McAdow v. Commissioner , 12 T.C. 311 ( 1949 )

Estate of Grace G. McAdow, Doris Hutson, and Wyatt T. Garlock, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. Estate of Richard C. McAdow, Richard C. McAdow, Jr., Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent

McAdow v. Commissioner

Docket Nos. 15789, 15799

United States Tax Court

12 T.C. 311; 1949 U.S. Tax Ct. LEXIS 258;

March 7, 1949, Promulgated

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">*258 Decisions will be entered under Rule 50.

In 1941 the son and daughter of William E. Benjamin, the former employer for many years of Richard C. McAdow, transferred to McAdow securities valued at $ 75,981.25, describing the transfer as a gift and filing gift tax returns. Under the evidence it is held that the transfer of the securities by these two individuals to McAdow constituted a gift and was not intended as compensation for services. Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34.

John P. Ohl, Esq., Timothy J. Shea, Esq., George C. Blattmachr,">*259 Esq., Robert G. Stewart, Esq., and M. Rudolph Preuss, Esq., for the petitioners.

Conway N. Kitchen, Esq., for the respondent.

Black, Judge.

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BLACK

">*311 These proceedings, which were consolidated, involved deficiencies in income tax for the taxable year 1941 as follows:

Petitioner	Docket No.	Deficiency
Estate of Richard C. McAdow	15799	$ 47,998.66
Estate of Grace G. McAdow	15789	47,998.66

Although separate deficiency notices were mailed to the respective petitioners, the adjustments and the amount of the deficiency determined in each of the deficiency notices are identical and reflect the joint and several liability imposed by section 51 (b) of the Internal Revenue Code by reason of the husband and wife having elected to file a joint return. The joint and several liability for any deficiency which may be determined to be due herein is not disputed by the petitioners.

The deficiency in each of the above dockets is due to four identical adjustments to the decedents' income as disclosed by their joint return for the year 1941, as follows:

Net income as disclosed by return		$ 26,350.90
Unallowable deductions and additional income:
(a) Salaries	$ 239.48
(b) Other income	75,981.25
(c) Other deductions	174.00
(d) Loss from sale of noncapital assets disallowed	3,504.60	79,899.33
Total		106,250.23
Nontaxable income and additional deductions:
(e) Long term capital loss allowed	1,623.24
(f) Long term capital gain eliminated	2,391.05	4,014.29
Net income as adjusted		102,235.94

">*260 ">*312 By appropriate assignments of error the petitioners contested two of these adjustments, namely, (b) and (d). At the hearing the assignment of error with respect to adjustment (d) was waived. Effect will be given thereto in the recomputation under Rule 50. This leaves for our consideration only the contested adjustment (b), which was explained by the respondent in a statement attached to the deficiency notices as follows:

(b) It is held that the value of securities received during the taxable year from Henry R. Benjamin and Beatrice B. McEvoy should be included in gross income pursuant to the provisions of section 22 (a) of the Internal Revenue Code.

FINDINGS OF FACT.

The petitioner in Docket No. 15799 is the duly appointed, qualified, and acting executor under the will of Richard C. McAdow, deceased, who died testate on July 18, 1946, a resident of the State of Florida. The petitioners in Docket No. 15789 are the duly appointed, qualified, and acting executors under the will of Grace G. McAdow, deceased, who died testate on August 19, 1946, a resident of the State of Florida .

Richard C. McAdow (hereinafter sometimes referred to as McAdow) and Grace G. McAdow were husband">*261 and wife and filed a joint income tax return for the year 1941 with the collector of internal revenue for the second district of New York.

In or about 1917 McAdow became an employee in the office of William E. Benjamin. His original duties were those of a clerk. Later, he became manager of the office and took over the handling of William E. Benjamin's investments and also those of his wife. McAdow was also manager for a number of years of certain corporations in which the Benjamin family owned substantial or controlling interests. These corporations were the Taykair Corporation, Buona Terra Corporation, and the Bencart Corporation. McAdow was compensated for the services he thus rendered. McAdow was trustee of four of the Benjamin family trusts, the so-called "WEB Trusts Nos. 1 and 2" and "Trusts 7 and 8." Neither Henry R. Benjamin nor Mrs. McEvoy were beneficiaries of Trusts Nos. 7 and 8. As regards the WEB Trusts, Henry R. Benjamin and Mrs. McEvoy were beneficiaries thereunder. They were not, however, the income beneficiaries of the trusts. William E. Benjamin was, during his lifetime, beneficiary of the income of both trusts. McAdow received compensation for acting as">*262 trustee in all four of the above named trusts. In the taxable ">*313 year 1941 his compensation as commissions from these trusts was $ 4,803.04, which is not in controversy here.

