1932 BTA LEXIS 1125">*1125 1. When the owner of real property declares himself a trustee to receive income therefrom and to pay such income to another and there is no transfer of any part of the corpus of the income-producing property to the beneficiary either for life or in perpetuity, the income remains taxable to such owner.
2. In the circumstances herein the title to a certain incomeproducing contract was transferred by the owner to another and the income thereafter is taxable to the transferee.
3. Salary paid by petitioner to his son in certain taxable years is deductible from his income in each of such years as a business expense.
4. A sprinkling tax levied by the City of Duluth is deductible from income under the provisions of section 214(a)(3) of the Revenue Act of 1926.
27 B.T.A. 101">*101 The respondent has asserted deficiencies for the years 1924, 1925, 1926 and 1928 in the respective amounts of $6,060.14, $1,106.89, $1,971 and $568.23. For his causes of action the petitioner alleges that the respondent erroneously added to his income in1932 BTA LEXIS 1125">*1126 certain of the years under review amounts received as rental for a parcel of real property; amounts received under the terms of a contract as payment for legal service; payments or advances to his son; and a payment of an assessment representing an assessment by the City of Duluth for sprinkling the public highways therein.
FINDINGS OF FACT.
The petitioner is an individual with his principal office in Duluth, Minnesota, where he is engaged in the practice of law.
On January 5, 1920, the petitioner executed the following instrument:
WHEREAS, the undersigned is the owner of Lot Seven (7), East Superior Street, Duluth Proper, First Division, in St. Louis County, Minnesota, and is desirous of irrevocably settling the rents therefrom upon his wife and daughter in the proportions hereinafter stated,
Now, THEREFORE, I, the undersigned, do hereby acknowledge and declare that all of the rents hereafter received by me from said Lot Seven (7), East Superior Street, Duluth Proper, First Division, in St. Louis County, Minnesota, are 27 B.T.A. 101">*102 received by me as Trustee and are and will be held by me in Trust and paid over as received, as follows:
1. The sum of One Hundred Dollars1932 BTA LEXIS 1125">*1127 ($100.00) per month until and including the month of January, 1926, for my daughter, CONSTANCE MITCHELL FISH:
2. All of the rentals hereafter received from said property, except the sum of One Hundred Dollars ($100.00) for each month until and including the month of January, 1926, for my wife, MARY W. MITCHELL, during her lifetime; at her death this Trust to terminate.
WITNESS my hand and seal this 5th day of January, A.D. 1920.
[Signed] OSCAR MITCHELL [Seal]
Under the terms of the instrument set out above there were received as net rentals from the property described therein, in the years 1924, 1925, 1926 and 1928, the respective amounts of $2,791.56, $2,800, $3,000, and $2,800. The petitioner included none of such receipts in his return for any of such years.
Prior to March 1, 1913, the petitioner performed certain legal services for A. B. Coates and George B. Tweed. On January 2, 1914, remuneration for such services was settled by the execution of the following agreement:
THIS AGREEMENT, Made this Third day of January, A.D. 1914, between A. B. COATES and GEORGE P. TWEED, parties of the first part, and OSCAR MITCHELL, party of the second part, WITNESSETH:
1932 BTA LEXIS 1125">*1128 The parties of the first part hold mining leases from John Finnigan and Wife, C. E. Tweed, Myron J. Sherwood and wife, and Augusta Carter Hill, covering the Northeast quarter of the Southwest quarter (NE 1/4 of SW 1/4) of Section Eighteen (18), Township Forty-seven (47) North, of Range Forty-five (45) West, in Gogebic County, Michigan.
In consideration of the sum of One Dollar ($1.00) and other valuable consideration to them in hand paid, the receipt and sufficiency of which are hereby acknowledged, the parties of the first part transfer and agree to pay to the party of the second part ten per cent (10%) of all of the net profits received by them growing out of said mining leases; this to apply whether said leases are sold, sub-leases given, or said leases operated by the parties of the first part or by a corporation owned or controlled by them. The parties of the first part shall be entitled, before any division is made, to be reimbursed for all expenses of every kind incurred and paid by them in connection with said properties, with interest thereon at six per cent (6%) per annum from the time such payments were made. Statements showing the gross and net earnings will be made1932 BTA LEXIS 1125">*1129 annually as of January 1st of each year, beginning with January 1st, 1915, the payments of the net profits to be made pro rata as the profits are withdrawn by the parties of the first part.
This agreement shall not give the party of the second part any interest in or right of control over the leases, but shall extend to and cover all extensions, renewals or substitutes for said leases.
On December 10, 1919, the petitioner executed the following instrument:
IN CONSIDERATION of the sum of One Dollar ($1.00) and of other valuable considerations, the receipt and sufficiency of which are hereby acknowledged, 27 B.T.A. 101">*103 I do hereby sell, assign, transfer and set over unto Mary W. Mitchell, my wife, all of my right, title and interest in and to that certain contract between A. B. Coates and George P. Tweed, on the one part and Oscar Mitchell, on the other part, under which I am given a share in the profits received in connection with the Finnegan Mine, and I hereby authorize and empower Mary W. Mitchell to collect, receive and receipt for all sums that may come payable under the provisions of said contract as fully in all respects as I might or could do. Said contract is hereto1932 BTA LEXIS 1125">*1130 attached and made a part hereof.
