Keitel v. Commissioner of Internal Revenue
| Decision Date | 18 March 1929 |
| Docket Number | Docket No. 18579. |
| Parties | ELMER J. KEITEL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
W. A. Allen, Esq., for the petitioner.
W. Frank Gibbs, Esq., and Owen W. Swecker, Esq., for the respondent.
This proceeding involves the redetermination of deficiencies in income tax for the years 1922 and 1923, in the respective amounts of $172.70 and $173.20. Petitioner asserts that respondent erred (1) in determining that the amounts paid by petitioner annually to his mother in consideration of the transfer by her to petitioner and his brother of her life interest were capital expenditures, and (2) that if such payments constitute capital expenditures, then respondent erred in refusing to permit the deduction of such amounts as represent the exhaustion of the interest purchased. The facts were stipulated and in accordance with the stipulation we make the following findings of fact.
FINDINGS OF FACT.
1. The petitioner, Elmer J. Keitel, is an individual residing at 3517 Papan Street, St. Louis, Mo 2. Petitioner is the son of F. Keitel and Caroline Keitel. At the time and prior to his father's death, petitioner, Waldemar C. Keitel and F. Keitel, their father, were a copartnership operating under the firm name of Columbia Oil Co. of the City of St. Louis. The interests of said partners were as follows:
F. Keitel ___________________________________ 65 per cent
Petitioner __________________________________ 25 per cent
Waldemar C. Keitel __________________________ 10 per cent
3. F. Keitel, by his last will and testament, bequeathed one-half of his said interest in said copartnership to petitioner and the other half to his wife, Caroline Keitel, for life or so long as she remained his widow, with remainder after her death or remarriage to Fred W. Keitel, Arie Keitel, Alvin Keitel, Waldemar C. Keitel, and petitioner.
4. F. Keitel died, leaving the partnership property to be distributed, managed and handled according to the terms of the will, which authorized and empowered petitioner to manage and operate said business and protect the interest of Caroline Keitel therein.
5. The partnership business was not in a prosperous condition at the date of F. Keitel's death. The income which could be earned by said partnership would not entitle Caroline Keitel to sufficient income to properly support her and meet her ordinary demands.
6. The aforesaid conditions induced the members of the partnership to consider the advisability of reorganizing and converting the partnership into a corporate enterprise. In order to do this petitioner purchased the interest of all of the other members except Waldemar C. Keitel and Caroline Keitel. This left the partnership in the names of these three members — petitioner, Waldemar C. Keitel, and Caroline Keitel.
7. On the third day of May, 1922, petitioner and Caroline Keitel entered into a contract by which she sold and transferred her right, title and interest in and to her interest in said property. Said contract reads:
THIS AGREEMENT, made and entered into this 3rd day of May, 1922, WITNESSETH:
THAT WHEREAS, F. Keitel, deceased, at the time of his death was a co-partner with Elmer J. Keitel and Waldemar C. Keitel in the business known as the Columbia Oil Company of the City of St. Louis, State of Missouri, the interests in said company of said parties being respectively as follows, to wit:
F. Keitel _________________________________________ 65%
Elmer J. Keitel ___________________________________ 25%
Waldemar C. Keitel ________________________________ 10%
AND WHEREAS, said F. Keitel, deceased, in and by his last will and testament bequeathed to said Elmer J. Keitel an undivided one-half of his share in said business and the other undivided one-half of his share in said business to Fred. W. Arie, Alvin, Waldemar C. and Elmer J. Keitel, to go into effect at the death of Caroline Keitel, widow of said F. Keitel, unless she shall sooner relinquish her rights therein in writing;
AND WHEREAS, said bequests were subject to the further provision of the said will and that said Elmer J. Keitel should receive an additional twenty-five per cent of the net profits of said business for his services rendered to said business, and the remaining net profits to his widow, Caroline Keitel, for and during her life, and should she remarry after the death of said F. Keitel, she ipso facto loses and forfeits all her right and titles in said property, and the bequests aforesaid shall take effect and be in force;