Henry R. Benjamin and Beatrice B. McEvoy are the son and daughter, respectively, of William E. Benjamin, and sometimes hereinafter they are referred to as Henry and Beatrice.

Beginning in 1917 and for some time thereafter McAdow prepared the income tax returns of William E. Benjamin, as well as the returns of Henry and Beatrice. Later on, however, as the office grew, other employees made out the returns and McAdow went over them to see if they were correct. McAdow performed other services for Beatrice while she was living in London, such as looking after passports and automobiles and rendering her other similar services. McAdow did not perform these services as an employee of Beatrice, but simply as an accommodation.

Henry became acquainted with McAdow when he returned from overseas in 1918 and he knew him from that time until the time of McAdow's death in 1946. During that period McAdow performed services for Henry in looking after his brokerage accounts. It was understood that McAdow would receive">*263 10 per cent of the profits in the accounts for his management services and he did receive that amount. The exact amount which McAdow received for these services is not shown by the evidence. It amounted to a considerable sum over the years in which he was thus employed. This arrangement was intended to and did fully compensate McAdow for his services rendered to Henry R. Benjamin.

William E. Benjamin was a man of large wealth, his estate at the time of his death on February 24, 1940, amounting to approximately $ 15,000,000. At the time of his death, William E. Benjamin was over 80 years of age. On June 30, 1926, he executed his last will and testament, in which Henry and McAdow, among others, were nominated as executor-trustees. During the latter period of his life various persons sought to influence William E. Benjamin to turn over the management of his property to them, to induce him to make large gifts to outsiders, and to revise his will. McAdow and Henry opposed these proposals. Because of the influences to which William E. Benjamin was subjected, he became dissatisfied with McAdow and thought that he was favoring Henry and Beatrice. As a result William E. Benjamin, ">*264 by a codicil executed on February 20, 1939, removed McAdow as one of his executor-trustees and also determined to turn over to the Bankers Trust Co. the management of his investments. William E. Benjamin, by a letter dated October 31, 1939, addressed to Henry, stated that he had decided to have the Bankers Trust Co. manage his affairs, beginning November 1, 1939, and that he had advised McAdow that he was closing out his three brokerage accounts and turning over the securities in them to the ">*314 Bankers Trust Co. Pursuant to this letter, William E. Benjamin's securities were turned over to the Bankers Trust Co. on November 1, 1939.

Shortly before his death on February 24, 1940, William E. Benjamin advised Henry that he had had a talk with McAdow in which he had discussed his affairs and finances, that he had concluded that McAdow had done a good job, and that he intended to reinstate him in his will as an executor. William E. Benjamin died shortly thereafter and McAdow was not reinstated as an executor. McAdow was disappointed that he had not been reinstated as an executor. For an estate the size of William E. Benjamin's an executor's fee would amount to a considerable sum. ">*265 McAdow made no claims against the estate of William E. Benjamin.

On July 3, 1941, McAdow received from Henry and Beatrice the following securities having a fair market value on that date as follows:

$ 20,000 City of Boston 2% bonds	$ 21,200.00
25,000 Multnomah 4% bonds, 1948	28,750.00
25,000 City of New York 3% bonds, 1977	26,031.25
Total	75,981.25

The City of Boston and City of New York bonds had been owned by Henry and the Multnomah bonds had been owned by Beatrice. At the same time there was delivered to McAdow a note reading as follows:

Our

Gift to R. C. McAdow by HRB. & B. B. McE on June 1, 1941 for an expression of love and affection over a period of twenty five years, for which no services were rendered or required

20M City of Boston 2% 1946

25M Multnomah 4% 1948

25M City of N. Y. 3% 1977

hand to R. C. McA this date July 3, 1941

Henry R. Benjamin

Beatrice B. McEvoy

This note was entirely in the handwriting of Henry, with the exception that the first word "Our" and her signature, which were written by Beatrice. Henry and Beatrice wanted to make a gift to McAdow and they discussed the matter and felt that it was a nice thing to do, since they knew">*266 that McAdow was upset and disappointed because he had not been named as an executor of their father's will. They had determined to make the gift on June 1, 1941, but did not get around to it until July 3, 1941, the date of the above gift note. The transfers of the securities from Henry and Beatrice were entered upon the security ledgers in their respective books of account as "Gift to R. C. M.," the initials R. C. M. referring to Richard C. McAdow.

