1949 U.S. Tax Ct. LEXIS 148">*148
In 1938 decedent advanced $ 25,700 to his wife to enable her to purchase a home, taking in return her demand promissory note in that amount, secured by 280 shares of a cooperative apartment house, which shares she had previously acquired as a gift from the decedent. Upon the wife's death in 1942, decedent, named in his wife's will as her executor and sole beneficiary, applied the net assets of her estate to the note and claimed as a deduction for a bad debt in his income tax return for 1942 the unpaid balance of the note in the amount of $ 12,756.37.
(1) That the transaction between decedent and his wife did not give rise to a bona fide debt within the meaning of
(2) That, although the deficiency assessed by respondent results from an adjustment made in the petitioner's tax liability for 1942, the statute of limitations in respect to such deficiency, due to the provisions of the Current Tax Payment Act of 1943, runs from the date of the filing of the decedent's 1943 return.
12 T.C. 1158">*1158 By this proceeding petitioner seeks a redetermination of a deficiency in income tax for the calendar year 1943 in the amount of $ 2,150.19.
Two issues are presented herein: (1) Whether the respondent erred in disallowing a deduction for a bad debt claimed by the petitioner's decedent in 1942 in the amount of $ 12,756.37, which arose from a transaction between the decedent and his wife; (2) whether respondent is barred by the statute of limitations from assessing and collecting any deficiency for the year 1943, which results solely from adjustments made in the income of the petitioner's decedent in the year 1942 and the application of the provisions of the Current Tax Payment Act of 1943.
The facts stipulated by the parties are hereby found and incorporated in our findings of fact.
FINDINGS OF FACT.
Carr V. Van Anda died on January 28, 1945, at the age of 80, and on February 14, 1945, letters testamentary on his estate were issued to Paul Van Anda, hereinafter referred to as the petitioner, by the Surrogate's Court of New York County, New 1949 U.S. Tax Ct. LEXIS 148">*150 York.
12 T.C. 1158">*1159 The decedent filed his income tax returns for the years 1942 and 1943 with the collector of internal revenue for the third district of New York.
On April 7, 1925, the decedent gave $ 15,200 to his son, Paul Van Anda, in order to enable the son to purchase a cooperative apartment, represented by stock and a proprietary lease in a cooperative apartment building at 40 West 55th Street, New York City. The son made the purchase as planned. At the time of the gift, the decedent knew that his son intended to be married on June 20 of that year. The marriage took place on that date.
On April 25, 1928, the decedent gave to his wife, Louise D. Van Anda, a cooperative apartment, represented by a proprietary lease and 280 shares of capital stock of 1172 Park Avenue Corporation, which owned the apartment building known as 1172 Park Avenue, New York City. The apartment was a maisonette apartment, having its own street entrance, numbered 1170. The stock and proprietary lease were acquired by the decedent immediately prior to the gift at a cost of $ 35,000 in cash.
1172 Park Avenue Corporation was organized August 31, 1925, and by contract dated September 2, 1925, it acquired 1949 U.S. Tax Ct. LEXIS 148">*151 the land and building at 1172 Park Avenue, by the issuance of all its authorized stock, having an aggregate par value of $ 1,010,000, and by paying the proceeds, amounting to $ 855,000, of a building loan contract with the Metropolitan Life Insurance Co., secured by mortgage on the property.
As of September 30, 1938, the net worth of the 1172 Park Avenue Corporation, as shown by its annual report for the fiscal year ending on that date, was $ 906,455.79. It then had issued and outstanding 10,100 shares of capital stock.
On October 22, 1938, the decedent delivered to his wife $ 25,700 and took her negotiable, promissory note in that amount, payable on demand to his order, secured by the 280 shares of the capital stock of 1172 Park Avenue Corporation, which was deposited as collateral by the wife. In connection with the transaction, the decedent requested his son, who is an attorney, to draw up the note and stated to him that his wife desired to purchase a house in Lenox, Massachusetts, known as "The Mount." The note read as follows:
On demand, after date, for value received, the undersigned hereby promises to pay to the order of Carr V. Van Anda, at the main office of the Central 1949 U.S. Tax Ct. LEXIS 148">*152 Hanover Bank and Trust Company in the City of New York, twenty-five thousand seven hundred dollars ($ 25,700.), without interest, the undersigned to have the right of prepayment of the principal of this note at any time, having deposited with the said payee as collateral security for the payment of this note two hundred and eighty (280) shares of the capital stock of 1172 Park Avenue Corporation. The undersigned hereby authorizes the said payee upon or after the nonpayment of this note to sell in one or more sales the whole or any part of said collateral 12 T.C. 1158">*1160 security at any broker's board or at any public or private sale, for cash or on credit, or for future delivery at the option of the payee without notice of intention to sell, or of the time or place of sale, and without further demand of payment or of other performance (which are hereby expressly waived and no specific demand or notice shall invalidate this waiver) and after deducting all expenses arising from or incidental to the sale of said collateral security to apply the residue of the proceeds to the payment of this note; the undersigned hereby agrees that at any such sale the payee may become the purchaser of any1949 U.S. Tax Ct. LEXIS 148">*153 or all of said collateral security and may hold the same thereafter in his own right absolutely free from any claim of the undersigned and that upon the sale or other realization of such collateral security this note shall be canceled and discharged. Upon the transfer of this note the payee may deliver the said collateral security or any part thereof to the transferee who shall thereupon become vested with all the powers and rights herein given to the payee in respect of this note and said collateral security, and the payee shall thereafter be forever relieved and fully discharged from any liability or responsibility in the matter.
