Court Opinion

ID: 9643739
Source: CourtListenerOpinion
Date Created: 2023-08-22 20:39:27.64302+00
Date Added: 2024-06-11T18:11:02.951839
License: Public Domain

BIGGS, Circuit Judge
(dissenting).
The taxpayer in 1923 gave his wife a demand note under seal. The note was in the sum of $150,000, was secured by collateral and bore “interest” at the rate of six per centum per annum. For a period of eleven years the taxpayer has paid his wife $9,000 a year allegedly for her forbearance to sue upon the note or to foreclose upon the collateral; This transaction was entered into in Pennsylvania and the majority of this court are of the opinion that because a seal imports consideration and creates an enforceable obligation under the law of Pennsylvania, in contradistinction to the laws of many of the states, the sums paid by the taxpayer to his wife were interest on indebtedness and therefore deductible under the provisions of Section 23(b) of the Revenue Acts of 1932 and 1934.3
*355I must respectfully dissent from the views thus expressed by the majority since in my opinion under the tax laws of the United States the transaction does not have the significance attributed to it by the majority. I think that the sum paid annually by the taxpayer to his wife is not “interest paid * * * on indebtedness.” As was stated by the Supreme Court in Deputy v. DuPont, 308 U.S. 488, 497, 60 S.Ct. 363, 368, 84 L.Ed. 416, “ * * * although an indebtedness is an obligation, an obligation is not necessarily an ‘indebtedness’ within the meaning of § 23(b). Nor are all carrying charges ‘interest’. In Old Colony R. Co. v. Commissioner, 284 U.S. 552, 52 S.Ct. 211, 76 L.Ed. 484, this Court had before it the meaning of the word ‘interest’ as used in the comparable provision of the 1921 Act, 42 Stat. 227. It said, 284 U.S. at page 560, 52 S.Ct. at page 214, 76 L.Ed. 484, ‘ * * * as respects “interest,” the usual import of the term is the amount which one has contracted to pay for the use of borrowed money.’ It there rejected the contention that it meant ‘effective interest’ within the theory of accounting or that ‘Congress used the word having in mind any concept other than the usual, ordinary, and everyday meaning of the term.’ 284 U.S. at page 561, 52 S.Ct. at page 214, 76 L.Ed. 484. It refused to assume that the Congress used the term with reference to ‘some esoteric concept derived from subtle and theoretic analysis,’ 284 U.S. at page 561, 52 S.Ct. at page 214, 76 L.Ed. 484.” See also Title Guaranty & Surety Co. v. Klein, 3 Cir., 178 F. 689, 691, 29 L.R.A.,N.S., 620; Maryland Casualty Co. v. Omaha Electric L. & P. Co., 8 Cir., 157 F. 514, 519; Westerfield v. Rafferty, D.C., 4 F.2d 590, 594; Kishi v. Humble Oil & Refining Co., 5 Cir., 10 F.2d 356; Corbett Investment Co. v. Helvering, 64 App.D.C. 121, 75 F.2d 525, 528; City of Lincoln, Neb. v. Ricketts, 8 Cir., 77 F.2d 425, 428; Baltimore & O. R. Co. v. Commissioner, 4 Cir., 78 F.2d 460, 462, 463; Dry Dock Bank v. American Life Ins. and Trust Co., 3 N.Y. 344, 355; Hayes v. Commissioner, 261 Mass. 134, 158 N.E. 539; Terbell v. Commissioner, 29 B.T.A. 44, affirmed per curiam, 2 Cir., 71 F.2d 1017; Fall River Electric Light Co. v. Commissioner, 23 B.T.A. 168. It is also the rule that it is the popular meaning of words which controls construction and meaning of a tax statute. Old Colony R. Co. v. Commissioner, supra, 284 U.S. page 560, 52 S.Ct. 211, 76 L.Ed. 484; Maillard v. Lawrence, 16 How. 251, 261, 14 L.Ed. 925; DeGanay v. Lederer, 250 U.S. 376, 381, 39 S.Ct. 524, 63 L.Ed. 1042.
Since consideration is completely lacking for the note and it is stipulated that it was “made, executed and delivered as an absolute gift * * * ”, the note in itself is nothing more than a promise to make a gift in the future and the sums paid annually by way of “interest” are nothing more than gifts reduced to possession year by year.
I think that the respondent has done nothing more than attempt to reallocate income within the intimate group of his family and has tried to create a new economic unit for that purpose. As was made very plain by the Supreme Court in Commissioner v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 84 L.Ed. 788, regardless of the particular devices used to split up income within the intimate family group, the tax gatherer must look to substance of the transactions rather than at their form. The economic conceptions in the case at bar become sheerly metaphysical if the respondent’s contentions he accepted. The deduction of which the respondent seeks to avail himself is in reality a part of his own income. The wife’s income is really a part of her husband’s income, a gift from her husband. In my opinion it may be deducted by the respondent only as a gift. The Clifford case may be distinguished from the case at bar because Clifford retained control of the trust while in the case at bar the respondent does not have control of the note or the collateral. It should be observed, however, that the respondent retains the equitable interest in the collateral and the income from it, the latter going to that fund, the husband’s income, from which the wife’s stipend is paid. Though the respondent does not retain control of the note or collateral, these facts do not seem to me to be sufficient to transform an annual gift into “interest * * * on indebtedness”.
The decision of the Board of Tax Appeals should he reversed and the cause remanded with directions to assess deficiencies for the taxable years in accordance with the determination of the Commissioner.

 Revenue Act of 1932, c. 209, 47 Stat. 169, 179, Revenue Act of 1934, e. 277, 48 Stat. 680, 688, 26 U.S.C.A.Int.Rev.Acts, pages 489 and 672,