">*315 Henry R. Benjamin and Beatrice B. McEvoy each filed a gift tax return for the calendar year 1941, in which there were included as a gift the securities transferred by each to McAdow in that year. In the return of Henry the motive for the transfer by him to McAdow was stated to be "for an old and true friendship of over 20 years." In the return of Beatrice the motive for the transfer by her was stated to be "love and affection for a true old friend of over 20 years."

The gift tax return filed by Henry R. Benjamin for 1941 listed gifts to his wife and four children (not needed here), and also listed as gifts to McAdow:

	Date of	Value at date
	gift	of gift
$ 20,000 City of Boston 2% bonds, due 1946
with 2/1/42 coupons attached	6/1/41	$ 20,000
$ 25,000 New York City 3% bonds, due 1977
with 1/15/42 coupons attached	6/1/41	25,000
Cash for Christmas present	12/24/41	2,000

">*267 The Commissioner included the first two items in McAdow's income, but did not include the $ 2,000 Christmas present.

The gift tax return filed by Beatrice B. McEvoy for the year 1941 listed gifts to her husband and to her son (not needed here), and also listed as gifts to McAdow:

	Date of	Value at date
	gift	of gift
$ 25,000 Multnomah 4% bonds, due 1948,
with Jan. 1, 1942, coupons attached	6/1/41	$ 28,000
Cash	12/24/41	2,000

The Commissioner included the first item in McAdow's income, but did not include the $ 2,000 Christmas present.

McAdow filed donee's information returns of gifts for the year 1941 in which the securities received from Henry R. Benjamin and Beatrice B. McEvoy were reported as gifts.

Henry R. Benjamin thereafter filed a claim for refund of gift tax for the year 1941 in the amount of $ 54,328.90. This claim included other gifts besides those made to McAdow. In a statement attached to the claim for refund there was set out the following statement with reference to the transfers to McAdow:

In the original 1941 return the taxpayer reported net gifts totalling $ 47,000 to "Richard C. McAdow, 598 Madison Avenue, New York, N. Y., for an old and true">*268 friendship of over 20 years." In the year 1940 net gifts of $ 28,000 to Mr. McAdow were likewise reported in the return.

Inasmuch as the Bureau, in the course of an audit of Mr. McAdow's income tax returns for the years 1940 and 1941, questioned the character of these transfers and has indicated that said transfers might be treated as other than gifts, the ">*316 taxpayer is filing this claim to protect his right to any overpayment resulting from an ultimate determination, if any, that the transfers to Mr. McAdow are not gifts.

The claim for refund was rejected by respondent on April 5, 1946.

In March 1940 Richard C. McAdow received Virginian Corporation 5 per cent notes having a value of $ 42,000 from Beatrice B. McEvoy. In April 1940 Richard C. McAdow received Triborough Bridge Authority bonds having a value of $ 28,000 from Henry R. Benjamin. These latter securities are not involved in any manner in these proceedings.

The revenue agent who was charged with the investigation of the joint income tax return of Richard C. McAdow and Grace G. McAdow for the taxable year 1941 interviewed McAdow on various dates between September 7 and October 13, 1944. McAdow stated in those ">*269 interviews that the securities involved herein were received by him in 1941 as gifts from the transferors. McAdow also stated to the revenue agent that he had considered William E. Benjamin at times unjust to his two children, Henry R. Benjamin and Beatrice B. McEvoy, and that he had endeavored to do everything in his power to assist in straightening out injustices that he thought were being done to them. McAdow also stated that he felt that he had been largely responsible for the creation of at least two trusts of which the transferors were beneficiaries. McAdow also acted as peacemaker in connection with friction which sometimes arose between William E. Benjamin and the transferors.

