Coffey v. Commissioner , 1 T.C. 579 ( 1943 )

R. C. Coffey, Petitioner, v. Commissioner of Internal Revenue, Respondent

Coffey v. Commissioner

Docket No. 105452

United States Tax Court

1 T.C. 579; 1943 U.S. Tax Ct. LEXIS 236;

February 12, 1943, Promulgated

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Decision will be entered under Rule 50.

The taxpayer endorsed stock certificates for transfer to his minor children with the declaration, in the presence of a witness, that he was making a gift of the shares to the children. He kept the certificates in his possession, did not have the shares transferred to the children on the books of the corporations, and continued to receive the dividends on the shares for his own use, without any accounting to the children prior to the taxable year 1938. Held, that there were no valid gifts of the shares to the children.

Frederick L. Pearce, Esq., for the petitioner.

F. L. Van Haaften, Esq., for the respondent.

Smith, Judge.

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SMITH

This proceeding involves a deficiency of $ 29,171.28 in petitioner's income tax for 1938. The issues are:

(1) Whether petitioner is taxable on the dividends received by him in 1938 on shares of stock which he claims to have given to his minor children in prior years;

(2) Whether petitioner is entitled to deduction of amounts paid to his children in 1938 as interest for the use of the dividends which he received in 1937 on the shares, certificates for which were previously endorsed to them;

(3) Whether petitioner is taxable on dividends on shares of stock which he conveyed to certain trusts for the benefit of his minor children after the declaration of dividends on such shares but before the payment thereof. (This issue was conceded by the petitioner at the hearing);

(4) Whether petitioner is entitled to the deduction of traveling expenses, automobile upkeep, telephone and telegraph, legal fees, and accounting fees paid out during the taxable year; and

(5) Whether petitioner is entitled to deduct the cost of operating a citrus grove on the premises of his residence in Florida.

FINDINGS OF FACT.

Petitioner is a resident of Orlando, Florida. He filed his income tax return for 1938 with the collector of internal revenue for the district of Florida.

Petitioner was born and received his early education in Prairie City, Iowa. He graduated from Iowa State College in 1905, specializing in mining engineering. After finishing college he spent several years in Colorado and Nevada and in 1911 went to Canada. Several years later he obtained a contract to build a reduction mill for the Lake Shore Mines, Ltd., at Kirkland Lake, Ontario. This work was completed about 1917 or 1918. Thereafter petitioner remained with the company until about 1925, first as mill superintendent and later as mine manager.

Early in 1925, following the death of his mother, petitioner returned to Prairie City, Iowa, to make a home for his father. During the year he made occasional trips to Canada and to points in the United States to look after his mining interests and to examine mining properties for possible investment therein. He also purchased other business properties in the United States.

In about 1926 petitioner began spending his winters in Florida. In 1937 he established a permanent residence at Orlando, Florida, where he still resides.

Petitioner is married and has three children, Robert George, born February 16, 1920; Anna Kathleen, born January 9, 1922, and Frances Alice, born June 7, 1926.

During his employment by Lake Shore Mines, Ltd., and prior to 1922, petitioner acquired a large number of shares of the common stock of that company. His holdings in 1921 amounted to about 45,500 shares. These shares were represented by a number of certificates issued in petitioner's name.

On October 10, 1922, petitioner endorsed certificate No. 3978 for 1,800 shares of Lake Shore Mines, Ltd., stock for transfer to his son Robert George, and certificate No. 1725 for 2,000 shares to his daughter Anna Kathleen. These endorsements were written in on the back of the certificates and the signatures were witnessed by Jenkin Evans, a friend of petitioner and postmaster at Kirkland Lake, Ontario, Canada. Petitioner told Evans at the time that he was making gifts of the shares to the children.

On August 18, 1924, petitioner endorsed certificate No. 3662 of Lake Shore Mines, Ltd., stock for 1,000 shares for transfer to his son Robert George, and certificate No. 1654 for 1,000 shares to his daughter Anna Kathleen.

On January 14, 1925, petitioner endorsed certificate No. 1676 for 1,000 shares of the same stock for transfer to Robert George, and certificate No. 3769 for 1,000 shares to Anna Kathleen. At the time petitioner made these endorsements he was living at Prairie City, Iowa, and the endorsements were witnessed and signed by Richard Zaayer, a friend of petitioner's who also resided at Prairie City.

