Stacy v. Commissioner , 43 B.T.A. 91 ( 1940 )

MARJORIE LIPE STACY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Stacy v. Commissioner

Docket No. 99420.

United States Board of Tax Appeals

43 B.T.A. 91; 1940 BTA LEXIS 851;

December 13, 1940, Promulgated

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Money paid upon the order of a surrogate by the guardian of the property of three infants to the guardian of their persons for their maintenance, etc., is not within the income of such guardian of their persons, in her individual capacity.

Benjamin E. Shove, Esq., for the petitioner.

Loren P. Oakes, Esq., for the respondent.

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STERNHAGEN

The commissioner determined deficiencies of $4,418.60 for 1933, $4,870.78 for 1934, $2,553.56 for 1935, and $8,017.62 for 1936, in petitioner's individual income tax. He included in petitioner's gross income amounts received by her as guardian of the persons of three children.

FINDINGS OF FACT.

Petitioner is the sister of W. Charles Lipe, who, with his wife, was killed in a motor boat accident at the Thousand Islands on August 16, 1929. Three minor children survived. Petitioner has three children of her own.

On August 28, 1929, the Surrogate of Onondaga County, New York, appointed the City Bank Trust Co. of Syracuse (merged into First Trust & Deposit Co. in December 1929) and Gwynn W. Hoyt guardians of the property and petitioner guardian of the persons of the Lipe children.

W. Charles Lipe left a will which was admitted to probate by the Surrogate of Onondaga County on September 18, 1929. He left a net estate of approximately $3,000,000, of which about $2,600,000 had been left him by his father. By her father's will petitioner had been given a life interest in the income of a trust.

Prior to may 1929, while petitioner was living at 100 Ruskin Avenue, Syracuse, she purchased land at 500 Brookford Road, Syracuse, upon which to build a house estimated to cost $150,000. Construction began in May 1929. After the death of her brother, petitioner determined to alter the plans and build a larger house so as to provide a home suitable not only for her own family but also for the three Lipe children. In October 1929 the three Lipe children came to live with petitioner and her family at 100 Ruskin Avenue. Extensive alterations and additions were made in the plans of the Brookford Road house. It was a brick house. The servants' quarters were enlarged to include rooms for more maids and for nurses; a third floor was added for the Lipe children, including bedrooms, nursery, playroom, nurses' bedrooms, and bathrooms. Its final cost was $416,762.51, of which $58,163.47 represented the cost of land, surveying, landscaping, and planting trees. Petitioner's family, with the three Lipe children, moved in April 4, 1931.

In each of three petitions to the surrogate, dated March 11, 1931, the guardians of the property alleged:

6. That it is your petitioner's belief that following the manner in which the allowances heretofore granted herein for the maintenance of said infants were computed, the said infants should be charged with a fair proportion of the rental value of said home. That in view of the fact that the three children of Mrs. Stacy are now of boarding school and college age and will soon be going away to school and college, the said three infants should be charged with 50% of the fair annual retal value of said home, which, in your petitioner's opinion, is forty thousand ($40,000.00) dollars, resulting in a charge against said three infants of twenty thousand ($20,000.00) dollars per year.

7. That it is also your petitioner's opinion and belief that the total extra cost of said home due to the fact that it was enlarged and altered in order to provide suitable accommodations for said three infants, should be charged against them over the average period of their minorities, to-wit: an approximate period of eighteen (18) years, making a total annual charge against the said three infants of eleven thousand one hundred eleven ($11,111.00) dollars.

8. That your petitioner has also been informed by Mrs. Stacy that she estimates that the total annual current expenses of maintaining her family and said three infants in said new home will be at least fifty thousand ($50,000.00) dollars per year instead of the approximately forty thousand ($40,000.00) dollars per year, as stated in the petition presented to and filed in this Court on or about February 19, 1930. That for the reasons stated in paragraph "6" above and also for the further reason that it is necessary that said three infants have greater care and more servants than the older children and adults in Mrs. Stacy's own family, your petitioner believes that said three infants should pay one-half of said total annual estimated expense account or a total of twenty-five thousand ($25,000.00) dollars per year.

