*3562 An organization known as Julius Rosenwald Fund was organized in 1917 for charitable, scientific, educational, and religious purposes. During the years in controversy the petitioner gave, through the medium of purported assignments, dividends on stocks, interest on a promissory note and rent from certain properties owned by the petitioner. He also clipped and gave to that fund, prior to maturity, coupons from the United States Liberty bonds. Petitioner, at all times during the period of these purported assignments, retained ownership and possession of the stocks, bonds, notes and real estate from which the income so assigned was derived. Held, that said income is taxable to the petitioner.
*351 This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years 1919, 1920, and 1921 amounting to $165,038.44, $181,531.95, and $115,222.60, respectively.
The proceeding for the year 1919, upon motion of counsel, was consolidated with the one for 1920 and 1921 for hearing*3563 and consideration.
The issues presented for consideration are:
(1) Whether the respondent erred in holding that certain dividends, interest, rent, and miscellaneous income which under and by virtue of certain assignments made by petitioner to the trustees of The Julius Rosenwald Fund, a charitable corporation, were paid during 1919, 1920, and 1921 directly to the trustees of said fund, are income to the petitioner and should be reported by him in his individual income-tax returns for those years; and
(2) Whether the respondent erred in holding that the amount of loss sustained by the petitioner in the sale of a certain house and lot was not a loss resulting from a transaction entered into for profit, and, therefore, not deductible in his individual income-tax return for the calendar year 1921.
FINDINGS OF FACT.
The petitioner is an individual residing at 4901 Ellis Avenue, Chicago, Ill. In October, 1917, a corporation known as The Julius Rosenwald Fund was organized exclusively for charitable, scientific, educational, and religious purposes. The officers or trustees of this corporation are Julius Rosenwald, the petitioner herein, president and treasurer, Augusta N. Rosenwald, *3564 his wife, Lessing J. Rosenwald, his son, secretary and assistant treasurer, and Armand S. Deutsch, his son-in-law, vice president.
On October 31, 1917, Julius Rosenwald made the original gift of 20,000 shares of capital stock of Sears, Roebuck & Co., then having a par value of $100 per share, to The Julius Rosenwald Fund, a corporation, expressed in the following words:
TO THE BOARD OF TRUSTEES OF THE JULIUS ROSENWALD FUND.
I hereby give you twenty thousand (20,000) shares of the common capital stock of Sears, Roebuck & Co., which I have transferred to and caused to be issued in your name. This gift is made for the general corporate purposes of The Julius Rosenwald Fund, and the principal as well as the income may be used in your discretion for any of the corporate purposes of the Fund.
In case at the time of my death any part of said gift or any future gift which I may make to the Fund remains undistributed, or should the Fund *352 receive any share of my estate, then in any such event such undistributed part of any gift or gifts from me or share of my estate shall be used primarily to the extent, prorata, to which it may reach toward the payment of yearly contributions*3565 for five (5) years after my death to the donees of regular annual subscriptions in accordance with the following plan, to-wit:
The Fund shall at all times maintain a book which shall be known as "List of Julius Rosenwald's Regular Annual Subscriptions," in which at my direction shall be entered a list of regular annual subscriptions which I desire to make or have made for charitable uses. Said list shall contain the names of the various donees and the respective amounts of the annual subscriptions. Such list may be modified or varied at my discretion during my life. It shall not be obligatory upon the Fund to donate or pay the amounts shown by said list during my lifetime. After my death the Fund shall, however, donate to such donees appearing upon the said list, the following sums:
Any subscription shown by said list, or any part thereof, remaining unpaid for the then current fiscal year of the donee; also the following further sums; during the first fiscal year of each donee after my death, one hundred (100%) per cent, during the second such fiscal year after my death, eighty (80%) per cent, during the third such fiscal year after my death, sixty (60%) per cent, during the*3566 fourth such fiscal year after my death, forty (40%) per cent, and during the fifth such fiscal year after my death, twenty (20%) per cent, of the respective amounts of regular annual subscriptions to said respective donees as shown by said list.
