White v. Fitzpatrick, Collector of Internal Revenue

CHASE, Circuit Judge

(dissenting).

Perhaps it woulld be desirable to protect the revenue by amending Sec. 23(a) (1) (A) to exclude from the business expense deductions now¹ allowed those which become necessary only because of intrafamily gifts of property used, or to be used, in the business. But that is a matter to be determined by Congress and, until it acts, I think courts are bound to give effect taxwi'se to gifts which are fully effective otherwise.

There is, I think, some distinction between the disallowance of the royalty and the disallowance of the rent deductions. It is that the transfer of the patent iby gift to the wife was a transfer of needed business property already owned by the taxpayer which was intended to, and did, make it necessary to pay her the royalties. The gift of the money, however, which she used together with some of her own to buy the building never owned by the taxpayer was not shown to have been of money which had any connection with the business at all and the net result from the standpoint of the taxpayer and his business was merely a change in landlord. However, as I view this case, it is not necessary to rely upon this ' distinction.

In respect to the claimed deductions, the decisive factor as the statute is now, is whether the rent and royalty payments were “required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he had no equity.” Sec. 23(a) (1) (A). The findings, based on evidence adequately supporting them, show that everything, was done to transfer the legal and equitable titles both to the patent and to the building absolutely to the wife, and the ownership she thereby acquired gave her the right to whatever she could get by way of royalties and rents which were, of course, taxable to her as income. And, as Sec. 23(a) (1) (A) is now so broad that no exception is made because of the way in which business expenses become necessary, i. e., by gift or otherwise, the reasonable royalties and rents the husband paid her were, I think, well within the scope of the statute, being “required” by the license and lease arrangements, and therefore deductible. Skemp v. Commissioner, 7 Cir., 168 F.2d 598; Brown v. Commissioner, 3 Cir., 180 F.2d 926, certiorari denied, 340 U.S. 814, 71 S.Ct. 42, 95 L.Ed. 598. See also Henson v. Commissioner, 5 Cir., 174 F.2d 846. The fact that in the Skemp and Brown cases the transfers were to independent trustees for the benefit of family members is a distinction without a difference since that bore only on the completeness of the gifts and reasonableness of the royalties and rentals paid, both here shown and found. W. H. Armston Co. v. Commissioner, 5 Cir., 183 F.2d 531, is distinguishable as an instance of a disguised transfer of dividends to a large stockholder of the corporation.

The cases dealing with problems arising under Sec. 22(a), I.R.C. as to the identity of the taxpayer liable for taxes payable toy some one, on which my brothers so much rely, help little, if any, in determining what deductions an identified taxpayer may take under Sec. 23(a) (1) (A) in computing his net income. Assuming, arguendo, that these cases are relevant,¹ factually they are inapplicable. The only basis pointed out by the majority for applying these cases to the facts before us is that the license of the patent and the lease of the buildings given to the taxpayer left “untouched in all practical reality the husband-donor’s effective dominion and control over the properties in question.” But whatever control the taxpayer received was the control of a licensee and lessee and was conditioned upon making the payments here claimed to be deductible. It would seem erroneous, therefore, to deny the claimed deduction on this basis.

One other point warrants brief mention. My brothers apparently think that the taxpayer is no longer entitled to any rent deduction because, presumably, he could have used the money he gave his wife to buy the building himself and then he would have had no rent to pay. If he had done so, no doubt he would have been allowed as deductions the maintenance costs, taxes, etc., which must have been included in the rent he paid his wife to make it reasonable over all but the effect of this decision may deprive him of even them. I cannot help but think that my brothers have mistakenly applied the 'business purpose rule of cases like Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, to a situation where what the taxpayer did was merely to use permissible business judgment as to whether he would increase his business investment or continue to pay reasonable rent.

I would reverse and remand for a judgment for the appellant.

1 . The only issue to which these eases could be relevant is whether or not the taxpayer was “required” to pay the royalties and rents as a condition to using the property since that is the test set forth in the statute. In order to be relevant to this issue, and to hold as the majority does, it would seem that one must accept the premise that a donor who retains sufficient control over property transferred by him so as to make any income from that property includible in the donor’s gross income under Sec. 22(a), is not, as a matter of law, “required” to pay the donee for its use even though he has entered into a firm, and legally enforceable, obligation so to do.