Passailaigue v. United States

• Decision Date: 05 December 1963
• Docket Number: Civ. A. No. 944.
• Citation: 224 F. Supp. 682
• Parties: Jack M. PASSAILAIGUE and Mary F. Passailaigue v. UNITED STATES of America.
• Court: U.S. District Court — Middle District of Georgia

224 F. Supp. 682

Jack M. PASSAILAIGUE and Mary F. Passailaigue v. UNITED STATES of America.

Civ. A. No. 944.

United States District Court M. D. Georgia, Columbus Division.

December 5, 1963.

Hatcher, Stubbs, Land & Rothschild, Columbus, Ga., for plaintiff.

Floyd M. Buford, U. S. Atty., and Sampson M. Culpepper, Asst. U. S. Atty., Macon, Ga., for defendant.

ELLIOTT, District Judge:

This is an action for recovery of federal income taxes and interest paid thereon in a total amount of $3,737.91 claimed to have been illegally and erroneously assessed and collected from Petitioners for the calendar years 1959 and 1960. This Court has jurisdiction of the matter under the provisions of § 1346(a) of Title 28 of the United States Code. This opinion is intended as compliance with the requirements of Rule 52 of the Federal Rules of Civil Procedure.

All of the pertinent facts relative to the issue in this case have been fully stipulated by the parties and these facts may be summarized as follows. In May, 1958 a parcel of real estate consisting of land and improvements thereon located at 1227 Sixth Avenue, in Columbus, Georgia (hereinafter referred to as "the property"), was purchased by the Taxpayer, Jack M. Passailaigue.¹ After the date of purchase the Taxpayer rented the property to Moffett Medicine Company for $250.00 per month for at least six months.

On or about January 1, 1959 Youth Craft Shop, Inc. (hereinafter referred to as "Youth Craft") occupied the property under an oral lease entered into between it and the Taxpayer. On February 1, 1959 a written lease agreement was entered into between Youth Craft and the Taxpayer whereby the former leased the property under terms and conditions set forth therein without any obligation to pay rent. The oral lease had been without rent and similar in terms to the written lease. Youth Craft occupied the property during all of 1959 and 1960 under the terms of the lease agreement.

The lease contained the usual provisions found in agreements establishing the landlord and tenant relationship with respect to commercial properties except that it provided that, "Tenant shall use said premises solely for the charitable, educational, and eleemosynary purposes for which Tenant was organized and chartered" and further that, "Tenant shall not pay to Landlord any sums as rental for the use, occupancy and rental of said premises, it being the intention of the parties to this contract that Landlord hereby gives the use, occupancy and rental to said Tenant, but Tenant shall be bound by all of the other provisions of this contract." And it was further provided that the period of the lease would begin on February 4, 1959 and would run for an indefinite period — until such time as Landlord desired to retake possession of the premises and evidenced such desire to terminate the lease by giving Youth Craft 15 days written notice that the occupancy and use by Youth Craft was to terminate.

In 1958 Youth Craft was incorporated as a charitable corporation by order of the Superior Court of Muscogee County, Georgia, and on December 11, 1961 Youth Craft was granted a tax exempt status under § 501(c) (4) of the Internal Revenue Code of 1954. Youth Craft was at all times operated and conducted in accordance with the terms and for the purposes set forth in its charter and, as heretofore noted, the lease which was entered into between the Taxpayer and Youth Craft provided that Youth Craft should use the property only for the charitable, educational and eleemosynary purposes for which it was organized.

On their joint income tax returns for the calendar years 1959 and 1960 the Taxpayers deducted $2,400.00 each year as a charitable contribution to Youth Craft, this sum representing Taxpayer's estimation of the fair rental value for the use of the property. It has now been stipulated that during the years 1959 and 1960 the property had a fair rental value of $2,250.00 per year.

Agents of the Internal Revenue Service audited the returns filed by the Taxpayers for 1959 and 1960, and as a result of that audit the Commissioner of Internal Revenue determined that the charitable deduction claimed by them for allowing Youth Craft to use the property was improper. Accordingly, he disallowed the deduction and on April 13, 1962 assessed the tax deficiency against them, $1,661.21 and $2,071.70 for the calendar years 1959 and 1960, respectively. On April 19, 1962 the Taxpayer paid the deficiency assessments and on May 22, 1962 filed timely claims for refund for the two years. On November 15, 1962 the Taxpayers executed a Form 2297 agreement waiving the statutory notification of disallowance of the claim for refund and this suit was thereafter timely filed by the Taxpayers.

The sole question for determination by the Court is whether the Taxpayer is entitled to deduct as a charitable contribution under § 170 of the Internal Revenue Code an amount representing the value of the use of the real estate by the charitable corporation.

Section 170(a) (1) of the Internal Revenue Code of 1954 provides for the allowance of a deduction for "* * * any charitable contribution * * * payment of which is made within the taxable year." Section 170(c) defines a "charitable contribution" as a contribution or gift to or for the use of certain types of organizations. It is clear that Youth Craft is one of those types of organizations. Therefore, the issue turns on whether there was or was not a charitable contribution made within the taxable year as contemplated by the statute.

It is the Taxpayer's contention that the lease of the property to Youth Craft by which the enjoyment and use of the property was granted to Youth Craft free of any rental constituted a charitable contribution to Youth Craft, the value of which was $2,250.00, the annual fair rental value for each of the years 1959 and 1960. It is the contention of the Commissioner that this grant of the use of the property does not satisfy the requirements to come within the classification of a charitable contribution as contemplated by the Code.

Under the terms of the 1939 and 1954 Revenue Codes there has never been any doubt that payment of the charitable contribution need not be in cash, but can be in property, and gifts of property have been upheld as charitable contributions in innumerable cases. Further, the Treasury Regulations under the 1954 Code, § 1.170-1(c), state: "If a contribution is made in property, other than money, the amount of the deduction is determined by the fair market value of the property at the time of the contribution * * *."

The Commissioner contends in this case that since the Taxpayer did not part with the title to his property, but instead granted the use and enjoyment of the property under the terms of a lease, that no gift was made, and, to use the Commissioner's phrase, "It was merely the granting of a privilege."

The Taxpayer, on the other hand, contends that it is immaterial that the title to the property was not transferred, that the lease arrangement transferred the valuable right to use the property, and the value of such use being readily determinable, such value is deductible as a charitable contribution.

It appears that in 1948 the Commissioner of Internal Revenue issued the following ruling narrowly construing the language of § 23(o) of the Internal Revenue Code of 1939 (I.T. 3918, 1948-2, Cum.Bull. 33):

"It is the view of this office that permission to use and occupy property granted to an organization described in § 23(o) of the Code does not represent a payment made to or for the use of the organization within the meaning of that section. Such an arrangement does not constitute a gift of property. It is merely the granting of a privilege for which no charge is made."

It further appears that in at least two cases subsequently decided the Tax Court has not agreed with the view...