Lunsford v. Commissioner ( 1931 )

MARGARET A. LUNSFORD, ADMINISTRATRIX OF THE ESTATE OF ABNER LUNSFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lunsford v. Commissioner

Docket No. 36059.

United States Board of Tax Appeals

22 B.T.A. 881; 1931 BTA LEXIS 2045;

March 24, 1931, Promulgated

---

">*2045 Held, that the evidence does not establish that $50,000 received by the decedent in 1923 from the Pond Creek Coal Company was a gift, and the amount should be included in gross income.

Morison R. Waite, Esq., John R. Schindel, Esq., and Herbert Shaffer, Esq., for the petitioner.

C. H. Curl, Esq., for the respondent.

---

SEAWELL

">*881 The Commissioner determined a dificiency in income tax for 1923 in the amount of $9,212.98, and for January 1 to April 12, 1926, in the amount of $87.66.

">*882 The sole question for determination is whether the Commissioner erred in including in gross income the amount of $50,000 received by the decedent on February 28, 1923, and claimed as a gift from the Pond Creek Coal Company, a Maine corporation. The only other error assigned, the disallowance by the Commissioner of a claimed $3,000 bad debt deduction in 1926, is abandoned.

The case is submitted on depositions and exhibits.

FINDINGS OF FACT.

The petitioner is the duly appointed, qualified and acting administratrix of the estate of Abner Lunsford, deceased, by appointment of the County Court of Pike County, Kentucky.

The decedent in">*2046 1922 and 1923 was the manager of the Kentucky properties of the Fordson Coal Company and in the employ of Henry Ford and acted as his representative in the purchase of the Pond Creek Coal Company's properties, which were acquired by the Ford interests for $8,500,000 on December 30, 1922, at which time Lunsford was receiving a salary of $16,500 annually from the Fordson Coal Company. R. S. McVeigh, vice president of the Pond Creek Coal Company, acted as its representative in effecting the sale of it to the Fordson Coal Company. Abner Lunsford was never an employee of the Pond Creek Coal Company.

After the sale of the Pond Creek Coal Company on December 30, 1922, and the payment of the consideration therefor, the minutes of the board of directors of the company of February 15, 1923, show the following action was taken: "Upon motion duly seconded, it was voted to pay fifty thousand dollars as a gift to Abner Lunsford, when and if the President is satisfied that this payment has the approval of the Ford Motor Company." Shortly after such action of the board of directors, a letter was written by McVeigh to Lunsford, reading as follows:

February 20th, 1923.

Mr. ABNER LUNSFORD,

">*2047 C/o Ford Motor Company, Cincinnati, Ohio.

MY DEAR MR. LUNSFORD: Inasmuch as the entire transaction between the Ford Motor Company and the Pond Creek Coal Company has been closed, and apparently to the entire satisfaction of both parties, it was decided at the last meeting of our Board of Directors that if it was agreeable to the Ford Motor Company they would like to remember you with a memento which is to be decided on by them.

We of course fully realize that it is not your policy to accept any gratuity but as our business relations with you have been so exceedingly pleasant and in token of our friendship and esteem we would like to remember you with some memento in connection with the transaction referred to, and will appreciate ">*883 prompt advice from you as to whether or not this meets with the approval of the Ford Motor Company.

Very truly yours,

(Signed) R. S. MCVEIGH,

Vice President.

O.K. (Signed) EDSEL B. FORD.

The original letter, of which the foregoing is a copy, was returned to McVeigh by Lunsford, with Edsel Ford's "O.L." on it, as above indicated.

Under date of February 28, 1923, H. L. Smith, a vice president and comptroller of the Pond">*2048 Creek Coal Company, wrote Abner Lunsford, stating:

At the request of our President, Mr. T. B. Davis, I hand you, herewith, our check in the amount of $50,000.

For your information, would advise that we are handling this payment on our records as a gift to you and will not report it as an item of expense in our tax return for the year 1923, so you should not include it as income in your personal return.

