{
  "id": 8527358,
  "name": "RUDOLPH C. STONE and AUDREY L. STONE v. MARK G. LYNCH, SECRETARY OF THE DEPARTMENT OF REVENUE",
  "name_abbreviation": "Stone v. Lynch",
  "decision_date": "1984-05-15",
  "docket_number": "No. 8310SC451",
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    "judges": [
      "Judges Webb and EAGLES concur."
    ],
    "parties": [
      "RUDOLPH C. STONE and AUDREY L. STONE v. MARK G. LYNCH, SECRETARY OF THE DEPARTMENT OF REVENUE"
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      {
        "text": "BECTON, Judge.\nWe must decide in this case whether union strike benefits are taxable as income to the recipient under North Carolina law, or whether they qualify as a gift, thereby allowing the taxpayer to exclude them from taxable income. We reverse the trial court, and we hold that the benefits constitute a gift and that plaintiff taxpayers are entitled to a refund on income tax paid on strike benefits.\nI\nThe Communications Workers of America (CWA) organized a local in early 1979 at plaintiff Rudolph Stone\u2019s place of employment. Plaintiff joined CWA in September, 1979, and several weeks later the local went out on strike. The strike lasted about eight weeks, ending on 29 November 1979. Although it had no legal obligation to do so, CWA provided financial assistance to the strikers, including plaintiff. CWA made these payments, based on need, from information supplied by the strikers. During the strike, plaintiff received $1,879.95 in benefits, for groceries, utilities, household, medical, and other expenses. On his tax return for 1979, plaintiff reported the $1,879.95 as \u201cnon-taxable\u201d income, based on information from CWA that it considered the benefits a gift to him. The Department of Revenue subsequently notified plaintiff that it considered the benefits taxable income. Plaintiff paid the deficiency and sued for a refund; from an order denying relief, he appeals.\nII\nThe definition of gross income under the North Carolina law is very broad. See N.C. Gen. Stat. \u00a7 105441(a) (Supp. 1983). However, the law provides certain exceptions, including the following exclusion pertinent to this case: \u201cThe words \u2018gross income\u2019 do not include the following items, which shall be exempt from taxation under this Division .... (3) The value of property acquired by gift, bequest, devise or descent. . . .\u201d N.C. Gen. Stat. \u00a7 105441(b) (Supp. 1983). Each side urges a differing construction of the word \u201cgift.\u201d How we define that statutory term will decide the outcome of this case.\nPlaintiff argues that North Carolina law should supply the rule of decision, and that the definition of gift should be that used in Foreman Mfg. Co. v. Johnson, Comm\u2019r of Revenue, 261 N.C. 504, 135 S.E. 2d 205 (1964). The State takes a contrary view and argues that the trial court correctly applied the federal standard, which allows a significantly narrower exclusion under virtually identical statutory language. See 26 U.S.C. \u00a7 102(a) (1982); Comm\u2019r v. Duberstein, 363 U.S. 278, 4 L.Ed. 2d 1218, 80 S.Ct. 1190 (1960). When North Carolina and federal statutes contain identical language, federal interpretations are instructive to supplement North Carolina decisions. See Love v. Pressley, 34 N.C. App. 503, 239 S.E. 2d 574 (1977), disc. rev. denied, 294 N.C. 441, 241 S.E. 2d 843 (1978). This applies especially to income taxation law in which the North Carolina decisions are few by comparison and the state and federal systems are closely interrelated. Our courts have relied heavily on federal tax decisions in the past, as, for example, in the Foreman case itself.\nNevertheless, we believe that when North Carolina\u2019s appellate courts have supplied rules of decision, those must control. Our Supreme Court has expressly rejected arguments that federal decisions, even those interpreting identical language, control the courts of this State in the interpretation of state law. Bulova Watch Co. v. Brand Distributors, Inc., 285 N.C. 467, 206 S.E. 2d 141 (1974). An examination of the North Carolina income tax statutes supports our conclusion. The General Assembly has specifically provided at numerous places therein that the State shall follow federal practice. See N.C. Gen. Stat. \u00a7 105-141(b)(9), (10), (17), (19), (23) (Supp. 1983) (exclusions from gross income); N.C. Gen. Stat. \u00a7 105444(b) (Supp. 1983) (definition of gain and loss); N.C. Gen. Stat. \u00a7 105445(e) (Supp. 1983) (like kind exchanges); N.C. Gen. Stat. \u00a7 105447(8), (16), (20) (Supp. 1983) (deductions). The absence of such language in G.S. \u00a7 105441(b)(3) leads to the inference that, by exclusion, the legislature intended federal practice not to control it. See State ex rel. Hunt v. Reinsurance Facility, 302 N.C. 274, 275 S.E. 2d 399 (1981) (applying maxim \u201cexpressio unius est exclusio alterius\"). It is true that N.C. Gen. Stat. \u00a7 105442(a) (1979) provides that accounting methods selected by the State \u201cshall follow as nearly as practicable the federal practice. . . .