Court Opinion

ID: 4630076
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:06:43.635005+00
Date Added: 2024-06-11T07:57:28.724352
License: Public Domain

Harold E. Wolfe and Ada M. Wolfe, Petitioners v. Commissioner of Internal Revenue, RespondentWolfe v. CommissionerDocket No. 4918-67United States Tax Court54 T.C. 1707; 1970 U.S. Tax Ct. LEXIS 69; September 1, 1970, Filed *69 Decision will be entered for the respondent.  The petitioners, together with the majority of the other residents and property owners in a housing subdivision, entered into a contract with a contractor to install water and sewer lines in their subdivision, each paying a proportionate amount of the cost.  This was done with the concurrence of the board of aldermen of the village of which the subdivision was a part, and when the lines were completed they were, in accordance with the agreement with the village, transferred to the village which undertook to maintain and operate the water and sewer system for the benefit of any participants who desired such use.  The petitioners paid the monthly charge and made use of the sewage system but not the water supply. Held, that the transfer by the petitioners to the village of their interest in the water and sewer system did not constitute a deductible charitable contribution under sec. 170, I.R.C. 1954.  Rudy M. Groom, for the petitioners.F. Timothy Nicholls, for the respondent.  Atkins, Judge.  ATKINS*1707  The respondent determined a deficiency of $ 382.53 in income tax for the taxable year 1962.  The only issue presented is whether the petitioners are entitled to deduct, as a charitable contribution under section 170 of the Internal Revenue Code of 1954, an amount of $ 1,560 representing their share of a water and sewer system which was transferred to Hilshire Village, Tex.FINDINGS OF FACTSome of the facts were stipulated and are incorporated herein by this reference.The petitioners, husband and wife, resided in Houston, Tex., at the time their petition was filed with this Court.  For the taxable year 1962 they filed a joint Federal income tax return with the district director*71  of internal revenue at Austin, Tex.  Sometimes hereinafter the petitioner Harold E. Wolfe will be referred to as the petitioner.During the taxable year 1962, and for a period of 7 years prior thereto, the petitioners owned and resided in a home at 1314 Pine Chase Drive, which is located in Hilshire Manors, a subdivision of Hilshire Village, Tex., hereinafter called the village.The village is a duly incorporated municipal corporation situated adjacent to the City of Houston, Tex., and is a political subdivision of the State of Texas.  It is composed of four subdivisions, two of which are Hilshire Manors and Telge Place.  During 1962 Hilshire Manors and Telge Place were composed of 65 lots on which there were 48 residences, 45 of such residences being situated in Hilshire *1708  Manors.  Hilshire Manors had four streets -- Pine Chase Drive, Glourie Drive, and two connecting streets, Anadell and Bromley Roads.The village is governed by a mayor and a board of aldermen all of whom are elected in April of each year.  All are required to be residents of the village. Meetings of the village aldermen and mayor are held on a regular basis on the third Tuesday of each month, at which*72  village problems are discussed.  Such meetings are open to all residents of the village.Prior to June 18, 1962, the village did not provide water and sewerage services to the residents of Hilshire Manors and Telge Place.  The residents, including the petitioners, maintained their own wells and septic tanks. In some areas of Hilshire Manors the elevation of the lots was low and the soil content was not such as to rapidly absorb moisture.  In those areas it was necessary on occasion to have the septic tanks cleaned by a person in that type of business.  In some instances the septic tanks were inadequate, the effluent from the tanks rising to the ground surface and flowing into open surface drains, creating a health problem to the village. At sometime prior to the taxable year 1962, this condition prevailed with respect to the septic tanks of eight residences located on Glourie Drive and Bromley Road, one of such residences being located at the corner of Pine Chase Drive and Bromley Road.  The water well of one of such residences became contaminated.  As a result of these conditions, several homes in the village were offered for sale, and the village was subjected to adverse newspaper*73  publicity.  The petitioners at no time encountered any difficulty with their septic tank or with their well.Beginning in the fall of 1958, the sewage problem became a major topic of discussion at some of the monthly meetings of the board of aldermen of the village. At that time the board of aldermen appointed a committee of five residents who were interested in this problem, including petitioner, to investigate the Hilshire Village area, in its entirety, and to recommend a solution to the problem.  These five residents devoted considerable time and effort on the problem.  There was no way to install a complete sewerage system in the village, because there was no place to install a sewage treatment plant, and because this would be very expensive.  