Prior to the time the certificates referred to above were endorsed for transfer they had been endorsed in blank by the petitioner for use as collateral for bank loans.

After endorsing certificates for the shares to his children as above noted petitioner kept them in his possession, and up to the close of the taxable year 1938 he had never submitted any of them to the transfer agent for transfer to the children on the books of the corporation. On one of his visits to Toronto in 1938 or 1939 petitioner presented the certificates to officers of the corporation and to the transfer agent for advice as to the effect of the endorsements, and he was told that when requested to do so they would transfer the stock to the children to whom the certificates were endorsed and to no one else.

On September 12, 1936, petitioner endorsed 10 certificates for 100 shares each of Nipissing Mines Co., Ltd., and one certificate for 100 shares of Hollinger Consolidated Gold Mines for transfer to each of his daughters, Anna Kathleen and Frances Alice, and three certificates for 100 shares each of Hollinger Consolidated Gold Mines for transfer to his son Robert George. On September 15, 1937, petitioner endorsed three certificates for 100 shares each of Hollinger Consolidated Gold Mines for transfer to each of his three children. These endorsements likewise were all witnessed by Richard Zaayer, whom petitioner told at the time that he was making gifts of the shares to his children. After the endorsements were made petitioner kept all the certificates in his possession in a safe in his home with other securities belonging to him until after the close of the taxable year 1938.

During 1938 petitioner received dividends in the aggregate amount of $ 32,933 on the shares of stock represented by the certificates which he had previously endorsed for transfer to his children as stated above. He deposited all of these dividends in his personal bank accounts, one of which was in a bank in Canada, one in Prairie City, Iowa, and one in Orlando, Florida. The accounts at Prairie City and Orlando were joint accounts of petitioner and his wife.

Prior to 1938 petitioner made no segregation of these dividends from dividends received on other shares of stock which he owned, and kept no accounts on behalf of any of the children. He reported all such dividends in his personal income tax returns.

Early in 1938 petitioner engaged an accountant to assist him in straightening out his affairs, open a set of books for him, and prepare his income tax returns. In the course of his work the accountant discovered the stock certificates bearing the endorsements for transfer to petitioner's children and advised the petitioner that in his opinion the dividends on those shares belonged to the children and were erroneously reported by the petitioner in his income tax returns. The accountant asked the advice of attorneys about the matter and they confirmed his opinion. Accordingly he prepared an amended return for the petitioner for 1937, eliminating the dividends in question, and also prepared returns for the two oldest children, Robert George and Anna Kathleen, for 1937, in which he reported the dividends received in that year on the shares represented by the certificates which had been endorsed to them. These returns were duly executed and filed. Petitioner's amended return for 1937 showed a reduction in tax of approximately $ 29,000. The accountant also prepared returns for petitioner and his children for 1938 on the same basis, omitting from petitioner's return for that year the dividends in controversy in this proceeding, amounting to $ 32,933.

Consonant with his theory that the dividends paid on the shares of stock previously endorsed for transfer to the children belonged to them and not to the petitioner, the accountant prepared, and had petitioner sign promissory notes payable to each of the children for the amount of the dividends found to be due them. There were two notes made payable to each child, one representing the dividends received on the shares prior to 1937 and the other the dividends received during 1937. The notes made payable to Robert George were, respectively, for $ 95,169.10 and $ 22,215.75; those payable to Anna Kathleen, $ 100,016 and $ 23,385.25; those payable to Frances Alice, $ 584.25 and $ 38. The notes were all dated October 31, 1938, and bore interest at the rate of 8 percent per annum. Petitioner signed the notes and put them away in his safe at his residence in Orlando in boxes separately kept for each child, which also contained other properties belonging to the children. No payment of principal has ever been made on any of the notes and no interest was paid on any of them up to December 31, 1938. The interest item which petitioner deducted in his 1938 return, and which is in controversy in this proceeding under issue (2), amounting to $ 4,462.44, was the interest computed to October 31, 1938, on the dividends received by the petitioner in 1937 on shares of stock certificates for which had been endorsed for transfer to the children. It did not represent interest on the notes themselves. It was paid by checks issued by petitioner to each of the children, dated October 31, 1938, in amounts as follows:

Robert George Coffey	$ 2,143.18
Anna Kathleen Coffey	2,259.76
Frances Alice Coffey	59.50

The checks for these amounts were all deposited in the children's separate bank accounts, and the amounts thereof were included as interest income in the returns filed for the children for 1938.

