Rhoads v. Commissioner, Docket No. 95089.
| Citation | 1963 TC Memo 238,22 TCM (CCH) 1205 |
| Decision Date | 04 September 1963 |
| Docket Number | Docket No. 95089. |
| Parties | Lynn E. Rhoads and Martha R. Rhoads v. Commissioner. |
| Court | United States Tax Court |
Sidney Barrows, for the petitioners. Sidney C. Freed, for the respondent.
The respondent determined a deficiency in petitioners' income tax for 1959 in the amount of $1,398.99. The petitioners claim an overpayment of income tax for 1959 in the amount of $779.50. The primary issue for decision is whether petitioners are entitled to a deduction under either section 165(c)(3) or section 212(2) of the Internal Revenue Code of 1954 for sums paid to settle a legal dispute with persons who sought to obtain Martha's inheritance. If it is determined that the petitioners are not entitled to a deduction under either of these sections, then a secondary issue is presented as to whether the sums paid may be added to petitioners' basis in the inherited property.
All of the facts have been stipulated and they are found accordingly.
Petitioners are husband and wife residing in Minneapolis, Minnesota. For the year 1959 they filed a joint income tax return with the district director of internal revenue for the district of Minnesota.
Martha is a granddaughter of J. Archie Robertson (hereinafter referred to as Robertson) and the daughter of Kenneth A. Robertson (hereinafter referred to as Kenneth). Robertson and Kenneth were residents of Missouri. For many years and until 1947, Kenneth was a member of the board of trustees and treasurer of the Trustees of the Permanent Fund for Conference Claimants of the St. Louis Annual Conference of the Methodist Episcopal Church, a Missouri corporation (hereinafter referred to as the Church). Kenneth became indebted to the Church in an amount in excess of $71,000. In order to satisfy this indebtedness, Kenneth entered into a Contract of Settlement with the Church on February 19, 1948, whereby he agreed to turn over to the Church all of his current assets as well as his expectancy under the will of his father, Robertson. At the time the Contract of Settlement was entered into, Robertson was still living but was incompetent due to a stroke he had suffered earlier.
As a supplement to the Contract of Settlement between Kenneth and the Church, an assignment was executed on the same day by Martha, her brother, and her sister, which provided that:
Both the Contract of Settlement and the supplement to it were executed in the State of Missouri.
Kenneth died within a year after executing the Contract of Settlement. On March 17, 1957, Robertson died, and under the laws of descent and distribution of the State of Missouri, Kenneth's other two children and Martha, collectively, became entitled to Kenneth's share of Robertson's estate.
Following the death of Robertson, the Church notified the executor of his estate that it possessed an assignment from Kenneth's other two children and Martha of their interest in the estate of Robertson. Because of the Church's claim, the executor refused to give Martha her one-ninth share of Robertson's estate.
On May 29, 1959, a Release was executed by the Church in favor of Kenneth's other two children and Martha and provided, inter alia, that:
WHEREAS, the dispute exists between the parties regarding the validity and enforceability of this document the assignment, First Party2 contending that it constitutes a valid and enforceable claim, lien or charge on Second Parties'3 entitlement * * *
In accordance with the terms of the Release, Martha paid $6,274.23 (one-third of $18,822.70) to the Church. On her income tax return for 1959 Martha claimed a deduction for the amount paid to the trustees. The respondent disallowed the deduction.
The basic issue is whether petitioners are entitled to a deduction under either section 165(c)(3)4 or section 212(2)5 of the Internal Revenue Code of 19546 for the amount paid to the Church in 1959.
Petitioners contend that the assignment by Martha to the Church was made under duress and out of fear for the welfare of her father, and that the act of the Church in securing such an assignment and its later insistence upon a payment in satisfaction of that assignment were tantamount to a taking of Martha's property by force and, therefore, equivalent to a loss of property by theft.
For tax purposes whether a theft loss has been sustained depends upon the law of the jurisdiction wherein the particular loss occurred. Curtis H. Muncie Dec. 19,142, 18 T. C. 849 (1952); Samuel Towers Dec. 21,011, 24 T. C. 199 (1955), affd. 57-2 USTC ¶ 9884 247 F. 2d 233 (C. A. 2, 1957), certiorari denied 355 U. S. 914 (1958); Michele Monteleone Dec. 24,278, 34 T. C. 688 (1960). In Missouri, the alleged locus criminis, if a person accuses or threatens to accuse another of a felony or threatens to injure anyone with a view or intent to gain or extort money or property and by such threats extorts property from the other, he shall be deemed guilty of robbery in the third degree. Vernon's Annotated Missouri Statutes, Vol. 41, section 560.130. According to the decided cases, in order to sustain a conviction under this section the evidence must be sufficient to show that the person parted with his money out of fear of exposure to a criminal charge or that he was intimidated and, therefore, parted with his money. State v. Williams, 335 Mo. 234, 71 S. W. 2d 732 (1934); State v. Lasky, 133 S. W. 2d 334 (Mo. 1939); State v. Patterson, 271 Mo. 99, 196 S. W. 3 (1917).
While a criminal conviction is not a necessary element in a taxpayer's proof in this Court that a theft loss has been sustained, the taxpayer must still show that the loss was occasioned by circumstances clearly indicating theft. Michele Monteleone, supra. In the instant case the petitioners offered no evidence that the Church officials in any way threatened to accuse Kenneth of a felony or that they threatened to injure Kenneth or Martha if their assets were not turned over to the Church. In the absence of such evidence, we must conclude that the petitioners have not carried their burden of proof. We, therefore, sustain respondent's determination that petitioners are not entitled to a deduction under section 165(c)(3).
The petitioners contend, in the alternative, that upon the death of Robertson, Martha became the absolute owner of a one-ninth interest in his estate, that the estate consisted entirely of income-producing property, and that the payment to the Church was for the purpose of maintaining and conserving this income-producing property.
The rule is now well established that the origin and character of a claim with respect to which an expense was incurred rather than its potential effect upon the fortunes of the taxpayer are the controlling basic test of whether an expense is deductible under section 212. United States v. Patrick 63-1 USTC ¶ 9286, ___ U. S. ___ (1963). See also United States v. Gilmore 63-1 USTC ¶ 9285, ___ U. S. ___ (1963); Deputy v. duPont 40-1 USTC ¶ 9161, 308 U. S. 488, 494, 496 (1940); R. Walter Graham, Jr. Dec. 26,059, 40 T. C. ___ (April 10, 1963) appeal pending (C. A. 4, June 6, 1963).
The facts of record disclose that in 1948 Martha executed for the benefit of the Church an assignment of her expectancy in the estate of Robertson. Robertson was alive at the time. While such an assignment is valid under Missouri law, Bank of Moberly v. Meals, 222 Mo. App. 862, 5 S. W. 2d 1113 (1928); Dennis v. Grand River Drainage Dist., 74 S. W. 2d 58 (Mo. 1934), it does not effect a passage of legal title to the assignees, but operates merely as an agreement to convey. National Refining Co. v. McDowell, 201 S. W. 2d 342 (Mo. 1947); Keeley v. Indemnity Co. of America, 222 Mo. App. 439, 7 S. W. 2d 434 (1928); Inlow v. Herren, 306 Mo. 42, 267 S. W. 893 (1924). Such being the case, upon the death of Robertson, Martha, notwithstanding her earlier assignment, became the owner at law of a one-ninth interest in the estate of Robertson.
Thereafter, a dispute arose between Martha, the owner at law, and the Church, the possessor of...
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