Hempel v. Commissioner
| Decision Date | 23 June 1947 |
| Docket Number | Docket No. 7993. |
| Citation | 6 TCM (CCH) 743 |
| Parties | Frieda Hempel v. Commissioner. |
| Court | U.S. Tax Court |
Joseph Getz, C. P. A., 475 Fifth Ave., New York 17, N. Y., for the petitioner. Martin M. Lore, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
This case involves deficiencies in income taxes for the years 1937 and 1938 in the amounts of $4,098.10 and $1,167.65, respectively, and a deficiency in penalty for the year 1937 in the amount of $409.81 as well as an additional deficiency penalty for the year 1937 in the amount of $614.71 claim for which was made in respondent's amendment to his answer filed pursuant to leave granted at the hearing.
The issues to be determined are: (1) Should the petitioner be allowed the alleged professional expenses claimed for the years 1937 and 1938 in the amounts of $9,493.07 and $11,985.78, respectively? (2) Should the amounts received by the petitioner during the years 1937 and 1938 from August Heckscher or from the August Heckscher Trust be included as taxable income during those years? (3) In the alternative, if these amounts be found to constitute income should they be taxable when distributable rather than when received? (4) Should petitioner be allowed a credit for a dependent by reason of her being the chief support of a niece during 1937 and 1938? (5) Should petitioner be allowed a deduction for interest alleged to have been paid in 1937 and 1938 in the amounts of $590 and $651.42, respectively? (6) Should the delinquency penalty with respect to petitioner's return for the year 1937 be calculated at the rate of 25 per cent instead of 10 per cent as determined in the deficiency notice?
From evidence, both documentary and oral, we make the following
Petitioner is a naturalized citizen of the United States and resides in New York City. Her income tax returns for the years 1937 and 1938 were filed with the collector of internal revenue for the third district of New York.
Petitioner is an opera and concert singer of international fame. She made her American debut at the Metropolitan Opera House in 1912 or 1913. Five or six years prior to that she had made her debut in Europe. With fame came financial success and during the early 1920's, after petitioner had left the Metropolitan, she formed her own concert organization and sang at as many as a hundred concerts a year. These included the famous "Jenny Lind" series both in Europe and this country.
William B. Kahn married petitioner in 1918 and acted as her manager from 1918 until 1926 when they were divorced.
Prior to April 1926 petitioner became acquainted with August Heckscher, a wealthy philanthropist, living in New York City. In April 1926 petitioner entered into an agreement with him which provided that she would not accept any professional engagements which would require an absence of more than two days at a time from the City of New York during the rest of her life, and would sing exclusively for charitable organizations whenever he requested her to do so. Heckscher agreed to pay her the sum of $48,000 annually beginning with quarterly payments on July 1, 1926.
After the first payment by Heckscher, payments were discontinued and in 1927 petitioner commenced an action in the New York Supreme Court against him for breach of contract. Subsequently, and before the suit came to trial a settlement out of court was agreed on. As a part of the settlement Heckscher set up a trust fund on or about May 11, 1928, for the benefit of petitioner under which she was to receive $15,000 annually during the remainder of her natural life. The trust instrument provided that if the net income of the trust was not sufficient to pay $15,000 per annum to petitioner, Heckscher during his life, and his legal representatives after his death, would pay to the trustees an amount in cash sufficient, when added to the trust income, to make a total of $15,000 (after deduction of trustees' expense and compensation only). The trust instrument also provided that neither Heckscher nor his legal representatives should be required in any year to pay to the trustees or to the petitioner an amount to make up any deficiency in income due to the payment of taxes in respect to the trust or the income thereof, all taxes being for the account of petitioner only and being assumed by her without any obligation on the part of Heckscher or his legal representatives. The trust instrument recites that the parties contemporaneously entered into two other agreements. By one of the instruments petitioner agreed to save Heckscher harmless from any action by petitioner's former husband on account of or by reason of any relation of Heckscher to petitioner. By the other instrument, after reciting the consideration, the parties, Heckscher and petitioner, agreed to surrender and deliver to each other all writings, communications, letters, telegrams, cablegrams and radiograms from each to the other. They further