International Freighting Corporation Commissioner International Freighting Corporation, Inc. v. Commissioner Facts: In this case, the facts can be summar

International Freighting Corporation Commissioner International Freighting Corporation, Inc. v. Commissioner

Facts:

In this case, the facts can be summarized as following. International Freighting Inc., which is the plaintiff in this case, offered 150 shares (from the duPont Company) to some staff classified as Class B bonus payouts. In other words, they were only offered to certain employees that were considered loyal, efficient and who were instrumental in the firm’s success. In fact, this took place in 1936. This said the fair market value of the total stocks issued to its employees (bonus amount) was valued at USD 24,858.75. However, the firm only had to pay roughly USD 16,153.36 for them, at the moment of purchasing them.

Nevertheless, in the same year it expensed the USD 24,858.75 and deducted this amount (fair market value) as business costs for tax purposes. The defendant, which was the Commissioner, intervened and decreased the amount of deduction to USD 16,153.36 only, claiming that since the International Freighting Inc. paid the bonus out in stocks (property) the allowable deduction amount should not be more than the cost of the shares (the property) namely the USD 16,153.36. Furthermore, this triggered that the Commissioner calculated that International Freighting Inc. still owed USD 2,156.76 in taxes. However, the firm did not agree with this imposed tax liability by the Commissioner.

Therefore, this triggered that International Freighting Inc. went to the Tax Court, in order to determine the right amount of deduction. On the other hand, the Commissioner stated that the USD 24,858.75 could only be deducted as business expenses, if International Freighting Inc., were to pay income taxes on the earned gain of USD 8,705.39, as part of handing the stocks over to its workforce. In this way, the Tax Court agreed with the Commissioner and came down with the verdict that International Freighting Inc. can deduct the entire amount of USD 24,858.75 as business expenses, while at the same time, it must pay income taxes on the gain of USD 8,705.39 respectively, which it realized as part of awarding them to its employees as bonus payouts. Consequently, International Freighting Inc., or the taxpayer in this case, asked for this case to be reviewed by the Circuit Court, since it was not willing to pay the USD 2,156.76 in additional taxes, based on the difference between the cost of the stocks and the shares fair market value.

Issue:

Looking at this case, the question is whether or not, International Freighting Corporation, Inc., can deduct the fair market value of these stocks as business expenses for tax purposes, while at the same time, it has to pay income taxes for the actual realized gain, as part of awarding the shares to its employees (disposing them). Was it a gift or a compensation?

Rule:

The law or better § 111(a) of the Revenue Act of 1936, 26 U.S.C.A, provides the foundation that the realized gain is taxable income for International Freighting Inc., accordingly. Therefore, the Commissioner’s argument and the ruling from the Tax Court were correct. In other words, the gain is considered the amount realized as the “excess” over the adjusted basis as stipulated and further explained in § 113(a) and § 113(b). Therefore, the ruling of Circuit Judge Frank agreed with the Tax Court that the market value can be deducted, while at the same time the gain was subject to income taxes. This said Judge Frank argued it was not a “gift” but a compensation for these employees who received the Class B bonus awards.

Analysis:

The Circuit Judge Frank confirmed the Tax Court’s ruling that the payout of the bonus was not considered a gift, in the form of shares. Therefore, the market value can be deducted as businesses expenses, while at the same time, the realized gain, or the difference between the fair market value of the stocks and the costs of the stocks (purchasing price) is subject to income taxes payable by International Freighting Corporation. In fact, the Judge pointed out that the bonus payout was for “past services rendered” by the staff to the corporation, hence considered a compensation and not a gift. Therefore, the tax liability of USD 2,156.76 was justified.

Conclusion:

The Tax Court decided correctly, since applying § 111(a) of the Revenue Act of 1936, 26 U.S.C.A., it is clear that, if the “sale or other disposition of property” or in this case the stocks results into a realized gain, it is taxable. Consequently, International Freighting Corporation, Inc. had to pay income taxes on the USD 8,705.39, or the gain of the difference between the cost of the shares and the fair market value on the date of handing them over to its employees. Therefore, the USD 2,156.76 is a tax liability that International Freighting Corporation Inc., had to pay. Purchase answer to see full
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