On September 15, 1938, the petitioner created three trusts, one for each of his three children, naming himself as the sole trustee of each trust. He transferred to the Robert George Coffey trust $ 1,000 cash and 200 shares of stock of Lake Shore Mines, Ltd., and to the Frances Alice Coffey trust $ 1,000 cash and 4,000 shares of that stock. These transfers were reported in a gift tax return filed by the petitioner for 1938. The evidence of record does not show what transfers were made to the Anna Kathleen Coffey trust. Issue 3 in this proceeding, which petitioner has conceded, relates to the dividends declared, but not paid at the date of transfer, on the shares of stock transferred to these trusts.

In 1939 the petitioner transferred 3,800 additional shares of Lake Shore Mines, Ltd., stock to Robert George and 4,000 shares to Anna Kathleen, individually.

During 1938 the petitioner made several business trips from his home in Orlando to Prairie City, Iowa, and to Atlanta, Georgia, to look after business interests. Also in 1938 he made trips to Warrenton, North Carolina, and to Toronto, Canada, to inspect mining properties. Some of these trips were made by train and some by automobile. Petitioner claimed a deduction in his return for 1938 for "Travel" of $ 1,909.96 and for "Auto Upkeep" of $ 1,122.31. Petitioner also sent a number of telegrams and made long distance telephone calls on business matters during 1938 for which he claimed a deduction in his return for that year of $ 155.86.

Also during 1938 petitioner paid a firm of attorneys in Des Moines, Iowa, a fee of $ 1,047.93 for services performed in obtaining a reduction in valuation for local tax assessment purposes of certain business properties which petitioner owned in that city. He claimed a deduction of the amount so paid in his return for 1938.

Also in 1938 petitioner paid $ 1,750 to the accountant whom he employed in that year to straighten out his accounts and open a set of books for him. He deducted the amount in his income tax return for 1938. The services performed by the accountant for which this fee was paid included the adjustment of petitioner's tax liability to the State of Florida for a tax on intangibles, to which was allotted $ 1,000 of the $ 1,750 fee, and assistance in the preparation of the trusts which petitioner created for his children in 1938, to which $ 200 of the fee was allotted. The balance of the fee, amounting to $ 550, was allotted to general accounting and the preparation of the 1937 Federal income tax returns for petitioner and his children. The above items, and also an item of $ 51.15 designated "Miscellaneous," amounting in the aggregate to $ 6,037.21, were deducted in petitioner's return as business expenses.

It has been stipulated that all of the above amounts were paid out by the petitioner during 1938 for the purposes indicated by the designations of the items on the return.

Petitioner's residence in Orlando is situated on a rectangular tract of about 6 1/2 acres. At the time petitioner acquired the property it was part of an old orange grove which was in a badly run-down condition. Petitioner built the residence himself. It was completed sometime in 1937 or 1938. There were about 300 orange and citrus trees on the tract when petitioner acquired it. He had some of these removed and planted others. Most of the tract and all but about 10 of the orange trees were enclosed in a cement block wall which petitioner built around the premises.

It is stipulated that during 1938 petitioner paid the following amounts for maintenance and care of the citrus grove:

Fertilizer	$ 127.49
Insecticide	5.20
Contract culture, cultivation	299.49
Contract pruning	72.00
Tools and supplies	$ 107.72
Labor, regular yard man	471.00
Labor, extra man	194.30
Total grove expense	1,277.20

Petitioner's return for 1937 showed no receipts from or deductions on account of the orange grove. Adjustment of the return was made by a revenue agent to show income from the sale of fruit of $ 462.80 and expenses relating thereto of $ 295.09, or a net income of $ 167.71. Petitioner's return for 1938 shows no income from the sale of fruit. In 1939 petitioner reported the receipt of $ 230.50 from the sale of fruit and a loss on the grove of $ 446.21. In 1941 he reported no income and a loss on the grove of $ 490.64.

