Court Opinion

ID: 6865081
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:53:34.798153+00
Date Added: 2024-06-11T16:05:18.582299
License: Public Domain

MANTON, Circuit Judge
(dissenting).
Under a license agreement between the petitioner and the G. Washington Coffee Refining Company, the corporation was licensed to use his secret process for the manufacture of powdered coffee, and in consideration therefor agreed to pay to the petitioner a fixed royalty payable monthly, based upon net receipts from the sale of the product. By the letter quoted in the majority opinion, petitioner assigned to his wife and three children a one-fifth interest each in this royalty contract with the company.
Because of certain facts considered below, the Board of Tax Appeals held that the petitioner had set up a trust, reserving power to so modify and change the corpus of the trust $hat it might be revested in himself, and consequently that the income *832of the trust was taxable to the settlor within section 219 (g) of the Revenue Acts of 1924 and 1926, 26 U.S.C.A. § 166 and note.
The majority opinion relies on the settlor’s reservation of a power to apply the royalties, notwithstanding the assignment, to the discharge of four-fifths of the financial obligations of the settlor existing at the date of assignment — 1918.
Upon neither of these theories is it possible to sustain the Commissioner in taxing to the petitioner the entire amount of these royalty payments made in 1925, 1926, and 1927. In Nelson v. Ferguson, 56 F.(2d) 121 (C.C.A.3), certiorari denied 286 U.S. 565, 52 S.Ct. 646, 76 L.Ed. 1297, the petitioner, had assigned a patent to a corporation in consideration of the corporation’s agreement to pay him a third of all the profits received by the corporation from its use in manufacturing a patented article. As a gift, the petitioner transferred all his rights under this contract to his wife, and thereafter the corporation paid her a third of all the profits. The court held that the petitioner under his contract with the corporation had certain vested property rights, and that these had been effectively transferred to the wife. The transaction was not merely an anticipatory transfer of income when earned, although from the property assigned profits and income were expected to flow. The income was not taxable to the assignor, the petitioner, but was properly returned as the income of his wife, the assignee. This principle, that, where there • is a present transfer of property, the income thereafter accruing is taxable to the assignee and not the assignor, is established in Lowery v. Helvering, 70 F.(2d) 713 (C.C.A.2); Hall v. Burnet, 60 App.D.C. 332, 54 F.(2d) 443, 83 A.L.R. 86, certiorari denied 285 U.S. 552, 52 S.Ct. 408, 76 L.Ed. 942; Com’r v. Field, 42 F.(2d) 820 (C.C.A.2), and Copland v. Com’r, 41 F.(2d) 501 (C.C.A.7).
In the instant case, the petitioner had a vested property right to royalty payments by reason of his contract with the corporation. He effectively assigned four-fifths of these property rights, and the income therefrom should be taxed to the assignees, his wife and children, not to him. The doubt cast upon this conclusion arises by reason of certain reservations in the assignment.- If these reservations can be read as reserving the disposition of the income within the petitioner’s power, it is properly taxable to him. If he can divert the income, it is-taxable to him whether or not he exercises his option of diverting it, for the income is still within his control. Mitchel v. Bowers, 15 F.(2d) 287 (C.C.A.2), certiorari denied 273 U.S. 759, 47 S.Ct. 473, 71 L.Ed. 877; Rosenwald v. Com’r, 33 F.(2d) 423 (C.C.A.7) , certiorari denied Rosenwald v. Lucas, 280 U.S. 599, 50 S.Ct. 69, 74 L.Ed. 644; Dickey v. Burnet, 56 F.(2d) 917 (C.C.A.8) , certiorari denied 287 U.S. 606, 53 S.Ct. 10, 77 L.Ed. 527. And see Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 337, 74 L.Ed. 916, where the court said:
“If a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent. The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.”
