Opinion
Docket No. 663.
1944-07-17
RICHARD S. DOYLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Richard S. Doyle, Esq., and Stanley Worth, Esq., for the petitioner. Philip A. Bayer, Esq., for the respondent.
After the taxpayer had acquired a share in an interest in the future proceeds of a judgment to be obtained by another in a suit against the United States, and after the judgment had become final but before its payment, the taxpayer assigned percentages of his interest to his wife and each of his two minor sons. Held, the assignment is an anticipatory assignment of future income and the gain when received by the assignees is taxable to the taxpayer. Richard S. Doyle, Esq., and Stanley Worth, Esq., for the petitioner. Philip A. Bayer, Esq., for the respondent.
The Commissioner determined a deficiency of $5,860.25 in income tax for 1938, as the result of including in petitioner's gross income $20,955.61 received by his wife and minor sons in payment of rights petitioner had theretofore given them in a contract.
FINDINGS OF FACT.
The petitioner, a resident of Bethesda, Maryland, filed his 1938 income tax return at Baltimore, Maryland. The return was on the cash basis. His wife, Anne, filed a separate income tax return. Their two children, Samuel C., born August 4, 1925, and Willis S., born January 12, 1928, have been maintained and supported by petitioner during all their lives.
On December 11, 1919, Briggs & Turivas, an Illinois corporation, made a contract with the United States Shipping Board Emergency Fleet Corporation for the purchase of certain fabricated and unfabricated iron and steel materials. On the same date Briggs & Turivas, Walter B. Eichleay, Theodore Friedeberg, and Joseph G. Hitner made an agreement as follows:
It is agreed by the undersigned that Briggs & Turivas, a Corporation of Illinois having purchased certain materials from the U.S. Shipping Board, Emergency Fleet Corporation, covered by a proposal and acceptance on December 11th, 1919, hereby agree to assign all of their right, title and interest in the said property so purchased to a Syndicate composed of the undersigned, or a Corporation to be organized by them, who shall have an interest in the profits and shall share the expenses or losses in the proportion set opposite to their names, as follows:
+----------------------------+ ¦Briggs & Turivas ¦50% ¦ +--------------------+-------¦ ¦Walter B. Eichleay ¦12 1/2%¦ +--------------------+-------¦ ¦Theodore Friedeberg ¦25% ¦ +--------------------+-------¦ ¦Joseph G. Hitner ¦12 1/2%¦ +----------------------------+
Agreements satisfactory to counsel for the parties hereto shall be signed by them when prepared and presented for signature, and pending the execution of the final agreements Briggs & Turivas shall act in this matter as agents for the Syndicate— and shall have authority to call upon the undersigned for their proportionate share of the expenses which they hereby agree to pay. Briggs & Turivas hereby acknowledge the receipt of Twenty-five Thousand Dollars from the other members of the Syndicate in payment of one-half of the deposit theretofore made on account of the said purchase price.
Thereafter, on December 18, 1919, the United States Shipping Board Emergency Fleet Corporation set aside the sale of surplus materials to Briggs & Turivas and resold the materials to another party over the protest of Briggs & Turivas, thereby breaching its contract. In 1922 Briggs & Turivas filed a claim for breach of contract with the United States Shipping Board, which was denied March 24, 1923. On June 15, 1925, Briggs & Turivas instituted an action in the Court of Claims against the United States for damages for the breach of contract. On November 9, 1936, the court awarded judgment to Briggs & Turivas for $2,778,333 damages. A motion for a new trial filed by the Government was denied on February 8, 1937. A petition for certiorari was denied by the Supreme Court of the United States on October 11, 1937. A deficiency appropriation bill carrying an appropriation to pay the judgment was passed by Congress and approved by the President of the United States on March 5, 1938. Payment of $2,778,333 was made on March 22, 1938, by warrant of the United States to Briggs & Turivas.