They approached the City of Houston which agreed to cooperate and provide water and sewage disposal services, provided there was installed in the village a gathering system for the sewage and a distribution system for the water. Houston made it clear, however, that it would not deal with the individuals, but only with the village. This was one reason that motivated the participants to transfer their interests to the village.In or after*74  April 1961 the board of aldermen of the village devised a plan for financing a water and sewer system. Such plan was to *1709  divide the estimated cost among those property owners who were expected to participate in the project.  As originally planned, 43 property owners were expected to participate, and it was calculated that $ 1,560 would be the cost to be borne by each owner.  The petitioners were among those who agreed to participate.  Collection of the $ 1,560 cost per residence was begun in the fall of 1961, and 10 or 12 collections were made at that time.  All collections were deposited in a specific bank account.The target date for starting the system was March 1962 and it was understood that if there were not enough subscribers to the plan, the money furnished by each resident would be refunded.  By March 1962 there were only 36 property owners who decided to participate.  On March 20 these 36 property owners in Hilshire Manors and Telge Place entered into a contract with Walter M. Mischer Co., contractor, to construct a water distribution and sewage collection system in the streets of the village to service these 36 lots, each agreeing to pay $ 1,560.  Such contract*75  provided that the service lines were to extend to the property line of the premises of each of the participating owners and no further.  The contract further provided as follows:It is further specifically understood and agreed by and between the parties hereto that Ordinance No. 1962-2, passed by the Board of Aldermen of Hilshire Village on March 20, 1962, provides that all water and sewer lines constructed within the public rights of way within Hilshire Village shall be dedicated and conveyed to the Village in consideration for which the Village will maintain such lines; and in this connection and in order to facilitate such dedication and conveyance of the lines to be constructed under this contract, and in order to avoid multiplicity of dedication and conveyance, the undersigned Owners do hereby jointly and severally make, constitute and appoint Contractor, its officers, agents and attorneys, our true and lawful attorney, for us, and each of us in our names, places and stead to make, acknowledge, execute and deliver all conveyances, assignments, dedications and/or other transfers of the said water and sewer lines contracted to be installed by Contractor hereunder, conveying, assigning, *76  dedicating and/or otherwise transferring all of our right, title and interest therein unto the said Hilshire Village pursuant to the aforesaid ordinance.The total contract price paid by these property owners to the contractor was $ 56,160.  Since there were not sufficient subscribers, the plans were revised to eliminate any system on Pine Chase Drive where the petitioners' home is located.  The petitioners and another resident were not covered in the revised plan.  Nevertheless, the petitioners agreed to participate with the other property owners and to contribute their share of the cost.  Later a supplemental agreement was executed by 7 additional property owners with the construction company, thereby permitting the system to be extended to include Pine Chase Drive, on which petitioners' residence was located.  Thus 43 property *1710  owners, including the petitioners, originally participated in the project.The petitioners, as original participants, were parties to the agreement with the contractor. They, like all other original participants, paid $ 1,560 into the Hilshire Manor Water & Sewer Fund as their prorata share of the construction price.  Their payment was made *77  by check dated May 15, 1962, to the order of Hilshire Manor Water & Sewer System.On March 20, 1962, the board of aldermen passed ordinance No. 1962-2 which provided in part as follows:Whereas, certain property owners participating in the Hilshire Manor Water and Sewer Project have signed and will sign in the future contracts with Walter M. Mischer Company, a Texas Corporation, as Contractor for the installation of water and sewer lines in that area and such contracts provide for a release and conveyance by such property owners to the Village of Hilshire, by said contractor as agent and attorney-in-fact, of all water and sewer lines and other facilities of such project, in consideration of the Village of Hilshire maintaining the lines and administering the system:Now, Therefore, Be It Ordained by the Board of Aldermen of Hilshire Village that upon the execution of such individual contracts between the property owners so situated and Walter M. Mischer Company, Hilshire Village, a municipal corporation, does hereby accept such conveyance of all water and sewer lines and other facilities of such system, and obligates itself to maintain water and sewer lines and other facilities of such*78  system out of funds provided for that purpose in a special fund known as, the Hilshire Manor Water and Sewer Fund, and to do whatever is necessary in the premises to operate such system on an economical and prudent basis, and to establish rates of such system in such a manner as to operate it, out of such funds only, and not out of general funds of the treasury of Hilshire Village.On the same date the board of aldermen passed ordinance No. 1962-4 