Commissioner of Internal Revenue v. Duberstein/Opinion of the Court

by William J. Brennan, Jr.

United States Supreme Court

363 U.S. 278

COMMISSIONER OF INTERNAL REVENUE, Petitioner,  v.  Mose DUBERSTEIN et al. Alden D. STANTON et al., Petitioners,

 Argued: March 23, 24, 1960. --- Decided: June 13, 1960

These two cases concern the provision of the Internal Revenue Code which excludes from the gross income of an income taxpayer 'the value of property acquired by gift.' ^[1] They pose the frequently recurrent question whether a specific transfer to a taxpayer in fact amounted to a 'gift' to him within the meaning of the statute. The importance to decision of the facts of the cases requires that we state them in some detail.

No. 376, Commissioner v. Duberstein. The taxpayer, Duberstein, ^[2] was president of the Duberstein Iron & Metal Company, a corporation with headquarters in Dayton, Ohio. For some years the taxpayer's company had done business with Mohawk Metal Corporation, whose headquarters were in New York City. The president of Mohawk was one Berman. The taxpayer and Berman had generally used the telephone to transact their companies' business with each other, which consisted of buying and selling metals. The taxpayer testified, without elaboration, that he knew Berman 'personally' and had known him for about seven years. From time to time in their telephone conversations, Berman would ask Duberstein whether the latter knew of potential customers for some of Mohawk's products in which Duberstein's company itself was not interested. Duberstein provided the names of potential customers for these items.

One day in 1951 Berman telephoned Duberstein and said that the information Duberstein had given him had proved so helpful that he wanted to give the latter a present. Duberstein stated that Berman owed him nothing. Berman said that he had a Cadillac as a gift for Duberstein, and that the latter should send to New York for it; Berman insisted that Duberstein accept the car, and the latter finally did so, protesting however that he had not intended to be compensated for the information. At the time Duberstein already had a Cadillac and an Oldsmobile, and felt that he did not need another car. Duberstein testified that he did not think Berman would have sent him the Cadillac if he had not furnished him with information about the customers. It appeared that Mohawk later deducted the value of the Cadillac as a business expense on its corporate income tax return.

Duberstein did not include the value of the Cadillac in gross income for 1951, deeming it a gift. The Commissioner asserted a deficiency for the car's value against him, and in proceedings to review the deficiency the Tax Court affirmed the Commissioner's determination. It said that 'The record is significantly barren of evidence revealing any intention on the part of the payor to make a gift. * * * The only justifiable inference is that the automobile was intended by the payor to be remuneration for services rendered to it by Duberstein.' The Court of Appeals for the Sixth Circuit reversed. 265 F.2d 28, 30.

No. 546, Stanton v. United States. The taxpayer, Stanton, had been for approximately 10 years in the employ of Trinity Church in New York City. He was comptroller of the Church corporation, and president of a corporation, Trinity Operating Company, the church set up as a fully owned subsidiary to manage its real estate holdings, which were more extensive than simply the church property. His salary by the end of his employment there in 1942 amounted to $22,500 a year. Effective November 30, 1942, he resigned from both positions to go into business for himself. The Operating Company's directors, who seem to have included the rector and vestrymen of the church, passed the following resolution upon his resignation: 'Be it resolved that in appreciation of the services rendered by Mr. Stanton * * * a gratuity is hereby awarded to him of Twenty Thousand Dollars, payable to him in equal instalments of Two Thousand Dollars at the end of each and every month commencing with the month of December, 1942; provided that, with the discontinuance of his services, the Corporation of Trinity Church is released from all rights and claims to pension and retirement benefits not already accrued up to November 30, 1942.'