The securities valued at $ 75,981.25 were received by the decedent, Richard C. McAdow, as gifts and not as compensation for services.

OPINION.

Amounts received as compensation for personal service are includible in gross income under section 22 (a) of the Internal Revenue Code. On the other hand, the value of property received by gift is specifically excluded from gross income by the provisions of section 22 (b) (3). There is thus squarely presented the question of whether the securities transferred">*270 to McAdow in 1941 by Henry R. Benjamin and Mrs. McEvoy were in payment for services rendered and, therefore, includible in income, or constituted gifts and, as such, were excludable from income.

It should be noted at the outset that the receipt of property such as McAdow received in the instant case can not be a gift and at the same time be taxable income. In Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, the Supreme Court said:

If the sum of money under consideration was a gift and not compensation it is exempt from taxation and cannot be made taxable by resort to any form ">*317 of subclassification. If it be in fact a gift, that is an end of the matter; and inquiry whether it is a gift of one sort or another is irrelevant. This is necessarily true, for since all gifts are made nontaxable, there can be no such thing under the statute as a taxable gift. * * *

In determining whether the value of the securities received by McAdow was a gift or compensation for services, the controlling test is the intention of the parties gathered from all the facts and circumstances surrounding the transaction, and particularly that of the transferors. 302 U.S. 34">Bogardus v. Commissioner, supra;">*271 Poorman v. Commissioner, 131 Fed. (2d) 946; Willkie v. Commissioner, 127 Fed. (2d) 953; certiorari denied, 317 U.S. 659">317 U.S. 659; Fisher v. Commissioner, 59 Fed. (2d) 192; and Charles Schall, 11 T.C. 111. The treatment of the payment by the parties is, however, not alone controlling. As stated by the Supreme Court in 302 U.S. 34">Bogardus v. Commissioner, supra:

* * * A claim that it is a gift presents the sole and simple question whether its designation as such is genuine or fictitious; that is to say, whether, though called a gift, it is in reality compensation. * * *

Since the intention of the transferors may be gathered from expressed purposes or inferred from surrounding facts and circumstances, we turn to the facts for evidence of their intent. At the time the securities were delivered to McAdow there was delivered a note signed by the transferors which stated that it was "Our gift to R. C. McAdow * * * for an expression of love and affection over a period of twenty five years, for which ">*272 no services were rendered or required." The transfer of the securities was entered upon the security ledger in the respective books of account of the transferors as a "Gift to R. C. M.," the initials referring to Richard C. McAdow. The transferors each filed a gift tax return for the year 1941, paying the gift tax thereon, in which there were included as a gift the securities transferred by each to McAdow in that year. In the return of Henry the nature of the transfer by him to McAdow was stated to be "for an old and true friendship of over 20 years." In the return of Beatrice the motive for the transfer by her was stated to be "love and affection for a true old friend of over 20 years." McAdow filed donee's information returns of gifts for the year 1941, in which the securities received from the transferors were reported as gifts. In addition thereto, Henry testified at the hearing that he and his sister Beatrice wanted to make a gift to McAdow and that they had discussed the matter beforehand and felt that it was a nice thing to do, since they knew that McAdow was upset and disappointed because he had not been named as an executor-trustee under their father's will. These acts, ">*273 while not conclusive, are circumstances which convince us that the transferors intended to make McAdow a gift and not to pay him compensation for any past services.

">*318 Mrs. McEvoy did not testify at the hearing. It was stated by counsel that she was seriously ill in the hospital and on that account was unable to be present and testify.