which provided in part as follows:That the Mayor and Village Treasurer be authorized to pay to Walter M. Mischer Company, a Texas corporation, the sum of $ 17,160.00, being the total amount of cash collected by the Board of Aldermen of Hilshire Village and deposited in the Spring Branch State Bank in a Special Fund known as the Hilshire Manor Water and Sewer Job for construction of such lines in the area of Hilshire Manor or according to plans and specifications prepared by Turner and Collie; and further that the Mayor and Treasurer be authorized to pay Walter M. Mischer Company, a Texas corporation, the sum of $ 1,560.00 in addition to the above mentioned $ 17,160.00 when such funds are received upon application of the 36th property owner*79  in such project, and that the Mayor be authorized to deliver to Walter M. Mischer Company the funds received from the 36th participating property owner in such manner as the funds are received, either in cash or security, as the case may be;And further that the Board of Aldermen by proper resolution be authorized to return to the original participants all funds received for new connections to said facilities by the Hilshire Manor Water and Sewer Fund which are in excess of that required for its proper administration and maintenance; and that such funds shall be distributed out of the excess, on a prorata basis, to *1711  all of those participants who are members of such project by the 1st day of May, 1962, and to them only, and that all participants in said Hilshire Manor Water and Sewer Job after such date shall pay a connection charge of $ 1,560.00 plus whatever other necessary expenses, fees and charges the Board of Aldermen may in its discretion decide to be proper and uniform.On the same date the board of aldermen passed ordinance No. 1962-3 authorizing the issuance of a permit to the contracting company for the construction of the water and sewer lines in the streets of*80  the village. This was conditioned upon the payment by the contracting company to the village of a specified amount out of the sums already collected from property owners, for the purpose of paying necessary engineering and inspection fees and providing for $ 500 in a reserve fund to be known as the Hilshire Manor Water and Sewer Reserve Fund.Construction of the project was commenced by the contractor on May 1, 1962, and was completed on June 18, 1962.  Upon completion of construction, the entire system was conveyed to the village, which has operated the system as a village facility for all residents in the village who wished to subscribe.  Petitioners owned an undivided 1/43 interest in the completed system and such interest had a value of $ 1,560 at the time transferred to the village.On June 19, 1962, the board of aldermen of the village adopted a resolution which recited that the Village of Hilshire had assumed control of the water and sewer system, and which provided that a connection fee of $ 1,710 should be collected for all connections made after May 20, 1962.  It was therein provided that the system should be maintained by the village solely out of funds of the system and*81  that no general funds of the village should be used for the operation and maintenance of the system.  It was further provided that the moneys received from the operation of the system should be kept in a separate fund designated as the Hilshire Manor Utility Account and that in no event should any surplus therein be transferred to the credit of the village.The village entered into a contract with the City of Houston.  The City of Houston sold water to the village and also charged a monthly fee per house for disposal of the sewage. The village, in turn, charged a fixed monthly fee to the participating owners for both the sewer service and the furnishing of a specified amount of water.There were some residents who did not subscribe to the system and the system was not connected to their houses, although laterals were installed up to the houses.  One resident who subscribed has never tied into either the sewer system or the water supply.The petitioners had the water and sewer system connected to their house and have continued to pay the fixed monthly fee.  They have continued *1712  to use the sewer system but have not used the water supply, although they have the right, without*82  any further charge to do so.Six residents subscribed to the service after the system had been completed and each of them was required to pay the prescribed fee of $ 1,710 to the Hilshire Manor Water & Sewage System.  After paying the cost of making the house connections, the remainder of these fees was divided equally among all subscribers including the latest subscriber, and distributions were made within 60 days to all such participants.  The petitioners received rebates for some years, amounting to about $ 24 per year, which they reported as income in the years received.  In addition, there were annual rebates to all participants of any surplus of collections over operating expenses of the system.When the water system was completed, fire hydrants were installed for the first time in Hilshire Manors and Telge Place, and this benefited the homes in the area.  