Winthrop v. Bates

Hefferhan, J.

On August 16, 1935, petitioner gave his daughter, Mrs. Alice W. Payne, $200,000, which he deposited to her account in the Chase National Bank. On the same day he borrowed the identical sum from her and gave her a note payable five years after date with interest at 2%. He paid a Federal gift tax of $8,250, on the gift in question.

The note matured on August 16,1940, and a renewal note was given by him to his daughter for the amount of the loan payable three years after date with interest at 2%.

On November 12, 1941, petitioner agreed to increase the interest to 5% per annum in consideration of the fact that his daughter agreed to extend the maturity date of the note to August 16, 1945. This agreement was indorsed on the back of the note. Petitioner paid the major part of the note’s principal sum in July, 1946. It is conceded that interest on the note was paid regularly from the date of its inception. Mrs. Payne testified that she received the interest payments and reported them in her 1941 and 1942 Federal and New York State income tax returns. In so doing, she paid taxes on the interest.

On the audit of the petitioner’s Federal income tax returns 'for 1942 and 1943, an issue was raised as to his right to deduct the interest payments. Interest paid on the loan has been allowed by the Federal Income Tax Bureau for the years the loan was made.

There is not the slightest bit of proof in the record to justify an inference that the gift was subject to any private agreement between the father and daughter. The uncontradicted evidence establishes the contrary. The money which petitioner borrowed was used in his business for the production of other income.

The respondents disallowed the interest in computing petitioner’s income tax for the years 1941 and 1942. Section 360 of article 16 of the New York Tax Law provides:

“ Deductions.

“ In computing net income there shall be allowed as deductions ; * * *

“ 2. All interest paid or accrued during the taxable year on indebtedness except interest referred to in paragraph f of section three hundred and fifty-nine of this chapter.”

A similar provision is found in subdivision (b) of section 23 of the Internal Revenue Code (U. S. Code, tit. 26). The exception referred to in no way affects the right to the deduction of the interest paid on the note held by Mrs. Payne.

There is no evidence in the record to sustain the determination of the respondents that petitioner did not lose control of the gift which he made to his daughter.

The proof in the record before us justifies the conclusion that when petitioner borrowed the money from his daughter he incurred an indebtedness and thereafter paid interest on such indebtedness which is deductible under the provisions of the Tax Law heretofore quoted. The evidence on behalf of petitioner is uncontradicted and there is no reason for denying to it conclusiveness (Hull v. Littauer, 162 N. Y. 569).

The determination of the State Tax Commission is annulled on the law and facts, with $50 costs and disbursements and the payments of interest in the years 1941 and 1942 are allowed as proper deductions on petitioner’s income tax returns for those years.