For the purpose of guarding against loss to any of the intended beneficiaries of said plan whose names, through inadvertence or neglect, may not appear upon such list, the Fund may also make like payments to any corporations, associations or bodies, organized for charitable purposes, to which I or the Fund, at my request, have been a regular annual subscriber or contributor for at least two (2) consecutive years, including the then current fiscal year, immediately prior to my death, based upon the last regular annual subscription to such other corporation, association or body. The Trustees of the Fund shall be the sole judges as to what other corporations, associations, or bodies shall receive such like payments and the proper respective amounts thereof.
The above provisions are made so that the said respective donees may not be suddenly deprived, by reason of my death, of the regular annual contributions which I have been making or*3567 may hereafter make or cause to be made to them, and are not intended to set a maximum upon the amounts which the Trustees, after my death, may, in their discretion, give to any of said donees.
DATED, October 31, 1917.
Yours truly,
JULIUS ROSENWALD.
On December 31, 1917, the board of trustees of The Julius Rosenwald Fund, after calling attention to the aforementioned gift by Julius Rosenwald, accepted the same, in words as follows:
RESOLVED, that the gift to the Corporation of twenty thousand (20,000) shares of the Common Capital Stock of Sears, Roebuck and Co., made by Julius Rosenwald to this Corporation, be and the same is hereby accepted, as of October 31, 1917, on the part of the Corporation, upon the terms expressed in the letter or gift of Julius Rosenwald, a copy of which is transcribed upon pages four and five of this record book.
*353 On March 1, 1918, Julius Rosenwald made an additional gift to The Julius Rosenwald Fund, expressed in the following words, to wit:
To the Board of Trustees of
The Julius Rosenwald Fund:
I hereby assign to you all dividends to which I may become entitled as the owner of any and all shares, preferred and common, of*3568 the capital stock of Gimbel Brothers, New York, a corporation of New York, for a period of five (5) years from this date; also to all interest payable within five (5) years from this date on a certain loan of One Million ($1,000,000) Dollars made to I. Gimbel and other stockholders of Gimbel Brothers, New York, secured by a certain note for One Million ($1,000,000) Dollars, payable to my order, dated April 30, 1914, and signed by said I. Gimbel and others.
This assignment is a gift to The Julius Rosenwald Fund, for the same purposes and uses as set forth in my original letter of gift to said Fund dated October 31, 1917.
Dated March 1, 1918.
The loan of $1,000,000 to I. Gimbel and other stockholders of Gimbel Brothers, New York, bore interest at 6 per cent, and the interest thereon was made payable by the note in the following terms and words, to wit:
NEW YORK, N.Y., April 30, 1914.
FOR VALUE RECEIVED, we promise to pay to Julius Rosenwald, or order, at his office in the City of Chicago, Illinois, the principal sum of One Million ($1,000,000) Dollars, in five installments of Two Hundred Thousand ($200,000) Dollars each, payable respectively in five (5), six (6), seven*3569 (7), eight (8) and nine (9) years after date, without grace, or sooner, as in the following collateral agreement provided on failure to comply with the terms hereof or the terms of said agreement following, together with interest at the rate of six (6%) per cent per annum, payable semi-annually on the thirtieth day of October and April in each year until the full payment of this note. * * *
On April 23, 1918, Julius Rosenwald made a gift to The Julius Rosenwald Fund, expressed in words as follows, to wit:
To the Board of Trustees of
The Julius Rosenwald Fund:
I hereby assign to you all dividends to which I may become entitled, payable henceforth and to and including April 30th, 1923, on all shares of capital stock, preferred and common, of the following named corporations:
Continental Can Company
Ederheimer, Stein Co.
Brown Shoe Company
National Cloak & Suit Co.
Kabo Corset Company
Consumers Company
National Union Fire Insurance Co.
WestinghouseAir Brake Company
Independent Pneumatic Tool Company
F. W. Woolworth CompanyColumbia Graphophone Manufacturing
Co.
American Graphophone Company
Greenebaum Sons Bank & Trust Co.
Hermann, Aukan & Co.