\u201d This provision, however, does not mandate use of federal accounting practices. See Watson v. Watson Seed Farms, Inc., 253 N.C. 238, 116 S.E. 2d 716 (1960) (use of federal practice permitted); In re Virginia-Carolina Chem. Corp., 248 N.C. 531, 103 S.E. 2d 823 (1958) (similar; policy explained). And our Supreme Court has held that G.S. \u00a7 105442(a) does not authorize any deductions not specifically authorized by North Carolina statute, In re Fleishman, 264 N.C. 204, 141 S.E. 2d 256 (1965), nor does it require use of federal tax treatments. State ex rel. Comm\u2019r of Revenue v. Speizman, 230 N.C. 459, 53 S.E. 2d 533 (1949). Classification of certain payments as gifts does not appear to be an \u201caccounting method.\u201d See 26 U.S.C. \u00a7 446 (1982); Black\u2019s Law Dictionary 18 (5th ed. 1979). We, therefore, hold that G.S. \u00a7 105442(a) (1979) does not apply and that federal law, while instructive, does not provide the rule of decision.\nWe turn then to the only North Carolina case which has construed G.S. \u00a7 105441(b)(3) (Supp. 1983), Foreman. In Foreman, an officer-stockholder of a corporation forgave a $70,000 debt owed him by the corporation. The corporation sued for a refund of taxes assessed on the forgiveness of debt, and the Supreme Court ruled that the forgiveness constituted a contribution to capital, which was, under the tax circumstances of the case, the equivalent of a gift. The Foreman Court ruled:\nThe value of property acquired by gift is excluded from both State and Federal income tax. G.S. 105441(b)(3); Int. Rev. Code of 1954 \u00a7 102. A gift is usually defined as a voluntary transfer of property by one to another without any consideration therefor. Theoretically, a contribution by a stockholder increases the resources of the corporation and the value of all the stock, including his own, proportionately. This business aspect removes such a transaction from the concept of a pure gift. However, such a gift to a corporation necessarily constitutes a gift to the other stockholders.\nIn American Dental Co., . . . the Supreme Court held that the gratuitous release by creditors of accrued rent and interest on merchandise purchased constituted a gift to the corporation which was not subject to income tax. The court said: \u2018The fact that the motives leading to the cancellation were those of business or even selfish, if it be true, is not significant. The forgiveness was gratuitous, a release of something to the debtor for nothing, and sufficient to make the cancellation here gifts within the statute.\u2019 [Citation omitted.] The creditors-donors in American Dental Co. were not stockholders. When a creditor who is a stranger to the corporation forgives its debt to him, the forgiveness is exempt from income tax under the exclusion of gifts. When a stockholder gratuitously cancels the debt the corporation owes him, the transaction is denominated a contribution to capital. [Citations omitted.]\nWe hold that the forgiveness of the debt in question constituted a contribution to the capital of the plaintiff corporation and was therefore not taxable income.\n261 N.C. at 507, 135 S.E. 2d at 208 (quoting Helvering v. American Dental Co., 318 U.S. 322, 331, 87 L.Ed. 785, 791, 63 S.Ct. 577, 582 (1943)).\nOf importance to the present case is the Foreman Court\u2019s reliance on the cited language from American Dental Co. By adopting the language that business or selfish motives are insignificant in determining classification as a gift, and by focusing solely on the legal obligations of the donor, the Court effectively rejected, for North Carolina income tax purposes, the test adopted by the United States Supreme Court in Duberstein, some four years before Foreman. The Duberstein Court looked beyond the legal and moral obligations of the parties to the donor\u2019s intent to recompense the donee for past services or to induce future beneficial services. The Duberstein Court found a clear distinction between the traditional meaning of \u201cgift\u201d and its definition under the tax statutes. The holding in Foreman, on the other hand, means that for North Carolina income tax purposes the definition of gift remains what it was at common law: \u201ca voluntary transfer of property by one to another without any consideration therefor.