[Signed] Louise D. Van Anda
The following notation appears on the face of the note:
December 31, 1939 Received from Louise D. Van Anda three hundred dollars ($ 300) in part payment of the above obligation. [Signed] Carr V. Van Anda
The purpose of the decedent in handling the transaction in this manner was to effect a balance between his wife and son in the distribution of his property.
The decedent's wife acquired the house in Lenox, Massachusetts, by purchase for $ 25,700 cash on October 24, 1938. The Lenox home was of masonry construction, contained1949 U.S. Tax Ct. LEXIS 148">*154 29 rooms, had approximately 155 acres of grounds, with a half mile frontage on Laurel Lake, a gate-house, garage and stable, caretaker's cottage, barns, ice house, chicken house, and boathouse. This home was assessed for property taxes in the town of Lenox at $ 70,000 for each of the years 1939 and 1940. By a decision of the Appellate Tax Board of Massachusetts dated July 25, 1941, the assessment for each of the years 1939 and 1940 was reduced to $ 40,000.
Decedent and his wife jointly occupied the homes in New York and Massachusetts until the death of the wife. The decedent paid all household expenses, all taxes and expenses for maintenance and repairs of the Massachusetts home, and all rents and expenses in connection with the New York home.
Louise D. Van Anda died on February 17, 1942, at the age of 69. She had no gainful occupation after her marriage, being fully occupied as a mother and housewife, and had no independent means except 105 shares of the Standard Oil Co. of California, worth about $ 2,000, a gift from her husband, and the stock and proprietary lease at 1170 Park Avenue, New York.
12 T.C. 1158">*1161 The last will and testament of Louise D. Van Anda, dated December 30, 1949 U.S. Tax Ct. LEXIS 148">*155 1940, named her husband, Carr V. Van Anda, the decedent herein, as sole beneficiary and executor.
On September 12, 1942, the house in Lenox was sold for $ 18,000, consisting of $ 10,000 cash and a mortgage for $ 8,000. This sale and the decedent's application of the net assets of the wife's estate to the note are reflected in the report of the decedent, as his wife's executor, to the Probate Court of Berkshire County, Massachusetts, which report was accepted February 25, 1944, by decree of the court.
Decedent, after paying all claims against his wife's estate other than his own, applied the remaining assets of her estate on the note, crediting it with payments in the amount of $ 12,643.63. Decedent had previously received one payment on the note in the amount of $ 300, on December 31, 1939. Applying the above amounts to the principal sum of $ 25,700, the decedent computed and claimed in his 1942 income tax return a deduction for a bad debt in the amount of $ 12,756.37.
Decedent continued to occupy both properties until the sale of the Massachusetts home, after which he resided in the New York home until his death. After October 1, 1943, he resided in the New York home under an1949 U.S. Tax Ct. LEXIS 148">*156 ordinary lease to himself, the proprietary lease to his wife having been canceled on that date.
Under agreement effective October 1, 1942, with the Metropolitan Life Insurance Co., mortgagee of the building 1172 Park Avenue, New York City, the income from the building, less necessary expenses (excluding depreciation), was held in trust for the mortgagee. On October 1, 1945, a summons and complaint in a foreclosure action instituted by the Metropolitan Life Insurance Co. for unpaid principal, interest, and taxes under the mortgage, was served on 1172 Park Avenue Corporation.
The 280 shares of capital stock of 1172 Park Avenue Corporation were listed as worthless as of the date of the wife's death on February 17, 1942, by the New York estate tax appraiser in his report, on which an order of exemption from tax was entered in the Surrogate's Court of New York County, on April 26, 1943. The estate of the wife was not subject to Federal estate tax.
The petitioner herein paid the proposed deficiency of $ 2,150.19 on June 19, 1948, to the collector of internal revenue for the third district of New York.
OPINION.
Respondent has denied a deduction claimed by the petitioner's decedent in the1949 U.S. Tax Ct. LEXIS 148">*157 year 1942 for a bad debt in the amount of $ 12,756.37, on the basis that the transaction from which it arose was intended to be a family transaction between husband and wife and not a bona fide debtor-creditor relationship.
