Greer v. United States, 18218.

• Decision Date: 21 March 1969
• Docket Number: No. 18218.,18218.
• Citation: 408 F.2d 631
• Parties: John L. GREER, Sr., and wife, Russell Z. Greer, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

408 F.2d 631 (1969)

John L. GREER, Sr., and wife, Russell Z. Greer, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 18218.

United States Court of Appeals Sixth Circuit.

March 21, 1969.

Jackson C. Kramer, and David E. Rodgers, Knoxville, Tenn., for appellants; Kramer, Dye, Greenwood, Johnson & Rayson, Knoxville, Tenn., of counsel.

Richard C. Pugh, Atty., Dept. of Justice, Washington, D. C., for appellee; Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Myron C. Baum, Carolyn R. Just, Attys., Dept. of Justice, Washington, D. C., on brief; John H. Reddy, U. S. Atty., Knoxville, Tenn., of counsel.

Before EDWARDS and COFFIN,^* Circuit Judges, and CECIL, Senior Circuit Judge.

CECIL, Senior Circuit Judge.

The plaintiffs-appellants, John L. Greer, Sr., and his wife, Russell Z. Greer, brought this action in the District Court against the United States for a refund of income taxes, in excess of $37,000, alleged to have been illegally assessed and collected. Mrs. Greer is a party only because she signed joint income tax returns with her husband for the tax years in question. For this reason we will refer to Mr. Greer alone as the taxpayer.

At the time this cause of action arose, and for several years prior thereto, the taxpayer was, in addition to his bakery business, engaged in the business of racing, breeding and raising thoroughbred race horses. In the course of this business two separate transactions occurred which give rise to the questions presented on this appeal.

The first of these transactions involves the transfer by the taxpayer of a portion of his one-third interest in a race horse known as Ridan. A Mr. E. H. Woods, Mrs. Moody Jolley, wife of the taxpayer's trainer, and the taxpayer purchased Ridan in 1960, for eleven thousand dollars ($11,000), the taxpayer's share being $3,666.67. After the horse was trained and began racing, he won his first four races. In these races he earned $18,050 for his owners, netting above expenses $1,766.28 each.

Mr. Greer's grandson, John L. Greer III, had displayed an interest in his grandfather's racing business and in June or July of 1961 called his grandfather seeking to purchase an interest in Ridan. After some negotiations, handled by Mr. Greer's son William, a racing interest in 1/15 of the horse, or 1/5 of Mr. Greer's share was sold to each of Mr. Greer's grandsons, John III and Ernest Russell, aged ten and five years, respectively. The consideration, which was in fact paid to the taxpayer, was $550 from each grandson. The sale was of a racing interest only, which carried with it the responsibility for sharing the expense of maintenance and the privilege of sharing the income, both proportionately, according to the respective interests. The interest of the grandsons would terminate whenever, for any cause, Ridan was through racing. It is not uncommon in the racing business to sell the racing interests separately from the breeding and other interests.

Except for the assignment of the two-fifths racing interest, the taxpayer retained his entire one-third interest in Ridan, including the breeding rights, rights to nomination awards and the salvage value of the horse. The horse remained in the custody of his trainer, Mr. Leroy Jolley, son of Mrs. Jolley, one of the co-owners. The trainer made all decisions as to when the horse would race and where. Mrs. Jolley kept the books with respect to expenses and earnings, paid the expenses and remitted one-third of the net profit to the taxpayer. The earnings were more than enough to pay the maintenance of Ridan and the grandsons did not have to pay anything out of their pockets for his support. Mrs. Jolley did not know of the grandsons' interest in the horse.

On the date of the assignment of the taxpayer's two-fifths racing interest to his grandsons, Ridan was the unanimous favorite to win the Arlington Futurity at the Arlington Park Race Track in Chicago, which was scheduled to be run three days later. Ridan won this race and a purse of $127,050 for his owners. He earned for his owners a total of $284,050 in 1961, $311,477.75 in 1962 and $34,130 in 1963. In February 1963, he sustained a leg injury and had to be retired from racing. During his racing career, he earned for his owners $629,657.75. Following his racing career, Ridan had a substantial value to his owners for breeding purposes but we are not concerned with that here.

