1950 U.S. Tax Ct. LEXIS 243">*243
1. In observance of the one-hundredth anniversary of the founding of its business a business corporation, late in 1943, by paid advertisement, offered 17 awards totaling $ 50,000 to the persons submitting the best and most constructive 17 plans for postwar employment in the United States. The plan submitted by the petitioner was adjudged the best of more than 35,000 entries and in May, 1944, he received $ 25,000 as payment of the first award. All manuscripts and plans became the property of the corporation, with the right to publish and distribute them. After announcement of the awards the corporation copyrighted and published the 17 plans in booklet form, which it distributed to Government officials and offered, by paid advertisement, to send to anyone writing for it. The corporation's name appeared prominently and frequently in its advertisements and literature relating to the awards and the amount of the awards was treated by the corporation as a business expense for its current taxable year.
2. On the facts presented, 1950 U.S. Tax Ct. LEXIS 243">*244
14 T.C. 494">*494 The respondent determined1950 U.S. Tax Ct. LEXIS 243">*245 a deficiency of $ 1,715.16 in the petitioner's income tax for 1944. The issues presented by the pleadings are (1) whether an amount of $ 25,000 received by the petitioner during the taxable year as an award for a plan submitted by him in a competition conducted by a business corporation was compensation or a gift, and (2) whether deductions of $ 2,500, $ 150, and $ 67.50 taken by the petitioner as expenses incurred for editorial assistance, travel, and a clipping service, respectively, constituted allowable deductions. At the hearing the petitioner abandoned his claim for allowance of the deductions of $ 150 and $ 67.50.
14 T.C. 494">*495 FINDINGS OF FACT.
During 1944 the petitioner resided in Takoma Park, Maryland, and filed his income tax return for that year with the collector for the second district of New York. The petitioner's return was prepared on the cash receipts and disbursements basis.
In December, 1943, Pabst Brewing Co., Milwaukee, Wisconsin, sometimes hereinafter referred to as Pabst, made public announcement of its offering of 17 awards totaling $ 50,000 (purchase price) in United States war bonds for postwar employment plans. The first award was $ 25,000, the second $ 1950 U.S. Tax Ct. LEXIS 243">*246 10,000, and 15 additional awards of $ 1,000 each. The announcement, in the form of paid advertisements by Pabst, appeared in the Washington Post, the Washington Star, Time, News Week, and other publications.
The petitioner learned of the offering of the awards and around the first of January, 1944, decided to submit a plan. At that time he was chief of the Economic Analysis Section, Munitions Branch, Statistics Division, of the War Production Board. During his college course he had majored in economics and afterwards had done approximately three years of graduate work in that field.
The announcement of the awards stated that they were being offered by Pabst in observance of the one-hundredth anniversary of the founding of its business. As stated in the announcement the purpose of the awards was:
To bring about universal recognition of the critical importance of the Post-War Employment question; to stimulate intelligent planning for the lives and futures of Americans everywhere; to foster and encourage constructive thinking for the fullest measure of employment after Victory.
Through these Awards, we hope to provoke mature and responsible discussion, and thus to develop and assemble1950 U.S. Tax Ct. LEXIS 243">*247 practical and workable plans and ideas for meeting one of the greatest problems of the peace to come * * * and to make these plans and ideas available,
Respecting the basis on which the awards would be made the announcement stated:
The Awards will be made solely on the basis of the value of the plans presented * * * not on literary merit. Manuscripts submitted should present a
As to the use to be made of the winning plans, the announcement stated:
At the close of the competition, copies of the winning plans will be turned over to responsible officials of the Government. In addition, copies will be made available for study by any other agency -- public or private -- which concerns itself 14 T.C. 494">*496 with the problems of Post-War Employment; and may be published, in booklet or other form, for distribution to the public.
The board of judges consisted1950 U.S. Tax Ct. LEXIS 243">*248 of four members, who served without compensation. They were assisted in the preliminary judging by members of the faculty of the Economics Department of Columbia University. The competition closed February 7, 1944.
Under the rules of the competition every citizen of the United States was eligible to compete for the awards except the officers and employees of Pabst, its subsidiaries, and its advertising agency; the instructors, administrators, and students in the Economics Department of Columbia University; and members of the immediate families of the foregoing groups. The rules provided for the submission of an entry jointly by more than one person, in which case if the entry won an award the amount of the award would be divided equally among those persons. By submitting an entry in the competition the entrant agreed to be bound by all provisions of the rules. All manuscripts and plans submitted became the property of Pabst, which had the right to publish the manuscript and the author's name, but not to the exclusion of the author. The decision of the majority of the judges constituted the decision of the board of judges and was final, conclusive, and binding upon all persons1950 U.S. Tax Ct. LEXIS 243">*249 entering the competition. The board of judges had the right to require any entrant to furnish satisfactory proof that he was the author of the manuscript and plan submitted by him.