12 T.C. 1158">*1162 It is elementary that one of the essential prerequisites for a bad debt deduction is that the debt must have an existence in fact.
Intrafamily transactions are subject to rigid scrutiny, and transfers from husband to wife are presumed to be gifts. However, this presumption may be rebutted by an affirmative showing that there existed at the time of the transaction a real expectation of repayment and intent to enforce the collection of the indebtedness.
In the instant case, the decedent advanced $ 25,700 to his wife, taking in exchange her demand promissory note in that amount, secured by 280 shares of the capital stock of the 1172 Park Avenue Corporation, which shares had been given by him to his wife 10 years before. In form, the transaction appears to have possessed every element necessary to establish a debtor-creditor1949 U.S. Tax Ct. LEXIS 148">*159 relationship. Our inquiry, therefore, necessarily must be to the question of whether it was so intended and regarded by the parties.
Decedent's son testified that it was his father's intention to maintain in the disposition of his property a balance between his wife and son. In 1925, decedent had given his son $ 15,200 for the purchase of a cooperative apartment and in 1928 he had given his wife a cooperative apartment, represented by the 280 shares of stock in the 1172 Park Avenue Corporation, which had been purchased by the decedent immediately prior to the gift at a cost of $ 35,000.
The son further stated that decedent was willing "to lend his wife the money for a second home against the security of her first home, so that she could dispose of either home when she decided which she permanently wanted and hold the other free and clear, or if she did not do this by the time of her death, or by the time of his death, the matter would be adjusted in their respective estates." Although this may have been the decedent's purpose in causing his wife to execute the note in respect to the money advanced and pledging the stock in the cooperative apartment as security, such a purpose does1949 U.S. Tax Ct. LEXIS 148">*160 not, in our 12 T.C. 1158">*1163 opinion, necessarily mean that the parties intended or regarded the advancement as a bona fide debt.
There can be no doubt that the two homes, one in New York and the other in Lenox, Massachusetts, although nominally owned by the wife, provided living accommodations for the mutual benefit of the decedent and his wife. The evidence discloses that the decedent occupied jointly with his wife the apartment at 1170 Park Avenue, which she had put up as security for the note, and the home purchased by her in Lenox, Massachusetts, until the death of his wife in February 1942. Thereafter, he continued to occupy the Lenox home until it was sold on September 12, 1942, and the New York apartment until his death, although the wife's proprietary lease on the apartment was canceled on October 1, 1943. He paid all of the household expenses, taxes, and expenses of maintenance and repairs of both homes.
At most, the security available to the decedent in the event of the wife's default would have been the homes in which he, as well as the wife, resided. No mortgage or lien was given the decedent on the Lenox home, and the note provided that it was to be discharged in the event1949 U.S. Tax Ct. LEXIS 148">*161 that the stock representing the New York apartment was sold. There is no evidence that decedent ever demanded or requested payment from his wife, and in the 3-year period during which the note was outstanding there was but one payment, of $ 300, made by the wife, that being on December 31, 1939. The note itself bore no interest. Moreover, it is agreed that decedent's wife had had no gainful occupation after her marriage and apparently no source of income other than the dividends, if any, from 105 shares of Standard Oil of California. As neither the New York apartment nor the Lenox home were income-producing properties, it seems doubtful that decedent ever seriously considered that his wife would be able to pay off the note, and lends support to respondent's suggestion that the transaction was actually testamentary in nature.
We can not believe that under the facts presented the parties regarded these properties as subject to a bona fide debt owing the husband from the wife. Although the formalities of such a transaction may have been observed and the "debt" was adequately secured, if there was no real intention of making repayment or enforcing the obligation, these facts are 1949 U.S. Tax Ct. LEXIS 148">*162 of little significance. In our opinion, the intention of the parties, as evidenced by the facts shown herein, was not such as to give rise to a bona fide debt. The money advanced by decedent to his wife was more in the nature of a contingent gift, the note being designed more to direct the disposition of the decedent's property in the event of his death than as evidence of a debtor-creditor relationship between him and his wife. Such a transaction does not give rise to a "debt" within the meaning of
Petitioner further argues that, as the adjustment which results in the deficiency herein was made in decedent's 1942 tax return, the respondent's assessment of the deficiency herein is barred by the fact that the deficiency notice was mailed more than three years after March 15, 1943, the date decedent's return for 1942 is deemed to have been filed. Petitioner contends that, regardless of the effect of the Current Tax Payment Act of 1943, the statute of limitations runs from the filing of the 1942 return and not from the date of filing of the 1943 return. This Court1949 U.S. Tax Ct. LEXIS 148">*163 has on several occasions passed upon the precise question, and in each case has held adversely to the position of the petitioner.