*3570 Liberty Trust & Savings Bank.
also all rents henceforth and to and including April 30th, 1923, payable to me under lease to Troy Laundry Machinery Company for premises leased by me *354 to said Company in Chicago, Illinois; also all interest payments payable to me henceforth and to and including April 30th, 1923, on bonds or notes secured by mortgages or trust deeds in nature of mortgages executed by the following:
North Chicago Hebrew Congregation
City Club
Lake Shore Country Club
Union League Club
Ravislow Country Club
Idlewild Country Club
New Illinois Athletic Club
South Side Tennis Club
Alabama Penny Prudential Trust & Savings Bank Co.
Chicago Tennis Club.
This assignment is a gift to The Julius Rosenwald Fund, for the same purposes and uses as set forth in my original letter of gift to said Fund dated October 31st, 1917.
Dated, April 23rd, 1918.
The rents under the lease to the Troy Laundry Machinery Co. were made due and payable by the lease to that company dated the 14th day of February, 1907, by terms and words as follows, to wit:
Said Lessee agrees to pay at the office of said Lessor in the said City of Chicago or at such other place*3571 in said City as may from time to time be designated by him as rent for said demised premises the sum of Three Hundred and fifty-three thousand three hundred and thirty-three and 33/100 Dollars ($353,333.33) being at the rate of Twenty Thousand Dollars ($20,000.00) per annum, to be paid in equal quarterly installments of Five Thousand Dollars ($5,000.00) each in advance on the first day of September and of December, 1907, and on the first day of the months of March, June, September and December of each and every year thereafter, including the year 1924, and the sum of Three Thousand three hundred and thirty-three and 33/100 Dollars ($3,333.33), payable on the first day of March, 1925. * * *
On July 23, 1918, the board of directors of The Julius Rosenwald Fund, after reciting the aforementioned gifts by Julius Rosenwald, accepted the same in words as follows, to wit:
RESOLVED, that the gifts made to the corporation by Julius Rosenwald in a letter of gift dated March 1st, 1918, and in another letter of gift dated April 23rd, 1918, which are hereby ordered to be transcribed upon the minutes of this meeting, be and the same are hereby accepted as of March 1st, 1918, and April 23rd, *3572 1918, respectively, on the part of the Corporation, upon the terms expressed in said letters of gift.
All of the stocks, bonds and other property mentioned hereinabove were, at the time of the assignment, the property of Julius Rosenwald. Save and except, in so far as affected by the gifts hereinbefore recited, the same thereafter remained the property of Julius Rosenwald, and also remained in his possession and control, except as hereinafter set forth.
Immediately after the gifts to The Julius Rosenwald Fund as above recited, Julius Rosenwald notified Mr. I. Gimbel of the assignment of the interest upon the loan of $1,000,000 in a letter as follows:
*355 MARCH 1, 1918.
Mr. I. GIMBEL,
c/o Gimbel Brothers, New York, N.Y.
DEAR MR. GIMBEL:
I have assigned all interest payments which are payable within the next five years upon my loan to you and your brothers to The Julius Rosenwald Fund, being an Illinois Corporation, whose present address is care of Sears, Roebuck and Co., Chicago, Illinois.
Will you please accept this letter as a direction and authority to you and your brothers to make payment of such interest accordingly to The Julius Rosenwald Fund.
*3573 Yours very truly,
Under date of March 23, 1918, Gimbel Brothers acknowledged receipt of the notice of assignment, in words as follows, to wit:
We take pleasure in acknowledging the receipt of copy of Mr. Julius Rosenwald's letter of March 1st addressed to Mr. Isaac Gimbel, New York, assigning all interest payments due by the Messrs. Gimbel during the next five years on the loan made to them by Mr. Rosenwald, to the Julius Rosenwald Fund, care of Sears, Roebuck and Company, Chicago, Ill., which has been noted and will be complied with as desired.
Respectfully,
Immediately after the gifts to The Julius Rosenwald Fund, as above recited, Julius Rosenwald notified the corporations, the dividends upon whose stock had been assigned to The Julius Rosenwald Fund, that he had assigned the dividends upon said stock for a period of five years, and directed those corporations to pay all dividends for the said period of five years to The Julius Rosenwald Fund. The form of notification read as follows:
MARCH 1, 1918.