The Operating Company's action was later explained by one of its directors as based on the fact that, 'Mr. Stanton was liked by all of the Vestry personally. He had a pleasing personality. He had come in when Trinity's affairs were in a difficult situation. He did a splendid piece of work, we felt. Besides that * * * he was liked by all of the members of the Vestry personally.' And by another: '(W)e were all unanimous in wishing to make Mr. Stanton a gift. Mr. Stanton had loyally and faithfully served Trinity in a very difficult time. We thought of him in the highest regard. We understood that he was going in business for himself. We felt that he was entitled to that evidence of good will.'

On the other hand, there was a suggestion of some ill-feeling between Stanton and the directors, arising out of the recent termination of the services of one Watkins, the Operating Company's treasurer, whose departure was evidently attended by some acrimony. At a special board meeting on October 28, 1942, Stanton had intervened on Watkins' side and asked reconsideration of the matter. The minutes reflect that 'resentment was expressed as to the 'presumptuous' suggestion that the action of the Board, taken after long deliberation, should be changed.' The Board adhered to its determination that Watkins be separated from employment, giving him an opportunity to resign rather than be discharged. At another special meeting two days later it was revealed that Watkins had not resigned; the previous resolution terminating his services was then viewed as effective; and the Board voted the payment of six months' salary to Watkins in a resolution similar to that quoted in regard to Stanton, but which did not use the term 'gratuity.' At the meeting, Stanton announced that in order to avoid any such embarrassment or question at any time as to his willingness to resign if the Board desired, he was tendering his resignation. It was tabled, though not without dissent. The next week, on November 5, at another special meeting, Stanton again tendered his resignation which this time was accepted.

The 'gratuity' was duly paid. So was a smaller one to Stanton's (and the Operating Company's) secretary, under a similar resolution, upon her resignation at the same time. The two corporations shared the expense of the payments. There was undisputed testimony that there were in fact no enforceable rights or claims to pension and retirement benefits which had not accrued at the time of the taxpayer's resignation, and that the last proviso of the resolution was inserted simply out of an abundance of caution. The taxpayer received in cash a refund of his contributions to the retirement plans, and there is no suggestion that he was entitled to more. He was required to perform no further services for Trinity after his resignation.

The Commissioner asserted a deficiency against the taxpayer after the latter had failed to include the payments in question in gross income. After payment of the deficiency and administrative rejection of a refund claim, the taxpayer sued the United States for a refund in the District Court for the Eastern District of New York. 137 F.Supp. 803. The trial judge, sitting without a jury, made the simple finding that the payments were a 'gift,' ^[3] and judgment was entered for the taxpayer. The Court of Appeals for the Second Circuit reversed. 268 F.2d 727.

The Government, urging that clarification of the problem typified by these two cases was necessary, and that the approaches taken by the Courts of Appeals for the Second and the Sixth Circuits were in conflict, petitioned for certiorari in No. 376, and acquiesced in the taxpayer's petition in No. 546. On this basis, and because of the importance of the question in the administration of the income tax laws, we granted certiorari in both cases. 361 U.S. 923, 80 S.Ct. 291, 4 L.Ed.2d 239.

The exclusion of property acquired by gift from gross income under the federal income tax laws was made in the first income tax statute ^[4] passed under the authority of the Sixteenth Amendment, and has been a feature of the income tax statutes ever since. The meaning of the term 'gift' as applied to particular transfers has always been a matter of contention. ^[5] Specific and illuminating legislative history on the point does not appear to exist. Analogies and inferences drawn from other revenue provisions, such as the estate and gift taxes, are dubious. See Lockard v. Commissioner, 1 Cir., 166 F.2d 4099 The meaning of the statutory term has been shaped largely by the decisional law. With this, we turn to the contentions made by the Government in these cases.

First. The Government suggests that we promulgate a new 'test' in this area to serve as a standard to be applied by the lower courts and by the Tax Court in dealing with the numerous cases that arise. ^[6] We reject this invitation. We are of opinion that the governing principles are necessarily general and have already been spelled out in the opinions of this Court, and that the problem is one which, under the present statutory framework, does not lend itself to any more definitive statement that would produce a talisman for the solution of concrete cases. The cases at bar are fair examples of the settings in which the problem usually arises. They present situations in which payments have been made in a context with business overtones-an employer making a payment to a retiring employee; a businessman giving something of value to another businessman who has been of advantage to him in his business. In this context, we review the law as established by the prior cases here.

