Coffey v. Comm'r of Internal Revenue

• Decision Date: 12 February 1943
• Docket Number: Docket No. 105452.
• Citation: 1 T.C. 579
• Parties: R. C. COFFEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

1 T.C. 579

R. C. COFFEY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 105452.

Tax Court of the United States.

Promulgated February 12, 1943.

The taxpayer endorsed stock certificates for transfer to his minor children with the declaration, in the presence of a witness, that he was making a gift of the shares to the children. He kept the certificates in his possession, did not have the shares transferred to the children on the books of the corporations, and continued to receive the dividends on the shares for his own use, without any accounting to the children prior to the taxable year 1938. Held, that there were no valid gifts of the shares to the children. Frederick L. Pearce, Esq., for the petitioner.

F. L. Van Haaften, Esq., for the respondent.

This proceeding involves a deficiency of $29,171.28 in petitioner's income tax for 1938. The issues are:

(1) Whether petitioner is taxable on the dividends received by him in 1938 on shares of stock which he claims to have given to his minor children in prior years;

(2) Whether petitioner is entitled to deduction of amounts paid to his children in 1938 as interest for the use of the dividends which he received in 1937 on the shares, certificates for which were previously endorsed to them;

(3) Whether petitioner is taxable on dividends on shares of stock which he conveyed to certain trusts for the benefit of his minor children after the declaration of dividends on such shares but before the payment thereof. (This issue was conceded by the petitioner at the hearing); (4) Whether petitioner is entitled to the deduction of traveling expenses, automobile upkeep, telephone and telegraph, legal fees, and accounting fees paid out during the taxable year; and

(5) Whether petitioner is entitled to deduct the cost of operating a citrus grove on the premises of his residence in Florida.

FINDINGS OF FACT.

Petitioner is a resident of Orlando, Florida. He filed his income tax return for 1938 with the collector of internal revenue for the district of Florida.

Petitioner was born and received his early education in Prairie City, Iowa. He graduated from Iowa State College in 1905, specializing in mining engineering. After finishing college he spent several years in Colorado and Nevada and in 1911 went to Canada. Several years later he obtained a contract to build a reduction mill for the Lake Shore Mines, Ltd., at Kirkland Lake, Ontario. This work was completed about 1917 or 1918. Thereafter petitioner remained with the company until about 1925, first as mill superintendent and later as mine manager.

Early in 1925, following the death of his mother, petitioner returned to Prairie City, Iowa, to make a home for his father. During the year he made occasional trips to Canada and to points in the United States to look after his mining interests and to examine mining properties for possible investment therein. He also purchased other business properties in the United States.

In about 1926 petitioner began spending his winters in Florida. In 1937 he established a permanent residence at Orlando, Florida, where he still resides.

Petitioner is married and has three children, Robert George, born February 16, 1920; Anna Kathleen, born January 9, 1922, and Frances Alice, born June 7, 1926.

During his employment by Lake Shore Mines, Ltd., and prior to 1922, petitioner acquired a large number of shares of the common stock of that company. His holdings in 1921 amounted to about 45,500 shares. These shares were represented by a number of certificates issued in petitioner's name.

On October 10, 1922, petitioner endorsed certificate No. 3978 for 1,800 shares of Lake Shore Mines, Ltd., stock for transfer to his son Robert George, and certificate No. 1725 for 2,000 shares to his daughter Anna Kathleen. These endorsements were written in on the back of the certificates and the signatures were witnessed by Henkin Evans, a friend of petitioner and postmaster at Kirkland Lake, Ontario, Canada. Petitioner told Evans at the time that he was making gifts of the shares to the children.

On August 18, 1924, petitioner endorsed certificate No. 3662 of Lake Shore Mines, Ltd., stock for 1,000 shares for transfer to his son Robert George, and certificate No. 1654 for 1,000 shares to his daughter Anna Kathleen.

On January 14, 1925, petitioner endorsed certificate No. 1676 for 1,000 shares of the same stock for transfer to Robert George, and certificate No. 3769 for 1,000 shares to Anna Kathleen. At the time petitioner made these endorsements he was living at Prairie City, Iowa, and the endorsements were witnessed and signed by Richard Zaayer, a friend of petitioner's who also resided at Prairie City.

