Rosenthal v. Comm'r of Internal Revenue, Docket No. 28414.
| Decision Date | 27 December 1951 |
| Docket Number | Docket No. 28414. |
| Citation | 17 T.C. 1047 |
| Parties | PAUL ROSENTHAL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. In 1944 the petitioner made payments to his wife pursuant to separation agreement. Held, on the facts, that the payments were partly in consideration of the release by the wife of rights to support, and partly in consideration of release of other marital rights, therefore that the payments were partly taxable as gifts. Held, further, that the determination of deficiency was not arbitrary.
2. In 1946 petitioner made further transfers for the benefit of his children, who had been provided for under the separation agreement made in 1944. The agreement between petitioner and his former wife for such transfers to the children was made dependent upon the divorce decree being amended, which was done. Held, the transfers to the children were not for full and adequate consideration, because of modifications of the previous agreement for transfers to the children, and did not pass by reason of the amendatory court decree, therefore were taxable as gifts to the children. Amount reduced so far as applicable to provisions for support of petitioner's minor daughter. Henry Epstein, Esq., for the petitioner.
Michael Waris, Jr., Esq., for the respondent.
In this case there is involved gift tax for the years 1944 and 1946. Deficiencies were determined, and petitioner claims overpayments, as follows:
+----------------------------------+
¦ ¦ ¦Overpayments ¦
+----+--------------+--------------¦
¦ ¦Deficiencies ¦claimed ¦
+----+--------------+--------------¦
¦1944¦$64,814.66 ¦$32,057.90 ¦
+----+--------------+--------------¦
¦1946¦39,848.36 ¦160,212.00 ¦
+----------------------------------+
By amended answer, respondent prays in the alternative that the deficiency for the year 1944 be increased by $171,336.45, to a total deficiency of $236,151.11 for 1944. The issues presented are (a) whether certain transfers by petitioner to his wife in 1944, pursuant to a separation agreement, are in part allocable to release of marital rights, other than for support, by the wife and taxable; (b) whether petitioner is taxable upon the present worth of certain payments to his children in 1946 under an amended separation agreement. The respondent, in the alternative, contends that if gifts to the children are held to have been made in 1944 and not in 1946, they were additional taxable gifts in 1944.
All stipulated facts are so found.
The petitioner filed his gift tax returns for the taxable years with the collector of internal revenue for the second district of New York.
The petitioner, born October 21, 1898, and his wife, Ethel, born April 6, 1898, were married in New York City on March 7, 1922, and they thereafter resided in New York.
Two children were born of the marriage, Jill Rosenthal, born May 14, 1924, and Sue Rosenthal, born June 12, 1930. Both of the children were alive and had not married by the end of the calendar year 1946.
The petitioner's mother, Virginia Rosenthal, was born November 25, 1877, and died November 19, 1944.
The petitioner was a general partner in the New York banking firm of Ladenburg, Thalmann & Co. from 1924 until December 31, 1945, at which time he became a limited partner. The firm was a member of the New York Stock Exchange, Curb Exchange, and Commodity Exchange and did a large writing of new securities. Their capital was invested in private types of business deals. Petitioner had the general duties of a member of such a firm. His drawing salary from that firm was $20,000 a year during the period 1931 to 1936 and from 1936 to December 31, 1945, was $22,500 a year. His interest in the profits of the firm during the period 1931 through 1945 ranged from 20 to 22 per cent.
The petitioner was also entitled to interest, if and to the extent earned, at the rate of 5 per cent of his capital account with the firm.
The values of the petitioner's assets consisting of cash and securities as of the end of the years 1940 through 1944, as shown on the books at Ladenburg, Thalmann & Co. were as follows:
+----------------------------------+
¦December 31, 1940¦$2,004,518.39 ¦
+-----------------+----------------¦
¦December 31, 1941¦1,956,560.78 ¦
+-----------------+----------------¦
¦December 31, 1942¦1,860,280.21 ¦
+-----------------+----------------¦
¦December 31, 1943¦2,053,012.70 ¦
+-----------------+----------------¦
¦December 31, 1944¦* 1,597,100.14¦
+----------------------------------+
FN* After a payment of $400,000 out of such assets in connection with the marital agreement of July 26, 1944.