The assignment to the petitioner’s family provided that any' financial obligations the settlor had in 1918 should “be liquidated out of the herewith assigned assets to the extent of one-fifth by each of you, the balance to be yours absolutely.” This paragraph the prevailing opinion relies on to make the income of 1925, 1926, and 1927 taxable to the petitioner. There is no showing in the record what these debts were, and nothing was brought out to show that any debts remained outstanding during the years in question, except the monthly payments to Arkell. The petitioner concedes that so far as his debts were paid there was income realized by and taxable to him. This is as far as he should be compelled to go. It is not his burden to prove that no other debts were outstanding to which the benefits of the assignment might be subject. The Commissioner is attacking the assignment, and it should not be held invalid any further than justified by the proof he offered. The payment of the settlor’s obligations would be income realized to him when the payment was made. Although the assignment would be regarded as invalid for tax purposes as far as the payments to the assignees could be subject to these debts, whether or not they were so applied, the provision cannot be considered the *833equivalent of a general power of disposition reserved in the assignor. Even if it be considered that a trust was set up here, section 219 (g) of the Revenue Act restricts the income taxable to the settlor only to that derived from that part of the corpus which the grantor has power to re-vest in himself during the taxable year. Though we read this broadly enough to cover the present case, it gives no authority for taxing the entire income during 1925, 1926, and 1927 to the petitioner.
Another provision of the letter states: “However, in view of your inexperience in business matters, I want it distinctly understood that I reserve, for myself, the exclusive right to .alter or modify said contract, as well as the amount of royalties payable thereunder, from time to time, as in my judgment may best serve the interest of the business.”
This refers to the petitioner’s royalty contract with the corporation. Since the petitioner owned stock of the corporation, it is argued that this power to reduce the amount of royalties due from the corporation would correspondingly increase his income through dividends on the corporation stock which he held. Dickey v. Burnet, 56 F.(2d) 917 (C.C.A.8), is advanced as authority against petitioner. In that case a father sold clay beds to a corporation which he owned, and the corporation agreed to pay two-thirds of the income from these clay beds to his wife and children. The father had fifteen plants dependent upon these clay beds for their raw material. He contracted with the corporation to buy clay from it at $1 a ton. It was developed that the purchase contract between the father and the company was “subject to termination by mutual assent which would be readily forthcoming,” since he owned all the stock of the corporation selling the clay. Thus the father could have contracted to pay any price he pleased for the clay. This, of course, would have caused the income payable to the wife and children to vary. It was held that the petitioner had not in fact relinquished control over the income and that it was still taxable to him. The difference in that case and the instant case is that here the power he retained to control the royalty contract was not complete. The quoted language, “in view of your inexperience in business matters, I want it distinctly understood that I reserve,” etc., would not empower the petitioner to promote his own interest at the aassignees’ expense. His, the .only, testimony offered, was that the purpose of this reservation was to leave room for a readjustment of the corporation’s royalty obligations if new financing, which might require Such readjustment, should be found necessary. The power given seems to be no broader than this. ■ More comprehensive language has been restricted in New York. Cf. Carrier v. Carrier, 226 N.Y. 114, 123 N.E. 135. There, the settlor of a trust for the welfare of his daughters had reserved an absolute and uncontrolled discretion in investing the corpus of the trust. After the family had parted, the father wanted to use the fund in a speculative venture. The court restricted him, holding that the language did not empower him to further his own interest at the beneficiaries’ expense. The provisions in the present case should be similarly limited. This would not, therefore, reserve to the petitioner here complete dominion over the income to the assignees.
The provision in the letter of assignment that the general expense of living together should be shared does not make the entire royalty income taxable to the petitioner. During the years in question the children were all over 21; petitioner had no duty to support them, and their payment of their share of the living expenses was not a discharge of the father’s obligation. There was a duty to support his wife. A proper finding of the amount by which the petitioner’s duty of support was discharged by these agreed payments would support a tax upon this amount as income to him. However, no finding was made, and, for all that is shown, the wife may have been completely independent financially or provided for by other means.
As far as the payments made toward the general upkeep of the petitioner’s house inure to his benefit, he can be taxed as upon realized income. It appears that the petitioner desired by the letter of assignment to give his wife and children each a one-fifth interest in the residence. As the letter was ineffective to transfer any real property, petitioner made the provision by deed about a year after the letter. The expenses on the realty assumed by liis family in that interval would be taxable to him, but that is no reason for levying a tax in 1925, 1926, and 1927 when the property was no longer owned by the petitioner.
*834The payments to Arkell of $2,000 per month were not shown to be reasonable business expenses. The taxpayer has the burden of proving that he came within the statute allowing the deduction. See New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348. There is nothing to force a reversal of the Commissioner’s assessment as to these payments.
The petitioner should be taxed only on one-fifth of the income from the royalty contract with the corporation and on the amounts paid yearly to Arkell.
The order should' be reversed and remanded.