Shoemaker v. Commissioner of Internal Revenue, Docket No. 25639
| Decision Date | 25 June 1929 |
| Docket Number | 25640,Docket No. 25639,25886-25889. |
| Parties | FLOYD M. SHOEMAKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FLORA H. SHOEMAKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. M. HOLMES SHOEMAKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. GUY S. SHOEMAKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CLAYTON S. SHOEMAKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. LOIS SHOEMAKER OLCOTT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Manton M. Wyvell, Esq., Clyde L. Rogers, Esq., and Isaac Allison, Esq., for the petitioners.
P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent.
The respondent has asserted deficiencies in income taxes as follows:
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| Docket No. | Year | Amount
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Floyd M. Shoemaker _________________________ | 25639 | 1923 | $688.43
| | | 1922 | 9,097.84
Flora H. Shoemaker _________________________ | 25640 | Two questions are presented for determination in these proceedings, which were instituted for a redetermination of the deficiencies asserted: (1) Whether the $25,000 paid to Charlotte S. Holmes by the petitioner, Flora H. Shoemaker, in 1922 and by the partnership in 1923 is deductible as an expense in each of the taxable years; and (2) whether in the event the Board determines the payment to have been a capital expenditure, as contended by the respondent, they are entitled to deductions for exhaustion of the life estate so purchased.
At the hearing the appeals were consolidated, the issues involved being common to all.
FINDINGS OF FACT.
The petitioners are individuals residing at Elmira, N. Y. Flora H. Shoemaker is the daughter of Charlotte S. Holmes and the wife of Floyd M. Shoemaker. The petitioners Lois Shoemaker Olcott, Clayton S., Guy S., and M. Holmes Shoemaker are the children of Flora H. and Floyd M. Shoemaker.
On July 13, 1919, Clay W. Holmes, husband of Charlotte S. Holmes, died, leaving a last will and testament, which provides in part as follows:
Second. — I give and bequeath to my beloved wife, Charlotte Holmes, all real and personal property of which I may die possessed, for her sole use and benefit, during her life, the same to pass from her to her only daughter, Flora Lois Shoemaker, at her death, for the sole benefit of herself and her children. In case my wife should die before me then my daughter Flora Lois Shoemaker, shall in her stead receive all the property conveyed by this Will, or in case my wife should be of unsound mind then the property shall pass to the daughter aforesaid with the condition that so much of the property as may be needed shall be used without limit to make my said wife comfortable while she lives.
An order of the surrogate's court held in Chemung County, New York, on the 8th day of June, 1920, fixes the value of the estate to Charlotte S. Holmes and Flora L. Shoemaker as of the date of the death of Clay W. Holmes as follows:
ORDERED, That the cash value of all the legacies, estates, annuities, life estates, terms of years, property and interests, growing out of the estate of said deceased, and which are subject to tax under said Act, and the tax to which the same are liable, shall be and the same are hereby assessed and fixed as follows:
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Beneficiary | Present value | Tax
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Charlotte Holmes _____________________________________ | $80,741.60 | $1,264.83
Flora L. Shoemaker ___________________________________ | 376,575.39 | 11,613.02
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The estate consisted largely of a going business, the Holmes Frostilla Co., which manufactured face lotions and cosmetics. The Holmes Frostilla Co. had been established about 1870 by Clay W. Holmes, then a pharmacist in the City of Wilkes-Barre. With a certain doctor he had observed the complications resulting to the skin of miners in that locality from climatic and occupational conditions and devised the formula for Frostilla, which they prepared in the drug store operated by Holmes. Demands increased and after a half century the formula for Frostilla became quite valuable, the article being widely distributed.
During the few years just preceding the death of Holmes he took an indifferent interest in developing the Frostilla business. Upon his death a modern sales system was instituted and a national advertising campaign conducted which Holmes had not thought worth while. The result was a large increase in sales and a better market position as the articles manufactured became internationally established.
The net earnings of the Holmes Frostilla Co. for the years 1916 to 1922, inclusive, were as follows: 1916, $38,647.01; 1917, $39,257.17; 1918, $21,454.66; 1919, $52,852.16; 1920, $49,939.48; 1921, $46,606.19; 1922, $41,183.27.
As a result of the business methods employed and the resulting increase in net earnings, the Holmes Frostilla Co. had a value on December 8, 1921, greatly in excess of the value at the date of Holmes' death.
On December 8, 1921, the life interest of Charlotte S. Holmes in the estate of her husband had a value of at least $92,500.
On December 27, 1921, Charlotte S. Holmes was 82 years of age and according to accepted mortality tables her life expectancy, dating from January 1, 1922, was 3.7 years. She was quite unequal to the management and personal direction of her property, which included the Holmes Frostilla Co., and in order to relieve herself of the care and obligations attached thereto the following contract was entered into on December 8, 1921:
THIS AGREEMENT, made this 8th day of December, 1921, by and between Charlotte S. Holmes, of the City of Elmira, New York, party of the first part, and Flora Holmes Shoemaker, of the City of Elmira, New York, party of the second part, WITNESSETH:
NOW THEREFORE, the party of the first part, in consideration of the sum of One Dollar, ($1.00), paid by the party of the second part, the receipt whereof is hereby acknowledged, and the promises of the party of the second part hereinafter contained, does hereby consent that the custody and control of the corpus of the estate of said Clay W. Holmes excepting the garage lot and the garage thereon which is now used by the first party, and excepting also the cemetery lot, may be transferred to the party of the second part to use and invest the same as said second party may desire absolutely as if it were her own, and pay the income thereof monthly during the life of said party of the first part as hereinafter provided.
1. The party of the first part hereby grants to the party of the second part power to grant and convey in her own name any of the assets of said estate, excepting the garage lot and the garage thereon which is now used by the first party, and excepting also the cemetery lot, and the party of the first part hereby grants, quitclaims and remises unto the party of the second part, her heirs and assigns forever, all the real estate which belonged to said Clay W. Holmes at the time of his death, excepting the garage lot and the garage thereon which is now used by the first party, and excepting also the cemetery lot, and agrees to execute such other instruments in writing as may be necessary or convenient to carry out the terms of this agreement.
2. The party of the second part agrees to pay monthly to the party of the first part, from the income of said estate, one-twelfth of Twenty-five thousand dollars, ($25,000) i. e. Two Thousand Eighty-Three Dollars and Thirty-Four cents, ($2,083.34) during the life of said party of the first part, and in case the income of said estate is not sufficient therefor ...
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