Expenses of the prosecution of the suit having accumulated, demand was made by Briggs & Turivas in January 1928 upon Eichleay, Friedeberg, and Hitner for payment of their respective portions. Friedeberg indicated his desire to sell his interest in the syndicate agreement of December 11, 1919, for $6,750, plus a release from all liability for the accrued expenses, of which his share at that time was $4,250. On January 20, 1928, it was agreed in writing between Briggs & Turivas, Ralph D. Young, assignee of Friedeberg, Eichleay, and Hitner, that the ‘net amount of any recovery had from the prosecution of‘ the action pending in the United States Court of Claims should be divided as follows:
+-------------------------------------------------------+ ¦Briggs & Turivas ¦50% ¦ +-----------------------------------------------+-------¦ ¦Ralph D. Young, assignee of Theodore Friedeberg¦25% ¦ +-----------------------------------------------+-------¦ ¦Walter B. Eichleay ¦12 1/2%¦ +-----------------------------------------------+-------¦ ¦Joseph G. Hitner ¦12 1/2%¦ +-------------------------------------------------------+
It was further agreed that Briggs & Turivas should continue in the prosecution of the claim, with the law firm of Hopkins, Starr & Hopkins acting as its counsel; that Young, Eichleay, and Hitner should immediately reimburse Briggs & Turivas pro rata for certain expenses theretofore incurred and to be incurred; and that upon any recovery Briggs & Turivas was to deduct therefrom the proportionate shares of all future expenses and charges incurred but not paid to it and distribute the remainder in accordance with the above percentages. On March 15, 1928,
+----------------------------------------------------------------+ ¦ ¦May 18 ¦Sept. 28 ¦Dec. 30 ¦Total ¦Cost and¦ +---------------+---------+---------+---------+---------+--------¦ ¦ ¦ ¦ ¦ ¦received ¦expenses¦ +---------------+---------+---------+---------+---------+--------¦ ¦Samuel C. Doyle¦$3,735.96¦$1,121.44¦$3,820.35¦$8,677.75¦$295.51 ¦ +---------------+---------+---------+---------+---------+--------¦ ¦Willis S. Doyle¦3,735.96 ¦1,121.44 ¦3,820.35 ¦8,677.75 ¦295.51 ¦ +---------------+---------+---------+---------+---------+--------¦ ¦Anne C. Doyle ¦1,867.98 ¦560.72 ¦1,910.18 ¦4,338.88 ¦147.75 ¦ +----------------------------------------------------------------+
All of the foregoing amounts received by petitioner's wife and sons were deposited direct to the credit of their individual savings bank accounts.
The petitioner's wife and sons each filed an individual Federal income tax return for 1938 and reported therein the amounts of $4,191.13, $8,382.24, and $8,382.24, respectively, as the ‘Profit on liquidation of interest in contract with Briggs & Turivas, Chicago, Ill.‘ and paid the tax thereon. In his 1938 return petitioner reported $13,970.40 as his share of the ‘Profit on liquidation of interest in contract with Briggs & Turivas, Chicago, Illinois.‘
The petitioner and his wife have made a practice of making gifts of moneys and securities to their two sons from time to time during their lives for the purpose of establishing separate and independent funds for their education. All such gifts of moneys and all income from such securities have been deposited to the credit of the sons in their respective savings bank accounts. Petitioner, as parent, opened a savings bank account on August 11, 1925, for Samuel C. and on January 16, 1928, for Willis S. During the period from August 11, 1925, to January 1, 1938, about $6,500 had been accumulated in the bank account of Samuel and about $6,000 for Willis, which amounts had from time to time been invested by petitioner in securities.
