*2763 Where one purchases an interest in property determinable upon the death or remarriage of the grantor and agrees to pay therefor a certain sum each month so long as the grantor lives or does not remarry, held that the amount paid each year may be deductible under section 214(a)(8) of the Revenue Act of 1921, but, based upon the facts obtaining and there being no proof of the value of the life estate acquired, the deduction to which petitioner may be entitled can not be determined.
*903 This proceeding involves the redetermination of deficiencies in income tax for the years 1922 and 1923, in the respective amounts of $172.70 and $173.20. Petitioner asserts that respondent erred (1) in determining that the amounts paid by petitioner annually to his mother in consideration of the transfer by her to petitioner and his brother of her life interest were capital expenditures, and (2) that if such payments constitute capital expenditures, then respondent erred in refusing to permit the deduction of such amounts as represent the*2764 exhaustion of the interest purchased. The facts were stipulated and in accordance with the stipulation we make the following findings of fact.
FINDINGS OF FACT.
1. The petitioner, Elmer J. Keitel, is an individual residing at 3517 Papan Street, St. Louis, Mo.
*904 2. Petitioner is the son of F. Keitel and Caroline Keitel. At the time and prior to his father's death, petitioner, Waldemar C. Keitel and F. Keitel, their father, were a copartnership operating under the firm name of Columbia Oil Co. of the City of St. Louis. The interests of said partners were as follows:
| F. Keitel | 65 per cent |
| Petitioner | 25 per cent |
| Waldemar C. Keitel | 10 per cent |
3. F. Keitel, by his last will and testament, bequeathed one-half of his said interest in said copartnership to petitioner and the other half to his wife, Caroline Keitel, for life or so long as she remained his widow, with remainder after her death or remarriage to Fred W. Keitel, Arie Keitel, Alvin Keitel, Waldemar C. Keitel, and petitioner.
4. F. Keitel died, leaving the partnership property to be distributed, managed and handled according to the terms of the will, which authorized and empowered*2765 petitioner to manage and operate said business and protect the interest of Caroline Keitel therein.
5. The partnership business was not in a prosperous condition at the date of F. Keitel's death. The income which could be earned by said partnership would not entitle Caroline Keitel to sufficient income to properly support her and meet her ordinary demands.
6. The aforesaid conditions induced the members of the partnership to consider the advisability of reorganizing and converting the partnership into a corporate enterprise. In order to do this petitioner purchased the interest of all of the other members except Waldemar C. Keitel and Caroline Keitel. This left the partnership in the names of these three members - petitioner, Waldemar C. Keitel, and Caroline Keitel.
7. On the third day of May, 1922, petitioner and Caroline Keitel entered into a contract by which she sold and transferred her right, title and interest in and to her interest in said property. Said contract reads:
THIS AGREEMENT, made and entered into this 3rd day of May, 1922, WITNESSETH:
THAT WHEREAS, F. Keitel, deceased, at the time of his death was a co-partner with Elmer J. Keitel and Waldemar*2766 C. Keitel in the business known as the Columbia Oil Company of the City of St. Louis, State of Missouri, the interests in said company of said parties being respectively as follows, to wit:
| F. Keitel | 65% |
| Elmer J. Keitel | 25% |
| Waldemar C. Keitel | 10% |
AND WHEREAS, said F. Keitel, deceased, in and by his last will and testament bequeathed to said Elmer J. Keitel an undivided one-half of his share in said business and the other undivided one-half of his share in said business to Fred. W., Arie, Alvin, Waldemar C. and Elmer J. Keitel, to go into effect at the *905 death of Caroline Keitel, widow of said F. Keitel, unless she shall sooner relinquish her rights therein in writing;
AND WHEREAS, said bequests were subject to the further provision of the said will and that said Elmer J. Keitel should receive an additional twenty-five per cent of the net profits of said business for his services rendered to said business, and the remaining net profits to his widow, Caroline Keitel, for and during her life, and should she remarry after the death of said F. Keitel, she ipso facto loses and forfeits all her right and titles in said property, and the bequests aforesaid*2767 shall take effect and be in force;
AND WHEREAS, said Elmer J. Keitel has by purchase acquired all the right, title and interest in and to said Columbia Oil Company which was bequeathed to said Arie, Alvin and Fred W. Keitel, and said Elmer J. Keitel, Caroline Keitel and Waldemar C. Keitel are the only persons now having any interest in said Columbia Oil Company and it was heretofore agreed between them that it was impracticable and involved too many risks to continue the business as a partnership, which by mutual agreement has been deemed dissolved as of the date of the death of said F. Keitel, deceased, and it is the desire of the parties hereto to arrive at an understanding and agreement respecting the affairs of said company;
NOW THEREFORE, in consideration of the premises and in further consideration of the sum of One ($1.00) Dollar each to the other paid, the receipt of which is hereby acknowledged, and in further consideration of the mutual covenants and agreements hereinafter mentioned and hereby mutually agreed to be kept and performed, it is hereby agreed as follows:
That a corporation shall be formed under the laws of the State of Missouri to be known as Columbia Oil*2768 Company, with a capital stock fully paid of Twenty-Two Thousand ($22,000) Dollars and that the assets of said former partnership shall be used in payment thereof, and all further and other assets of said partnership over and above the amount necessary to pay said capital stock shall be turned over to said corporation as a paid in surplus.
