Horst v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 90819

• Decision Date: 12 April 1939
• Docket Number: Docket No. 90819,93220.
• Citation: 39 BTA 757
• Parties: PAUL R. G. HORST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

39 B.T.A. 757 (1939)

PAUL R. G. HORST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 90819, 93220.

Board of Tax Appeals.

Promulgated April 12, 1939.

Harry H. Wiggins, Esq., for the petitioner.

J. R. Johnston, Esq., for the respondent.

These consolidated proceedings involve the redetermination of income tax deficiencies in the amounts of $13,903.09 and $12,376.20 for the respective years 1934 and 1935.

The facts are all stipulated and we adopt the stipulation as our findings of fact. For the purposes of our opinion we deem it necessary to set forth herein only the following findings of fact.

FINDINGS OF FACT.

1. Petitioner is and was during the years 1934 and 1935 a citizen of the United States, temporarily residing at No. 3 Avenue Elisee Reclus, Paris, France.

2. During the years 1934 and 1935 petitioner kept his books and made his income tax returns on the cash receipts and disbursements basis.

3. Throughout the year 1934 petitioner owned foreign state, municipal, and industrial coupon bonds from which, on the 10th day of August 1934, he detached and transferred by manual delivery to his son, Robert P. K. Horst, as a gift, prior to their maturity, negotiable interest coupons of an aggregate face value of $25,182.50.

4. All of such coupons matured during the year 1934 and in that year Robert P. K. Horst collected therefrom the total amount of $25,182.50 and reported such amount in his Federal income tax return for that year.

5. Throughout the year 1935 petitioner owned foreign state, municipal, and industrial coupon bonds from which, in August 1935, he detached and transferred by manual delivery to his son, Robert P. K. Horst, as a gift, prior to their maturity, negotiable interest coupons of an aggregate face value of $37,032.50.

6. All of such coupons matured during the year 1935 and in that year Robert P. K. Horst collected therefrom the total amount of $25,495 and reported such amount in his Federal income tax return for that year.

7. Petitioner did not report in his income tax return for the year 1934 any part of the amount represented by the interest coupons delivered as a gift to his son in that year, and petitioner did not report in his income tax return for the year 1935 any part of the amount represented by the interest coupons delivered as a gift to his son in that year.

8. Respondent in determining the deficiency for the year 1934 added to the taxable income of the petitioner the amount of $25,182.50 as the value of the coupons transferred to Robert P. K. Horst in that year, and in determining the deficiency for the year 1935, respondent added to the taxable income of the petitioner the sum of $22,360 as the aggregate net worth of all of the coupons transferred by petitioner to his son in that year.

9. Deficiency in income tax for the year 1934 resulted solely from the addition to income of petitioner in that year of the above stated amount of $25,182.50. The deficiency in income tax for the year 1935 resulted from the addition to income of petitioner in that year of the above stated amount of $22,360 plus certain other minor adjustments not in controversy here.

OPINION.

HILL:

There is only one question for determination, namely, whether the amounts collected in the respective years 1934 and 1935 on the coupons involved are taxable as income to petitioner. We think they are. It is true that we were reversed on a similar point in our decision in Julius Rosenwald, 12 B. T. A. 350, by the United States Circuit Court of Appeals for the Seventh Circuit, 33 Fed. (2d) 423. The court assigned as the basis for such reversal that the severance and delivery of the coupons before maturity constituted a completed gift and hence the coupons were not taxable to the owners of the bonds from which they had been severed. We think our decision in that case was right and respectfully decline to follow the decision of the Circuit Court of Appeals on the point stated. Unquestionably the gift of the coupons in that case, as well as in the instant case, was a completed one, but it was, nevertheless, a gift of income. The severance and negotiation of an interest coupon does not change the character of the thing which it evidences and represents. That thing is interest on the bond from which the coupon was severed. Such interest is income derived from the bond, whether it be paid to the owner of the bond or to his donee or assignee. The owner of property which produces income is chargeable with such income for tax purposes regardless of whether he receives or enjoys the income. Van Meter v. Commissioner, 61 Fed. (2d) 817; Bing v. Bowers, 22 Fed. (2d) 450; affirmed per curiam (C. C. A., 2d Cir.), 26 Fed. (2d) 1017; Ward v. Commissioner (C. C. A., 9th Cir.), 58 Fed. (2d) 757.

In the Van Meter case, supra, the court said:

The Supreme Court has definitely determined that Congress has the power to tax the earner of income therefore, irrespective of whether it is paid to someone else. Citing a number of cases.

The "earner" of income is one whose personal efforts have produced it; who owns property which produced it or a combination of the two. Decisions of the Supreme Court have declared that the income statutes require taxation to the earner in each of the three above sources of income where the income was actually realized but never came to beneficial enjoyment by the earner. * * *

* * * * * * * In determining who is taxable for an income, there are three considerations which may be of importance, to wit, who earns the income, who receives it, and who enjoys it. Where the same person earns, receives, and enjoys the income (the normal and usual situation), there is no difficulty. Where different persons earn, receive and/or enjoy the income, disputes occur. In determining such disputes, the vital matter is always the relation of the earner (whether a person, owner of property or combination of the two) of the income to the income so earned. The rule and intent of the taxing statutes is that the earner of income which he might and, normally, would receive and enjoy for himself is not relieved because he chooses not to receive or not to enjoy it, and this is not necessarily changed by such deprivation taking the form of an obligation legally binding him thereto. * * * but where the earner of the income does nothing more than transfer the income earned in his own right to another, even though such disposal be in advance of the earning thereof (Burnet v. Leininger and Lucas v. Earl, supra), or where he retains any power of control over the income earning property or the income therefrom (Corliss v. Bowers, 281 U. S. 376, 50 S. Ct. 336, 74 L. Ed. 916, and analogous as to transfer tax Chase Nat. Bank v. U. S., 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed. 405, 63 A. L. R. 388; Reinecke v. Northern Trust Co., 278 U. S. 339, 49 S. Ct. 123, 73 L. Ed. 410, 66 A. L. R. 397, and as to State succession tax, Saltonstall v. Saltonstall, 276 U. S. 260, 48 S. Ct. 225, 72 L. Ed. 565), such income is taxable to him within the intent of the statute (Burnet v. Leininger, Lucas v. Earl and Corliss v. Bowers, supra).

* * * It may be true that income already entirely earned is transferable as a species of property, but that has no effect upon the power and intention of Congress to tax income to the earner. The earner may, in a legally binding way, dispose of his earnings, whether they are already earned or are to be earned, without affecting in the slightest manner his status as earner thereof and his resulting liability for taxation thereon as income.

In the case of Bing v. Bowers, supra, the court said:

To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt.

The Ward case, supra, affirming 22 B. T. A. 352, supports the proposition that the owner of income producing property is chargeable, for tax purposes, with...