The petitioner did not acquire or operate the citrus grove as a business venture.

OPINION.

The principal question in this proceeding is whether petitioner made completed gifts to his minor children of the shares of stock represented by the certificates which he had endorsed for transfer to them in years prior to 1938. If so, the dividends paid on the shares in 1938 are taxable to the children, the owners of the shares, and not to the petitioner.

The evidence is that in each instance when petitioner endorsed the certificates for transfer to his children he stated to the witness who signed the endorsement that he was making a gift of the shares to the child to whom they were endorsed. Thereafter, petitioner kept the certificates in his own possession and did not present any of them to the issuing corporations for transfer to the children on the corporations' books, at least until after the close of the taxable year 1938. Petitioner continued to receive the dividends from the shares and to appropriate them to his own use without making any accounting to or on behalf of the children until some time in 1938, when he was advised to do so by the accountant.

The prerequisites of a valid gift are stated in Allen-West Commission Co. v. Grumbles (C. C. A., 8th Cir.), 129 Fed. 287, as follows:

* * * Among the indispensable conditions of a valid gift are the intention of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject of the gift in praesenti at the very time he undertakes to make the gift (Lehr v. Jones, 74 App. Div. 54, 77. N. Y. Supp. 213; Bickford v. Mattocks, 50 Atl. 894, 95 Me. 547">95 Me. 547; In re Estate of Soulard, 141 Mo. 642">141 Mo. 642, 657, 659, 43 S. W. 617; Newman v. Bost (N. C.) 29 S. E. 848, 850); the irrevocable transfer of the present title, dominion, and control of the thing given to the donee, so that the donor can exercise no farther act of dominion or control over it (Basket v. Hassell, 107 U.S. 602">107 U.S. 602, 614, 615, 2 Sup. Ct. 415, 27 L. Ed. 500">27 L. Ed. 500;Cook v. Lum, 55 N. J. Law, 373, 376, 26 Atl. 803); and the delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it. This delivery must be an actual one "so far as the subject is capable of it. * * *" * * *

In Lunsford Richardson, 39 B. T. A. 927, the Board said that:

It is well settled that before there can be a completed gift the donor must surrender dominion and control of the subject matter of it. Edson v. Lucas, 40 Fed. (2d) 398; Allen-West Commission Co. v. Grumbles, 129 Fed. 287; Delight Ward Merner, 32 B. T. A. 658; 79 Fed. (2d) 985; Adolph Weil, 31 B. T. A. 899; 82 Fed. (2d) 561; certiorari denied, 299 U.S. 552">299 U.S. 552; Jackson v. Commissioner, 64 Fed. (2d) 359; Dulin v. Commissioner, 70 Fed. (2d) 828. The "delivery" must be as perfect as the nature of the property and the circumstances and surroundings of the parties will reasonably permit. * * *

In Harvey v. Stowe, 219 Fed. 17; affd., 241 U.S. 199">241 U.S. 199, the following was quoted from Bauernschmidt v. Bauernschmidt, 54 Atl. 637, 643:

There can be no gift which the law will recognize where there is reserved to the donor, either expressly or as a result of the circumstances and conditions attending the transaction, a power of revocation or a dominion over the subject of the gift. There can be no locus penitentiae, and there is always a locus penitentiae where the supposed donor may at any moment undo what he has done.

In Adolph Weil, 31 B. T. A. 899; affd. (C. C. A., 5th Cir.), 82 Fed. (2d) 561; certiorari denied, 299 U.S. 552">299 U.S. 552, the court said:

* * * We do not doubt that a certificate of stock may without formal transfer be by such a delivery given; and if to a minor such parting of control and dominion to a third person for the child is sufficient. Whether a father may deal wholly with himself for his child without writing, without cooperation of any third person who represents the child, without doing what is ordinarily done to transfer this kind of property, and without parting with control over the certificate, we greatly doubt. Generally a donor must go as far as the nature of the property and the circumstances reasonably permit in parting with dominion and making the gift irrevocable. [Citing cases.] If the donor intends to give, and even goes so far as to transfer stock on the books of the company, but intends first to do something else and retains control of the transferred stock for that purpose, there is no completed gift. [Italics supplied.]

