Gilman v. Commissioner of Internal Revenue
| Decision Date | 21 February 1930 |
| Docket Number | Docket No. 22659. |
| Citation | 18 BTA 1277 |
| Parties | W. S. GILMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
K. S. Finlayson, Esq., for the petitioner.
A. H. Murray, Esq., for the respondent.
The respondent asserts deficiencies for the years 1922 and 1923 in the respective amounts of $7,391.57 and $392.47. The petition herein alleges nine errors by respondent in computing the deficiencies in question. At the hearing petitioner, by stipulation, abandoned all allegations of error except those designated (a) and (b), and in such stipulation the respondent confessed error as to (b). The only issue presented to the Board is whether the respondent erroneously disallowed certain amounts paid to petitioner's wife and children in each of the taxable years as deductions from gross income on account of interest paid in such respective years.
FINDINGS OF FACT.
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 Lyon 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 a 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 safe-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, ($144,000.00), 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 payees 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 parties have stipulated that the profit realized from the petitioner's sale of certain property in the year 1922 was $2,500 instead of $5,000, and that the profit realized from the sale of certain property in 1923 was $15,000, instead of $11,488.71, as asserted by the respondent in the deficiency notice. Effect of this stipulation should be reflected in the recomputation under Rule 50 of any tax liability for such year.
The single issue submitted to the Board is whether certain payments by the petitioner to his wife and children in each of the taxable years, in the circumstances set forth in our findings of fact, are deductible from gross income under the provisions of section 214 (a) (2) of the Revenue Act of 1921, which is as follows:
(a) That in computing net income there shall be allowed as deductions:
* * * * * * *
(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.
The petitioner contends that the effect of the assignment by gift of certain interests in the twelve contracts for the sale of land was to pass absolute title to such property to the petitioner's wife for herself and as trustee for the three children in the year 1919. If this is true, he argues that it follows that the notes given in 1920 were for consideration equal to the value of the interests reacquired by his wife's surrender and their mutual agreement to cancel the assignments.
It is obvious that we must first consider and determine whether the assignments here involved transferred the...
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