1963 U.S. Tax Ct. LEXIS 98">*98
Petitioner Norman Petty transferred his own promissory note to the Norman Petty Foundation in 1958. Contributions to this Foundation entitle the contributor to a deduction for charitable contributions. The note was unenforceable during the year in issue for want of consideration, under the applicable local laws.
40 T.C. 521">*522 The respondent determined a deficiency in the petitioners' income tax for the year 1958 in the amount of $ 8,777.47.
The respondent has stipulated that the petitioners are entitled to one of the deductions disallowed in the deficiency notice.
The only issues remaining for decision are whether the petitioners are entitled to a charitable deduction in 1958 for the fair market value of an unsecured negotiable demand note given to a tax-exempt charitable foundation in that year, and if so, what was the fair market value of the note on the date of the gift.
FINDINGS OF FACT
All of the evidentiary facts are stipulated and are found as stipulated.
The petitioners are husband and wife who reside in Clovis, N. Mex. Both are engaged in musical entertainment and the recording profession and derive income from record royalties and musical contracts. The petitioners filed a joint individual income tax return with the district director1963 U.S. Tax Ct. LEXIS 98">*100 of internal revenue, Albuquerque, N. Mex., for the calendar year 1958. The petitioners maintained their books and reported their income for Federal income tax purposes on the cash basis of accounting for the year 1958.
The Norman Petty Foundation was created during 1958. By letter ruling dated May 26, 1961, the Commissioner ruled that contributions to the Norman Petty Foundation were, based upon the information furnished him, deductible by the donor as provided in
On December 31, 1958, Norman Petty executed and delivered an unsecured negotiable demand promissory note in the amount of $ 15,000 to the Norman Petty Foundation. The note bore interest in the amount of 5 percent per annum.
On December 31, 1958, Norman Petty had cash in the bank in the amount of $ 19,803.89. After receipts and disbursements, in January 1959 he had cash in the bank of $ 14,605.52. On December 31, 1958, Norman Petty had a net worth of $ 76,054.82.
The note was paid on April 15, 1959, together1963 U.S. Tax Ct. LEXIS 98">*101 with $ 215 accrued interest.
40 T.C. 521">*523 OPINION
The respondent contends that the petitioner is not entitled to a deduction for the value of the note given to the Foundation. We must agree withthe respondent.
(a) Allowance of Deduction. -- 1 General rule. -- There shall be allowed as a deduction any charitable
This case has been argued on brief by both parties largely upon the question of whether the giving of a note constitutes "payment." In our view of the case it is unnecessary for us to reach the question whether the giving of the promissory note constituted payment. 1963 U.S. Tax Ct. LEXIS 98">*102 The statute requires that to be entitled to a deduction a taxpayer must make a "contribution or gift." The word "contribution" is not defined in the statute, but we think that it is clear that whatever is meant it would at least requiresome right be relinquished or some obligation incurred by the contributor. See
40 T.C. 521">*524 Atkins,
The general rule has always been that, under the cash method of accounting, there must be actual payment as a prerequisite to a deduction, that is, there must be an outlay of cash or property, and that the giving of a promissory note does not constitute actual payment. See 1963 U.S. Tax Ct. LEXIS 98">*104
Under the various revenue acts the deduction for contributions is allowed for the taxable year in which the contribution is made. Hence, a taxpayer on an accrual basis of accounting may claim that he is entitled to a deduction for the amount of a charitable pledge in one year, although he does not actually pay it until a later year, or indefinitely postpones payment. The doubt and confusion in such cases is aggravated by reason of the uncertainty and diversity in the law of the various States on the question as to1963 U.S. Tax Ct. LEXIS 98">*105 when the liability of a subscriber to a charitable fund is fully incurred. In the interest of certainty in the administration of the revenue laws, it is desirable to dispel this confusion by enactinga clear and uniform statutory rule to govern this situation.
The bill provides that the deduction for contributions or gifts for charitable and other purposes shall be allowed only for the taxable year in which the contribution is
Thus, it is clear that Congress intended that in no case should the time of deductibility of a contribution depend upon the time that the liability for payment might be fully incurred under the law of a particular State. The income tax regulations since the passage of the Revenue Act of 1938 have consistently required that a charitable contribution be
40 T.C. 521">*525 Here the petitioner did not make actual payment in the taxable year in question. Although the promissorynote which he gave in the year in question was a demand promissory note, it nevertheless was merely a promise to pay, as distinguished from actual payment. The giving of the note was not the equivalent of the giving of a check, the latter being an order to pay and hence considered payment as distinguished from a promise to pay. See
Accordingly, it seems to me that the petitioner cannot be considered as having made payment of a contribution within the taxable year in question, within the meaning of this statute, and therefore is not entitled to the claimed deduction.
