Gilman v. Commissioner of Internal Revenue

• Citation: 53 F.2d 47
• Decision Date: 14 October 1931
• Docket Number: No. 8998.,8998.
• Parties: GILMAN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

53 F.2d 47 (1931)

GILMAN v. COMMISSIONER OF INTERNAL REVENUE.

No. 8998.

Circuit Court of Appeals, Eighth Circuit.

October 14, 1931.

Kenneth S. Finlayson, of Omaha, Neb. (Edward R. Burke and Finlayson, Burke & McKie, all of Omaha, Neb., on the brief), for petitioner.

William Cutler Thompson, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key and J. P. Jackson, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and De Witt M. Evans, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before KENYON and VAN VALKENBURGH, Circuit Judges, and DAVIS, District Judge.

DAVIS, District Judge.

This case is brought here by a petition to review a decision of the Board of Tax Appeals finding additional income and profit taxes due from petitioner for each of the years of 1922 and 1923. The assessment of the additional tax resulted from the disallowance of deductions of $14,400 claimed to have been payments of interest in each of those years.

The petitioner is a resident of the city of Sioux City, in the state of Iowa. In the year 1918, he purchased a considerable area of farm lands in Iowa and Nebraska, from two large eastern estates, for a consideration in excess of $1,000,000, paid thereon about $150,000, and gave back mortgages for the remainder of the purchase price. In the year 1919, he resold a large part of the lands so purchased, receiving certain cash payments from each of the vendees and notes secured by mortgages for the unpaid balances. Each such sale was based on and evidenced by a written contract specifying the cash payment, the amounts and due dates of the deferred payments, and the amounts and due dates of interest accruing thereon.

In December, 1919, the petitioner made a written assignment to his wife relating to certain payments provided for in each of twelve of the sales contracts above described. The principal amounts of the payments designated in such assignments aggregated $240,000. Each of the twelve assignments so made specified certain of the principal payments of each of the sales contracts. One of the assignments, typical of all, related to petitioner's contract to sell 320 acres of land in Lynn county, Iowa, to Chauncey W. Pitts, for a total consideration of $72,000. That contract provided for a down payment of $7,200, for five annual payments of $3,600 each, and for a final payment of $46,800. As part of the purchase price paid for the land in 1918, the petitioner had assumed a mortgage in the amount of $18,000. Of the deferred payments provided in this contract, the petitioner's assignment involved the amount of $46,800. The twelve assignments were delivered to the petitioner's wife, together with copies of the contracts, and were kept by her in her own safety deposit box at a bank.

The written assignments in each instance were made to the petitioner's wife with the understanding that one-half the total value thereof was for her personal use and that she was to hold the remainder for the benefit, in equal shares, of the three children of petitioner and his wife. In the year 1919, petitioner's wife received the amount of $14,400 on account of such assignment, of which she retained $7,200 for her own use and paid over $7,200 in equal shares to each of the three children. None of the amounts so received by the petitioner's wife represented principal payments under the contracts in which an interest was assigned to her, and, if derived from collections on such contracts, all were first received by petitioner, entered on his books as credits to his wife, and thereafter deposited in her bank account, where it was subject to her check.

In the year 1920, the economic situation of agriculture in the Middle West became quite unsatisfactory to farmers and the owners of farm land. The prices of grain, live stock, and other farm products declined very materially, and the market values and salability of farm lands were greatly reduced as a result thereof. In this situation many of the purchasers of the lands sold by Gilman in 1919 were unable to meet their contractual obligations. In this situation, with a double set of mortgages, one running in favor of the petitioner and the other against him, he thought it best to reassume all the interest in the sales contracts that he had relinquished by assignment to his wife. On December 31, 1920, the petitioner's wife returned the assignments to him, and on that date he made four 30-year notes to his wife and their children in the respective amounts of $144,000, $48,000, $48,000, and $48,000, with interest payable annually at the rate of 5 per cent. All such notes, except as to payees and amounts, in words and figures were as follows:

"Promissory Note.

"On or before thirty years after date, for value received, I promise to pay to the order of Marjorie King Gilman, One Hundred Forty-four Thousand and 00/100 Dollars ($144,000), with interest at Five (5%) per cent per annum, payable annually from date.

"This note is given in exchange for certain securities which I turned over to the payee and which have now been returned to me.

"This note is payable only to the payee, is not assignable or transferable, is non-negotiable, and may not be pledged for any debts, and in case of the death of said payee, said note is to be void.

"Dated at Sioux City, Iowa, this 31st day of December, A. D. 1920.

"Signed W. S. Gilman."

Since the issue of the notes above described, the petitioner has annually paid his wife and children 5 per cent. of the principal, and the amounts so paid have been deposited in the general bank accounts of the payee subject to their use. Petitioner's wife has used some of the money so received for the payment of household expenses, but has not been restricted in the use thereof by any agreement with her husband.

In his income tax returns for each of the taxable years, the petitioner deducted the amounts paid as stated above from his gross income as interest paid. Upon audit, the Commissioner disallowed such deductions and restored the amounts thereof, $14,400 in each year, to taxable income. Since the notes were issued, the wife and children of the petitioner have made separate income tax returns, and each has included in gross income the amounts received from the petitioner on account of the notes in question.

The single question presented is whether or not the payments made by petitioner to his wife and children in...