International Freighting vs.

CIR
135 F.2d 310 (1943)
Frank, Circuit Judge.

Facts:

- Petitioner (taxpayer), a subsidiary of another company (DuPont), had an arrangement from years 1933 to 1936
where select employees, particularly those who have been employed by taxpayer for at least two years, are to
receive bonuses in the form of common stock or in cash to be invested in such stock.
o For the year 1936, taxpayer paid and distributed to the beneficiaries certificates representing 150 shares of
the common stock of DuPont, whose cost to taxpayer was $16, 153.36 (when it acquired such from
DuPont), and with the market value of $24,858.75 at the time it was given to the employees. Each of the
employees receiving a share paid a tax thereon, computing the market value at the time of delivery as
taxable income.
- Taxpayer took a deduction of $24,858.75 in its income tax return for 1936 on account of the shares of stock
distributed to its employees.
o The Commissioner, however, said that the appropriate deduction is only $16, 153.36. As the bonus was
paid in property, the basis for calculation of the amount thereof is the cost of such property and not its
market value as claimed on the return. Based on this, taxpayer still had a deficiency in its payment of
income tax return. The taxpayer raised a petition with the Tax Court for a redetermination.
o Before the Tax Court, the Commissioner gave an amended answer and alleged that if it were held that
taxpayer was entitled to a deduction in the amount of $24,858.75 on account of payment of bonus in
stock, then taxpayer realized a taxable profit of $8, 705.39 on the disposition of the shares, and so
taxpayers net taxable income should be increased accordingly.
o Tax Court held that the taxpayer was entitled to the full deduction ($24,858.75), but that since taxpayer
acquired the said stocks for $16, 153.36, which later had a final market value of $24,858.75, then it
gained a profit of $8, 705.39, which was taxable as gross income.
Hence, this petition.

Held:

- The Tax Court correctly held that the market value at the time of delivery was properly deducted by the taxpayer
as an ordinary expense of the business, as such delivery was an additional reasonable compensation for past
services actually rendered.
- The Tax Court also correctly held that the transaction resulted in taxable gain to taxpayer.
o Pet: the delivery of those shares was a gift, hence not liable for income tax.
o Court: not a gift because: 1. It would have been wrongful as against taxpayers stockholders, 2. The value
of the shares could not have been deducted as an expense, and 3. The employees, as donees, would not
have been obliged to pay an income tax on what they received.
In other words, it was not a gift precisely because it was compensation for services actually
rendered, i.e. because the tax payer received a full quid pro quo.
o As the delivery of the shares constituted a disposition for a valid consideration, it resulted in a
closed transaction with a consequent realized gain.
It is of no relevance that taxpayer was not legally mandated to award those shares or pay
additional compensation to the employees; although they are not obligatory, they are regarded as
made for a sufficient consideration.
Since the bonuses would be invalid to the extent that what was delivered to the employees
exceeded what the services of the employees were worth, it follows that the consideration
received by the taxpayer from the beneficiaries (the at least two years of service) must be deemed
to be equal to the value of the shares given in 1936.
 o Since it was made for a consideration equal to at least the market value of the shares when it was
delivered, there is then a taxable gain equal to the difference between the cost of the shares and the
market value.
Courts analogy: taxpayer, without entering into a previous contract fixing the amount of
compensation, had employed an employee for one day and, when he completed his work, had
paid him 5 shares of DuPont stock having a market value at that time of $500, but which it
(taxpayer) had bought in a previous year for only $100. It can be clearly seen then that theres a
taxable gain.

Decision Affirmed.