During the period 1938 to 1942, inclusive, amounts were received by each son and deposited in his bank account, invested in securities, and disbursed by petitioner for the son's account as follows:
+-----------------------------------------------------------------------------+ ¦ ¦Samuel ¦Willis ¦ +---------------------------------------------------------+---------+---------¦ ¦Receipts ¦ ¦ ¦ +---------------------------------------------------------+---------+---------¦ ¦Cash on deposit Jan. 1, 1938 ¦$12.75 ¦$152.64 ¦ +---------------------------------------------------------+---------+---------¦ ¦Interest and dividends ¦2,018.57 ¦1,975.19 ¦ +---------------------------------------------------------+---------+---------¦ ¦Briggs & Turivas ¦8,676.10 ¦8,676.10 ¦ +---------------------------------------------------------+---------+---------¦ ¦Gain on exchange or proceeds from securities ¦1,218.21 ¦1,027.20 ¦ +---------------------------------------------------------+---------+---------¦ ¦Gift ¦ ¦25.00 ¦ +---------------------------------------------------------+---------+---------¦ ¦Reimbursement of amounts previously disbursed for ¦2,821.68 ¦3,105.17 ¦ ¦educational expenses ¦ ¦ ¦ +---------------------------------------------------------+---------+---------¦ ¦ ¦14,747.31¦14,961.30¦ +-----------------------------------------------------------------------------+
Disbursements Investments 7,959.73 7,405.76 1938 income taxes, state and Federal 497.50 499.31 Insurance premiums 502.60 152.00 Misc. personal 39.50 24.00 Tuition and expenses, camp and school 2,777.27 3,212.59 11,776.60 11,293.66 Cash on deposit Jan. 1, 1943 * 3,163.67 * 3,675.30 FN* Disbursements of $192.96 and $7.66 were apparently not withdrawn.
On November 25, 1942, after the technical staff of the Bureau of Internal Revenue had raised a question relating to his obligation as parent to educate the children, petitioner reimbursed the savings account of each son with the total amount theretofore expended from the account for educational expenses.
On December 22, 1942, petitioner at his request was by order of the Orphans Court of Montgomery County, Maryland, appointed legal guardian of each of his sons.
Petitioner's wife has always maintained her own separate savings account and petitioner has never had any power to draw checks on that account. His wife had power to draw on petitioner's bank account, but has never deposited any of her funds in that account. Petitioner has always managed her investments.
OPINION.
STERNHAGEN, Judge:
The only question is whether the taxpayer's gross income for 1938 includes the $20,955.61 which was the total of the net amounts received by his wife and sons in the distribution to them of their respective ‘interest in the proceeds of the judgment obtained and collected in the case of Briggs & Turivas v. United States.‘ The Commissioner in determining the deficiency included this amount, with the explanation:
Income received by your wife, Anne C. Doyle, and by your sons, Samuel C. Doyle and Willis S. Doyle, upon liquidation of the interests in the Briggs and Turivas suit theretofore assigned to them by you is included in your income for the reason that the assignments in question are deemed to have constituted anticipatory assignments of income taxable to you under the provisions of Section 22(a) of the Revenue Act of 1938.
This the taxpayer assails on the theory that, since gifts had been made to his wife and sons of fractional parts of his interest in the Young syndicate, the amounts which were thereafter received by them in the distribution of the syndicate were their capital assets, and the gain was taxable to them and not to him. The taxpayer contends that by the gifts he transferred property, namely, interests in the syndicate, and not mere rights to receive income in the future, and that the doctrine of no escape from income tax by anticipatory assignment is not applicable to him. There is no question as to the validity of the gifts, but only as to the character of their subject matter under the income tax law, for if they were gifts of income-producing property, and not of rights merely to receive income if and when produced, the income from the property given is taxable to the donee and not to the donor. Blair v. Commissioner, 300 U.S. 5.