As of the close of business on August 31, 1943, the firm of Ladenburg, Thalmann & Co. had a net worth as shown on its audited financial state of $4,086,457, without including a credit balance of $6,090,532.19, representing the amount deposited with the firm by a corporation all the stock of which was owned by members of the firm and their families, and which account the firm was entitled to use in case of need in connection with its business and was subject to the risks of its business. As of August 31, 1943, the firm's assets were $19,458,367.75. On May 31, 1944, its assets were $21,777,323.79 and its net worth was $4,304,780.19, without including $6,101,193.28 credit balance in favor of the corporation all the stock of which was owned by members of the firm and their families, which stock could be used by the firm in case of need in connection with its business and subject to the risks of its business.
The petitioner, from 1935 to 1944, had the income from a trust set up by his mother. The trust corpus was securities of a value of $700,000 to $800,000. He also owned stock in Cooperstown Corporation, which was included in the above described assets of Ladenburg, Thalmann & Co., at $1,100,000.
Following the death of his father, Moritz Rosenthal, in 1934, the petitioner was a contingent remainderman of a trust of the residuary estate of his deceased father, the principal of which amounted to one-third of the residuary estate. The income beneficiary of the entire estate was the petitioner's mother, Virginia Rosenthal. On December 31, 1943, the petitioner was prospectively entitled to receive as such contingent remainderman, if he survived his mother, property of a value of approximately $750,000, such amount being the approximate amount which he ultimately received from the trustees under the will of his deceased father. In addition to the interest in the estate of his deceased father, the petitioner had an expectancy of inheriting one-third of his mother's individually owned property, since the petitioner had one brother and one sister. On the death of his mother, the petitioner became the income beneficiary of a trust of one-third of the residuary estate, the corpus of which trust amounted to approximately $435,000.
The amount of cash withdrawn by the petitioner and his wife from the firm of Ladenburg, Thalmann & Co. for the years 1935 through 1943 and the first seven months of 1944 was $653,365.57.
In the years 1935 through 1944 the petitioner lived at 50 East 77th Street, New York City, in a 16-room duplex apartment. He rented the apartment unfurnished. In the furnishing and decorating of the apartment he spent about $40,000 for fixtures and moldings and about $100,000 for furniture, draperies, and other furnishings. He had at the apartment six servants and a chauffeur, at an expense of about $1,100 a month. Doctor's bills for the family were about $10,000 a year, and dental treatment for the children cost $800 a year for four years. Petitioner's wife paid some household expenditures. The source of her funds were Ladenburg, Thalmann & Co. She opened an account with Fulton Trust Company with funds she received from the petitioner from Ladenburg, Thalmann & Co. She also had an account at the Hyannis Trust Company at Hyannis Port, Massachusetts. Petitioner acquired for $42,500 a house and about 15 acres of land about 1927 on an island at Cape Cod. It had a tennis court, gardens and beach house, five rooms downstairs, six rooms and sleeping porch upstairs, three of four baths, separate servant quarters, separate laundry, and garage. Petitioner had a board and station wagon there. The servants at the Cape Code home were the same as those in the New York apartment, except that in the summer time at the Cape Code home he had two gardeners and the balance of the year one gardener and a permanent caretaker. In 1936 petitioner bought 350 acres of farm land at Pine Plains, New York, upon which there was situated a rough farm house and farm buildings. In 1937 he built a home for his occupancy there and acquired another 150 acres of land. The home, including furniture and garage, cost about $80,000. Petitioner employed three farmers to take care of the farm and a couple of servants for the house. The help at the farm was not the same help used at the apartment in New York. The family lived at the farm at periods during the year and the petitioner lived there at the time of trial. In addition to the station wagon at Hyannis Port, the Cape Code home, and a town car at the apartment in New York, petitioner owned an airplane, at first a single engine Beachcraft and subsequently a twin engine, which was purchased in the late 1930's for about $42,500. Petitioner and a friend who also owned an airplane shared the expense of a commercial pilot, each paying about $2,500 a year.
During the years from 1930 to 1944 petitioner was a member of several clubs, the combined annual dues for which were about $1,000.
Petitioner and his family took various trips during his married life. In 1927 he, his wife and daughter and nurse were in Europe about 3 1/2 months. Later he took a house for his wife, daughter and nurse at Palm Beach. One year they went to Mexico. For several years he spent four or five...
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