On March 16, 1931, the surrogate ordered that the general guardians of the property of each infant, commencing as of March 1, 1931, be permitted to draw from the funds of the infant, and to apply to his support and maintenance $1,558.33 in each month for his care, support, and maintenance in the home of the guardian of his person, exclusive, however, of special medical and surgical and dental care and clothing and toys and other personal chattels.

In 1933-1936 petitioner received from the guardians of the property, for the care and maintenance of the Lipe children, exclusive of special medical, surgical, and dental care, clothing, toys, and other personal chattels:

1933	$56,099.88
1934	50,806.56
1935	44,900.85
1936	61,233.93

During 1931-1936 the guardians of the property made disbursements only out of income. In each of those years they filed a Federal income tax return for each child.

During the course of construction of petitioner's new home she borrowed $115,000 from a bank and other money from her husband, which she used for construction. She gave the architect notes aggregating $11,500. The first borrow was in June 1930. Petitioner paid interest on the amounts borrowed, charging all of the interest against the allowances received for the Lipe children, as follows:

1931 (after March 1, 1931)	$6,283.40
1932	6,824.74
1933	4,323.40
1934	$3,311.01
1935	1,058.61
1936	686.67

In 1933-1936 petitioner made the following expenditures for household maintenance expenses of her family and the three Lipe children and charged one-half against the allowances received for the Lipe children.

1933
House supplies and expenses	$6,689.01
House payroll	11,667.43
Fuel, light, and water	1,589.27
Auto and boat expense	2,597.33
Telephone	334.26
Periodicals	82.23
Flowers	442.21
Club dues	272.00
Sundry house expense	1,179.23
Groceries and milk	2,553.08
Insurance	1,541.05
Total	28,947.10
1934
House supplies and expenses	$16,044.40
House payrolls	8,929.28
Fuel, light and power	1,557.89
Auto and boat expense	5,457.06
Telephone	345.10
Periodicals	92.25
Flowers	305.08
Club account	144.79
Insurance ($2,000.88 less $68.01)	1,932.87
Total	34,808.72
1935
Household supplies, etc.	$15,377.29
Household payroll	10,106.81
Fuel, light and water	1,377.34
Auto and boat expenses (includes new station wagon $768, Olds. $600, new truck $740)	4,382.07
Telephone	537.24
Magazines, etc.	82.00
Flowers	101.00
Insurance ($1,743.42 less personal $338.08)	1,410.34
Sundries, all chargeable to Lipes	1,225.36
Total	34,599.45
1936
House supplies and expenses	$17,905.18
House payroll	9,651.44
Fuel, light and water	1,530.27
Auto and boat expense (includes $625 for Olds.)	2,892.54
Telephone	434.54
Magazines	104.75
Flowers	44.50
Insurance	1,269.22
Total	33,832.44

In 1931-1936 petitioner paid real estate taxes on 500 Brookford Road and on a small parcel of land in Clayton used for a dock for a curiser serving both petitioner's family and the Lipe children, as follows:

1931	$2,275.41
1932	4,208.94
1933	3,549.59
1934	$3,946.52
1935	3,406.11
1936	4,170.13

In 1931-1936 petitioner paid other taxes and made contributions, as follows:

Year	Item	Amount
1931	Community chest	$2,875.00
1932	Gasoline tax	106.75
1932	Community chest	2,500.00
1933	Community chest	3,046.32
1934	Gasoline tax	230.32
1934	Automobile licenses	110.60
1934	Community chest	2,796.32
1935	Gasoline tax	$256.51
1935	Automobile and boat taxes	126.16
1935	Community chest	3,038.60
1936	Gasoline tax	194.89
1936	Automobile licenses	119.85
1936	Unemployment taxes	59.77
1936	Community chest	1,904.42

For 1931-1936 all these taxes and contributions were deducted on petitioner's income tax returns and one-half of them was charged against the allowances received for the Lipe children.

For 1933 petitioner made the following charges against the $56,099.88 allowance received for the Lipe children.

One-half household maintenance and taxes	$16,248.35
Interest on money borrowed	4,323.40
One-half community chest	1,523.16
Extra Federal tax on $20,000 rent item	4,818.09
Extra state tax on $20,000 rent item	800.00
Total	27,713.00

From the remainder of $28,386 petitioner deducted $20,000 rent and applied the $8,386 remainder against one-half the cost of the house.

