Galt v. Commissioner of Internal Revenue
| Decision Date | 11 October 1954 |
| Docket Number | 11001.,No. 10987,10987 |
| Citation | 216 F.2d 41 |
| Parties | GALT v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Gerhard E. Seidel, Owen Rall, Walter W. Ross, Jr., Chicago, Ill., Eckert, Peterson & Lowry, Chicago, Ill., Tim G. Lowry, Elroy C. Sandquist, Jr., Chicago, Ill., of counsel, for Galt.
H. Brian Holland, Asst. Atty. Gen., Harry Marselli, Attorney, Tax Division, Washington, D. C., Ellis N. Slack, Lee A. Jackson, Sp. Assts. to Atty. Gen., for Commissioner of Internal Revenue.
Before MAJOR, Chief Judge, and DUFFY and SCHNACKENBERG, Circuit Judges.
Arthur T. Galt, petitioner (sometimes referred to as the taxpayer), petitions for a review of two separate decisions of the Tax Court, entered May 22, 1953, in which it was decided in Tax Court Docket No. 27,844 that there was a deficiency in petitioner's gift tax for the year 1946, in the amount of $768.84, and in Tax Court Docket No. 29,528 that there was a deficiency in petitioner's income tax for the same year in the amount of $68,318.17. Respondent, Commissioner of Internal Revenue, had asserted a deficiency in gift taxes for the year 1946 in the amount of $68,079.00, and a deficiency in income taxes in the amount of $69,622.52. Petitioner sought from the Tax Court a redetermination of the deficiencies asserted by the Commissioner, which resulted in the aforesaid decisions by the Tax Court. The two proceedings were consolidated for hearing before the Tax Court and they are presented likewise here. Respondent has abandoned a cross-petition to review the Tax Court's decision in the gift tax case.
Preliminary to a statement of the contested issues, we think it appropriate to make a statement of the facts, about which there is little, if any, dispute and, in the view which we take of the legal issues presented, as subsequently disclosed, we think this statement may be brief as compared to the extensive findings entered by the Tax Court.
Petitioner, in 1922, acquired certain real estate (sometimes referred to as the "Fair Grounds" property), situated near Maywood, Illinois, a suburb of Chicago. From that time until 1946, the property was used for numerous purposes, with the income derived by the taxpayer little, if any, more than sufficient to pay the real estate taxes. In 1939, the property was leased to the Cook County Fair Association which improved the property by the construction of a track for harness races and a grandstand and other permanent improvements for the accommodation of spectators. This venture was unsuccessful and taxpayer continued to receive little, if any, net income. In July, 1945, the State of Illinois legalized pari mutuel harness racing in Illinois and on February 26, 1946, petitioner entered into a twenty-year lease with Maywood Park Trotting Association, Inc., as lessee (sometimes referred to as Maywood Park). The lease covers fifteen pages of the printed record and contains forty-six sections.
At this point, we think it material to relate only a portion of Secs. 1, 2 and 4. After providing that the lessee was to have and hold the property from January 2, 1946 until the 31st day of December, 1965, Sec. 1 provided that the lessee, in consideration of the demise, covenanted and agreed to pay the lessor as rent for said demised premises the sum of seven hundred thousand dollars ($700,000), at the rate of thirty-five thousand dollars ($35,000) per year, with the first annual rental payable July 1, 1946, and thereafter the annual rental was to be paid in advance on January 2 of each and every year of the term of the lease. This annual rental was characterized as "the guaranteed fixed rental." Sec. 2 provided that the lessee, in addition to the guaranteed fixed rental provided in Sec. 1, pay the lessor the following sums:
"One per centum of the First Ten Million ($10,000,000) Dollars wagered on said premises in any one calendar year and * * * two per centum on all amounts wagered in excess of Ten Million ($10,000,000) Dollars in any one calendar year."
Sec. 4 provided:
Arthur T. Galt, Jr., Raymond M. Galt and William C. Galt, named in Sec. 4 of the lease, at the time of its execution were adults. On February 26, 1946 (the same date on which the lease was executed), petitioner delivered to each of the three named sons a letter which, after reciting facts with reference to the execution of the lease, stated in part as follows:
During 1946, the percentage rental provided in Sec. 2 of the lease amounted to $39,873.05, of which $15,949.22 (40%) was paid to petitioner and $7,974.61 (20%) to each of the three sons, as designated in the lease. Maywood Park, on October 22, 1946, made payment to each of the sons by its check, in which each was named as payee. A letter accompanying each check stated that the money thus paid "is your share under the terms of the lease." These checks were endorsed by the sons, deposited in their respective bank accounts and reported in their separate income tax returns as income. Petitioner in his federal income tax return for 1946 reported as rental income received from Maywood Park in that year in the amount of $50,949.22 ($35,000, the guaranteed rental, plus $15,949.22, 40% of the percentage rental). He did not report any of the amounts paid by Maywood Park to his sons.
As noted, the Commissioner determined a deficiency of $69,622.52 in taxpayer's income tax for 1946, which resulted in part from inclusion in his income of the aggregate of $23,923.83, received during that year by the sons as rental from Maywood Park. The Tax Court reduced the deficiency to $68,318.17, which also resulted in part from inclusion in petitioner's income of the amounts thus received by the sons.
Petitioner filed a federal gift tax return for the year 1946, and in a schedule attached showed that on February 26, 1946, he made a gift to his sons of 60% of sums that might become due under the provisions of Sec. 2 of the lease dated February 26, 1946. The schedule stated that the percentages to be received by the sons were contingent and uncertain and of no value. Each of the sons filed a donee's information return of gifts which stated that the gifts were received on February 26, 1946, and that they had no value.
The Commissioner determined a deficiency in petitioner's gift tax for 1946 in the amount of $68,079.00, and in a memorandum attached to his deficiency notice stated:
"The value of 60% of the income under the percentage clause of the twenty year lease with Maywood Park Trotting Association, Inc., given to the donor\'s three sons is held to be $337,500.00 on the basis of information now of record, or in the alternative the gift to the three sons in 1946 is the 60% of the percentage income, or $23,923.83, the amount paid in to the sons under the lease."
The Commissioner's assertion of a deficiency based upon a valuation of $337,500.00 rested on the premise that petitioner made a gift to his sons on February 26, 1946 (the date of the execution of the lease), but the record contains no information as to the manner or means by which that amount was ascertained other than that stated in the deficiency notice, that it was "on the basis of information now of record."
The Tax Court sustained the income tax deficiency asserted by the Commissioner by including, as did the Commissioner, in petitioner's income for 1946 the sum of $23,923.83, paid by Maywood Park to the three sons. (Other amounts of income which enter into the deficiency found by the Tax Court are not here involved.) Thus, one of the contested issues is whether the Tax Court correctly decided that the rental payments made by Maywood Park to the three sons in the year 1946 were includible in petitioner's income for that year.
At the inception of the hearing before the Tax Court, the Commissioner shifted his position on the gift tax issue by disclaiming the theory on which his deficiency had been asserted, that...
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