The grandsons' interest in the horse was completely extinguished with the injury in February of 1963. They received from the earnings of Ridan the aggregate sum of $26,141.60 in 1961 and $27,194.38 in 1962. They filed income tax returns for the years of 1961 and 1962 and paid total taxes in the amount of $13,199.42. The taxpayer's son William received and invested the grandsons' money for them.

Mrs. Jolley testified that she was offered $250,000 for Ridan prior to the date of the assignment to the grandchildren. Also prior to the date of the assignment Ridan was insured for $100,000. Beginning July 29, 1961 this insurance was increased in successive steps from $100,000 to $200,000, to $300,000, to $500,000, and finally to $700,000 on February 5, 1963.

The facts as above outlined are not in dispute. The collector of internal revenue made deficiency assessments against the taxpayer of $17,401.53 for the year 1961 and $14,866.05 for the year 1962. Part of the assessment for the year 1962 was for a separate transaction which we will discuss later. The basis of the assessments was that the taxpayer retained the income producing property and assigned only a portion of the income without adequate consideration. The taxpayer paid the deficiencies and brought this action in the District Court for refund. A trial before a jury resulted in a verdict for the taxpayer. The trial judge then granted defendant's motion for judgment notwithstanding the verdict, in an opinion reported at 269 F. Supp. 801, and the taxpayer appealed.

There is a rebuttable presumption that the taxes were legally assessed and collected. The burden is upon the taxpayer to prove that they were illegally assessed. Niles Bement Pond Co. v. United States, 281 U.S. 357, 50 S.Ct. 251, 74 L.Ed. 901; United States v. Rindskopf, 105 U.S. 418, 26 L.Ed. 1131.

A taxpayer cannot retain the ownership of income producing property and legally assign or give away a portion of the income only therefrom, and escape taxation thereon. In Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, the Court held that where a taxpayer gave away the interest coupons from bonds before they were due he gave away only the income and not the income producing property and that he was therefore liable for the tax on the income from the coupons as earned income from the income producing property. See also, Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731; Commissioner of Internal Revenue v. P. G. Lake, Inc., 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743; Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L. Ed. 898; Harrison v. Schaffner, 312 U.S. 579, 61 S.Ct. 759, 85 L.Ed. 1055; Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81; Austin v. Commissioner of Internal Revenue, 161 F.2d 666 (C.A.6), cert. den. 332 U.S. 767, 68 S.Ct. 75, 92 L.Ed. 352; Friedman v. Commissioner of Internal Revenue, 346 F.2d 506 (C.A.6). If a taxpayer is vested with the right to receive the income he cannot escape the tax on this income by any sort of anticipatory arrangement.

The question here is whether the taxpayer made a bona fide sale of a portion of the income producing property, or whether because of an inadequate consideration the assignment was of the income only.

We come now to the question of the adequacy of the consideration. If it is wholly inadequate, as we conclude that it is, it would, in effect, amount to retaining ownership of the income producing property and assigning the income therefrom. Under such circumstances the taxpayer would be liable for the tax on the entire income.¹ The facts of this case seem to us most analogous to the gift of bond coupons in Helvering v. Horst, supra, i. e., a transfer only of income.

The government argues:

"If the consideration paid by the children had been equal to the fair value of the income interests transferred to them, then this consideration — representing the value of the income rights transferred — would have been taxable in full to the taxpayer and there would be no need to invoke assignment of income principles to prevent tax avoidance through the shifting of the income."

The taxpayer returned for income tax purposes the $1,100 he received as consideration for the transfers. It was recited in the transfers that the consideration of $550 represented the depreciated book value in the hands of the taxpayer of a one-fifteenth interest in Ridan, based on his cost of $3,666.67.

It is obvious from the undisputed facts that Ridan had not depreciated in value from the time of purchase to the date of the transfer of the racing interests to the grandsons. He was only a year old at the time of the purchase. At the time of the transfer he had been schooled and trained for racing, had won the first four races in which he was entered and was insured for $100,000. Much time and money had been spent on him for schooling and training, the expense of which was borne by his owners. In addition an offer of $250,000 had been made for him. Although the taxpayer claims that he did not know of this offer, he certainly knew of the increasing value of the horse. The fact that the insurance was stepped up successively from $100,000 to $700,000, would be mute testimony of Ridan's appreciating value.

The taxpayer argues that horse racing is a speculative business and that the horse might injure itself at any time and have to be retired from racing. It seems that it was reducing risk to the minimum to make the transfer three days before Ridan was scheduled to run in a race...