AND WHEREAS, said Elmer J. Keitel has by purchase acquired all the right, title and interest in and to said Columbia Oil Company which was bequeathed to said Arie, Alvin and Fred W. Keitel, and said Elmer J. Keitel, Caroline Keitel and Waldemar C. Keitel are the only persons now having any interest in said Columbia Oil Company and it was heretofore agreed between them that it was impracticable and involved too many risks to continue the business as a partnership, which by mutual agreement has been deemed dissolved as of the date of the death of said F. Keitel, deceased, and it is the desire of the parties hereto to arrive at an understanding and agreement respecting the affairs of said company;
NOW THEREFORE, in consideration of the premises and in further consideration of the sum of One ($1.00) Dollar each to the other paid, the receipt of which is hereby acknowledged, and in further consideration of the mutual covenants and agreements hereinafter mentioned and hereby mutually agreed to be kept and performed, it is hereby agreed as follows:
That a corporation shall be formed under the laws of the State of Missouri to be known as Columbia Oil Company, with a capital stock fully paid of Twenty-Two Thousand ($22,000) Dollars and that the assets of said former partnership shall be used in payment thereof, and all further and other assets of said partnership over and above the amount necessary to pay said capital stock shall be turned over to said corporation as a paid in surplus.
It is further understood and agreed that inasmuch as the present value of the interest for and during the life of said Caroline Keitel in and to said business would be insufficient to afford her a substantial income, and in order to remove all question concerning any and all matters arising under the will of said F. Keitel, deceased, the said Caroline Keitel hereby relinquishes her rights in and to said former partnership, and all interest therein of said F. Keitel, deceased, which was acquired by her under and by virtue of said will and which she hereby assigns and transfers to said Elmer J. Keitel, except her interest in the share of Waldemar C. Keitel, which she hereby transfers to said Waldemar C. Keitel.
In consideration of said relinquishment and transfer to said Elmer J. Keitel, he, the said Elmer J. Keitel, hereby agrees to pay the said Caroline Keitel the sum of Two Hundred ($200) Dollars per month for and during the life of said Caroline Keitel, unless she should remarry, at which time said payments shall cease; and to secure payment of said sum each month to be paid the said Caroline Keitel, he, the said Elmer J. Keitel agrees to hold in trust twenty-two (22) shares of the capital stock of the said proposed corporation, it being understood that said number of shares in said corporation with the capitalization and surplus thereof represents the present value of the life interest of said Caroline Keitel bequeathed to her by the will of said F. Keitel, deceased, in and to said Columbia Oil Company.
It is further understood and agreed that said Elmer J. Keitel shall have the right to vote upon said shares of stock so held in trust by him.
The statements in the above contract regarding the relative interest of all members of the partnership prior to and subsequent to the death of F. Keitel and relative to the organization of the corporation are true.
8. As full consideration for the transfer of her interest in said partnership, petitioner agreed to pay Caroline Keitel $200 per month during her lifetime or until she should remarry. At the time of execution of said contract, Caroline Keitel was 62 years of age and according to well accepted mortality tables her life interest would approximate a period of 13 years after the execution of said contract.
9. The said $200 contracted to be paid monthly or until remarried was more than Caroline Keitel's interest was earning at and prior to the time of execution of said contract.
10. Caroline Keitel's interest in the partnership was equivalent to 22 shares of stock in the corporation after reorganization. To protect her interest and secure the payment of the agreed annuities of $2,400 annually, 22 shares of stock of the Columbia Oil Co. were placed in the hands of petitioner, as trustee. These shares were so placed as collateral security for the payment of said amounts.
The case has been stipulated and briefed with no disagreement between respective counsel concerning the actual payments made to the mother by petitioner. The sale and transfer by Caroline Keitel of her interest under the will of her husband in the partnership in consideration of the payment to her by petitioner of the sum of $200 per month, so long as ...
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