It is further understood and agreed that inasmuch as the present value of the interest for and during the life of said Caroline Keitel in and to said business would be insufficient to afford her a substantial income, and in order to remove all question concerning any and all matters arising under the will of said F. Keitel, deceased, the said Caroline Keitel hereby relinquishes her rights in and to said former partnership, and all interest therein of said F. Keitel, deceased, which was acquired by her under and by virtue of said will and which she hereby assigns and transfers to said Elmer J. Keitel, except her interest in the share of Waldemar C. Keitel, which she hereby transfers to said Waldemar C. Keitel.
In consideration of said relinquishment and transfer to said Elmer J. Keitel, he, the said Elmer J. Keitel, hereby agrees to pay the said*2769 Caroline Keitel the sum of Two Hundred ( $200) Dollars per month for and during the life of said Caroline Keitel, unless she should remarry, at which time said payments shall cease; and to secure payment of said sum each month to be paid the said Caroline Keitel, he, the said Elmer J. Keitel agrees to hold in trust twenty-two (22) shares of the capital stock of the said proposed corporation, it being understood that said number of shares in said corporation with the capitalization and surplus thereof represents the present value of the life interest of said Caroline Keitel bequeathed to her by the will of said F. Keitel, deceased, in and to said Columbia Oil Company.
It is further understood and agreed that said Elmer J. Keitel shall have the right to vote upon said shares of stock so held in trust by him.
*906 The statements in the above contract regarding the relative interest of all members of the partnership prior to and subsequent to the death of F. Keitel and relative to the organization of the corporation are true.
8. As full consideration for the transfer of her interest in said partnership, petitioner agreed to pay Caroline Keitel $200 per month during her*2770 lifetime or until she should remarry. At the time of execution of said contract, Caroline Keitel was 62 years of age and according to well accepted mortality tables here life interest would approximate a period of 13 years after the execution of said contract.
9. The said $200 contracted to be paid monthly or until remarried was more than Caroline Keitel's interest was earning at and prior to the time of execution of said contract.
10. Caroline Keitel's interest in the partnership was equivalent to 22 shares of stock in the corporation after reorganization. To protecy her interest and secure the payment of the agreed annuities of $2,400 annually, 22 shares of stock of the Columbia Oil Co. were placed in the hands of petitioner, as trustee. These shares were so placed as collateral security for the payment of said amounts.
OPINION.
MILLIKEN: The case has been stipulated and briefed with no disagreement between respective counsel concerning the actual payments made to the mother by petitioner. The sale and transfer by Caroline Keitel of her interest under the will of her husband in the partnership in consideration of the payment to her by petitioner of the sum of $200*2771 per month, so long as she lived and remained testator's widow, constituted a capital transaction. See , affirmed in , and , affirmed in . These authorities dispose of petitioner's first contention. His second contention involves the application of sections 214 and 215 of the Revenue Act of 1921. The applicable parts of these sections read:
SEC. 214. (a) That in computing net income there shall be allowed as deductions:
* * *
(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade of business, including a reasonable allowance for obsolescence. In the case of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913.
SEC. 215. (a) That in computing net income no deduction shall in any case be allowed in respect of -
(b) *907 Amounts paid under the laws of any State, Territory, District of Columbia, *2772 possession of the United States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled.
Under the will of her husband, Caroline Keitel acquired an interest in one-half of her husband's interest in the partnership known as the Columbia Oil Co. It is immaterial to this proceeding whether she became a partner in this concern or whether she acquired only an interest in what was left after all partnership obligations had been paid. It is sufficient to say that her interest, whether in the partnership as such or in the proceeds, was limited to her life or widowhood. Nor is it material whether the assets of the partnership may have been composed only of personalty. The*2773 rights of remaindermen in personalty are recognized and enforced by the courts of Missouri. See ; ; . Where, as in this proceeding, the personal property is reproductive, the holder of the life interest does not possess the right to consume it and is entitled only to its use and income. 21 C.J. 1040. So that what petitioner purchased was the right to use his monther's interest during her life or widowhood. The fact that petitioner owned a remainder interest in part of what he so purchased does not affect the question here presented. From an income-tax standpoint, he is in the same position as though he had no other interest in the assets of the partnership. What he purchased, and that is all that concerns us, was a terminable estate and the termination of the estate will end all that he purchased.