For 1934 petitioner made the following charges against the $50,806.56 allowance received:

One-half household maintenance and taxes	$19,548.08
One-half community chest	1,398.16
One-half sundries	1,004.29
Interest on money borrowed	3,311.01
Total	25,261.54

The remainder of $25,545.02 petitioner applied against one-half the cost of the house.

For 1935 petitioner made the following charges against the $44,900.85 allowance received:

One-half household maintenance (less sundries) and taxes	$18,561.44
Sundries, all chargeable to Lipes	1,225.36
Interest	1,058.61
One-half community chest	1,519.30
Total	22,364.71

The remainder of $22,536.14 petitioner applied against one-half the cost of the house.

For 1936 petitioner made the following charges against the $61,233.93 allowance received:

One-half of household maintenance and taxes	$19,188.54
Interest	686.67
One-half community chest	952.21
Sundries, all chargeable to Lipes	504.24
Total	21,331.66

The remainder of $39,902.27 petitioner applied against one-half the cost of the house.

On October 23, 1936, petitioner wrote a letter to one of the guardians of the property, reading as follows:

Confirming statements which I have made from time to time to Mr. Johnson and to Mr. Hoyt, I wish to state that ever since the Surrogate of Onondaga County in March, 1931 gaanted the orders authorizing the general guardians of the property of the three Lipe infants to pay the sums therein stated for the care, support and maintenance of the three Lipe children in the home which I had built for them and my own family, it always has been my intention and it is now my intention, at any time I am requested so to do by either the First Trust & Deposit Company, Mr. Hoyt, the Surrogate of Onondaga County, any special guardian who may hereafter be appointed and whose request is approved by either the First Trust & Deposit Company or Mr. Hoyt, or any one of the Lipe children for a reasonable time after each child becomes 21 years of age, to convey to each one of the Lipe children an undivided one-sixth interest in the property at 500 Brookford Road, Syracuse, New York, which has been used by me as a common home for my family and the Lipe children.

As I have explained on frequent occasions, the only reason that a deed has not been given to the infants before has been due to the feeling upon the part of myself and others interested in the infants that ownership of any part of the property might constitute much more of a liability than of an asset.

In 1933-1936 petitioner had two bank accounts, both of which were in her individual name. In these accounts the guardians of the property made three deposits of $1,588.33 monthly until September 15, 1936, when they were reduced to $1,200. Petitioner drew checks on her individual bank accounts for family maintenance expenses without distinguishing between expenses of her family and those of the Lipe children. She gave the guardians of the property annual reports showing her disbursements for maintenance and care of the Lipe children. She made no investments for the Lipe children.

Petitioner made decisions as to purchases of clothing and medical services for the Lipe children. Payment for clothes was made from special accounts for each in which amounts were deposited by the guardians of the property upon petitioner's request.

On November 27, 1935, the grardians of the property filed a petition with the surrogate for intermediate judicial settlement of their accounts. On December 23, 1935, special guardians in the accounting proceedings were appointed. They interviewed petitioner and inspected her home. On August 17, 1936, they prepared a report to the surrogate which recited the substance of the petition of March 11, 1931, and proceeded:

Now THEREFORE, your Special Guardians herein jointly suggest and recommend for the consideration of the Court, that the order of March 11, 1931, be modified so as to provide:

1. A revaluation of the property at 500 Brookford Road, Syracuse, New York, wherein the infants herein now live with the guardian of their person, Marjorie Lipe Stacy, so that any rental value hereinafter sought to be charged against said infants, may be based on the actual value of the property, rather than its original cost.

2. A discontinuance of the amortization payment or in the event that such be continued,

(a) A reduction in rental so that the infants may pay rent only upon onehalf of the actual value of the home, and not upon that portion of the cost of the building which they are amortizing.

(b) A provision providing that upon such amortization costs being completed, the infants receive a deed conveying to them a one-half interest in such property.

3. A reduction in the $25,000 payment allotted for maintenance of the infants.

On October 16, 1936, the surrogate entered orders settling the accounts and reducing the monthly allowances per child from $1,588.33 to $1,200.