The course of decision here makes it plain that the statute does not use the term 'gift' in the common-law sense, but in a more colloquial sense. This Court has indicated that a voluntarily executed transfer of his property by one to another, without any consideration or compensation therefor, though a common-law gift, is not necessarily a 'gift' within the meaning of the statute. For the Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 730, 49 S.Ct. 499, 504, 73 L.Ed. 918. And, importantly, if the payment proceeds primarily from 'the constraining force of any moral or legal duty,' or from 'the incentive of anticipated benefit' of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41, 58 S.Ct. 61, 65, 82 L.Ed. 32, it is not a gift. And, conversely, '(w) here the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it.' Robertson v. United States, 343 U.S. 711, 714, 72 S.Ct. 994, 996, 96 L.Ed. 1237. ^[7] A gift in the statutory sense, on the other hand, proceeds from a 'detached and disinterested generosity,' Commissioner of Internal Revenue v. LoBue, 351 U.S. 243, 246, 76 S.Ct. 800, 803, 100 L.Ed. 1142; 'out of affection, respect, admiration, charity or like impulses.' Robertson v. United States, supra, 343 U.S. at page 714, 72 S.Ct. at page 996. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's 'intention.' Bogardus v. Commissioner, 302 U.S. 34, 43, 58 S.Ct. 61, 65, 82 L.Ed. 32. 'What controls is the intention with which payment, however voluntary, has been made.' Id., 302 U.S. at page 45, 58 S.Ct. at page 66 (dissenting opinion). ^[8]

The Government says that this 'intention' of the transferor cannot mean what the cases on the common-law concept of gift call 'donative intent.' With that we are in agreement, for our decisions fully support this. Moreover, the Bogardus case itself makes it plain that the donor's characterization of his action is not determinative-that there must be an objective inquiry as to whether what is called a gift amounts to it in reality. 302 U.S. at page 40, 58 S.Ct. at page 64. It scarcely needs adding that the parties' expectations or hopes as to the tax treatment of their conduct in themselves have nothing to do with the matter.

It is suggested that the Bogardus criterion would be more apt if rephrased in terms of 'motive' rather than 'intention.' We must confess to some skepticism as to whether such a verbal mutation would be of any practical consequence. We take it that the proper criterion, established by decision here, is one that inquires what the basic reason for his conduct was in fact-the dominant reason that explains his action in making the transfer. Further than that we do not think it profitable to go.

Second. The Government's proposed 'test,' while apparently simple and precise in its formulation, depends frankly on a set of 'principles' or 'presumptions' derived from the decided cases, and concededly subject to various exceptions; and it involves various corollaries, which add to its detail. Were we to promulgate this test as a matter of law, and accept with it its various presuppositions and stated consequences, we would be passing for beyond the requirements of the cases before us, and would be painting on a large canvas with indeed a broad brush. The Government derives it test from such propositions as the following: That payments by an employer to an employee, even though voluntary, ought, by and large, to be taxable; that the concept of a gift is inconsistent with a payment's being a deductible business expense; that a gift involves 'personal' elements; that a business corporation cannot properly make a gift of its assets. The Government admits that there are exceptions and qualifications to these propositions. We think, to the extent they are correct, that these propositions are not principles of law but rather maxims of experience that the tribunals which have tried the facts of cases in this area have enunciated in explaining their factual determinations. Some of them simply represent truisms: it doubtless is, statistically speaking, the exceptional payment by an employer to an employee that amounts to a gift. Others are overstatements of possible evidentiary inferences relevant to a factual determination on the totality of circumstances in the case: it is doubtless relevant to the over-all inference that the transferor treats a payment as a business deduction, or that the transferor is a corporate entity. But these inferences cannot be stated in absolute terms. Neither factor is a shibboleth. The taxing statute does not make nondeductibility by the transferor a condition on the 'gift' exclusion; nor does it draw and distinction, in terms, between transfers by corporations and individuals, as to the availability of the 'gift' exclusion to the transferee. The conclusion whether a transfer amounts to a 'gift' is one that must be reached on consideration of all the factors.

