Mesta v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 96531.
| Citation | 42 BTA 933 |
| Decision Date | 10 October 1940 |
| Docket Number | Docket No. 96531. |
| Parties | L. W. MESTA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
W. A. Seifert, Esq., W. W. Booth, Esq., and A. G. Wallerstedt, C. P. A. for the petitioner.
J. Harrison Miller, Esq., for the respondent.
The Commissioner determined a deficiency in petitioner's income tax for the year 1935 in the amount of $31,163.18. The facts are found to be as stipulated. For present purposes the following summary will suffice.
Petitioner, a resident of Pittsburgh, Pennsylvania, duly filed his return of income for the taxable year with the collector for the twenty-third collection district of Pennsylvania. The tax shown to be due was paid. He had been married on August 19, 1921, and he and his wife lived together until October 12, 1934, on which date they separated. There was no issue as a result of the marriage.
On February 14, 1935, petitioner's then wife, Cora Jane Mesta, filed a libel in divorce, praying for a decree divorcing her and petitioner "from bed and board and such alimony as her husband's circumstances will admit of." On March 8, 1935, her petition to amend the libel to ask for an absolute divorce was granted. Bill of particulars and answer thereto were duly filed. On April 12, 1935, hearing was had and on April 15, 1935, a final decree granting the wife an absolute divorce was entered.
On March 22, 1935, petitioner signed and acknowledged, in duplicate, an agreement attached to the stipulation of facts filed herein. It was delivered to counsel representing the wife in the libel action. She signed and acknowledged both copies on April 13, 1935, and one of the duplicate originals was delivered to counsel for petitioner herein on April 17, 1935.
The agreement provided that Mesta should deliver to Cora Jane Mesta certificates for 5,200 shares of the common stock of the Mesta Machine Co., endorsed in blank, a diamond ring, title certificate for a Cadillac automobile, a set of golf clubs and bag, all household furnishings in their home and all dividends on the 5,200 shares of stock, declared or paid after March 6, 1935. Mesta gave up any claims which he might have against her or her property or estate growing out of the relationship of husband and wife. Cora Jane Mesta agreed that the home, which was owned by her and Mesta as tenants by the entirety, should vest in him through the intermediation of a "straw man", and that the delivery of the securities and property mentioned above by him was "in full settlement and satisfaction of all claims and demands on the part of Mrs. Mesta for her maintenance and support, and in lieu of all rights which she may now have, or hereafter acquire, against the property of Mr. Mesta, as wife, widow, or in any manner arising out of or resulting from the relationship of husband and wife * * *." She also released Mesta, his heirs, executors, administrators and assigns, from all claims for support and maintenance and from all rights, interests, claims, demands or preferences in or against him or his estate that she might have as wife, widow, or otherwise.
On April 17, 1935, petitioner, in accordance with the terms of the agreement, delivered to Cora Jane Mesta 5,200 shares of the Mesta Machine Co. stock and on April 25, 1935, deeds for the purpose of vesting title to the home in petitioner were recorded.
As of April 13, 1935, petitioner was possessed of an estate in personalty of approximately $1,150,000 and the value of the real estate (home) was approximately $35,000. The household furnishings had a value of $28,000 and Cora Jane Mesta claimed them and the other property referred to in the agreement.
Petitioner was 45 years of age and his wife was 57 years of age on April 17, 1935. The present worth of $1 payable to a woman 57 years of age at the death of her husband, aged 45, assuming she outlives him, is $0.187.
The fair market value of 5,200 shares of Mesta Machine Co. stock on April 17, 1935, was $156,975. The said 5,200 shares had a cost or base to petitioner of $7,574.56, as set out in the notice of deficiency.