GIMBEL BROTHERS,
New York, N.Y.
GENTLEMEN:
I have assigned all dividends payable or which may be paid within five years from this date upon the shares of*3574 capital stock of Gimbel Brothers, New York, both preferred and common, which I hold to The Julius Rosenwald Fund, said Fund being an Illinois corporation, whose present address is care of Sears, Roebuck and Co., Chicago, Illinois. You are hereby directed to make payment of all dividends accordingly to The Julius Rosenwald Fund for the next five years.
Yours very truly,
Similar notices were given to all of the corporations whose dividends were assigned, such notices being of even date with the assignment, and in the following form:
DIVIDEND ORDER
GENTLEMEN:
Having assigned to The Julius Rosenwald Fund, a corporation of Illinois, all cash dividends which, as owner of shares of stock in the above named company, I may be entitled to receive at any time on or before April 30, 1923, *356 you are hereby directed to Pay all cash dividends on all shares of stock of your company, preferred and common, standing in my name to The Julius Rosenwald Fund, c/o Greenebaum Sons Bank & Trust Co., Chicago, Illinois.
Please acknowledge receipt hereof.
Yours truly,
JULIUS ROSENWALD.
Immediately after notices were given to the corporations whose dividends were assigned the respective*3575 corporations acknowledged notice of said assignment. The following is representative of such acknowledgments:
GENTLEMEN:
We beg to acknowledge receipt of your favor of April 24th enclosing assignment and order directing payment of dividends on all shares of capital stock of this company registered in the name of Mr. Julius Rosenwald payable to and including April 30, 1923, to the Julius Rosenwald Fund, care of Greenebaum Sons Bank and Trust Company, Chicago, Illinois, and we have made the necessary changes on our books to insure the carrying out of these instructions.
Very truly yours,
(Signed) S. C. MCCOUAHEY,
Treasurer, WestinghouseAir Brake Company.
Immediately after the gifts above recited, Julius Rosenwald advised the lessees under the leases recited in the gifts aforedescribed of the gifts, and instructed that all rents for the said period of five years should be paid direct to The Julius Rosenwald Fund. The notice to the Troy Laundry Machinery Co. read as follows:
GENTLEMEN:
Having assigned to The Julius Rosenwald Fund, a corporation of Illinois, all rent payable on or before April 30, 1923, under the terms of your lease for the premises owned by me in*3576 the City of Chicago, Illinois, of which you are the tenant, you are hereby directed to pay all such rent to The Julius Rosenwald Fund, c/o Greenebaum Sons Bank & Trust Company, Chicago, Illinois.
Please acknowledge receipt.
Yours truly,
JULIUS ROSENWALD.
The Troy Laundry Machinery Co. acknowledged receipt of the notice of assignment under date of April 30, 1918, in words and terms as follows:
GENTLEMEN:
We are in receipt of yours of the 24th instant enclosing Assignment and directions to pay our rent to the Julius Rosenwald Fund, instead of to Mr. Julius Rosenwald personally.
We will be governed accordingly in our future payments.
Yours very truly,
TROY LAUNDRY MACHINERY CO.
Immediately upon the making of the above-described gifts, Julius Rosenwald in a similar manner advised the obligors under the bonds, notes and mortgages mentioned in the said gifts of the gifts, and *357 instructed the obligors to pay the interest on such obligations direct to The Julius Rosenwald Fund during the period of five years covered by the gift. The obligors under the bonds, notes and mortgages mentioned in said gifts acknowledged such assignments.
During the years*3577 1919, 1920, and 1921 the corporations, lessees and obligors paid dividends, rents and interest on the stocks, bonds, notes and leased property described in said letters of March 1, 1918, and April 23, 1918, to The Julius Rosenwald Fund, through its collection agent, Greenebaum Sons Bank & Trust Co., as follows:
| 1919 | 1920 | 1921 | |
| (a) Rent from Troy Laundry Mach. Co | $20,000.00 | $20,000.00 | $20,000.00 |
| (b) Interest on bonds containing | |||
| tax-free covenant | 360.00 | 360.00 | |
| (c) Interest on bonds and notes | 4,312.20 | 15,841.60 | 3,405.00 |
| (d) Dividends | 242,482.00 | 271,031.50 | 216,839.75 |
| Total | 267,154.20 | 307,233.10 | 240,244.75 |
The dividends shown in subdivision (d) hereof did not include, after the respective sales, any dividends paid by the corporations on stock sold by the petitioner.
