DocketNumber: Docket No. 294-75
Citation Numbers: 1977 U.S. Tax Ct. LEXIS 57, 68 T.C. 792
Judges: Hall
Filed Date: 8/30/1977
Status: Precedential
Modified Date: 10/19/2024
*57
Petitioner, a New Jersey resident, executed gratuitous promises under seal to pay certain sums to his sister. He paid and deducted interest on the promised amounts.
*793 Respondent determined the following deficiencies in petitioner's income tax:
Year | Deficiency |
1971 | $ 1,792.50 |
1972 | 1,433.20 |
Another issue having been disposed of by mutual agreement, the remaining issue for decision is whether petitioner is entitled to interest deductions under
In 1951 petitioner wished to make a substantial gift to his sister Rose but lacked sufficient liquid assets to make a gift in cash or securities. Instead, on September 15, 1951, he gave her what he termed a bond, payable in 20 years, in the face amount of $ 34,000, which in essence embodied petitioner's purported obligation to make Rose a gift of this amount. To secure this bond, he gave Rose what he termed a mortgage on his Bayonne residence. The mortgage documents indicated that petitioner would pay Rose annual interest of 5 percent on the bond. The mortgage was recorded in Hudson County, N.J. Rose transferred nothing of value to petitioner for the bond given to her on September 15, 1951.
At various times thereafter petitioner gave Rose additional bonds of $ 3,000, securing each bond by an additional *794 mortgage. Each additional bond bore the same interest rate and expiration date as the original bond. All of the bonds petitioner gave Rose were signed by him, were payable in a sum certain, and were executed*60 under seal. Each additional mortgage was filed in Hudson County, N.J. Rose transferred nothing of value to petitioner for these additional gifts.
As of May 15, 1971, the total face value of the bonds and securing mortgages executed by petitioner and held by Rose totaled $ 46,000. On that date petitioner decided to consolidate these bonds and mortgages and also decided to increase his overall gift to Rose to $ 49,000. Therefore Rose canceled his prior bonds and mortgages, and petitioner signed and executed under seal a new bond to Rose, in the face amount of $ 49,000, payable on May 15, 1981, with annual interest of 7 percent. He also executed a new mortgage of $ 49,000 on his Bayonne residence and had it recorded. In 1972 petitioner signed and executed under seal an additional bond for $ 3,000 to Rose, payable on May 15, 1981. He also executed an additional mortgage in the same amount. Both the 1971 and 1972 bonds were payable to Rose Linder or her assigns.
The 1971 bond reads as follows (the 1972 bond was identical, except for the amount of money involved): JOSEPH LINDER, of the
The Condition of the above obligation is such that if the above bounden
*795 * * *
And it is hereby expressly agreed, that should any default be made in the payment of the said interest, or of any part thereof, on any day whereon the same is made payable as above expressed, or should any tax, assessment, water rent or other municipal or governmental rate, charge, imposition or lien be hereafter imposed or acquired upon the premises described in the mortgage accompanying this bond, and become due and payable; and should the said interest remain unpaid and in arrear for the space of
In 1974 petitioner paid Rose $ 52,000 and canceled the outstanding bonds and mortgages. Prior to 1974 petitioner had not made any payments to reduce the principal of his bond and mortgage obligations. *64 On August 1, 1974, Rose purchased an annuity contract from an insurance company, paying a single premium of $ 55,000.
Title to the Bayonne residence at all times remained in petitioner's hands. Petitioner also paid all real estate taxes on the house. The responsibility for day-to-day operation of the house rested with Rose, who used her own income as well as petitioner's interest payments to pay for groceries, cleaning, and other household expenses.
In 1971 petitioner made interest payments totaling $ 3,430 to Rose on the $ 49,000 bond then outstanding and deducted this amount on his 1971 tax return as interest on a home mortgage. In 1972 he paid Rose $ 3,640 as interest on the $ 52,000 of bonds then outstanding and similarly deducted this *796 amount on his return. Respondent disallowed these deductions in their entirety.
OPINION
Over a period of 20 years petitioner made successive promises to his sister Rose to make sizable gifts to her. His promises for the years in issue were memorialized in bonds, executed under seal, secured by mortgages on his home. The issue before us is whether petitioner is entitled to deduct the interest which he paid to his sister on these *65 bonds.
A deduction is generally allowed on "all interest paid or accrued within the taxable year on indebtedness."
*66 Since in most jurisdictions *67 a promissory obligation executed as a gift is not legally enforceable, any interest paid on such an obligation is not deductible.
The following statutory rule applies in New Jersey:
On its face, this statute, enacted in substantially its present form in 1900 (1900 N.J. Laws, ch. 150, sec. 15), appears to modify the common law rule and to make lack of consideration a defense to a sealed instrument. This would scarcely be surprising, for the magic of the seal has long since been legislatively exorcised in most American jurisdictions. See Williston, Contracts, secs. 218, 219A (3d ed. 1957). The interpretation we place*69 upon the statute seems even more clear in view of the following history. The predecessor of the *798 statute, enacted on April 6, 1875 (1875 N.J. Laws, ch. 320), provided in pertinent part:
that in every action upon a sealed instrument, or where a set-off is founded on a sealed instrument, the seal thereof shall be only presumptive evidence of a sufficient consideration, which may be rebutted, as if such instrument was not sealed * * *
While this statute may well have been
Our opinion could have ended with quoting the current statute were it not for a 1941 per*71 curiam decision of the New Jersey Court of Errors and Appeals handed down long after the 1900 statute had been enacted. In this brief and cryptic opinion, it was held, without citing or discussing the relevant statutes, that a sealed promise was enforceable without *799 consideration, because "It is not essential in order to make a promise under seal operative as a sealed contract, that consideration be given for the promise."
Regardless of the statutory language, were we convinced that
We are of the opinion that if faced with the issue today, the highest court of New Jersey would more probably than not refuse to follow the opinion in
1. All section references are to the Internal Revenue Code of 1954, as in effect during the years in issue.↩
2. The nontypeset portions of the bond have been underlined.↩
3. Respondent argues that the entire transaction is without substance, relying on
4. Two older Federal cases found that under the applicable State law a note made under seal, even though executed as a gift, was legally enforceable.
5. Other cases have employed similar reasoning without explicitly relying on State law.
Johnson v. Commissioner of Internal Revenue , 86 F.2d 710 ( 1936 )
Commissioner of Internal Revenue v. Park , 113 F.2d 352 ( 1940 )
Autenreith v. Commissioner of Internal Revenue , 115 F.2d 856 ( 1940 )
Cockrell v. McKenna , 103 N.J.L. 166 ( 1926 )
French v. Commissioner of Internal Revenue , 138 F.2d 254 ( 1943 )
Woodward v. United States , 208 F.2d 893 ( 1953 )
Whitehead v. Villapiano , 16 N.J. Super. 415 ( 1951 )
Morton v. Commissioner of Internal Revenue , 112 F.2d 320 ( 1940 )
Carl E. Weller and Emily I. Weller v. Commissioner of ... , 270 F.2d 294 ( 1959 )
William Herbert Brown and Mary F. Brown v. Commissioner of ... , 241 F.2d 827 ( 1957 )
Zirk v. Nohr , 127 N.J.L. 217 ( 1941 )
Gilman v. Commissioner of Internal Revenue , 53 F.2d 47 ( 1931 )