IN WITNESS WHEREOF I have executed this instrument this 10th day of December, A.D. 1919.
[Signed] OSCAR MITCHELL
The amounts of $3,014.24 and $2,229.22 under the agreement with Coates and Tweed in the years 1924 and 1926 were realized. Petitioner reported neither of such amounts as income in his income tax returns for either of these years. Upon audit of such returns the respondent added such amounts to the reported income for the respective years.
Some time prior to 1926 the petitioner's son, who had just become a member of the bar, was employed by the law firm in which his father was a partner, at a small annual salary. The son assisted his father in the work of the partnership and also rendered substantial service in looking after affairs and interests not connected with the business of the partnership. In each of the years 1925 and 1928 petitioner paid his son $1,200 in addition to the salary paid by the partnership. The Commissioner determined that such payments were not ordinary and necessary expenses deductible from income in the years in which they were made.
The City of Duluth sprinkles the streets and the cost thereof1932 BTA LEXIS 1125">*1131 is distributed to the owners of property abutting thereon. In the year 1926 petitioner paid $20.90 to the city for street sprinkling on account of his ownership of a residential property. The respondent disallowed the amount as a deduction from petitioner's income for 1926, as not being tax paid within the meaning of the applicable statute.
OPINION.
LANSDON: The petitioner's first contention is that the assignment to his wife for life of rentals from a parcel of real estate owned by him effected a transfer of title to the income-producing property. In support of this theory he cites a long line of decisions and many sound text book authorities dating back to the enactment of the Statute of Uses in the reign of Henry the VIII. A careful scrutiny of all such cases and of the textbooks indicates quite clearly that this principle applies only when all the "rents, issues and profits" from real property are assigned in perpetuity. In the instant proceeding the assignment does not include any profit which might be 27 B.T.A. 101">*104 realized from the sale of the property prior to the termination of the trust, which is not perpetual, but terminates with the death of the assignee. 1932 BTA LEXIS 1125">*1132 We conclude, therefore, that the instrument in question effected nothing more than a gift of income to be received in the future. There was no effective transfer of the property and the income therefrom is taxable to the petitioner. ; affirming .
A careful study of the instrument in question discloses also that there is no basis for the theory that it transferred a life interest in income-producing property to the petitioner's wife. There is here nothing more than the creation of a trust to receive income after it accrues to the owner. It was within the petitioner's power to transfer a life interest in the property by proper procedure, but this was not done. As title to the property with power to sell at any time and realize resulting capital gains remains in the petitioner, the income is taxable to him as determined by the respondent.
At March 1, 1913, the petitioner owned a chose in action against Coates and Tweed. On January 3, 1914, he settled with his debtors by the execution of a contract under which he was to receive a percentage of the profits from the operation of certain mining1932 BTA LEXIS 1125">*1133 properties. That contract was property which would produce income in the event of the successful operation of the mines. On December 29, 1919, for a consideration, he assigned such property to his wife and divested himself from any right to it or to any income therefrom. The determination of the respondent on this issue is reversed. ; affd., . .
The record discloses that petitioner's son was employed by the law partnership of which his father was a member and that in addition to his duties as such employee he also attended to many business matters for his father, whom he also personally assisted in his work as a member of the firm. In the circumstances herein we are of the opinion that the amounts which the petitioner paid to his son were reasonable compensation for services rendered to him in his business and, therefore, deductible from his gross income as ordinary and necessary expenses in the year when paid. 1932 BTA LEXIS 1125">*1134 ; ; ; .
In 1926 the petitioner paid the City of Duluth $20.90 for sprinkling the street in front of a residential property which he owned. Such charge was assessed by ordinance under the following provisions of the charter of the city:
Section 61. The council may, by a four-fifths vote, order the construction of any sidewalk or sewer, or the sprinkling of any highway which it deems 27 B.T.A. 101">*105 necessary for public convenience or safety, and may cause the cost of such construction or sprinkling or any portion of such cost, to be assessed against the property specially benefited.
The petitioner claims that such payment was a tax and deductible from income under the provisions of section 214(a)(3) of the Revenue Act of 1926. The respondent disallowed this payment as a deduction, on the ground that it was a special tax and not deductible under the following exception in that section: "(C) taxes assessed against local benefits of a kind tending to increase the value of property assessed. 1932 BTA LEXIS 1125">*1135 " In support of his determination he cites and relies on and/or article 133 of Regulations 69. In the Caldwell proceeding and all other proceedings in which it is cited as authority, the special tax was imposed to meet the costs of permanent improvements such as street paving, sidewalks, and sewers and was assessed against property adjacent thereto in proportion to the benefits of such improvements, and the measure of such tax in all cases was the estimated addition to the value of the property against which it was levied. Since sprinkling a street in front of a residental property is not an improvement intended to increase the value thereof, we are of the opinion that the payment in question is not within the exception above quoted and that it is a tax levied by the proper authority to pay one of the incidental expenses that are incurred by the municipality for the public interest. On this issue the determination of the respondent is reversed.
Decision will be entered under Rule 50.