Prior to maturity of the coupons Julius Rosenwald gave to The Julius Rosenwald Fund, by manual delivery, coupons clipped from United States Liberty Loan bonds, of the third issue, and during the year 1919 The Julius Rosenwald Fund collected taxable interest on such Liberty bond coupons in the amount of $14,662.50.
The Commissioner added to the net income of the petitioner*3578 for the year 1919 the sum of $281,809.50, representing the total of the amounts set forth hereinabove as income paid direct to The Julius Rosenwald Fund, less $7.20 interest on tax-free covenant bonds, which action on the part of the Commissioner is the principal cause of the proposed deficiency set forth in the Commissioner's notice of deficiency. The Commissioner likewise added to the net income of the petitioner for the year 1920 the sum of $307,225.90, and for the year 1921 the sum of $240,244.75, which amounts are set forth hereinabove.
Without consulting with the other trustees of The Julius Rosenwald Fund, and without their knowledge or consent, and without any change in the terms of the assignment, Julius Rosenwald sold securities the income from which had been assigned to the fund, as follows:
During the year 1919
225 shares Consumers, common
271 shares Consumers, preferred
500 shares Ederheimer, Stein, preferred
250 shares Ederheimer, Stein, common
100 shares Greenebaum Sons Bank & Trust Co.
*358 During the year 1920
200 shares F. W. Woolworth & Co., preferred.
During the year 1921
10 shares Greenebaum Sons Bank & Trust Co.
72 shares Columbia*3579 Graphophone Co., preferred.
1625 shares Columbia Graphophone Co., common.
Such securities were sold without direct notice of and without reference to the assignment, and the proceeds from the sales were retained by the petitioner. The purchasers of these securities took the said securities without any acknowledgment of the assignment of income therefrom, and no claim against either the petitioner or the said purchasers has ever been made by The Julius Rosenwald Fund to any dividends from such securities after their sate.
During the years 1919, 1920, and 1921, and for a number of years prior to the establishment of The Julius Rosenwald Fund, the petitioner's contributions to charity had exceeded 15 per cent of his net income.
The books and records of Julius Rosenwald were kept on the cash receipts and disbursements basis during the years 1919, 1920, and 1921.
Under date of March 26, 1919 the petitioner's attorneys communicated with the respondent as follows:
DEAR SIR:
We wrote you some time ago asking the question propounded in the attached copy of a letter addressed to you from the Washington Secretary of the Corporation Trust Company. We have received no reply*3580 to this letter, but have assumed that the income tax on interest coupons given away before maturity should be paid by the recipient, for the following reason: As the payment of the interest will be income in someone's hands, the question arises, in whose hands is it income? It is clearly not income in the hands of the donor who has made a gift of the coupons before maturity, as it is neither income received nor derived by him. The gift is not taxable, but the question arises, what is given? We have assumed that the thing that is given is the earning power of the bond for the time being, that is the time covered by the interest coupons given away, and that the interest paid upon these coupons is the income upon this earning power, the same as if there was a gift of an estate for years in a piece of real estate carrying with it the income of the real estate. The gift of the estate for years would not be taxable, but the income derived from the estate would. The interest coupons are written evidences of the earning power of the bonds and the possession of the same, if not registered, carries with them the right to receive the income on this earning power.
Are we correct in our*3581 assumption?
Yours truly,
ADLER LEDERER & BECK.
*359 The respondent replied in part as follows:
In reply you are advised that this office holds that since the donor has not converted the coupons into income, they are in no way taxable as such to him, but the donee must include as income in his tax return for the year in which they are converted by him into money or its equivalent the difference between the actual value of the coupons as of the date of the gift and the amount actually received by him for such coupons.
OPINION.
