1946 U.S. Tax Ct. LEXIS 245">*245 Decision will be entered under Rule 50.
Petitioner's husband, for money lent, gave her his note for $ 76,128 in 1932. No principal was ever paid. In 1932 he paid interest of $ 4,558.46; also, $ 2,500 on September 16, 1940. From about 1932 her husband was a victim of a nervous breakdown and mental condition, at times in a sanitarium. On November 16, 1940, she gave the note to her adult children, giving no thought to the collectibility of the note. Interest accrued and unpaid at that date was $ 43,320.04. On December 4, 1940, her husband was killed in an airplane accident. Though at the date of the gift he had had cash of about $ 21,000, at death he had cash of about $ 99,000, a gross estate of approximately $ 850,000, and net estate of approximately $ 343,000. On December 31, 1940, his executor paid the children interest of $ 39,904.31, and in June 1941, paid them interest of $ 3,415.73, completing payment of the interest accrued and unpaid at date of the gift. Gift tax was paid by petitioner on the accrued interest. Held, that the petitioner was taxable in 1940 upon the interest paid on December 31, 1940, but not upon that paid in June 1941. Helvering v. Horst, 311 U.S. 112">311 U.S. 112;1946 U.S. Tax Ct. LEXIS 245">*246 Annie A. Colby, 45 B. T. A. 536.
6 T.C. 593">*594 This case involves income tax liability for the calendar year 1940. A deficiency of $ 24,784.28 was determined by the Commissioner. The one question for consideration is whether the petitioner is taxable upon interest paid upon a note which, with interest accrued thereon, petitioner gave to her children. A part of the facts were set forth in a stipulation, and we find them to be as so stipulated. Such parts thereof as are considered pertinent are set forth herein together with other facts found from evidence adduced.
FINDINGS OF FACT.
Petitioner, a resident of Shaker Heights, Ohio, filed her Federal income tax return for 1940 with the collector for the eighteenth district of Ohio, Cleveland division. She kept her accounts and filed her return on a cash basis. She was married in 1903 to W. J. Austin. The marriage continued until the death of her husband on December 4, 1940. On June 1, 1932, he gave her a negotiable promissory note, of which she1946 U.S. Tax Ct. LEXIS 245">*247 was payee and he was payor, in the face amount of $ 76,128 Interest was paid on the note on December 31, 1932, in the amount of $ 4,558.46, and on September 16, 1940, in the amount of $ 2,500. No principal was paid. On November 16, 1940, there was unpaid $ 71,569.54 principal, and interest to that date of $ 43,320.04, a total of $ 114,889.58. On that date petitioner gave the note to her three children, who were of the ages of 35, 31, and 28 years. She filed a gift tax return for the year 1940, about March 24, 1941, reporting the note as of a value of $ 114,889.58, and paid gift tax on the gift. On December 4, 1940, W. J. Austin was killed in an airplane accident, with several others.
On December 31, 1940, the executor of the estate of W. J. Austin 6 T.C. 593">*595 paid $ 39,904.31 interest in equal parts to each of the children. In June 1941 he paid $ 3,415.73 further interest, making a total interest payment by him of $ 43,320.04.
W. J. Austin had been for years engaged in the business of contracting, building, and engineering, on a large scale. The Austin Co., from which he and his wife derived their wealth, was organized in 1904. It was prosperous up to the depression following1946 U.S. Tax Ct. LEXIS 245">*248 1929. In 1929 the petitioner's wealth was approximately $ 600,000 and her income about $ 60,000. During the 1920's W. J. Austin had engaged in speculative side investments in large amounts, such as in real estate in Florida and California and Cleveland, Ohio. Banks in that city lent $ 500,000. These investments failed. Petitioner lent her husband money. From about 1932, W. J. Austin became a victim of a nervous breakdown and mental depression, and went to a sanitarium. In 1935 he took a trip with a son around the world. Though he continued to be president of Austin Co., he gave up his previous position of general manager and never resumed full activity with the company. The petitioner never asked him for payment of the note, as she did not wish to worry him about finances. She made gifts of Austin Co. stock to the children of about $ 55,000 in 1938 and $ 55,000 in 1939. None of the children were dependent upon the petitioner. Gifts made to the children in 1940 by W. J. Austin were largely in stock of Austin Co., cash gifts being small items, $ 1,000 or less.
No Austin Co. stock had ever been listed on an exchange or sold outside of the family or the employees of the company. 1946 U.S. Tax Ct. LEXIS 245">*249 Some stock was sold to employees at $ 100 a share, with option in the company to purchase it in case of death or resignation. No common stock in that company had been sold from 1930 to 1937. In 1940, 495 shares were sold to two employees at $ 100 per share.
