Court Opinion

ID: 4631314
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:09:23.003433+00
Date Added: 2024-06-11T08:00:06.034560
License: Public Domain

LOUISE WRIGHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wright v. CommissionerDocket No. 20209.United States Board of Tax Appeals14 B.T.A. 1337; 1929 BTA LEXIS 2955; January 16, 1929, Promulgated *2955 Held, that the petitioner's payments to her two sons in the taxable year from income received from property of which she was for the most part only a life tenant, had no reasonable relation to the value of services rendered in the operation of a trade or business or to income received therefrom, and are not deductible from her gross income as ordinary and necessary business expenses.  J. A. Councilor, C.P.A., and Robert W. Littleton, Esq., for the petitioner.  F. Easby-Smith, Esq., for the respondent.  LANSDON *1337  The respondent asserts a deficiency in income tax for the year 1921 in the amount of $2,446.87.  The only issue is whether the petitioner *1338  was entitled to deduct from her gross income in the taxable year certain amounts alleged to have been paid as salaries to here sons as compensation for their services in connection with the management of her property.  FINDINGS OF FACT.  The petitioner is an individual residing in New York City.  She is a widow, and under the will of her deceased husband she is to receive, during her life, the income of his entire estate, the residual corpus of which will at her death be*2956  distributed in equal parts to her two sons.  The income-producing property left by the deceased husband of the petitioner consisted of a half interest in the business of the Harlem & Morrisiana Truck Lines, a partnership, and one-half of the stock of the North & East River Steamboat Co., a corporation; and certain undescribed parcels of real estate.  At the date of her husband's death the petitioner was about 60 years old and had never had any business experience.  Prior to the taxable years here involved she entered into an oral agreement with her two sons for the care and management of her income and property, and for payment for such oversight in amounts that she might consider just and proper compensation for the services to be rendered.  She paid each of her sons the amounts of $4,000 and $5,147.88 in 1920 and 1921, respectively, and deducted the amounts paid from her gross income in her income-tax returns for each of such years as ordinary and necessary business expenses.  Upon audit of her return for 1920 the Commissioner disallowed the deduction she made for that year, held that such payments were gifts of income after receipt, and determined the deficiency here in controversy. *2957  In the year 1921 the older son, Charles G. Wright, was employed as advertising manager for a New York newspaper at a salary of not less than $12,000 per annum.  He devoted considerable time to the oversight of his mother's business affairs, but was not active in the management or operation of either of the concerns from which the major part of her income was derived.  His services were of an advisory nature only.  He also devoted some time to the supervision of his mother's real estate holdings, and the investment of her income in securities.  Prior to the death of his father, M. G. Wright, the younger son of the petitioner entered the employment of the Harlem & Morrisiana Truck Line and was so engaged in the taxable year, in which he received a salary of not less than $100 per week.  In the taxable year the petitioner's income was made up of the following items: (1) dividends, $4,050; (2) other income $20,096.11; (3) interest on bank deposits, $674.04; and (4) income from investments, *1339  $2,200.  The first two items of income represented her share of the profits earned by the Harlem & Morrisiana Truck Lines and the North & East River Steamboat Co., each of which was*2958  engaged in a highly competitive business and depended for its success on the skill and ability of its management.  OPINION.  LANSDON: The petitioner contends that the payments made to her sons in 1921 were in compensation for services rendered in connection with the management and oversight of her property and the production of her income, and should be allowed as ordinary and necessary business expenses.  The record here does not support this contention.  She was not engaged in business.  The two enterprises from which she received the greater part of her income were concerns that had been long established and each of which had its own executives and employed personnel.  There is not the slightest evidence that either of the sons rendered any service to the North & East Steamboat Co. The younger son was an employee of the Harlem & Morrisiana Truck Lines, and as he was not the manager his salary of not less than $100 per week can hardly be regarded as nominal.  The older son devoted some time to the oversight of the real estate and security investments, but his mother's total income from this source was less than $3,000.  The oral contract of employment which it is alleged the*2959  petitioner made with her sons appears to have been a rather elastic agreement.  The sons could render such service as the exigencies of the estate required and their own engagements permitted, and the mother could place her own estimate of value thereon and pay whatever she thought was right.  There seems to have been no legal obligation either for the sons to serve or the mother to pay.  It is also to be noted that the petitioner, at the most, was only a life tenant of the corpus of the income-producing property, which at her death is to be divided equally between the sons.  If the services in question were necessary to the conservation of the corpus of the estate, they were at least as valuable to the sons as to the mother, and can not be regarded a business expense incurred by her in the production of income.  The petitioner cites the decision in , and contends that it should govern here.  In that case a father was engaged in the active operation of several large business enterprises, and was the owner of the property involved as well as the recipient of any income resulting therefrom.  He was growing old and was failing in health.  He*2960  employed his sons, who rendered continuous *1340  and substantial service in connection with the operations of his business and the production of his income.  The facts there have no significant similarity to the situation here, and our decision in that proceeding establishes no rule applicable to the contention of the petitioner.  In our opinion the payments here are without reasonable relationship to the value of services rendered or the amount of income produced, and in substance may be regarded as gifts of income after receipt.  Such payments are not deductible from the income of the petitioner in 1921 as reasonable compensation for services rendered in connection with business operations.  Decision will be entered for respondent.