Williams v. Commissioner

Elma M. Williams, Petitioner, v. Commissioner of Internal Revenue, Respondent

Williams v. Commissioner

Docket No. 111836

United States Tax Court

3 T.C. 200; 1944 U.S. Tax Ct. LEXIS 202;

February 4, 1944, Promulgated

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">*202 Decision will be entered under Rule 50.

1. Interest paid by an individual taxpayer on a mortgage indebtedness upon which she was a joint obligor with the other shareholder and the mortgagor corporation and was a signer of an agreement after foreclosure providing that she would make up any deficit in the income from the mortgaged property, held deductible by the taxpayer as interest on indebtedness.

2. Annual fees paid to investment counsel for services of advice as to a taxpayer's investments held deductible under Revenue Act of 1942, section 121, amending section 23 (a), Internal Revenue Code.

Ralph W. Barbier, Esq., for the petitioner.

Melvin S. Huffaker, Esq., for the respondent.

Sternhagen, Judge.

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STERNHAGEN

">*201 Deficiencies of $ 1,177.84 and $ 921.30 were determined in petitioner's income tax for 1939 and 1940, respectively. Two items of adjustment are controverted -- (1) the disallowance of deduction taken for interest, and (2) the disallowance of deduction of payments to investment counsel.

FINDINGS OF FACT.

1. Petitioner, a resident of Grosse Pointe Farms, Michigan, filed her returns for 1939 and 1940 in Detroit.

In 1929, after she and her brother">*203 had acquired real property by devise from their mother, they organized Mennen Estates, Inc., a New Jersey corporation, of which each took 50 percent of the shares. They transferred to it a building at South Broad and William Streets, Newark, New Jersey. A loan of $ 750,000 was made by the National Commercial Title & Mortgage Guaranty Co., secured by a mortgage on the building. The mortgage bond of $ 1,500,000 was executed by Mennen Estates, Inc., William G. Mennen, and Elma Mennen Williams. A default having occurred the mortgage was foreclosed. After the decree of foreclosure but before execution, an agreement was made dated December 27, 1937, between the mortgagee, first party, Mennen Estates, Inc., second party, and William G. Mennen and Elma Mennen Williams, third parties, which recited that the first party had loaned to the second party $ 750,000, "which the parties of the second and third parts agreed to repay to the party of the first part." The principal agreement therein was that the rents of the building were assigned by Mennen Estates, Inc., to the Mortgage Co., and should be applied to (1) the expenses and maintenance of operation, (2) taxes, and (3) interest, in that">*204 order. In the event of insufficiency of the rent for such needs the amount required to make up the deficiency should be paid by Mennen and Williams upon demand. In accordance with this agreement Mennen and Williams were required to make payments to make good the deficit in income from the building, and petitioner, in 1939, paid $ 14,374.76, and in 1940 paid $ 1,430.61, which amounts were applicable to interest. These amounts were deducted on her income tax returns for those respective years and the Commissioner disallowed the deduction. In 1939 and 1940 the fair market value of the building was $ 150,000.

2 Petitioner, in 1939, paid Loomis Sayles & Co. $ 1,572.41, and in 1940 $ 1,541.85, as their regular fees for services as petitioner's investment counsel throughout the year.

OPINION.

1. The Commissioner explained the disallowance of the deduction of the amounts paid in 1939 and 1940 by this taxpayer to the Mortgage Co. by the statement that:

">*202 they do not represent interest, but payments under an agreement dated December 27, 1937, which provides that you and W. G. Mennen shall make up any deficit resulting from the operation of certain mortgaged property held by Mennen">*205 Estates, Inc., for a period of five years, and are therefore a charge against the corporation.

A payment by a taxpayer of interest on another's obligation is not deductible by the taxpayer. Colston v. Burnet, 59 Fed. (2d) 867; Automatic Sprinkler Co. of America, 27 B. T. A. 160; Agnes I. Fox, 43 B. T. A. 895; Orange Securities Corporation, 45 B. T. A. 24, 31; Inez H. Brown, 1 T.C. 225. However, interest paid upon an indebtedness of which he is a joint obligor is deductible. F. C. Nicodemus, Jr., 26 B. T. A. 125; George A. Neracher, 32 B. T. A. 236; Rose B. Larson, 44 B. T. A. 1094, 1104.

This petitioner was a principal obligor of the $ 750,000 loaned by the Mortgage Co. to Mennen Estates, Inc., and the bond for its repayment was signed by her, her brother, and the Mennen corporation. The later agreement recites that the three "agreed to repay" the loan. Thus she was a joint debtor on the loan, which was secured by a mortgage on ">*206 the corporation's building. After the mortgage was foreclosed the three joint obligors on the bond signed the agreement assigning the rents to the mortgagee. Petitioner's obligation both upon the bond and upon the agreement were her direct personal obligations. She was not a guarantor of payment by the Mennen corporation of its obligation. The Mortgage Co., under the contract, agreed that the loan might be repaid pro tanto with the income from the mortgaged property; and the joint obligors were to make payments in the event of an insufficiency in such income. However, to the extent of such insufficiency their joint obligation was absolute. The building income was, as provided in the contract, to be applied, first, to maintenance and operation of the building, second, to taxes, and, third, to interest. In the tax years the income was enough to pay the expenses and taxes, but not enough to pay the interest. The insufficiency in interest had to be met by the joint obligors. The amounts which petitioner paid were payments to make up this interest requirement and they are clearly within the statutory definition of payments of interest on the taxpayer's indebtedness.

The respondent">*207 intimates that the interest paid by this petitioner may have been deducted by the Mennen corporation, on its tax return, as interest on its obligation. The Commissioner did not state this as a ground for his determination of deficiency as to this petitioner. The corporation is not a party to this proceeding and the evidence does not disclose such inconsistent conduct. We can not permit this oblique suggestion to affect the decision. The petitioner here, having paid the interest on her indebtedness, was entitled to the deduction; she took the deduction and the Commissioner disallowed it, and the question ">*203 for judicial determination in this proceeding is whether the disallowance as to her was erroneous. The decision can not be controlled by a mere intimation that perhaps the corporation itself also took the deduction.

Since the deduction was allowable as interest, it is not necessary to consider the further question presented whether the amount would be the subject of a deduction for worthless debts upon the theory that they were advances to the corporation. Cf. Daniel Gimbel, 36 B. T. A. 539.

2. In 1939 and 1940, petitioner paid amounts">*208 to Loomis Sayles & Co. for services throughout those years as her investment counsel. The services were not specifically related to any particular transactions, but were general advice throughout the year in respect of her investments. They had nothing to do with her tax affairs. Cf. Aldus C. Higgins, 2 T.C. 948. The Commissioner disallowed the deductions, saying that they did not constitute ordinary and necessary business expenses. The original issue, however, has been altered by the amendment of the Revenue Act of 1942, which permits the deduction of expenses paid "for the production or collection of income, or for the management, conservation or maintenance of the property held for the production of income." This amendment covers the deduction of amounts paid by an individual taxpayer for the regular services of investment counsel in giving advice in respect of the taxpayer's investments made and carried for the production of income. Edward Mallinckrodt, Jr., 2 T.C. 1128. The petitioner's payments are, therefore, deductible.

3. A third point was abandoned by the taxpayer.

Decision will be entered under Rule ">*209 50.