The respondent, in contending that the value of the securities constituted compensation for personal services, argues that McAdow was in a position to render personal services and that he actually rendered such services and received the securities as compensation therefor. Respondent points out, as evidence of the fact that McAdow rendered services to Henry R. Benjamin, that Henry's father, William E. Benjamin, in 1939 was 80 years old and was possessed of a large estate; that various persons sought to influence William E. Benjamin to turn over the management of his property to them and to induce him to make large gifts and to revise his will; that McAdow cooperated with Henry in resisting these attempts, which constituted the rendition of personal services of McAdow to Henry; and that Henry testified that William E. Benjamin "got a little ">*274 disgruntled with McAdow and thought he was favoring my sister and myself," which indicates that McAdow rendered personal services to the transferors because he was "favoring" them. Respondent argues that because of such services McAdow was removed as manager of William E. Benjamin's affairs and was removed as an executor-trustee of his will, depriving McAdow of a substantial executor's fee, and that, in order to make up for such loss after William E. Benjamin's death in 1940 and to compensate McAdow for such "favors," the transferors transferred to McAdow the securities involved herein. Respondent also points out that McAdow had endeavored to straighten out injustices which he believed were being done to the transferors by their father; that McAdow had acted as peacemaker in connection with friction which sometimes arose between William E. Benjamin and the transferors; and that he took care of certain personal matters for Beatrice, such as preparing her income tax returns, obtaining her passports, and in general endeavoring to act in her interests.

It is apparent to us that the above services which respondent maintains were rendered to the transferors were mainly incidental to McAdow's">*275 employment by William E. Benjamin. The facts show that McAdow was employed by the father of the transferors for many years and by certain corporations in which the Benjamin family was interested, and that he acted as trustee of certain trusts for the benefit of members of the Benjamin family. He received his compensation from these sources. McAdow's position being what it was, it was only natural that he should endeavor to act in a manner which he thought was in the best interests not only of William E. Benjamin, but of other members of his family. The fact that McAdow cooperated with Henry in resisting the efforts of various persons to influence ">*319 William E. Benjamin in the disposition of his property and endeavored to protect the interests of William E. Benjamin's children and to promote harmony between William E. Benjamin and his children indicates that McAdow was endeavoring to act in the best interests of the Benjamin family as a whole and was not thereby rendering personal services to Henry R. Benjamin and his sister, Beatrice B. McEvoy. If the securities had been transferred by William E. Benjamin to McAdow there might be some ground for the inference that they">*276 were payments of additional compensation for personal services rendered to William E. Benjamin. 302 U.S. 34">Bogardus v. Commissioner, supra.The cases have pointed out that the payment of an additional sum by an employer to an employee carries a presumption that such payment is for services rendered. Willkie v. Commissioner, supra;Van Dusen v. Commissioner, 166 Fed. (2d) 647.

There can be no doubt that McAdow, as an employee of William E. Benjamin, did render services which greatly benefited the Benjamin family, including Henry R. Benjamin and Mrs. McEvoy, the transferors of the property here in question. These two undoubtedly felt deeply grateful to McAdow for what he had done, and that was the moving cause for their gifts to him, and it seems clear to us that in transferring to him the bonds which are involved in these proceedings they were not paying compensation to an old and faithful employee of theirs for past services. Cf. Charles Schall, supra.McAdow had never been an employee of Mrs. McEvoy. True he had at times looked after the preparation and filing">*277 of her income tax returns, securing passports, paying her automobile license fees, and other matters of that kind, but he was not her employee and did those favors as matters of courtesy and friendship. It is true that McAdow for several years was employed by Henry R. Benjamin to look after his brokerage account. Henry paid him for these services 10 per cent of the profits from the brokerage account. We do not think these services by McAdow to Henry in looking after his brokerage account had anything to do with the transfers of the bonds here in question. Henry testified at the hearings that he always paid McAdow his 10 per cent share of the profits from the brokerage account and that he considered this as full compensation for McAdow's services and so did McAdow, and that in making the transfers here in question he had no thought or intent of paying additional compensation to McAdow for his services as an employee in looking after his brokerage account. We have no reason to doubt the truth of this testimony. The winning of a decision by petitioners in these proceedings will certainly profit Henry R. Benjamin nothing, nor will it profit Mrs. McEvoy anything. The contrary would">*278 be true, for, if they made ">*320 McAdow no gift, they would have no gift tax to pay on account of their transfers to him and would doubtless be entitled to a refund of the gift taxes which they paid on account of their gifts to McAdow.

We think the reasons given by Henry R. Benjamin and Beatrice B. McEvoy in their gift tax returns for making the gifts have been established by a preponderance of the evidence. 302 U.S. 34">Bogardus v. Commissioner, supra. We conclude, therefore, that the securities were received by McAdow in 1941 as a gift, and not as compensation for services rendered.

Decisions will be entered under Rule 50.