (1934); Sims v. United States, 252 F.2d 434, 438 (4 Cir. 1958), aff’d, 359 U.S. 108, 79 S.Ct. 641, 3 L.Ed.2d 667 (1959). This ruling, promulgated in 1945, cannot compel us to arrive at a result different from that demanded of us by our interpretation of a later Supreme Court decision.

Affirmed.