agreed that they would neither publish nor suffer to be published any of the contents of the writing or communications, nor any facts nor statements of or concerning any business, financial or personal relationship or transaction between them, and that neither would publish or cause or suffer to be published any statement with respect to or concerning any financial or other adjustment made, or any payment made or promised to be made, and that neither would leave or preserve any such writing concerning the matters for publication at any time, either before or after the death of either. Further, that neither would at any time communicate with or molest or otherwise interfere with the peace, quiet and happiness of the other, or permit or suffer the same to be done with her or his knowledge or consent. They also agreed to cremate the above mentioned writings upon delivery and receipt of them and to execute and deliver a joint certificate or letter of cremation in such form as their respective counsel might approve. The agreement was also to be binding upon and should inure to the benefit of the heirs, executors and administrators of both parties. The instrument stated that both parties released the other, his or her heirs, executors' and administrators from all manner of actions or suits, etc., excepting only the obligations of the indenture above mentioned and the terms and provisions of the indemnity agreement of even date. The trust instrument also provided that if petitioner failed to perform the terms and provisions of such agreements the trust created for her benefit might, at the option of Heckscher or his legal representatives be terminated, at which time the corpus of the trust should be paid over to certain charitable corporations as set forth in the trust instrument. Other than this provision for termination, the trust was to continue for the life of the petitioner, and upon her death the corpus was to go to the benefit of certain charitable corporations.
The payments provided by the trust agreement were duly made until the latter part of 1935 when Heckscher alleged that petitioner had violated the agreements with respect to certain matters and she was informed that the payments were to be discontinued and the trust terminated in accordance with the provisions, above mentioned. Petitioner thereupon instituted legal proceedings against Heckscher, William Dickinson Hart, and George F. Thompson (who were the trustees in the trust above mentioned), to require performance with respect to the annual payments to her.
Three separate suits were filed by petitioner in the New York Supreme Court. One of the suits was for the payments due December 1, 1935, another for the two payments due March 1, 1936, and June 1, 1936, and a third suit for the payment due September 1, 1936, plus, in each case, interest from the due date of each payment.
Summons and complaints were served upon the defendants in which appeared orders that if Heckscher did not pay the amount due in the particular suit to the defendants Hart and Thompson within five days after the service of the orders, then petitioner was to have judgment against Heckscher for the amounts due. (Should Heckscher pay the amount of the suits to the other defendants, then petitioner was to have judgment against them.)
Judgment was entered against Heckscher only in the three suits, under dates of June 2, 1936, July 28, 1936, and December 28, 1936.
The judgments were satisfied on February 5, 1937, by Heckscher's payment of the amount due to petitioner's attorneys.
On or about January 28, 1937, petitioner received payment from Heckscher through her attorneys in the amount of $15,555.62. This amount represented payment of $19,751.89 by Heckscher direct to petitioner's attorneys in settlement of the above mentioned judgments and a deduction of $4,196.27 for attorneys' fee and disbursements. Petitioner claimed $1,500 of the above mentioned attorneys' fee as expenses against the trust payment included in her 1937 income tax return.
No income was received or paid out by the trustees of the Heckscher trust during the year 1937. During 1937 Heckscher, in compliance with the provisions and obligations set forth in the trust instrument, paid over to the trustees $15,000 to compensate for deficiency in income to that amount and which was later transmitted to the petitioner by the trustees.
Both petitioner and the above-mentioned trust reported their income and deductions on the cash basis in the years 1937 and 1938. Petitioner reported $13,500 for 1937 and $15,000 for 1938 as income from the Heckscher Trust.
Under the date of December 31, 1934, petitioner received a letter from her attorney to the effect that she should not be oversanguine about the continuance of "these payments" and that Heckscher was in great financial distress and that "the 57th Street and Fifth Avenue property" was either under foreclosure or had already been foreclosed, and that that...
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