Court Opinion

ID: 4474276
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:51.894445+00
Date Added: 2024-06-11T14:50:53.048285
License: Public Domain

ARUNdell, /., dissenting: The evidence in this case establishes that the petitioners unconditionally and irrevocably conveyed a coal lease and the lease to a railroad siding to. two trusts established for the benefit of their minor children. Immediately- thereafter the trustee, who was an independent trustee, leased these properties to petitioners on a royalty basis, which was reasonable in amount. The Commissioner does not contend that the trusts were not bona fide but that the royalties paid by petitioners to the trusts do not constitute ordinary and necessary expenses within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code. The majority opinion takes the view that the agreement between petitioners and the trusts constituted a gift of partnership income, although the evidence is clear that the sums paid by petitioners to the trusts by way of royalties were in nowise dependent upon the earning of any income on the part of petitioners, and petitioners were legally liable to the trusts for the royalties, even if their operations had resulted in a loss. In my opinion, the undisputed facts bring this case within the principle stated by the Seventh Circuit Court of Appeals in Skemp v. Commissioner, 168 Fed. (2d) 598, in which opinion the court stated: The Commissioner argues that the payments as rent were not required because the taxpayer had voluntarily entered into the transaction. While the taxpayer voluntarily created the situation which required the payments of rent, the fact remains that the situation created did require the payments. In this case we have a valid, irrevocable trust, wholly divesting the taxpayer of any interest in the trust property, and an agreement by the taxpayer to pay the trustee a reasonable rental under a valid lease. The income from the property is not claimed in this proceeding to be that of the taxpayer. We have here only a question of deduction of rental from gross income. There can be no question but what rent required to be paid is properly deductible. The trustee was duty bound to exact rent of the taxpayer and the taxpayer was legally bound to pay it, just as much as if the taxpayer had moved across the street into the property of a third party. The majority relies on Ingle Coal Corporation, 10 T. C. 1199, which case was affirmed by the Court of Appeals for the Seventh Circuit, the same court which reversed our decision in A. A. Skemp, 8 T. C. 415. It is significant to note that in affirming Ingle Coal Corporation the appellate court adhered to its holding in Skemp v. Commissioner, supra, and pointed out what it considered to be the fundamental distinction between the two cases, viz., that “In the case before us [Ingle Coal] the transfer of property was not to an independent third party, but to a corporation which the same stockholders controlled, and who had it within their power to change or erase the overriding royalty obligations at any time that they chose to do so,” while in the Shemp case there was a change in the taxpayer’s economic status and he could only occupy the building by paying the rent fixed by the trustee. As already stated, the facts in the instant case in my opinion bring it within the principle of Skemp, supra, and distinguish it from Ingle Coal, supra. I can detect no sham in the transaction entered into by petitioners with the two trusts. As already stated, there was an absolute and unconditional conveyance of all right and title in the properties from the petitioners to the trustee which completely divested petitioners of all interest therein. Whatever interest the petitioners subsequently acquired was obtained by virtue of valid leases which provided for the payment of reasonable rentals and royalties. The royalties and rentals paid by petitioners to the trustee of the two trusts, to paraphrase the language of section 23 (a) (1) (A), were royalties or other payments required to be made as the condition to the continued use or possession, for the purpose of the trade or business, of property to which the taxpayers had not taken and were not taking title or in which they had no equity. I think the petitioners should prevail. Van Fossan, Murdock, Black, Tyson, and LeMire, JJagree with this dissent.