MORRIS: While the sole question presented for consideration by the first allegation of error relates to the inclusion in the petitioner's income of dividends, interest, rents and miscellaneous income alleged to have been assigned by him to The Julius Rosenwald Fund, and, while the same problems arise with respect to all of those items, we deem it advisable to dispose of the dividend item separately, since that question has been heretofore considered and passed upon by the Board.
In , one of the questions was whether certain income disposed of by the taxpayer under an assignment and two trust*3582 indentures, said income being received by the assignee and other beneficiaries, was taxable as income to the taxpayer. The taxpayer there was president of the Oakland Motor Car Co., a subsidiary of General Motors Corporation, in which capacity he was compensated in part with stock of General Motors Corporation. The certificates of stock so issued were not to be delivered to the taxpayer until he had severed his connection with the company. He did receive, however, a certificate evidencing the fact that the stock had been allotted to him. In 1920 the taxpayer in that case entered into the following agreement with his wife, assigning "all his right, title and interest in and to any and all dividends," with respect to 12,500 shares of the stock so allotted to him:
AGREEMENT, made this 2nd day of July, 1920, between Fred W. Warner, of the City of Pontiac, State of Michigan, party of the first part, and Bertha S. Warner, wife of the said first party, party of the second part.
WITNESSETH:
WHEREAS there have been allotted to the first party by General Motors Corporation, a corporation of Delaware, Twelve thousand five hundred (12,500) shares of the common capital stock of said*3583 General Motors Corporation, without nominal or par value, for the year 1918, pursuant to the Bonus Plan of said corporation, which said shares are deliverable to the first party on the 31st day of December, 1923, or sooner, as in said Bonus Plan provided; and
WHEREAS the first party desires to assign to the second party the dividends, rights and income payable thereon, or in respect thereto while said stock is held by General Motors Corporation.
NOW THEREFORE, in consideration of the premises, the sum of Ten ( $10) dollars to him in hand paid, receipt whereof is hereby acknowledged, and other valuable consideration, the first party hereby assigns, transfers, sets over and *360 delivers unto the second party, all his right, title and interest in and to any and all dividends, rights or income payable or accruing on or in respect to the said Twelve thousand five hundred (12,500) shares of the common stock of General Motors Corporation without nominal or par value, held by said General Motors Corporation for the first party, pursuant to said Bonus Plan, represented by certificate numbered C15063 and hereby authorizes and empowers the said General Motors Corporation to pay and*3584 deliver any and all dividends, profits or rights payable thereon, or in respect thereto, to the said Bertha S. Warner.
IN WITNESS WHEREOF, the said first party has hereunto set his hand and affixed his seal the year and day first above mentioned.
(Signed) FRED W. WARNER.
The taxpayer there, as in the instant case, reported his income on the basis of cash receipts and disbursements. Notwithstanding the legal formalities present in the aforementioned assignment, such as the execution under seal and the recitation of consideration, and the fact that the taxpayer's income was reported on the cash basis, the Board held that the taxpayer was the owner of the stock and was liable for the tax upon the dividends derived therefrom.
The purported assignment in the instant case was not under seal, there was no mention of consideration therein, and in fact the petitioner sold, inadvertently as he explains, a great number of shares of stock upon which the dividends had been assigned, the effect of which sale naturally was to nullify that assignment, and consequently we believe, considering these factors, that the instant case has considerably less merit than the appeal of *3585
In view of that opinion and the opinion in , we conclude that the respondent committed no error in adding the amounts of these dividends to the petitioner's income for the years in controversy.
We come now to the items of interest on a promissory note, rents from certain properties owned by the petitioner and Liberty Bond interest purported to have been assigned or given to the Julius Rosenwald Fund. Since all of the facts are fully set forth in the findings of fact herein, we do not deem it necessary to repeat them here except so far as they may become pertinent to the discussion.
