Court Opinion

ID: 9448611
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:41:15.136859+00
Date Added: 2024-06-11T17:31:30.242847
License: Public Domain

WHITAKER, Judge
(dissenting).
I regret to disagree with Judge LARAMORE’S opinion with reference to the basis for the computation of the deduction for the charitable contribution in 1951. I think he has misinterpreted the applicable statutes.
Ordinarily a lawyer on a cash basis includes in his income tax return all fees received within the year. From this, in order to arrive at his “adjusted gross income”, as defined in section 22(n) of the 1939 Internal Revenue Code, he deducts his “trade and business deductions”, his “deductions attributable to rents and royalties”, “losses from sales or exchange of property”, and, in some cases, other items. The result is his “adjusted gross income.”
To arrive at his net income, the lawyer deducts various things set out in section 23, among which are “charitable and other contributions” up to an amount not in excess of 15 percent of his “adjusted gross income.” Then he deducts certain exemptions and computes his tax on the balance.
This taxpayer received a fee in 1951 of $1,266,625.20. This he included in *478his gross income. In that year he made contributions of $203,243.48, but, since this exceeded 15 percent of his adjusted gross income, he only deducted $189,-993.78.
So computed, his tax amounted to a certain figure. But section 107 of the Code says that he does not have to pay this much, since the fee was earned in a period of more than three years, if a lesser amount results from computing the tax for each year during which the services were rendered, including in the gross income for each year a ratable part of the fee received, and taking the deductions and exemptions permitted by the law applicable to each year. If the aggregate is less than the tax as normally computed, he is required to pay only the lesser amount.
In making the computation under section 107, the tax for each year is computed as if he had actually received in that year a ratable part of the total fee. This ratable part is included in his gross income. From this he takes his deductions, expenses, taxes, interest paid, losses and charitable contributions made during the year, to the extent allowable for the particular year. He does this for 1935, 1936, 1937, 1938, and so on up to and including 1951. For each year he deducts from his supposed income for that year the allowed items, including any charitable contributions made in that year. He does this for 1951. He computes his gross income for that year, as if he had received therein only a ratable part of the total fee; then he takes the ■deductions allowed to determine “adjusted gross income”; and then he deducts therefrom other items allowed, including a charitable deduction, up to 15 percent of this adjusted gross income.
But the aggregate of the taxes for ■each of these years is not his tax, necessarily; it is the tax he has to pay only if it is less than the tax normally computed.
It seems clear to me that when a taxpayer computes his tax under section 107, ia order to ascertain his adjusted gross income, he includes in his gross income for each year only the ratable amount of the total compensation received, and then takes therefrom the allowable deductions. From the adjusted gross income, so arrived at, he deducts charitable contributions made for that year, up to 15 percent of his adjusted gross income, computed as prescribed in section 107, that is, by including in gross income only a ratable part of the fee received in that year.
Defendant’s Counterclaim and Set-off
On August 13, 1957, defendant refunded to plaintiff an overpayment of income taxes in the principal amount of $85,-721.93, which, together with interest, amounted to a total of $114,885.19. However, after plaintiff had filed his petition in this case, defendant on July 29, 1959, filed a counterclaim, which was amended on September 17, 1959, claiming that this refund was erroneous. The reason assigned therefor was that Wilkinson should have reported as income the difference between what he paid for an interest in Captain Bonnin’s share of the fee in the Ute case and'what he received therefor. (Captain Bonnin was originally employed by the Indians and associated plaintiff with him.)
What plaintiff was entitled to receive on account of Bonnin’s share of the fee, he assigned, in September 1951, to the Brigham Young University and the Church of Jesus Christ of Latter-day Saints. This was paid to the assignees in December 1951. Plaintiff never received any part of it.
Plaintiff says no gain is realized from the appreciation in value of property when the property is given away. This has long been recognized; it has never been questioned. The Revenue Agent who examined plaintiff’s returns recognized it. His report, quoted in the Trial Commissioner’s finding 4, reads:
“No gain or loss is realized by a gift of property even though the gift is a charitable contribution for which a deduction is allowed of the fair market value of the property at the time of the contribution of the *479gift. L.O. 1118, CB Dec. 1923, p. 148.
“If the contribution is other than money, the basis for calculation thereof is the fair market value of the property at the time of the contribution. Since there is no provision in the law which makes a charitable contribution of gift result in taxable gain or deductible loss any appreciation in value of the property is not taxable to the donor and any decrease in value is not deductible.”
This report was approved by the Commissioner of Internal Revenue.