What the taxpayer gave to each of the donees was in terms a percentage of his fractional interest in the Young syndicate, and the Young syndicate had Friedeberg's former interest in the agreement of December 11, 1919, with Briggs & Turivas, including his right against Briggs & Turivas for a share ‘of any recovery‘ of Briggs & Turivas in the Court of Claims suit against the United States. The group of which Friedeberg was a member had no ‘property‘ other than an interest in the results of a cause of action against the United States for damages for breach of contract by the Emergency Fleet Corporation, i.e., the failure of that corporation to deliver to Briggs & Turivas the materials purchased by Briggs & Turivas by its contract of December 11, 1919. Thus, when the taxpayer in his instruments of gift in 1937 and 1938 said that he was assigning an interest in the ‘property‘ owned by the Young syndicate, he could only mean, and the instrument could only be read as meaning, that he was assigning a portion of whether net amount would be recovered from the United States by Briggs & Turivas and, after expenses, was distributable to those who, by reason of the 1919 four-party agreement or by mesne assignments, were entitled to distributive shares. While it is not incorrect to speak of this as ‘property,‘ it is still but a contractual expectancy of gain to be derived when the interest is reduced to cash by the distribution of the net proceeds of the judgment. It was not even a gift of an interest in the judgment, for at no time did Briggs & Turivas attempt to assign any part of its cause of action or the judgment against the United States. We can see no escape from the proposition that the taxpayer never owned, and therefore never transferred to his wife and sons, anything but an interest in a possible future gain to be derived from the realization of proceeds of a judgment against the United States for its breach of contract. Hence, it is not important to consider whether such an interest may be called property, for even so it is still an interest in future income.
Before the taxpayer assigned any part of his interest, the gain that he was expecting to derive from his investment of $928.75 was practically assured. The judgment in favor of Briggs & Turivas had been rendered by the Court of Claims, and the United States Supreme Court had on October 11, 1937, denied certiorari, so the judgment had become final, and only an appropriation by Congress was needed to supply certainty to the probability of receipt. At this stage the taxpayer had a fractional interest in the future net proceeds of a judgment which had become final, the amount of which was fixed, and about which there was nothing to engender doubt. There is no reason to suppose, as the taxpayer suggests, that before the appropriation by Congress and the approval by the President there was uncertainty in the probability of payment or its amount. It was fair to assume that the normal machinery would operate to produce payment of such a judgment, unless there were circumstances to the contrary.
In Harrison v. Schaffner, 312 U.S. 579, the taxpayer, being the life beneficiary of a trust, assigned to her children specified amounts in dollars from the income of the trust for the year following the assignment. The taxpayer was held taxable in that year upon the assigned amount of income. The Court thought that, unlike the situation in Blair v. Commissioner, 300 U.S. 5, it could not be said: that the beneficiary of a trust who makes a single gift of a sum of money payable out of the income of the trust does not realize income when the gift is effectuated by payment, or that he escapes the tax by attempting to clothe the transaction in the guise of a transfer of trust property rather than the transfer of income where that is its obvious purpose and effect. We think that the gift by a beneficiary of a trust of some part of the income derived from the trust property for the period of a day, a month or a year involves no such substantial disposition of the trust property as to camouflage the reality that he is enjoying the benefit of the income from the trust of which he continues to be the beneficiary, quite as much as he enjoys the benefits of interest or wages which he gives away as in the Horst and Eubank cases.
Although the Schaffner and Blair cases both dealt with periodic income from a trust fund, we can see no difference in principle in a case where the taxpayer assigned part of an interest in the proceeds of a judgment with the effect of assigning by anticipation the gain which the proceeds when realized would include. Both cases involved the assignment of future income expected by the taxpayer, one a single payment of income from a trust fund and the other a single payment of the gain (a different sort of income) embraced in the realization of the proceeds of an investment.
Since for the reason stated the entire $20,955.61 received by the taxpayer's wife and sons is properly included in his gross income, it is unnecessary to consider the Commissioner's alternative contention that the taxpayer's gross income must include the amount or a part of it because it was to be used for the children's education and to some extent was in fact so used.
The Commissioner's determination is sustained, and
Decision will be entered for the respondent.