Under date of January 8, 1924, Smith Again wrote Lunsford, saying:

Referring to the payment of $50,000, which the Pond Creek Coal Company made to you as a gift in connection with the sale of the Pond Creek Coal Company's properties, to the Ford Motor Company, wish to advise that the Federal examiners who audited the accounts of the Pond Creek Coal Company questioned this payment to you as a gift, taking the position that any payment such as this must necessarily be in respect of services rendered, and suggested that in order to avoid any possible complications the Company make mention of this payment in its return for 1923, stating that the payment was made as a gift, and has not been claimed as an item of expense, and also that you make a note on your personal return of the">*2049 receipt of this amount, stating that since the Company had paid it to you as a gift, and as it had not claimed the payment as an item of expense, you were not including it as an item of taxable income. Since the examiners have reported this payment to you to the personal income tax unit, I think we should follow their suggestion, and for your information I am attaching, hereto, a copy of the information return we are filing.

On the face of the information return is stated: "Gift - See note on back - $50,000.00." On back of the return in typewriting is the following:

This payment was voted Mr. Lunsford by the Board of Directors of the Pond Creek Coal Company as a gift in connection with the sale of the properties of the Pond Creek Coal Company to the Ford Motor Co. It has not been deducted as an expense item in the Pond Creek Coal Company's Corporation Income Tax Return for the year 1923.

One L. C. Perceval, connected with the Pond Creek Coal Company, also aided in effecting the sale of said company's property to ">*884 the Ford interests and the board of directors of said company at a meeting held on February 15, 1923, voted to pay $50,000 to L. C. Perceval as a gift, ">*2050 in connection with the sale of the company's property to the Fordson Coal Company. The payment was made to Perceval. Neither the payment of $50,000 to Lunsford nor the same amount to Perceval was claimed as a deduction in the 1923 return of the Pond Creek Coal Company, but both were reported as unallowed deductions.

In his individual income tax return for 1923, the decedent did not return the $50,000 paid as stated as income, but wrote on the face of such return: "$50,000.00 received from Pond Creek Coal Co. as gift, and not included in my taxable income as it was not reported by them as an item of expense." The name of the decedent, Abner Lunsford, does not appear on the books of the Pond Creek Coal Company as a stockholder therein, but his 1923 income tax return shows he received $18,000 for interests of some kind (whether stocks or bonds, the return does not indicate) in the "Pond Creek Coal Company" which cost him $13,654.51 and on which he realized a net profit of $4,345.49.

The Commissioner, in auditing the tax return of the Pond Creek Coal Company, refused to recognize as "gifts" the payment of $50,000 to Lunsford and Perceval, each, but treated same as compensation">*2051 or salary and income to them and as deductible expense items to the Pond Creek Coal Company in its return.

The Commissioner, having so audited the 1923 return of the Pond Creek Coal Company, advised it by letter that instead of it having a net income of $41,890.59, as reported by it, there was a net loss of $58,109.41 and an overassessment of $5,236.32, which with interest amounted to $5,413.42 and for which sum a check was sent to and accepted by the Pond Creek Coal Company.

The $50,000 received by Perceval was treated by him as income and tax paid thereon as such. On the $50,000 received by Lunsford no income tax was paid.

Neither prior to the sale of the Pond Creek Coal Company nor thereafter did Lunsford demand, request or suggest (so far as the record shows that anything be paid him by the Pond Creek Coal Company on account of his services or connection in the matter of the sale of its properties to the Fordson Coal Company. There is no evidence showing that the Pond Creek Coal Company or anyone connected therewith agreed to pay or promised that anything would be paid Lunsford by reason of his part in negotiating or aiding in effecting said sale. The evidence shows, ">*2052 however, that it was solely on his connection with the sale of the Pond Creek Coal Company's ">*885 properties that the sum of $50,000 was received by him from the said company.

OPINION.

SEAWELL: The decedent in 1923 received $50,000 from the Pond Creek Coal Company, which it and the decedent both treated as a gift in their income tax returns. The Commissioner refused to recognize such item as a gift, treating the same as a deductible expense in the return of the company and as compensation and income to the decedent in his return. The only question before this Board for determination is whether or not the $50,000 item mentioned was a gift in the sense of the statute.