The use of these fire hydrants was not restricted to participants in the water system, but benefited the village as a whole.In their income tax return for the taxable year 1962, the petitioners deducted an amount of $ 1,560 as a charitable contribution to "Hilshire Village Utilities." In the notice of deficiency the respondent*83  determined that the transfer by the petitioners to the village of their interest in the water and sewer system did not constitute a charitable contribution within the meaning of section 170 of the Internal Revenue Code of 1954, and therefore disallowed the claimed deduction.The transfer by petitioners of their interest in the water and sewer lines was made in consideration of the village's undertaking to maintain and operate the water and sewer system by supplying water and disposing of the sewage. Their transfer of their interest did not proceed primarily from a detached and disinterested generosity, but primarily from the incentive of an anticipated benefit of an economic nature.OPINIONThe only issue presented is whether the petitioners are entitled to deduct for the taxable year 1962 as a charitable contribution under section 170 of the Internal Revenue Code of 1954, 1 the amount of *1713  $ 1,560 representing the value of their interest in a water and sewer system, which was transferred to the village in that year.*84  The respondent concedes that the village is, within the meaning of the statute, a political subdivision of the State of Texas, but contends that the transfer does not qualify under the statute because it was not a "contribution or gift." He argues that the transfer merely created a trust relationship or, alternatively, that the transfer was made pursuant to a binding contract whereby the petitioners received direct benefits, and that the transfer was primarily motivated by the anticipation of the receipt of such benefits.  The respondent also contends that the transfer was not made for exclusively public purposes because only residents who paid a designated sum of money, in addition to the monthly service charge, were permitted to participate in the water and sewerage services.The petitioners, on the other hand, contend that the transfer of their interest in the water and sewer lines was intended as a gift, that they never expected or received any benefit or other consideration from the village for the conveyance other than those derived from being a citizen of the village, that the water and sewer system has been operated exclusively for public purposes since the transfer, and that*85  therefore they are entitled to the benefit of a deduction as provided in section 170 of the Code.The term "charitable contribution" as used in section 170 is synonymous with the word "gift." Harold DeJong, 36 T.C. 896">36 T.C. 896, affd. (C.A. 9) 309 F. 2d 373; Jordon Perlmutter, 45 T.C. 311">45 T.C. 311; James A. McLaughlin, 51 T.C. 233">51 T.C. 233, affd. (C.A. 1)    F. 2d   ; and Channing v. United States, (D. Mass.) 4 F. Supp. 33">4 F. Supp. 33, affd. (C.A. 1) 67 F. 2d 986, certiorari denied 291 U.S. 686">291 U.S. 686.In Harold DeJong, supra, we stated:As used in this section the term "charitable contribution" is synonymous with the word "gift." Channing v. United States, 4 F. Supp. 33">4 F. Supp. 33, 34 (D. Mass.), affirmed per curiam 67 F. 2d 986 (C.A. 1), certiorari denied 291 U.S. 686">291 U.S. 686. A gift is generally defined as a voluntary transfer of property by the owner to another without consideration therefor.  If a payment proceeds *86  primarily from the incentive of anticipated benefit to the payor beyond the satisfaction which flows from the performance of a generous act, it is not a gift. Cf.  Estate of O. J. Wardwell, 35 T.C. 443">35 T.C. 443; Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 41; Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278.In Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, the Supreme Court stated:The course of decision here makes it plain that the statute does not use the term "gift" in the common-law sense, but in a more colloquial sense.  This Court has indicated that a voluntary executed transfer of his property by one to another, without any consideration or compensation therefor, though a common-law gift, is not necessarily a "gift" within the meaning of the statute.  For the *1714  Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 730. And, importantly, if the payment proceeds primarily from "the constraining force*87  of any moral or legal duty", or from "the incentive of anticipated benefit" of an economic nature, Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 41, it is not a gift. And, conversely, "[where] the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it." Robertson v. United States, 343 U.S. 711">343 U.S. 711, 714. A gift in the statutory sense, on the other hand, proceeds from a "detached and disinterested generosity," Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243, 246; "out of affection, respect, admiration, charity or like impulses." Robertson v. United States, supra, at 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention".  Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 43. "What controls is the intention with which payment, however voluntary, has been made." Id., at 45 (dissenting opinion).* * * *the proper criterion, established by decision here, is one that inquires what*88  the basic reason for his conduct was in fact -- the dominant reason that explains his action in making the transfer.  * * ** * * *Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case.  * * *The above principles were enunciated by the Supreme Court with regard to the meaning of the term "gift" as used in section 102(a) of the Internal Revenue Code of 1954, but it has been held that they are equally applicable with regard to the term "gift" as used in section 170 of the Code.  