Prior to the time the certificates referred to above were endorsed for transfer they had been endorsed in blank by the petitioner for use as collateral for bank loans.

After endorsing certificates for the shares to his children as above noted petitioner kept them in his possession, and up to the close of the taxable year 1938 he had never submitted any of them to the transfer agent to the children on the books of the corporation. On one of his visits to Toronto in 1938 or 1939 petitioner presented the certificates to officers of the corporation and to the transfer agent for advice as to the effect of the endorsements, and he was told that when requested to do so they would transfer the stock to the children to whom the certificates were endorsed and to no one else.

On September 12, 1936, petitioner endorsed 10 certificates for 100 shares of Nipissing Mines Co., Ltd., and one certificate for 100 shares of Hollinger Consolidated Gold Mines for transfer to each of his daughters, Anna Kathleen and Frances Alice, and three certificates for 100 shares each of Hollinger Consolidated Gold Mines for transfer to his son Robert George. On September 15, 1937, petitioner endorsed three certificates for 100 shares each of Hollinger Consolidated Gold Mines for transfer to each of his three children. These endorsements likewise were all witnessed by Richard Zaayer, whom petitioner told at the time that he was making gifts of the shares to his children. After the endorsements were made petitioner kept all the certificates in his possession in a safe in his home with other securities belonging to him until after the close of the taxable year 1938.

During 1938 petitioner received dividends in the aggregate amount of $32,933 on the shares of stock represented by the certificates which he had previously endorsed for transfer to his children as stated above. He deposited all of these dividends in his personal bank accounts, one of which was in a bank in Canada, one in Prairie City, Iowa, and one in Orlando, Florida. The accounts at Prairie City and Orlando were joint accounts of petitioner and his wife.

Prior to 1938 petitioner made no segregation of these dividends from dividends received on other shares of stock which he owned, and kept no accounts on behalf of any of the children. He reported all such dividends in his personal income tax returns.

Early in 1938 petitioner engaged an accountant to assist him in straightening out his affairs, open a set of books for him, and prepare his income tax returns. In the course of his work the accountant discovered the stock certificates bearing the endorsements for transfer to petitioner's children and advised the petitioner that in his opinion the dividends on those shares belonged to the children and were erroneously reported by the petitioner in his income tax returns. The accountant asked the advice of attorneys about the matter and they confirmed his opinion. Accordingly he prepared an amended return for the petitioner for 1937, eliminating the dividends in question, and also prepared returns for the two oldest children, Robert George and Anna Kathleen, for 1937, in which he reported the dividends received in that year on the shares represented by the certificates which had been endorsed to them. These returns were duly executed and filed. Petitioner's amended return for 1937 showed a reduction in tax of approximately $29,000. The accountant also prepared returns for petitioner and his children for 1938 on the same basis, omitting from petitioner's return for that year the dividends in controversy in this proceeding, amounting to $32,933.

Consonant with his theory that the dividends paid on the shares of stock previously endorsed for transfer to the children belonged to them and not to the petitioner, the accountant prepared, and had petitioner sign, promissory notes payable to each of the children for the amount of the dividends found to be due them. There were two notes made payable to each child, one representing the dividends received on the shares prior to 1937 and the other the dividends received during 1937. The notes made payable to Robert George were, respectively, for $95,169.10 and $22,215.75; those payable to Anna Kathleen, $100,016 and $23,385.25; those payable to Frances Alice, $584.25 and $38. The notes were all dated October 31, 1938, and bore interest at the rate of 8 percent per annum. Petitioner signed the notes and put them away in his safe at his residence in Orlando in boxes separately kept for each child, which also contained other properties belonging to the children. No payment of principal has ever been made on any of the notes and no interest was paid on any of them up to December 31, 1938. The interest item which petitioner deducted in his 1938 return, and which is in controversy in this proceeding under issue (2), amounting to $4,462.44, was the interest computed to October 31, 1938, on the dividends received by the petitioner in 1937 on shares of stock certificates for which had been endorsed for transfer to the children. It did not represent interest on the notes themselves. It was paid by checks issued by petitioner to each of the children, dated October 31, 1938, in amounts as follows:

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