In , the taxpayer was a member of a partnership, having a 51 per cent interest therein, and he entered into an agreement with his wife, whereby, for a valuable consideration, she should receive one-half of the profits accruing to the taxpayer from that partnership, also that she should be liable to pay him one-half of the losses which might be sustained by reason of his interest in the partnership. It was not contended in that proceeding that his wife thereby*3586 became a member of the partnership. The question raised there was whether by virtue of that agreement one-half of the income of the taxpayer covered by the agreement *361 with his wife constituted income to him within the meaning of the taxing statutes. The Board said in that case, "The income from taxpayer's interest in the partnership is first income to him, and no matter how he tries to dispose of it or does dispose of it, it is taxable to him as income from his interest therein." The Board further said, "If the contention made should prevail, the taxing law would be a nullity and an act of Congress imposing taxes made importent at the will of the taxpayer. If he can escape taxation on one-half the profits of the partnership by agreement, there is no reason why, by another agreement, he can not escape taxation on the other half; and if this taxpayer can do so there is no end to the agreements which may be made, and income as such will cease to be an object of taxation."
In , the taxpayer leased all its properties for a certain rental, the lessee to pay the entire rental directly to the stockholders of the lessor*3587 as dividends. The taxpayer there contended, inter alia, that none of the payments stipulated in the lease between itself and the lessee constituted income to it. The Board said in holding the income taxable to the lessor, after considering a number of cases cited infra, "The Telegraph Company [meaning lessee] owes and pays rent to the taxpayer. The Telegraph Company is the agent of the taxpayer distributing that rent among its stockholders."
In , the petitioner owned certain property in fee which was leased to one Stafford and others who subleased to the Big Run Coal. Co. That lease provided that the lessee pay certain portions of the rents and royalties as they became due to third persons. The Board said, citing ; certiorari denied, , "It is clearly authority for taxing the owner in this case where, so far as the record shows, he merely designates another to receive his pleasure. Conceded that he did not have actual possession of the amounts so paid, possession is not the determining factor of income even on the cash receipts*3588 basis." The Board said further, "Such a voluntary act in anticipation of actual receipt and before the income exists can only affect the income when it actually arises, and in our opinion it may properly be treated as coming to him and immediately disposed of." In the case of , the corporation leased its properties and agreed that the rental should be paid to its stockholders and bondholders. The taxpayer there contended, as in the instant case, that it did not receive the rents and did not have the right to receive them and consequently the amounts should not be included in its taxable income. The court said:
*362 It is true that the rent of its road does not go into the plaintiff's treasury and that it has no means of withholding the tax from it. It is also true that the rent reserved by the lease is paid by the lessee in fixed sums to third parties. All the same, the rent is the property of the plaintiff, and remains such, though by the terms of the lease paid out to others, whose rights are derived through it. While the rent is a debt of the lessee to the lessor, it is, as between the lessor and its*3589 stockholders, the lessor's income, out of which the dividends, if any, are to be paid.
The application of the rent under the lease is a mere labor-saving device, the effect being exactly the same as if it be paid to the lessor and by it paid out as far as necessary to bondholders for interest, and the surplus in dividends to its stockholders. The description of the fixed sum to be paid by the lessee of 8 per cent to the lessor's stockholders as a dividend shows that the payment is made as agent of the lessor.
Also see ; ; ; ; ; .
In all the cases cited, supra, there appear to have been legally binding agreements, yet notwithstanding those agreements it was held that the income was taxable to the assignor. In respect to the documents purporting*3590 to be assignments in the instant case, we are of the opinion that they constitute nothing more than assignments to the Julius Rosenwald Fund of dividends, interest, and rent as, if, and when they may become due and payable to the petitioner. Certain language in some of the assignments is clearly indicative of that conclusion. In the instrument assigning the dividends from Gimbel Brothers stock the following language was used.
I hereby assign to you all dividends to which I may become entitled as the owner of any and all shares * * *.
The assignment of dividends on other stock contains almost identical language. The assignment of the rent payable under a lease to the Troy Laundry Machinery Co. is of "all rents henceforth and to and including April 30, 1923, payable to me under lease," etc. Furthermore, the communications directed to the obligors by the petitioner were nothing more than orders to pay said Fund as, if, and when those obligations became due and payable, and said offers and orders were subject to the control of the petitioner at all times and may have been altered, modified, or repealed at any time at his will.