A total of 35,767 manuscripts were entered in the competition. The plan submitted by petitioner was selected by the judges for the first award and petitioner was officially so notified on May 17, 1944. The following week those whose plans had been selected for awards received their awards at a dinner given by Pabst at the Hotel Biltmore in New York City. Further public announcement of those receiving awards was made in the public press in the form of a paid advertisement by Pabst showing, among other things, pictures of the judges and of those who received the first and second awards, as well as a brief description of the background of those two recipients.
The 17 plans selected for awards were published by Pabst in a copyrighted booklet which it distributed to responsible Government officials and made available for study by any agency, public or private, that concerned itself with postwar employment plans. By paid advertisement Pabst offered a copy of the booklet to anyone writing for it. The petitioner's1950 U.S. Tax Ct. LEXIS 243">*250 plan was also published in a financial publication, the Congressional Record, and a number of daily newspapers. There was general interest in the public press in the outcome of the competition and immediately following the announcement of the awards there were a great many news stories and editorials respecting them. Two professors at Columbia University wrote a book in which, for the 14 T.C. 494">*497 purpose of reflecting a cross section of opinion on the subject, an analysis was made of several hundred of the entries that did not receive awards. The journal of the American Economics Association and the Royal Economic Journal of England each published an article based on the entries in the competition.
The petitioner spent about 80 hours in formulating his plan and preparing his manuscript. In the preparation of the manuscript petitioner was given some assistance by his wife several evenings, totaling approximately 15 hours. This assistance was of an editorial nature and dealt with the organization and presentation of petitioner's ideas for purposes of clarity. She had majored in economics in college and after graduation had been employed in the field of economics.
In formulating 1950 U.S. Tax Ct. LEXIS 243">*251 the plan and preparing the manuscript petitioner and his wife had no agreement about who would own any award that might be received. While they had a general understanding that all property owned by either was owned jointly, that is, "that the family property is common," the petitioner submitted his manuscript and plan in the competition exclusively in his own name. The war bonds of a cash value of $ 25,000 which were issued in payment of petitioner's award were, upon his instructions, issued in the joint names of himself and his wife.
In 1944 the petitioner and his wife had a joint checking account, a joint saving account, a joint account in a savings and loan association, and a joint safety deposit box, all of which had been maintained theretofore. Salary checks of petitioner and his wife were deposited in the joint checking account and each drew on it as he or she desired. The bonds received as the award were, upon receipt, placed in the joint safety deposit box. In 1944 bonds having a cash value of approximately $ 6,600 were cashed, of which $ 4,000 was deposited in the joint account in the savings and loan association, thereby bringing that account up to the insured maximum1950 U.S. Tax Ct. LEXIS 243">*252 of $ 5,000. The remaining $ 2,600 was placed in a separate savings and loan account in Mrs. Stein's name. Other bonds were cashed in 1945, the proceeds of which, together with the $ 2,600 in the separate account, were used to pay income tax. Other bonds were cashed in 1946 and the proceeds used to purchase real estate.
In its Federal income tax return for the taxable year 1944 Pabst treated the $ 50,000 in awards, including the $ 25,000 received by the petitioner, as deductible expense of carrying on its business. Pabst made no withholding of income tax with respect to the award made to the petitioner.
Upon the advice of the Bureau of Internal Revenue that the amount of the award received by him from Pabst constituted taxable income, and despite his own view to the contrary, petitioner reported the 14 T.C. 494">*498 $ 25,000 as income in his 1944 income tax return, showing it as income received from his business or profession of "Economic Counsel." He deducted therefrom an amount of $ 2,500 which he explained in his return was "a payment" for editorial assistance rendered by his wife in connection with his receipt of the award. In her 1944 income tax return petitioner's wife, Mildred1950 U.S. Tax Ct. LEXIS 243">*253 F. Stein, reported the $ 2,500 as income received by her from petitioner as her employer.
Prior to the time the petitioner and his wife prepared their 1944 returns, which were executed on January 14, 1945, and filed on the following day, they had no agreement concerning a division of the $ 25,000 award between them. Aside from the fact that the bonds issued in payment of the award were issued in the joint names of the petitioner and his wife, no payment of the $ 2,500 was ever actually made to her at any time.