It is urged on behalf of the petitioner that it was the intention of both parties, the Pond Creek Coal Company and the decedent, that the payment of the $50,000 should be considered and treated purely as a gift; that the evidence shows it to have been such; and that the facts bring it clearly within the principle decided by this Board in a number of cases of similar character.

In behalf of the Commissioner it is contended that the payment of the $50,000 to the decedent, Lunsford, was really in consideration">*2053 of services rendered, though an attempt was made by the Pond Creek Coal Company and the decedent to clothe the transaction in the garb of a "gift" by so treating it in the tax returns of each. It is true that in numerous cases similar contests have arisen which have been decided by this Board, but there is no necessity for reviewing all such cases, as in each instance the decision of the question rests upon the particular facts and circumstances presented which are rarely, if ever, the same.

The pertinent provisions of the statute in question are found in the Revenue Act of 1921 and are the same as those of the 1918 Revenue Act, which were involved in the case of (certiorari denied, ), and are as follows:

SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" -

(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, ">*2054 growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer; * * * but

(b) Does not include the following items, which shall be exempt from taxation under this title:

* * *

(3) ">*886 The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income).

In , Judge Parker, in delivering the opinion of the Court, stated: "It is an essential characteristic of a gift, however, that it be a transfer without consideration. If there is a consideration for the transaction, it is not a gift. 28 C.J. 621."

In considering the question in the instant case, it should be borne in mind that the decedent was in the employ of the Fordson Coal Company at an annual salary of $16,500; that it was the Fordson Coal Company, one of the Ford companies, that purchased the">*2055 properties of the Pond Creek Coal Company; that the evidence shows the decedent to have been a very important, if not the most important, factor in putting over the deal; that he owned stock or an interest of some kind in the Pond Creek Coal Company which he sold at a profit of $4,345.49 after the sale of the Pond Creek Coal Company's properties, and that the alleged "memento" or "gift" of $50,000 was "purely on his connection with the sale of the Pond Creek Coal Company's assets to the Ford interests" as testified by R. S. McVeigh, vice president of the Pond Creek Coal Company. In the light of these facts, it would require very strong evidence to convince us that the Commissioner committed error in not considering and treating as a "gift" the $50,000 received by Lunsford from the Pond Creek Coal Company.

It is true the payment was made under or by virtue of a resolution passed by the board of directors of the Pond Creek Coal Company and in the letter from its vice president, advising Lunsford of the action of the board of directors, it was stated, "they would like to remember you with a memento * * * in connection with the transaction referred to," it being the sale effected in">*2056 1922, as set forth in our findings of fact. The letter to Lunsford, from which the foregoing is quoted and on the margin of which appear these words, "O. K. Edsel B. Ford," gave no intimation that the "memento," was to be $50,000, more than the total amount of salary Lunsford would have drawn on account of his connection with the Ford interests, at his then rate of salary, in three years.

The word "memento" in its ordinary and generally accepted meaning does not convey the idea of any such valuable gift as the sum of $50,000, but rather merely a token or souvenir of some sort not of the character here involved. It is clear from the evidence that the Pond Creek Coal Company, through its board of directors, tried to present Lunsford with the $50,000 at a time and in a manner that would enable the company to treat the sum as a gift and have him do the same, with a view to having their interpretation and treatment, as indicated in their tax returns, accepted by the Commissioner. ">*887 The Commissioner, however, did not approve nor accept such attempted disposition of the matter, but took the view that notwithstanding the claims made for such sum as a "gift," it was in fact">*2057 a payment made, if not in consideration of any previous promise, nevertheless in consideration of the previous services rendered by Lunsford in effecting the purchase by the Fordson Coal Company of the properties of the Pond Creek Coal Company at, what the evidence shows, was a very satisfactory price to the latter. The Commissioner's determination, presumed to be correct, is not, in our opinion, overcome by any evidence adduced.

The respondent's determination as to both years is accordingly approved.

Judgment will be entered for the respondent.