Defendant now says — contrary to the determination of the Commissioner of Internal Revenue — that what plaintiff gave the university and his church was his income and, therefore, the difference in what he paid for it and its value on the date of the gift should have been returned as income. This is an untenable position. Plaintiff realized no income from his purchase of Bonnin’s interest in the fee, because he never sold or exchanged what he had bought, but gave it away. As the Revenue Agent said, “no gain or loss is realized by a gift of property.” This has been the uniform holding of the Internal Revenue Service from the beginning of income tax era.
This was not a gift of income that had been earned by plaintiff; it was never plaintiff's income; it was Bonnin’s income. Plaintiff became entitled to it by purchase, and not as compensation for his services.
Captain Bonnin, an ex-soldier of the United States Army in World War I, was a quarter-blood Sioux Indian. He had been chief clerk of the Uintah-Ouray Reservation in Utah. He had completed the law course at George Washington University, but did not get a degree and was never admitted to the Bar, but he was admitted to practice before the Department of the Interior. His wife was a full blood Sioux, highly educated, a fine orator, a graduate of the Boston Conservatory of Music, and a fine musician. She was president of the National Council of Indians and Captain Bonnin was secretary-treasurer. The Indians had full confidence in Captain Bonnin.
In August 1932 Captain Bonnin entered into two contracts to represent the Uncompahgre Band of Ute Indians in Utah and the Uintah and White River Bands of Ute Indians in the prosecution of claims against the United States. These contracts had to be, and were, approved by the Secretary of the Interior. They were property rights and were the subject of assignment. Captain Bonnin did assign them to a New York law firm, but reserved in himself a certain interest in them. The contracts called for a fee not to exceed 10 percent of any amount recovered on the claims. Captain Bon-nin' had never been admitted to the Bar and was unable to represent the Indians in court, but, nevertheless, he was entitled to a certain part of any recovery that might be had, since it was he who had the contracts to represent the Indians. He did such work as he could on the ease but practically all the work was done by the lawyers, but, even so, Captain Bonnin was entitled to his part of the fee.
Bonnin’s assignment of the contract passed from the New York law firm to Wilkinson; new and other contracts were made, but Bonnin’s interest survived. When the fee was finally paid, Bonnin’s share was $427,000+, less the part of his fee which he had previously sold, although Bonnin had died in 1942. Although he rendered no service after that date, and but little before, and although the recovery was due primarily to the labors of others, Bonnin’s share, arising .out of his contract with the Indians, was the sum stated.
It can scarcely be doubted that Bon-nin’s interest in any fee to be recovered was property — and valuable property at that — and capable of assignment to charitable and like organizations.
In 1938 Bonnin had to raise some money. He approached plaintiff to induce him to purchase an interest in his share of the fee. Plaintiff finally pur*480chased a 44.79 percent interest in it for the sum of $12,000+. This left Bonnin with a 55.21 percent interest. After Bonnin's death, his widow became entitled to a one-third interest in this 65.21 percent. Plaintiff, at her request, bought her interest for $16,000+. This he later sold to William F. Edwards for $72,916.50.
When plaintiff collected the fee awarded by the court, for himself and as trustee for others entitled to shares in it, he paid Bonnin’s share of $427,245.53 to John K. Edmunds, as trustee or attorney-in-fact, for distribution to the assignees and to Bonnin's heirs. Edmunds distributed the amount as follows:
To Church of Jesus Christ of Latter-day Saints.$124,386.13
To Brigham Young University. 66,977.15
To William F. Edwards. 78,627.42
The balance of $157,254.83 he held for the benefit of the heirs of Captain Bonnin.
Had Bonnin lived and had not sold a part of his share of the fee, he would have received the full $427,245.53, although most of the work that produced the fee was done by Wilkinson. Therefore, what Wilkinson got out of the Bon-nin share was not as compensation for his services, but as a result of his purchase of an interest in the compensation to which Bonnin was entitled. If he had not purchased an interest in it, he would have gotten no part of it. Hence, plaintiff would have realized no income until there was a sale of what he had purchased. Since he never sold it, it was never plaintiff's income, and was properly excluded from his gross income.
Since this income was Bonnin’s income, and not Wilkinson’s, the cases cited by defendant are not in point.
Deféndant does not dispute plaintiff is entitled to a deduction of the market value of the charitable contribution up to 15 percent of his adjusted gross income.
Plaintiff’s purchase and sale of the interest in the Bonnin fee he purchased from Bonnin’s widow was a capital transaction, and was so treated by plaintiff in his return.
I am of opinion that plaintiff’s petition and defendant’s counterclaim should be dismissed.