\u201d Id. at 507, 135 S.E. 2d at 208; Ex parte Barefoot, 201 N.C. 393, 160 S.E. 365 (1931).\nWe now apply the foregoing test to the facts of this case. It is unquestioned (a) that the benefits were property, (b) that they were voluntarily transferred by CWA, and (c) that the transfer was to another \u2014 that is, to plaintiff. The crucial element therefore becomes whether there was any consideration for the transfer. The trial court found as fact that \u201cUnion assistance was based upon moral obligation.\u201d (Emphasis added.) Plaintiff performed certain strike duties; the court found that \u201cPlaintiff was morally obliged to perform strike duties.\u201d Both parties concede that these findings are conclusive. The trial court did not find that CWA had any legal obligation of any kind to pay benefits, or that there was any other consideration for their payment. We find nothing in the record supporting such a conclusion.\nTherefore, the only possible consideration for the payment of the benefits was the moral obligation owed by CWA to plaintiff and plaintiffs moral obligation to participate in strike duties. It is firmly settled, however, that except in cases of consanguinity or similar relationship, or when there is some antecedent debt or legal obligation, a moral obligation alone does not constitute consideration. See Carolina Helicopter Corp. v. Cutter Realty Co., 263 N.C. 139, 139 S.E. 2d 362 (1964); Cruthis v. Steele, 259 N.C. 701, 131 S.E. 2d 344 (1963); Exum v. Lynch, 188 N.C. 392, 125 S.E. 15 (1924); see also Restatement (Second) of Contracts \u00a7\u00a7 71-73 (1981); 17 C.J.S. Contracts \u00a7 90 (1963); 38 C.J.S. Gifts \u00a7 7 (1943); 17 Am. Jur. 2d Contracts \u00a7\u00a7 130-133 (1964); 38 Am. Jur. 2d Gifts \u00a7\u00a7 1-2 (1968). No special relationship exists between these parties, and we discern no antecedent obligation or agreement which would cause the moral obligation to become sufficient consideration. We therefore hold that the benefits were a gift by CWA to plaintiff and thus properly excludable from plaintiffs taxable income for 1979. G.S. \u00a7 105441(b)(3) (Supp. 1983).\nThe State makes much of the fact that CWA\u2019s payments to plaintiff exceeded what plaintiff should have received under CWA\u2019s own needs guidelines. Under Foreman, however, the amount paid appears irrelevant: if anything, the excessive payments underscore the gratuitous nature of the benefits, since nothing \u201cextra\u201d was required of plaintiff in exchange for the overage. We also note in passing that even under federal law, the most recent action of the United States Supreme Court was to uphold a verdict that strike benefits are excludable from income. United States v. Kaiser, 363 U.S. 299, 4 L.Ed. 2d 1233, 80 S.Ct. 1204 (1960).\nThe judgment of the court below must therefore be reversed, and the case remanded for entry of judgment in favor of plaintiff.\nReversed.\nJudges Webb and EAGLES concur.\n. Plaintiff Audrey Stone received no taxable income during the tax year in question. She is only a nominal party to this action.",
        "type": "majority",
        "author": "BECTON, Judge."
      }
    ],
    "attorneys": [
      "Smith, Patterson, Foll\u00edn, Curtis, James & Harkavy, by J. David James, for plaintiff appellants.",
      "Attorney General Edmisten, by Special Deputy Attorney General Myron C. Banks, for the State."
    ],
    "corrections": "",
    "head_matter": "RUDOLPH C. STONE and AUDREY L. STONE v. MARK G. LYNCH, SECRETARY OF THE DEPARTMENT OF REVENUE\nNo. 8310SC451\n(Filed 15 May 1984)\n1. Taxation \u00a7 28\u2014 union strike benefits \u2014 income or gift \u2014 what law applies\nThe statute providing that accounting methods selected by the State \u201cshall follow as nearly as practicable the federal practice,\u201d G.S. 105-142(a), does not apply to a decision as to whether union strike benefits constitute income or a gift under North Carolina law; nor does federal law provide the rule of decision.\n2. Taxation \u00a7\u00a7 27, 28\u2014 union strike benefits \u2014 income or gift\nUnion strike benefits constitute a gift to the recipient under North Carolina law and were thus properly excludable from the recipient\u2019s taxable income where the union assistance was based upon a moral rather than a legal obligation.\nAppeal by plaintiffs from Farmer, Judge. Judgment entered 17 December 1982 in Superior Court, Wake County. Heard in the Court of Appeals 9 March 1984.\nSmith, Patterson, Foll\u00edn, Curtis, James & Harkavy, by J. David James, for plaintiff appellants.\nAttorney General Edmisten, by Special Deputy Attorney General Myron C. Banks, for the State."
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