On November 16, 1940, W. J. Austin had cash of $ 21,480.85. The estate of W. J. Austin was, in amount of assets, ample to pay the note. The estate tax return listed as on hand at the date of W. J. Austin's death, with other property, cash of $ 99,260.75, real estate valued at $ 68,739, common stock of Austin Co. in the amount of $ 461,550 at $ 170 a share, and preferred stock of $ 155,200 at $ 100 per share; gross estate was $ 856,255.72; net estate, $ 343,800.05.
At the time of the gift, the petitioner had no expectation that the note would be paid, in the sense that she gave the matter no thought, and the question of collectibility of the note did not enter her mind and it was given no consideration by her.
OPINION.
We have presented here a question as to whether a taxpayer, on the cash basis, who makes a gift of a note, with interest 6 T.C. 593">*596 accrued thereon, is taxable upon such interest, if it was paid during the same1946 U.S. Tax Ct. LEXIS 245">*250 taxable year in which the gift was made. The maker of the note did not have, at the date of the gift, cash on hand sufficient to pay the interest, but had assets ample for the satisfaction of note and interest and, he having been killed in an accident less than three weeks after the gift, the executors of the estate paid the interest before the year had ended.
We have excluded from the above statement of the issue the $ 3,415.73 interest accrued at the date of gift, but not paid until the next year. , is clear authority that it is not, in the taxable year, the income of the petitioner. Though concluding his brief by the request that the Commissioner's determination be approved, the respondent heads his argument: "The amount of interest due on the note which was paid during the taxable year and which petitioner donated to her children on November 16, 1940, was properly included by the Commissioner in her taxable income for that year."
The petitioner's view is, in short, that this case differs from others in that the note, as well as the interest income, was the subject of the gift, that she had no expectation of payment1946 U.S. Tax Ct. LEXIS 245">*251 of interest or principal at any foreseeable time in the future, that the debtor had no funds with which to pay, and that there was no motive to escape taxes, the basis, it is urged, of cases holding gifts of income to be taxable.
In the light of what the Supreme Court said in , petitioner's view, in our opinion, should not be sustained. That opinion is not based upon any idea that there was intent in the donor to escape taxes. In , we said: "The gift and the collection of the interest in the Horst case occurred in the same taxable year. The Supreme Court decided that, where both of those events occur in the same year, the interest is taxable in that year to the donor on a cash receipts basis." Though, of course, as above seen the Colby case did not involve interest collected in the year of gift, nor decide the problem here at hand, nevertheless, we think the quoted statement is accurate; and under the Colby case, the gift alone did not cause realization of income from the interest. In the Horst case the Court says that the exercise of "power 1946 U.S. Tax Ct. LEXIS 245">*252 to procure the payment of income to another is the enjoyment and hence the realization of the income * * *," and more specifically: "It is the exercise of the power of disposition of the interest or compensation with the resulting payment to the donee, which is the enjoyment by the donor of income derived from them." (Above italics ours.) Not only does the Court thus clearly find the economic satisfaction considered requisite, in gift and payment, but it goes on to dispose of the idea advanced by petitioner here, that there is distinction between a gift of a note bearing 6 T.C. 593">*597 interest, and mere gift of income, for, referring to , where gift of property earning income was held not gift of income, the Court says:
* * * Since the gift was deemed to be a gift of the property the income from it was held to be the income of the owner of the property, who was the donee, not the donor, a refinement which was unnecessary if respondent's contention here is right, but one clearly inapplicable to gifts of interests or wages. * * * [Italics supplied.]
The interest here involved had already been earned by the principal1946 U.S. Tax Ct. LEXIS 245">*253 at the date of gift. The tree had borne the fruit, and it had ripened. That it had not been plucked, is seen as immaterial. The donor had the satisfaction, during the taxable year, of seeing the harvest by her children, the objects of her bounty in the gift. Under the Horst case, that is such economic satisfaction as spells income. Therefore, that the petitioner thought nothing, at the time of gift, about the collection of the interest in the foreseeable future, as petitioner contends, and that the debtor had insufficient cash at that date to pay the interest, appears immaterial. She nevertheless, before the year was out, saw such interest collected by those for whom she intended it, ultimately at least. No less intent can be assumed from the fact of gift. Nor does the fact of payment of gift tax militate against the soundness of the theory of the Horst case; it is in fact consistent with it, for, as there said:
* * * The enjoyment of the economic benefit accruing to him by virtue of his acquisition of the coupons is realized as completely as it would have been if he had collected the interest in dollars and expended them for any of the purposes named. Burnet 1946 U.S. Tax Ct. LEXIS 245">*254 v. Wells, supra [289 U.S. 670].
We conclude and hold that the Commissioner did not err in including in petitioner's gross income the interest earned to the date of the gift, and paid within the year, but that he erred in including the interest paid in the following year.
Decision will be entered under Rule 50.