*3591 The petitioner contends that he entered into an agreement of novation whereby he ceased to be the holder of the rental obligation for a period of five years and the Fund, a corporation, became the holder, and in the case of interest on the notes and mortgages, the contractual obligation of the obligor to him was, by novation, discharged for a period of five years, and a contract obligation to the *363 corporation was established in its stead. Apparently a similar contention was raised in , as the court used the following language in the course of its opinion:
I do not see that the doctrine of novation has anything to do with this case. If A owes B $10,000 as rent for his property, to be paid annually, January 1st, and B owes C $10,000 falling due January 1st, and B says to A, "You pay the money you owe me to C, as I owe him," and this is done, the debt of A to B is discharged. He has paid the money to C pursuant to the authority and direction of B, and C has accepted it. But when B comes to make out his income tax return, can he say that $10,000 is not to be taken into account as income, inasmuch as he never received*3592 the money, but had it paid to C, and applied in payment of his debt to C? Is it any the less income derived from the leasing of his property for the reason he directs and consents to the application of it in payment of his just debt?
We can see no difference between the direction to make the payment of the income, and the obligor's consent thereto as a gift to a third person, and the direction to make such a payment in settlement of a debt.
Here, in our opinion, there was not even a binding and irrevocable assignment as contended by the petitioner. In order to constitute an assignment enforcible, in law or in equity, there must be a valid consideration the same as in any other contracts. Consideration has been defined by Professor Williston in his treatise on contracts as "a detriment incurred by the promissee or a benefit received by the promissor at the request of the promissor." There is no reference to consideration in these purported assignments nor is there anything from which consideration may be logically implied. In that respect at least we believe the petitioner's contention has less merit than the contentions urged in some of the cases hereinabove cited.
*3593 In the recent decision of , District Court, Southern District of New York, the court used the following language which is very pertinent to the issue involved herein:
To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt.
With respect to the coupons clipped from certain United States Liberty loan bonds of the third issue and given to The Julius Rosenwald Fund by manual delivery prior to maturity, which were collected by that corporation at some time during 1919, we have what at first blush seems quite different from the other transactions hereinabove *364 considered. However, stripping the transaction of all its intricacies and considering the substance of the matter rather than the form, have we anything other*3594 than a mere gift of interest on a negotiable instrument which is to become due in the future? Interest coupons attached to a bond are only evidence of an indebtedness, a mere symbol of ownership, which ripens into a claim at some given date. What possible difference can it make whether the recipient of the gift evidences his claim by an assignment, as was done in the case of the promissory note herein, or by coupons which have been detached from the bond itself and delivered to him? We can see no material difference. Suppose in the instant case these had not been coupon bonds and the petitioner had assigned the interest thereon to The Julius Rosenwald Fund, would not the situation have been the same as in the cases hereinbefore cited? In , there was a perfectly valid assignment of dividends, yet the Board said, "the dividend from the stores, the dividends or right to dividends on which were assigned to the taxpayer's wife, was income to the taxpayer before it could be diverted to another." We are, therefore, of the opinion that the interest on these Liberty bonds is not unlike the interest on the negotiable promissory note hereinbefore considered, *3595 and that, therefore, it was, first, income to the petitioner for tax purposes before it could be diverted to another.
Petitioner's brief is a rather lengthy one and presents many arguments in support of his contentions, all of which we obviously can not consider in this opinion. Suffice to say, however, that we have given very careful study to the arguments made and the cases relied upon. Since the petitioner has relied so strongly upon the case of , it may not be inappropriate to say that we have examined the decision in that case very carefully and believe it clearly distinguishable from the instant case.
Considering all the facts and circumstances in the light of the relationship of the petitioner to The Julius Rosenwald Fund, together with the cited cases dealing with the subject of assignment of income, we are of the opinion that the respondent was correct in adding to the income of the petitioner for the taxable years in controversy the amounts of interest, rents, and Liberty bond interest alleged to have been assigned or given in those years to The Julius Rosenwald Fund.
As no testimony was offered by petitioner in*3596 support of the second issue herein, we must sustain the respondent's determination with respect thereto.
Reviewed by the Board.
Judgment will be entered for the respondent.
LANSDON, SMITH, PHILLIPS, and MILLIKEN dissent in part.