On September 25, 1947, the petitioner filed a claim for refund of $ 9,970.30 of his 1944 income tax. The claim was grounded on the contention that the $ 25,000 received by him from Pabst did not constitute taxable income, but was a gift to him.
In determining the deficiency the respondent disallowed the deduction of $ 2,500 taken by the petitioner for editorial assistance and in the deficiency notice advised the petitioner, among other things, that if a petition was filed with the Tax Court the issue presented in the refund claim should be presented in his petition and that if no petition was filed the refund claim would be disallowed.
OPINION.
The question here is whether1950 U.S. Tax Ct. LEXIS 243">*254 the $ 25,000 in war bonds awarded to petitioner by Pabst was taxable income within the meaning of the Internal Revenue Code. By the
That the war bonds received by petitioner from Pabst represented gain to him from labor and therefore income within the Supreme Court's definition of income and represented "gains, profits, and income * * * or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, * * *" may not, it seems to us, reasonably be disputed. The petitioner had studied, worked, and trained to be an economist and he had entered into the exercise and practice of that profession. His attention was directed to an advertised offer by Pabst of awards totaling $ 50,000 for the 17 best plans which might be submitted on postwar employment. The prospect was alluring to petitioner and, whatever his dominant motive might have been, he decided to exercise his skill and knowledge as an economist1950 U.S. Tax Ct. LEXIS 243">*256 and to devise, work out, and offer such a plan and enter in the competition. In such work and exercise of his professional knowledge and skill he devoted approximately 80 hours of his time, a period of two standard work weeks. He completed and submitted his plan and in return therefor he received the top award, war bonds of a cash value of $ 25,000. That the petitioner was not a regular employee or an employee at all of Pabst and the endeavor was in the form of a competition where the entries ran into the thousands and his chances of being one of 17 to whom awards were given were quite remote, in no way changes the nature and character of the award when received from gain, compensation, or income from labor or the exercise of his professional training and skill to something else. It would be as reasonable to conclude that the award to the winning architect in a competition for design for a building or to an engineer in a competition for the winning design for a bridge would not be income to them because there would be a very good possibility that they would not be winners and that, except for the benefits derived as experience from working at their profession, they would receive1950 U.S. Tax Ct. LEXIS 243">*257 no return for work and labor expended.
It is argued further, however, that the award was a gift from Pabst to petitioner and that, since gifts are specifically excluded from income by
1950 U.S. Tax Ct. LEXIS 243">*259 In the first place the court in the
As suggested above, however, it is our opinion that this case fails to come within the scope of the
The remaining issue is whether the respondent erred in disallowing the deduction of $ 2,500 taken by the petitioner for editorial assistance rendered by his wife in the preparation of the manuscript embodying his plan. At the hearing and on brief the petitioner took the position that, if the $ 25,000 received by him is held to be taxable income, then it should be held that it was earned by both him and his wife and should be allocated between them and taxed to them on the basis of 10 per cent to her and 90 per cent to him. No contention is made by the petitioner1950 U.S. Tax Ct. LEXIS 243">*264 that he employed his wife to assist him in the preparation of his manuscript, agreeing to pay her $ 2,500 or any other amount for her services, and that a deduction of $ 2,500 should be allowed him for having paid her under that employment.
The petitioner's entry in the competition was made as his own and not jointly as his and his wife's, as the rules would have permitted. The award was made to him and to him alone. He testified that at the time his wife was assisting him in the preparation of his manuscript there was no agreement as to who would own the award, should one be received, that there was no thought or agreement between them concerning any division of the award prior to the time they prepared their 1944 income tax returns and the question of a division then became relevant only because of the question of payment of tax. That testimony negatives any thought of a partnership or a joint venture relationship between them respecting the entry and consequent award.
The petitioner further testified that the $ 2,500 deducted by him and reported by his wife, or one-tenth of the amount of the award, was the portion which they, at the time they prepared their income tax returns, 1950 U.S. Tax Ct. LEXIS 243">*265 decided was attributable to the wife's services in the preparation of the petitioner's manuscript. He did not state the basis on which they reached such a decision or give any explanation as to how that amount was ascertained. The case of
If it should be assumed that petitioner owed compensation to his wife for services rendered and the only obstacle to the granting of a deduction therefor was as to amount, then some approximation under the principle of
1. (b) Exclusions From Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
* * * *
(3) Gifts, Bequests, Devises, and Inheritances. -- The value of property acquired by gift, bequest, devise, or inheritance. * * *↩