If petitioner had purchased a lease, he would under section 214 (a)(8) be entitled to an annual deduction for the exhaustion of his leasehold. Such has been the consistent holding of the Board since its decision*2774 in . We perceive no difference in principle between the rule laid down in the above case and where one purchases a lease determinable upon the life of the lessor or any other person. In such a case the purchaser would be entitled to take his deduction for exhaustion on the basis of the life tables, if they constituted the only evidence in the case providing a method of determining the duration of the life of the lessor or other person. Nor can we perceive any difference in this respect between the purchase of a lease of a life interest and the purchase of the life interest itself. In both cases the interest is terminable and exhaustible for income-tax purposes. This proceeding does not *908 fall within the provisions of section 215(b), for the reason that petitioner did not acquire his mother's interest "by gift, bequest, or inheritance * * *." He acquired it by purchase. He purchased a terminable estate and is in the same position as one who purchases a lease, which is also a terminable interest.
Petitioner contends that if the purchase by him be deemed a capital transaction, then he purchased the life estate of his*2775 mother, for which he is obligated to pay her the sum of $2,400 each year until her death; that at the date of the sale his mother had a life expectancy of 13 years; that, therefore, his total payments to her will amouunt of $31,200; and that the latter amount should be spread over said term, with the result that he should be permitted to deduct for exhaustion the sum of $2,400 each year. It is to be noted that this result is reached by multiplying and dividing by the same number. It is further to be noted that this contention overlooks two important facts, the first of which is that petitioner did not acquire the whole of his mother's interest, and the second is that his mother's interest terminated upon her remarriage as well as upon her death. Petitioner acquired by his purchase only four-fifths of his mother's interest. The other fifth went to his brother, Waldemar. Petitioner would not be entitled to take as a deduction the exhaustion of what he does not possess. The second fact demonstrates that the life tables are not applicable.
The life tables, if they constituted the only evidence in the case, would be applicable where one has paid a lump sum for a life interest, *2776 since they would constitute the only standard whereby such payment could be spread over the life of the thing purchased. Here, however, no lump sum has been paid. Instead, petitioner is obligated to pay his mother the sum of $200 each month so long as she lives or remains his father's widow. While it is true that we do not know and can not ascertain what will be the total amount of all such payments, we do know that it will equal the product of each monthly payment multiplied by the number of months his mother lives or remains a widow.
We have decided the question of law involved in this proceeding, but when we come to the application of the facts thereto a barrier to an allowance is presented. Counsel for petitioner deemed it sufficient to rest the case for decision on the facts stipulated, which are set forth in our findings of fact. If a deficiency is apparent, there is nought we can do.
We are satisfied that petitioner should be allowed an annual deduction for the exhaustion of the four-fifths interest which he acquired. He should not be allowed, however, to recover a sum greater than the value of the interest purchased. What that value was we are unable to determine*2777 from the stipulated facts. It was stipulated that the *909 income which could be earned by the partnership was not sufficient to properly support and meet the ordinary demands of the mother, and that the sum which petitioner contracted to pay monthly to his mother was more than the mother's interest was earning at or prior to the time of the execution of the contract of May 3, 1922. It is also provided in the contract of May 3, 1922, that the petitioner was to hold in trust 22 shares of stock of the newly formed corporation which, together with the capitalization and surplus, represented the present value of the life interest of the mother. With the relationship of son and mother existing there was, no doubt, represented in the sum agreed to be paid to the mother an amount to satisfy her present needs savoring of a gift and irrespective of the value of the life interest which the petitioner acquired.
We think it not open to dispute that, if the then present value of the 22 shares of stock of the corporation held in trust and which it is stipulated represented the present value of the life interest, was $2,200 and the son agreed to pay $2,400 the first year, petitioner*2778 would not be entitled to a deduction of a sum greater than the value of the life interest acquired, much less to continue to deduct payments during the life or widowhood of the mother, or, in the extreme, to assume a total deduction of $31,200 as claimed by counsel for petitioner.
Upon the state of the record and while being satisfied as a question of law as to the right to a deduction, we are unable to segregate the value of the life estate and the sums voluntarily paid to the mother, and accordingly we are unable to determine the amount of the allowance to which petitioner is entitled.
Reviewed by the Board.
Judgment will be entered for the respondent.
PHILLIPS concurs in the result.
TRUSSELL dissents.
STERNHAGEN, concurring: There are several weaknesses in the petitioner's case which clearly support the judgment for respondent, but I regard the prevailing opinion as unsound. In any event it is obiter and can not serve as a precedent.
The petition alleges and the answer admits that -
the partnership business was not a success and his mother's income from the business being insufficient to meet her immediate needs, Elmer agreed*2779 to guarantee her an adequate income in the amount of $200 per month during life, if she would consent to a reorganization of the business that they might convert the partnership into a corporation.
In the absence of any other evidence to the contrary than is in this record, this stipulation indicates that some part or perhaps all *910 of Elmer's payments are "personal, living, or family expenses" which are among the items enumerated in section 215, Revenue Act of 1921, as not deductible. Gifts are also not among the statutory deductions.
Furthermore, the lack of evidence of actual payments or of a system of accounting justifying the deduction of items incurred, whether paid or not, deprives the issue of any factual basis and requires a judgment for respondent, notwithstanding the apparent willingness of counsel to argue the abstract question.
SMITH, TRAMMELL, MORRIS, and MURDOCK agree with this opinion.