The evidence in this case leaves considerable doubt in our minds whether petitioner had a definite intention at the time he endorsed these certificates for transfer to his children immediately to divest himself of the title, dominion, and control of the shares absolutely and irrevocably. Undoubtedly petitioner intended to invest the children with some interest in or claim upon the shares, else his acts in making the endorsements would have been meaningless. Possibly he intended to complete the gifts at some future date, or had the certificates endorsed to his children so that in case of his death they might claim the ownership of the shares. As to that, however, we can only speculate. In any event, in view of other circumstances, we can not find that petitioner's act of endorsing the certificates to his children with the declaration that he was giving the shares to them constituted present gifts of the shares to the children. Actually petitioner retained the same complete dominion and control over the shares after the endorsements as before. He made no attempt to have any of the shares transferred to the children on the books of the companies until after the close of the taxable year. He continued to receive the dividends from the shares for his own personal use and to enjoy all the benefits of ownership in them. There was nothing in petitioner's subsequent actions, up to the time of the accounting in October 1938, to indicate that he regarded himself as holding the certificates as trustee or guardian for the children. Cf. H. C. Priester, 33 B. T. A. 230, and Edward H. Heller, 41 B. T. A. 1020.

For these same reasons we can not find that petitioner made an irrevocable transfer or delivery of the shares to the children, so that he could exercise no further act of dominion or control over them.

The most effective means of transferring shares of stock to a purchaser or donee is by endorsement and delivery of the certificates to the transferee, followed by the surrender of those certificates to the transfer agent and the issuance of new certificates in the transferee's name. The mere transfer of shares to the name of a donee on the company's books with intent to make a gift is sufficient to pass title, even though the transferor retains possession of the certificates. See Essie Irene Gaffney, Executrix, 36 B. T. A. 610; Kathryn Lammerding, 40 B. T. A. 589; Marshall v. Commissioner, 57 Fed. (2d) 633.

In Miller v. Williams, 194 Iowa, 1305; 192 N. W. 798, it was said that an endorsement of a stock certificate only emphasizes the evidence of the endorser's intention to complete the gift. Something else is required, however, before the transfer becomes completed. In the instant case there was no transfer of the shares to the children on the companies' books, no manual delivery of the certificates to them, and no segregation of those shares from petitioner's other securities until some time in 1938. There was nothing to keep the petitioner at any time from making other endorsements of the certificates or other transfers of the shares and thereby undoing all that he had done towards making the gifts to his children.

In Edward H. Heller, supra, where gifts from a father to his minor children were held valid, we pointed out that the father had always been careful, after the gifts were made, to keep the funds and securities comprising the subject matter of the gifts segregated in separate bank accounts carried in the children's names. We said, too, that the result might have been different if the father had made a "systematic or even occasional personal use of the funds or securities." While the petitioner here admits that he consistently appropriated all of the dividends from the shares in question to his personal use, he claims that he thereby became indebted to the children for the large amounts represented by the promissory notes which he executed to the children in 1938. This so-called accounting to the children was made at the suggestion of petitioner's accountant, who prepared the notes for petitioner's signature. Petitioner testified that he did not know how the amounts of the notes were arrived at or why there were two separate notes for each child; that he had expected to make an accounting to the children when they became 21 years of age.

It might be observed at this point that there is no question here of bad faith on the part of either the petitioner or the accountant who prepared his returns. The present difficulty arises, apparently, from a misunderstanding of the legal effect of petitioner's endorsements of the certificates to his children.

For the reasons which we have stated, and which we believe to be impelling, we have concluded that petitioner did not make completed gifts of the shares in question to his children prior to the close of the taxable year 1938. It follows that the dividends on such shares paid in 1938 were petitioner's income and should be included in his individual return for that year.

Our determination on the first issue necessarily disposes of the second issue. For if the dividends which petitioner received on the shares in question were his own and not the children's income, then he owed them no interest on the use of such dividends and is not entitled to deduct the $ 4,462.44 which he claims as interest paid to them in 1938 for use of the dividends received in 1937.