Specifically, the trier of fact must be careful not to allow trial of the issue whether the receipt of a specific payment is a gift to turn into a trial of the tax liability, or of the propriety, as a matter of fiduciary or corporate law, attaching to the conduct of someone else. The major corollary to the Government's suggested 'test' is that, as an ordinary matter, a payment by a corporation cannot be a gift, and, more specifically, there can be no such thing as a 'gift' made by a corporation which would allow it to take a deduction for an ordinary and necessary business expense. As we have said, we find no basis for such a conclusion in the statute; and if it were applied as a determinative rule of 'law,' it would force the tribunals trying tax cases involving the donee's liability into elaborate inquiries into the local law of corporations or into the peripheral deductibility of payments as business expenses. The former issue might make the tax tribunals the most frequent investigators of an important and difficult issue of the laws of the several States, and the latter inquiry would summon one difficult and delicate problem of federal tax law as an aid to the solution of another. ^[9] Or perhaps there would be required a trial of the vexed issue whether there was a 'constructive' distribution of corporate property, for income tax purposes, to the corporate agents who had sponsored the transfer. ^[10] These considerations, also, reinforce us in our conclusion that while the principles urged by the Government may, in nonabsolute form as crystallizations of experience, prove persuasive to the trier of facts in a particular case, neither they, nor any more detailed statement than has been made, can be laid down as a matter of law.

Third. Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case. The nontechnical nature of the statutory standard, the close relationship of it to the date of practical human experience, and the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each, confirm us in our conclusion that primary weight in this area must be given to the conclusions of the trier of fact. Baker v. Texas & Pacific R. Co., 359 U.S. 227, 79 S.Ct. 664, 3 L.Ed.2d 756; Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 475, 64 S.Ct. 249, 254, 88 L.Ed. 171; United States v. Yellow Cab Co., 338 U.S. 338, 341, 70 S.Ct. 177, 179, 94 L.Ed. 150; Bogardus v. Commissioner, supra, 302 U.S. at page 45, 58 S.Ct. at page 66 (dissenting opinion). ^[11]

This conclusion may not satisfy an academic desire for tidiness, symmetry and precision in this area, any more than a system based on the determinations of various fact-finders ordinarily does. But we see it as implicit in the present statutory treatment of the exclusion for gifts, and in the variety of forums in which federal income tax cases can be tried. If there is fear of undue uncertainty or overmuch litigation, Congress may make more precise its treatment of the matter by singling out certain factors and making them determinative of the matters, as it has done in one field of the 'gift' exclusion's former application, that of prizes and awards. ^[12] Doubtless diversity of result will tend to be lessened somewhat since federal income tax decisions, even those in tribunals of first instance turning on issues of fact, tend to be reported, and since there may be a natural tendency of professional triers of fact to follow one another's determinations, even as to factual matters. But the question here remains basically one of fact, for determination on a case-by-case basis.

One consequence of this is that appellate review of determinations in this field must be quite restricted. Where a jury has tried the matter upon correct instructions, the only inquiry is whether it cannot be said that reasonable men could reach differing conclusions on the issue. Baker v. Texas & Pacific R. Co., supra, 359 U.S. at page 228, 79 S.Ct. at page 665. Where the trial has been by a judge without a jury, the judge's findings must stand unless 'clearly erroneous.' Fed.Rules Civ.Proc. 52(a), 28 U.S.C.A. 'A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.' United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746. The rule itself applies also to factual inferences from undisputed basic facts, id., 333 U.S. at page 394, 68 S.Ct. at page 541, as will on many occasions be presented in this area. Cf. Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 609-610, 70 S.Ct. 854, 856, 857, 94 L.Ed. 1097. And Congress has in the most explicit terms attached the identical weight to the findings of the Tax Court. I.R.C. § 7482(a), 26 U.S.C.A. § 7482(a). ^[13]