On March 9, 1936, petitioner filed a gift tax return, listing as a gift to his wife 5,200 shares of Mesta Machine Co. stock valued at $142,350. He computed the gift tax to be $3,346.13 and this amount was duly paid to the collector. On November 26, 1937, petitioner filed a claim for refund of the amount paid as a gift tax and on December 21, 1938, the Commissioner issued a certificate of overassessment for the full amount. Check for the gift tax and interest thereon was duly issued by the Treasurer of the United States on February 8, 1939. It was transmitted by the collector to petitioner on or about March 31, 1939, petitioner's counsel having written the collector, "placing him on notice that this case was pending in the United States Board of Tax Appeals and advising him that the acceptance of the aforementioned check in no way prejudiced petitioner's rights or contentions that no taxable profit resulted from the aforesaid 1935 transaction." This position was reiterated in a letter written by petitioner's counsel to the collector on or about April 1, 1939, acknowledging receipt of the check.
The respondent determined that petitioner had "realized taxable income in the transaction whereby * * * he transferred 5,200 shares of * * * Mesta Machine Co. * * * stock to Mrs. Cora Jane Mesta in accordance with a formal separation agreement dated April 13, 1935." He computed it as follows:
------------------------------------------------------------
| | Fair market | | Taken into |
| Base | value 4/17/35 | Gain | account as |
| | | | capital gain |
|-------------|-----------------|-------------|--------------|
| $7,574.56 | $156,975.00 | $149,400.44 | $57,018.95 |
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It is alleged in the petition that the Commissioner erroneously determined that petitioner realized taxable income in the transaction whereby he transferred the shares of stock to his former wife. At the hearing and upon brief petitioner denies that he received "gains, profits, or income" within the meaning of section 22 (a) or (e) of the Revenue Act of 1934, or that the transaction was taxable under section 111 of the same act. In the alternative he urges that section 22 (b) (3) of the Revenue Act of 1934 and article 22 (b) (3)-1 of Regulations 86, promulgated under it, negative any suggestion of tax to him. The sections and article cited are shown in the margin.1 The alternative contention will first be considered briefly.
The section cited by petitioner in this connection (22 (b) (3), supra) excludes from gross income "the value of property acquired by gift, bequest, devise, or inheritance * * *." His theory seems to be that, since he made a "gift" of the property to his wife, the section in question would preclude the Commissioner from including in his income the value of the property given away. Both parties agree that we are not charged with the responsibility of determining in this proceeding whether he made a taxable gift to his wife or not. The question is the much narrower one: Did petitioner give the property to his wife; and, if so, does the cited section preclude its inclusion in his income?
Respondent points out that the section "relates to the treatment by taxpayers of receipts by them of gifts, bequests, devises or inheritances, and has no relation whatever to the issue here involved." This is so obvious from an examination of the act that we do not deem it necessary to engage in any extended discussion. The act excludes from gross income the value of property "acquired by gift." If anyone acquired the property in question by gift, it was the wife. But she is not before us, and, since we are not required to determine whether petitioner made a taxable gift or not, we think the whole question may be passed. It may not be amiss to point out, however, that the Circuit Court of Appeals for the Second Circuit, in Commissioner v. Hyde, 82 Fed. (2d) 174, in answer to a husband's argument that a trust established for the benefit of a wife, under circumstances quite similar to those before us, was a "voluntary gift", said that "to hold that the trust was established as a voluntary gift * * * would be to close one's eyes to the realities."
Nor is petitioner upon sound ground in contending that the amount was a "marriage settlement" within the purview of article 22 (b) (3)-1, supra, and hence a gift. The term appears to have been used in its ordinary and generally accepted meaning as having reference to a contract between a man and a woman under which the title to certain property is changed in contemplation of, or contemporaneously with, their marriage. The transfer in question was made in connection with a dissolution of a marital relation and because the parties realized that it would "no longer be possible for them to live as husband and wife." That it was not a gift within the purview of the article cited accords with petitioner's view, as reflected in his claim for refund, and with the view of the respondent as set out in his certificate of overassessment. We think it is also in accord with the rationale of such cases as Douglas v. Willcuts, 296 U. S. 1; Commissioner v. Hyde, supra; Helvering v. Fuller, 310 U. S. 69; and Helvering v. Leonard, 310 U. S. 80. It follows that, if the respondent's determination is to be overturned, it must be upon some theory other than that set out in petitioner's alternative contention.
The question discussed at length by each of the parties is whether or not petitioner made a disposition of the stock which resulted in gain or profit to him. The respondent contends that he did, stating his position thus: ...
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