Court Opinion

ID: 4615717
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:32:57.98225+00
Date Added: 2024-06-11T07:59:47.312520
License: Public Domain

CHARLES STEELE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Steele v. CommissionerDocket Nos. 85694, 86878, 86879, 86880.United States Board of Tax Appeals38 B.T.A. 589; 1938 BTA LEXIS 852; September 21, 1938, Promulgated *852  Petitioner gave money to his wife by his check, which she deposited to her separated account.  She then loaned him money on his note, amply secured by collateral.  Held, payments of interest and principal of note in later years were not gifts.  Montgomery B. Angell, Esq., and Weston Vernon, Jr., Esq., for the petitioner.  Lewis S. Pendleton, Esq., for the respondent.  MURDOCK *589  The Commissioner determined the following deficiencies in gift tax: Docket No.YearAmount856941925$100.00868781932115,156.2586879193348,191.5086880193429,098.62*590  The issue relating to 1925 is whether $60,000 which the petitioner paid to his wife in that year was interest on an obligation or a gift.  The issues relating to 1932 are whether $1,000,000, which the petitioner paid to his wife in that year, was in payment of an obligation or a gift, and whether $5,000 was interest on the obligation or a gift.  If a gift was made in 1932, then another issue must be decided; that is, whether 25 percent of the tax is due under section 3176, R.S.U.S., for failure to file a timely return.  The deficiencies for 1933*853  and 1934 arise from the action of the Commissioner in including the alleged gift of $1,000,000 made in 1932 in the computation of the gift taxes for each of the latter years.  FINDINGS OF FACT.  The petitioner, an individual, has been a partner for many years in the firm of J. P. Morgan & Co., of New York (hereinafter called Morgan & Co.).  Morgan & Co. is a private banking firm, engaged in a general banking business, including the receipt of money for deposit and withdrawal by checks drawn upon the firm, as in the case of commercial banks.  The petitioner's family, in May 1917, consisted of his wife and three daughters.  The daughters were married at that time.  The petitioner thought that he should make some provision for his wife and daughter which would not be subject to the possible risks and commitments likely to confront his firm during the remainder of the World War, which the United States had just entered.  He decided to give $1,000,000 to his wife and $250,000 to each of his three daughters.  The petitioner had on deposit with Morgan & Co., at the beginning of the transactions later described, $10,711.24 which was subject to withdrawal as he might desire at any time. *854  This amount was separate from and was not a part of his investment as a partner in the firm.  He delivered to his wife on May 19, 1917, his check dated that day, payable to his wife, and drawn on Morgan & Co. for $1,000,000, with the intention of making a gift of that amount to his wife.  His wife accepted the check and endorsed and deposited it to her separate account with Morgan & Co. on the following Monday morning, May 21, 1917.  The funds were then her separate property absolutely and completely, without any restriction whatsoever as to their use.  The three daughters received checks for the amounts given to them and they also deposited the checks to their own separate accounts with Morgan & Co.  The four women had always sought the advice of the petitioner in the investment of their separate funds and on this occasion he advised them to lend to him the funds which he had *591  just given them.  He would give to each his note for the amount of the loan made by that one, the notes would bear interest at the rate of 6 percent, and he would place as collateral, securing the notes, high grade securities, of the kind they would otherwise invest in, in a proper amount in*855  excess of each loan.  They were in no way required to take this advice, but they voluntarily agreed to make the loans as suggested and, after their money was credited to their accounts on May 21, 1917, they loaned the money to the petitioner on his notes.  He executed the notes on May 21, 1917, but postdated them to May 19, 1917.  The notes were payable upon demand after notice of six months.  He placed collateral worth 120 percent of the face amount of the notes with Morgan & Co. as security for the loans.  He regularly paid the interest on the notes and claimed deductions on his returns for that interest.  The recipients reported the interest as a part of their incomes.  The loans from the three daughters were paid off in 1920 and are in no way in issue here.  Morgan & Co. during all of the life of the loan held for the account of the wife, as collateral for the note, marketable securities supplied by the petitioner from his own personal holdings, duly endorsed and available for sale, having a total market value substantially in excess of $1,000,000.  The loan from the wife was paid off on July 1, 1932.  The amount received by the wife in payment was invested immediately, mostly*856  in the securities which had been held as collateral.  The petitioner did not make a gift of the $60,000 which he paid to his wife in 1925.  That amount was in payment of interest legally due on the note for $1,000,000.  He did not make a gift of the $5,000 which he paid to his wife in 1932.  That amount was in payment of interest legally due on the note for $1,000,000.  He did not make a gift of the $1,000,000 paid to his wife in 1932.  That amount was in payment of the principal legally due on the note.  The petitioner filed a gift tax return on May 25, 1938, for the year 1932 reporting transfers of $1,005,000 to his wife during that year, but disclaiming any liability for gift tax thereon.  The failure of the petitioner to file a gift tax return for 1932 on or before March 25, 1933, was not due to willful neglect, but was due to reasonable cause.  OPINION.  MURDOCK: The petitioner claims that he made a valid, complete, and absolute gift of $1,000,000 to his wife in May 1917; thereafter she made him a loan of the money which was valid in all respects; she had a legally enforceable right to the interest and the proncipal; and, consequently, when he paid his obligations*857  of principal and interest *592  to her, he was not making gifts.  The Commissioner now refuses to see in the transactions of May 1917 any absolute gift and bona fide loan.  The decision depends upon whether the evidence shows an actual completed gift and an obligation to pay the principal and interest on a legally enforceable loan.  These transactions were not prompted by any desire to avoid or minimize taxes.  There was no gift tax in effect in 1917.  The United States had just entered a great war.  Although the petitioner was a wealthy man, he did not want to have all of his fortune at the risk of his partnership business, in view of the uncertainties of the future.  He deemed it wise to make some provision for his wife and daughters which would not be subject to those partnership risks.  So he decided to make a gift of a substantial sum to each.  He had ample funds to cover the checks which he used to make the gifts, and the steps taken were regular in every way.  The funds were actually and completely transferred from his account to their separate accounts.  The evidence on this point is precise, complete, and convincing.  There were no strings of any kind to the gifts, *858  no restrictions as to use, and no agreements as to use of the funds by the donees.  The loans afford no satisfactory reason to disregard the reality of the gifts.  The petitioner worked out the plan of the loans for the benefit and protection of the members of his family in trying times.  He wanted them to receive 6 percent upon their money, but he knew that sound securities would not return that much income.  The interest provision enabled them to secure the 6 percent.  The risk of his partnership business was satisfactorily eliminated by the notes, which made the women his general creditors, taking precedence as to his individual property over firm creditors, and by the ample and aound collateral which he gave.  There was no ulterior motive back of the loans.  Every step was calculated to produce the desired result.  The loans were valid and binding.  The petitioner could have been compelled to pay the interest and principal, and, consequently, when he made the payments, he was not making gifts.  Since no tax was due, of course, there can be no question of a penalty for failure to file a timely return.  But in connection with the main issue, it is noteworthy that the representatives*859  of the Commissioner, with full knowledge of the facts, accepted the return of the interest on the notes, as income of the women and as a deductible payment by the petitioner, for many years.  A different attitude was taken for the first time in 1935 and the belated explanation was that there was no consideration for the note and payment of interest could not be enforced.  The evidence shows that the Commissioner erred.  Decision will be entered under Rule 50.