Fourth. A majority of the Court is in accord with the principles just outlined. And, applying them to the Duberstein case, we are in agreement, on the evidence we have set forth, that it cannot be said that the conclusion of the Tax Court was 'clearly erroneous.' It seems to us plain that as trier of the facts it was warranted in concluding that despite the characterization of the transfer of the Cadillac by the parties and the absence of any obligation, even of a moral nature, to make it, it was at bottom a recompense for Duberstein's past services, or an inducement for him to be of further service in the future. We cannot say with the Court of Appeals that such a conclusion was 'mere suspicion' on the Tax Court's part. To us it appears based in the sort of informed experience with human affairs that fact-finding tribunals should bring to this task.

As to Stanton, we are in disagreement. To four of us, it is critical here that the District Court as trier of fact made only the simple and unelaborated finding that the transfer in question was a 'gift.' ^[14] To be sure, conciseness is to be strived for, and prolixity avoided, in findings; but, to the four of us, there comes a point where findings become so sparse and conclusory as to give to revelation of what the District Court's concept of the determining facts and legal standard may be. See Matton Oil Transfer Corp. v. The Dynamic, 2 Cir., 123 F.2d 999, 1000-1001. Such conclusory, general findings do not constitute compliance with Rule 52's direction to 'find the facts specially and state separately * * * conclusions of law thereon.' While the standard of law in this area is not a complex one, we four think the unelaborated finding of ultimate fact here cannot stand as a fulfillment of these requirements. It affords the reviewing court not the semblance of an indication of the legal standard with which the trier of fact has approached his task. For all that appears, the District Court may have viewed the form of the resolution or the simple absence of legal consideration as conclusive. While the judgment of the Court of Appeals cannot stand, the four of us think there must be further proceedings in the District Court looking toward new and adequate findings of fact. In this, we are joined by Mr. Justice WHITTAKER, who agrees that the findings were inadequate, although he does not concur generally in this opinion.

Accordingly, in No. 376, the judgment of this Court is that the judgment of the Court of Appeals is reversed, and in No. 546, that the judgment of the Court of Appeals is vacated, and the case is remanded to the District Court for further proceedings not inconsistent with this opinion. It is so ordered.

Judgment of Court of Appeals in No. 376 reversed, and judgment of Court of Appeals in No. 546 vacated, and case remanded to District Court for further proceedings.