DeJong v. Commissioner, supra.Some of the residents of Hilshire Manors, which is a subdivision of the village, were experiencing difficulty with their septic tanks and this became a matter of concern to many residents of the subdivision.  Forty-three of such residents, including the petitioners, contributed $ 1,560 each into a fund for the construction of sewer and water lines in the streets of the village. They as a group entered into a contract with a contractor to accomplish this construction, but this was done in conformity with an understanding*89  with the board of aldermen of the village which adopted ordinances which provided that upon completion of the construction the village would accept conveyance of all the water and sewer lines and obligate itself to maintain such lines and to do whatever might be necessary to operate the system for the benefit of such property owners and any others who subsequently decided to participate and make a payment of $ 1,710.  When the lines were completed the 43 participants, through the contractor as their agent, transferred all their right, title, and interest therein to the village. The village then contracted with the City of Houston for the water supply and for the disposal of the sewage. Each resident *1715  who made use of the services paid a flat sum per month for use of the sewage system and the receipt of a specified amount of water.The petitioner testified that for 7 years prior to the construction of the water and sewer system he had used his own water well and septic tank without any problems and that he did not anticipate any problems, that he therefore did not need the use of the water and sewer lines, that he participated in the enterprise for the benefit of those who*90  did need the use of such facilities, that he did not expect anything back from the village in consideration of the transfer of his 1/43 interest, and that he intended the transfer of his interest to be a gift to the village.The petitioners and the other participants transferred their interests in the water and sewer lines to the village in consideration of the undertaking of the village to maintain and operate the water and sewer system for supplying water and disposing of the sewage. Thus, the petitioners received a consideration for their transfer which deprives the transfer of the character of a gift. And even if the petitioners had not used the facilities the same would be true, since the system would be available for their use if they should choose to make use of it.  Furthermore, such an improvement as an operating water and sewer system would certainly tend to increase the value of their property.In any event, even if it were considered that the transfer was made without consideration from the village, the result would be the same.  The judicial ascertainment of someone's subjective intent or purpose motivating actions on his part is frequently difficult, and his true intention*91  is to be determined not only from the direct testimony as to intent but from a consideration of all the evidence.  Irving D. Fisher, 54 T.C. 905">54 T.C. 905, and cases cited therein.  Although the petitioner testified that he did not need either the water or the sewer system because his water well and septic tank were adequate, he did concede that he knew when he transferred his interest that the facilities would be available to him if he desired to use them.  In fact, he did use the sewer system, paying the monthly charge.  Although he did not use the water supply he was entitled to do so without further charge.  From a consideration of the record as a whole, we are of the opinion that the transfer by the petitioners of their interest in the system did not proceed primarily from a detached and disinterested generosity, but primarily from the incentive of an anticipated benefit of an economic nature.The petitioners rely upon the cases of Toole v. Tomlinson, (M.D. Fla.)    F. Supp.   ; and Citizens & Southern National Bank of S.C. v. United States, (W.D.S.C.) 243 F. Supp. 900">243 F. Supp. 900. We do not consider *1716  those cases apposite. *92  The transfers involved in those cases were made for the public benefit and the only benefits received by the transferors were the same as those enjoyed by other members of the public who did not make any transfers.  In the instant case the benefit derived by the petitioners was a direct benefit resulting from their transfer and not merely an incidental benefit flowing to them as members of the community.For the foregoing reasons, we hold that the transfer by the petitioners to the village of their interest in the water and sewer system did not constitute a contribution or gift within the meaning of section 170 of the Code, and that the respondent did not err in disallowing the claimed deduction.  It becomes unnecessary to consider other arguments made by the respondent in support of his disallowance of the deduction.Decision will be entered for the respondent.  Footnotes1. Sec. 170 of the Code provides in part as follows:(a) Allowance of Deduction.  -- (1) General rule.  -- There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. * * ** * * *(c) Charitable Contribution Defined.  -- For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of -- (1) A State, a Territory, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.↩