Issue 3, involving the dividends declared but not paid on shares which the petitioner transferred to the trusts for his children in 1938, has been conceded by petitioner.

Issue 4 involves the claimed deduction of $ 6,037.21 for travel, cost of automobile upkeep, telephone and telegrams, legal fees, auditing fees, and "Miscellaneous." The respondent disallowed these items in determining the deficiency herein on the ground that petitioner was not regularly engaged in a trade or business and that the amounts claimed are therefore not allowable as ordinary and necessary business expenses.

Under section 121 (a) (2) of the Revenue Act of 1942, which is retroactive, the allowable expense deductions were broadened to include certain nontrade or nonbusiness expenses. The new provision reads as follows:

(a) Expenses. --

* * * *

(2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

It is stipulated that petitioner paid each of the items in dispute during the taxable year for the purpose indicated in his return. The evidence clearly supports the respondent's determination that the petitioner was not regularly engaged in carrying on any business during the taxable year. Our question therefore is whether the items in dispute were ordinary and necessary expenses paid for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

Petitioner testified that the travel expenses amounting to $ 1,909.96 were paid in making trips to Toronto, Canada, and to several different points in the United States to look after business interests or to inspect business properties. As such the expenditures come within the provisions of the statute.

Petitioner further testified that the item of automobile upkeep, amounting to $ 1,122.31, covered gasoline, tires, oil, and repairs for one of several family automobiles which he used in making some of his business trips; that it also included his monthly expenditures for this automobile at the Orlando garage; that he sometimes found it more convenient to use the automobile than to use the train. Petitioner does not claim that the automobile was used exclusively for business purposes, nor is there any evidence upon which we can make an allocation between business and nonbusiness use. Neither does the evidence show what particular part of the amount claimed is attributable to the cost of any or all of the business trips. In these circumstances we think that the entire amount must be disallowed.

The next of these items is "Telephone & Telegraph $ 155.86." Since the evidence is that all of this item represents the cost of telegrams and telephone calls relating to business matters, the item is deductible in full.

The legal fees of $ 1,047.93 were paid to a firm of lawyers in Des Moines, Iowa, for services rendered in obtaining a reduction of local tax assessments on petitioner's business properties located in that city. As such, we think that the expenditure was ordinary and necessary and was for production of income as well as for the management of income-producing property.

The accountant's fees of $ 1,750 represent an amount paid to the accountant whom petitioner employed to straighten out his accounts, open a set of books for him, prepare his income tax returns, and adjust his liability for local taxes on intangibles. The accountant testified in this proceeding as to the nature of the services which he performed for petitioner and gave a breakdown of the $ 1,750 item as follows:

Adjustment of tax on intangibles	$ 1,000
Assisting and establishing trusts for the children	200
Accounting and preparation of income tax returns	550
Total	1,750

The amount paid for the adjustment of local taxes on intangibles is an allowable deduction. The taxes in question were assessed, or were to be assessed, on petitioner's income-producing securities and its adjustment was necessary "for the management, conservation, or maintenance of property held for the production of income." The balance of the $ 1,750 item, we think, is not deductible. The cost attributable to establishing the trusts for petitioner's children was clearly a personal expense and was not within any of the statutory provisions. According to the accountant's testimony the remaining $ 550 was attributable to "the accounting and income tax matters" and only a small amount of time was spent in the preparation of the returns. On this evidence we can not find that any of the $ 550 is allowable.

There being no evidence as to the nature of the expenditure of $ 51.15 designated "Miscellaneous," the amount is disallowed.

The next and last issue relates to the claimed deduction of $ 1,277.20 representing the cost of maintenance and care of the citrus grove. The evidence before us fails to show sufficient grounds for reversing the respondent's disallowance of this item. We are convinced that petitioner did not acquire or operate the grove as a business venture, and that in a true sense it can not be classified as income-producing property. Certainly, petitioner was not engaged in any business of raising citrus fruits. We think that the citrus grove was merely an adjunct of petitioner's residence and that what little income he may have received from it was incidental. The amounts expended for its care and maintenance were no more than might normally be required for similar noncommercial properties. Petitioner has not reported any income from the grove in the taxable year and we do not think that he has proven the right to deduct any expenses on its account.

Decision will be entered under Rule 50.