Notes

1. The operative provision in the cases at bar is § 22(b)(3) of the 1939 Internal Revenue Code, 26 U.S.C.A. § 22(b)(3). The corresponding provision of the present Code is § 102(a), 26 U.S.C.A. § 102(a).
2. In both cases the husband will be referred to as the taxpayer, although his wife joined with him in joint tax returns.
3. See note 14, infra.
4. § II.B., c. 16, 38 Stat. 167.
5. The first case of the Board of Tax Appeals officially reported in fact deals with the problem. Parrott v. Commissioner, 1 B.T.A. 1.
6. The Government's proposed test is stated: 'Gifts should be defined as transfers of property made for personal as distinguished from business reasons.'
7. The cases including 'tips' in gross income are classic examples of this. See, e.g., Roberts v. Commissioner, 9 Cir., 176 F.2d 221.
8. The parts of the Bogardus opinion which we touch on here are the ones we take to be basic to its holding, and the ones that we read as stating those governing principles which it establishes. As to them we see little distinction between the views of the Court and those taken in dissent in Bogardus. The fear expressed by the dissent at 302 U.S. at page 44, 58 S.Ct. at page 66, that the prevailing opinion 'seems' to hold 'that every payment which in any aspect is a gift is * * * relieved of any tax' strikes us now as going beyond what the opinion of the Court held in fact. In any event, the Court's opinion in Bogardus does not seem to have been so interpreted afterwards. The principal difference, as we see it, between the Court's opinion and the dissent lies in the weight to be given the findings of the trier of fact.
9. Justice Cardozo once described in memorable language the inquiry into whether an expense was an 'ordinary and necessary' one of a business: 'One struggles in vain for any verbal formula that will supply a ready touchstone. The standard set up by the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle.' Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212. The same comment well fits the issue in the cases at bar.
10. Cf., e.g., Nelson v. Commissioner, 6 Cir., 203 F.2d 1.
11. In Bogardus, the Court was divided 5 to 4 as to the scope of review to be extended the fact-finder's determination as to a specific receipt, in a context like that of the instant cases. The majority held that such a determination was 'a conclusion of law or at least a determination of a mixed question of law and fact.' 302 U.S. at page 39, 58 S.Ct. at page 64. This formulation it took as justifying it in assuming a fairly broad standard of review. The dissent took a contrary view. The approach of this part of the Court's ruling in Bogardus, which we think was the only part on which there was real division among the Court, see note 8, supra, has not been afforded subsequent respect here. In Heininger, a question presenting at the most elements no more factual and untechnical than those here-that of the 'ordinary and necessary' nature of a business expense-was treated as one of fact. Cf. note 9, supra. And in Dobson v. Commissioner, 320 U.S. 489, 498, n. 22, 64 S.Ct. 239, 245, 88 L.Ed. 248, Bogardus was adversely criticized, insofar as it treated the matter as reviewable as one of law. While Dobson is, of course, no longer the law insofar as it ordains a greater weight to be attached to the findings of the Tax Court than to those of any other fact-finder in a tax litigation, see note 13, infra, we think its criticism of this point in the Bogardus opinion is sound in view of the dominant importance of factual inquiry to decision of these cases.
12. I.R.C. § 74, 26 U.S.C.A. § 74, which is a provision new with the 1954 Code. Previously, there had been holdings that such receipts as the 'Pot O' Gold' radio giveaway, Washburn v. Commissioner, 5 T.C. 1333, and the Ross Essay Prize, McDermott v. Commissioner, 80 U.S.App.D.C. 176, 150 F.2d 585, were 'gifts.' Congress intended to obviate such rulings. S.Rep. No. 1622, 83d Cong., 2d Sess., p. 178. We imply no approval of those holdings under the general standard of the 'gift' exclusion. Cf. Robertson v. United States, supra.
13. 'The United States Courts of Appeals shall have exclusive jurisdiction to review the decisions of the Tax Court * * * in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury * * *.' The last words first came into the statute through an amendment to § 1141(a) of the 1939 Code, 26 U.S.C.A. § 1141(a) in 1948 (§ 36 of the Judicial Code Act, 62 Stat. 991). The purpose of the 1948 legislation was to remove from the law the favored position (in comparison with District Court and Court of Claims rulings in tax matters) enjoyed by the Tax Court under this Court's ruling in Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239. Cf. note 11, supra. See Grace Bros., Inc., v. Commissioner, 9 Cir., 173 F.2d 170, 173.
14. The 'Findings of Fact and Conclusions of Law' were made orally, and were simply: 'The resolution of the Board of Directors of the Trinity Operating Company, Incorporated, held November 19, 1942, after the resignations had been accepted of the plaintiff from his positions as controller of the corporation of the Trinity Church, and the president of the Trinity Operating Company, Incorporated, whereby a gratuity was voted to the plaintiff, Allen (sic) D. Stanton, in the amount of $20,000 payable to him in monthly installments of $2,000 each, commencing with the month of December, 1942, constituted a gift to the taxpayer, and therefore need not have been reported by him as income for the taxable years 1942, or 1943.'