Woodward v. United States, 14707.
| Decision Date | 08 December 1953 |
| Docket Number | No. 14707.,14707. |
| Citation | 208 F.2d 893 |
| Parties | WOODWARD v. UNITED STATES. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Tyrell M. Ingersoll, Cedar Rapids, Iowa (Robt. W. Clewell, Robert O. Daniel, Dubuque, Iowa, Elliott, Shuttleworth & Ingersoll, Cedar Rapids, Iowa, and Clewell, Cooney & Fuerste, Dubuque, Iowa, on the brief), for appellant.
Joseph F. Goetten, Sp. Asst. to Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Alonzo W. Watson, Jr., Sp. Assts. to Atty. Gen., and Francis E. Van Alstine, U. S. Atty., Sioux City, Iowa, on the brief), for appellee.
Before SANBORN and THOMAS, Circuit Judges, and HARPER, District Judge.
The Commissioner of Internal Revenue assessed deficiencies in the federal income taxes of F. W. Woodward, of Dubuque, Iowa, for the years 1944, 1945, and 1946, based upon the disallowance of certain claimed deductions. The taxpayer paid the additional taxes assessed, made timely claims for refund, and, upon their denial, brought this action under § 1346(a) (1), Title 28 U.S.C.A., asserting that the deficiencies had been illegally assessed.
The deductions disallowed by the Commissioner, with which this Court is concerned, involved amounts paid by the taxpayer to his wife as interest upon promissory notes payable on demand to her, with interest at 4%, which the taxpayer claimed he executed and delivered to her as the consideration for the repurchase or reacquisition by him of five policies of insurance upon his life which he had given to her in 1937 and which, in December 1939, he reacquired and placed in trust for her benefit.
The Commissioner determined that the payments made by the taxpayer to his wife in the years in suit as interest upon the promissory notes were not deductible as "interest paid or accrued within the taxable year on indebtedness," within the meaning of § 23(b) of the Internal Revenue Code, 26 U.S.C.A. § 23(b); that there was no real substance to the transaction out of which the notes arose; and that they were not enforceable and were merely gifts, interest upon which was not deductible from gross income.
The issue which was tried by the District Court, without a jury, was whether the notes evidenced genuine bona fide "indebtedness". The District Court found as a fact that "The transaction giving rise to the execution of the notes * * * lacked economic reality and the interest payments thereon in 1944, 1945, and 1946 were not paid upon an `indebtedness' within the scope of the provisions of § 23(b) of the Internal Revenue Code," and were not deductible. From so much of the judgment as reflected that determination, this appeal was taken.
The District Court wrote an exhaustive opinion, in which the facts relative to the notes in suit and the transactions out of which they arose are stated in complete detail. 106 F.Supp. 14.
The taxpayer in 1937 gave to his wife, Elsie M. Woodward, for her benefit and protection, five policies of insurance on his life aggregating in face value $125,000. He retained no interest in the policies, although he continued to pay the premiums. He filed a federal gift tax return for the year 1937, listing the transfer of the policies as a gift to his wife in the amount of $13,474.50, apparently their then value.
On December 26, 1939, the taxpayer entered into a trust agreement with his wife and their son, F. Robert Woodward, in which the five policies were scheduled as a part of the trust property, together with certain shares of stock. By the terms of the trust, Elsie M. Woodward was to receive from the trustees, consisting of the taxpayer, his wife, and their son, a fixed annuity of $300 a month during the taxpayer's lifetime, and $1,000 a month after his death. The trustees, other than the taxpayer himself, were authorized to pay his wife "such additional sums as they shall consider necessary or advisable for her comfort, pleasure, or support, or to meet any emergencies affecting her * * *." After the death of the taxpayer's wife, the trust was to continue for the benefit of their son, F. Robert Woodward.
The taxpayer's wife on December 28, 1939, executed an assignment to the taxpayer of two of the five policies in suit. The insurer was, on the same date, requested to make the estate of the taxpayer the beneficiary of the two policies. On January 30, 1940, the taxpayer's wife executed assignments to the taxpayer of the three other policies. On January 31, 1940, the taxpayer sent in requests that the beneficiary of each of these three policies be changed to "The Insured's executors or administrators." On January 23, 1940, the taxpayer assigned to the trustees of his trust two of the policies, and on February 19, 1940, he assigned the other three policies to them. While the assignments of the policies were completed after the date of the trust agreement, the delay in perfecting the assignments of the policies to the trustees was due to the necessity of complying with the formal requirements of the insurers with respect to the making of such transfers and the necessary changes in beneficiaries.
The demand notes payable to Elsie M. Woodward were executed by the taxpayer on the following dates and in the following amounts:
December 28, 1939, $ 5,098.00
January 31, 1940, $ 16,748.521
February 16, 1940, $ 2,159.69
The aggregate principal amount of the notes was the cash value of the five life insurance policies in suit.
According to the endorsements on the notes, interest on the $5,098.00 note and the $2,159.69 note was paid December 30, 1940, for the year 1940, and was not again paid until December 26, 1944, when interest for the years 1941, 1942, 1943, and 1944 was paid. Interest on the $16,748.52 note to December 31, 1944, was not endorsed upon it until December 26, 1944. It appears, however, that interest of $310.81 was paid on December 30, 1940. No principal payments were made upon any of the notes.
Tharsella Pins was the only witness, aside from the taxpayer himself, who testified in support of his claim.
The taxpayer's testimony, so far as material, may be summarized as follows:
He was and had been for many years in the business of publishing the Dubuque Telegraph Herald and owned a majority of the stock of the Dubuque Telegraph Herald corporation. He executed and delivered the notes in suit to his wife. When he executed the notes he received the insurance policies which he had previously given to her. The amount of the notes was the value of the policies when she assigned them to him. He had given the policies to his wife for her protection so that she would be taken care of in case he met with financial reverses. The newspaper was not heavily in debt in 1937, "but we were planning to go into debt." The taxpayer's wife owned none of the stock of the newspaper corporation. In the latter part of 1939 the taxpayer conceived the idea of setting up a trust for his family. A number of his friends had done the same thing. He intended to put the insurance policies in the trust for his wife's protection, together with 200 shares of the stock of the Dubuque Telegraph Herald corporation. He probably talked to her about it. He believed that the trust would give his wife greater protection and benefit than the assignments to her of the policies made in 1937. He asked her for the policies and told her he would buy them back, "that I would have to buy them back," but never said he would give her the notes in order to get the policies. He testified: "I had given them the policies to her, and it was one way of getting them back to put them in there the trust, and I figured that it was more protection for my wife and family." He stated that he had no reason for giving her the notes in exchange for the policies except the additional protection for her and his family. He never made any payments on the principal of the notes and gave no collateral to secure them.
Tharsella Pins, a private secretary employed by the Dubuque Telegraph Herald, testified that she had been in its employ since 1942; that, in addition to her work there, she took care of personal records for the taxpayer and his wife, without compensation from them; that she worked under the supervision of the taxpayer and his son; that they and she took care of Mrs. Woodward's...
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