In 1933-1936 petitioner had four automobiles and a truck, all of which were used for the entire household, including the Lipe chileren.

In 1932-1936 petitioner's son, Parker, while attending college, was at home only during vacations. Immediately following graduation in 1936 he moved away from home. In June 1936 petitioner's daughter, Virginia, married, and she and her husband lived with petitioner until April 1937.

On her returns for the years 1933 through 1936, petitioner took deductions for fees paid to her attorney and salary paid to her bookkeeper. The attorney represented petitioner and the guardian of the property in connection with petitions for allowances paid petitioner. On her 1933 income tax return she included as income $20,000 rent. In 1933 or 1934 she told her attorney that she no longer wished to treat any part of the allowances received for the Lipe children as rent.

OPINION.

STERNHAGEN: The petitioner is proceeding entirely in her individual capacity, and assails the Commissioner's determination of the deficiencies in her individual income tax. Neither her receipts nor her deductions as guardian for the Lipe children are in issue. The children are separately taxable upon their income, even though it is received for them by the petitioner as guardian; they have included the amounts in question in their returns, and their taxes are not now in controversy. The petitioner's dual position as an individual and as a guardian must be kept clear, .

In determining a deficiency for each of the taxable years in question, the Commissioner has included in petitioner's individual income the amounts of $56,099.88 for 1933, $50,806.56 for 1934, $44,900.85 for 1935, and apparently $61,233.93 for 1936, although this last amount can not be clearly identified in the copy of the deficiency notice appended to the petition. Recognizing that they were received by the petitioner from the property guardians pursuant to a surrogate's order directing that they be applied to the care, support, and maintenance of the children, he nevertheless held that the amounts were received by petitioner "as an individual in payment of services in furnishing board and lodgings, care and supervision with respect to the three minor children." This determination by the Commissioner is contrary to the evidence. Nothing in either the applications of the guardians of the property or the surrogate's order pursuant thereto recognizes a demand of the petitioner or an obligation to her for payment for her services. On the contrary, the petitioner testified, and there is other evidence to show, that she made no such demand and had no intention at any time of charging the children for any services which she might perform. Clearly she had a right to renounce any such claim which she might have, and it is not for the Government to characterize the allowance made to her as a payment for services.

During the year 1933, as in the years prior thereto, , petitioner treated $20,000 of the amount which she received from the property guardians as rent, and included it as such in her income on her individual tax return. She now stands by that inclusion and makes no contest of such treatment of the $20,000 by the Commissioner. She shows, however, that in 1933 or 1934 she announced her intention to make no such rent charge, and after 1933 she omitted any such item from her individual income. This she was entitled to do. There is no obligation upon petitioner to charge rent for the occupancy of any part of the house, and if, as an individual, she chose to permit the Lipe children to occupy the house free of rent, no one had any power to require her to do otherwise, and the Commissioner could not properly treat her as receiving the rent which she thus disclaimed.

She did have the right, with the approval of the surrogate, to recover from the children any advance which she had made for their share of the cost of the house, provided their proportionate ownership of the house was recognized. It has been recognized in the petitions to the surrogate and his order of March 1931 and in her letter of October 23, 1936. Apparently in the early years the petitioner was permitted to allocate $11,111 to amortization of her outlay of the children's share of the cost of the house. But this was not income to the petitioner; it was a recovery of her advance, as was any other amount which she might properly apply to such amortization.

It is still true, as the Board said in the earlier proceeding covering 1931 and 1932, that the Commissioner's concept of the petitioner's relation to the income and expenses of her wards is incorrect. The entire amounts which she received by order of the surrogate were received by her as guardian, and as such she was accountable therefor. The only amount shown by this evidence which petitioner may be regarded as having received individually as income from the allowances made to her as guardian, was the $20,000 treated by her as rent received. This she has included in her 1933 income, and the inclusion of more than this in 1933 or any part of the allowance in 1934, 1935, and 1936 is in error. The Commissioner's determination is reversed. There are apparently other items covered by the deficiency determinations which the petitioner does not contest.

Decision will be entered under Rule 50.