Bendix v. Commissioner

Ludwig Bendix, Petitioner, v. Commissioner of Internal Revenue, Respondent Bendix v. Commissioner Docket No. 19159 United States Tax Court 14 T.C. 681; 1950 U.S. Tax Ct. LEXIS 217; April 24, 1950, Promulgated *217 Decision will be entered for respondent. Because petitioner, a dealer in securities, has failed in his burden of proving that he made gifts of certain securities to his children in 1935 and 1936, it is held that payments made to them in 1943 allegedly "upon the indebtedness created by the 'long' position of the children in their brokerage account with petitioner" are not deductible as interest under section 23 (b) of the Internal Revenue Code. Norton I. Katz, Esq., and Zivel B. Niden, C. P. A., for the petitioner. Stephen P. Cadden, Esq., for the respondent. Hill, Judge. HILL *681 The respondent determined an income and victory tax liability against*218 petitioner in the total amount of $ 5,277.80 for the calendar year 1943. Certain of the adjustments made by respondent are not contested. The question for determination is whether petitioner should be allowed a deduction of $ 5,840.50 for alleged interest paid to his two children during the calendar year 1943. FINDINGS OF FACT. The tax return for the year involved was filed with the collector of internal revenue for the second district of New York. The petitioner kept his books and filed his return on a cash receipts and disbursements method. The petitioner was continuously engaged in business as a securities broker from 1929 to April 30, 1946. During that time he was a special partner of Carl M. Loeb & Co., and he was also individually in the business of dealing in securities. Petitioner is the father of two children, Eva Marie Bendix, born June 14, 1922, and Ernst Bendix, born August 26, 1924. In October, 1935, petitioner informed his children, Eva Marie and Ernst, then 13 and 11 years of age, respectively, that he intended making gifts to them of certain securities. He also told his accountant *682 of such intention and requested that the accountant make the necessary*219 entries in his books of account to record the transfers. On December 31, 1935, appropriate entries were made in the books of account of petitioner showing the transfer of the following securities: Value at time of transfer To Eva Marie Bendix, 200 shares of Ohio Oil $ 2,453.32 1/2 200 shares of Mid-Continental Petroleum 2,387.50 To Ernst Bendix, 200 shares of Ohio Oil 2,453.32 1/2 200 shares Mid-Continental Petroleum 2,387.50 On or about December 31, 1936, petitioner told his two children of his intention to make a gift of additional securities to them. He informed his accountant of that intention and told him to make the proper entries in his books of account. On December 31, 1936, entries were made in petitioner's books for the purpose of reflecting the transfer of the following securities to his children: Value of time of transfer To Eva Marie Bendix, 300 shares Rome Cable n1 $ 7,343.75 100 shares Potrero Sugar n2 1,177.50 To Ernst Bendix, 200 shares Potrero Sugar (See note 2) 120 shares Central National Corporation "B" - 1,021.25 200 shares Rome Cable (See note 1)*220 160 shares Realty Corporation of New York 9.34 During the years 1936 and 1937 petitioner sold for the children's accounts all of the above mentioned securities except 160 shares of Realty Corporation of New York and 120 shares of Central National Corporation "B". No powers of attorney were executed by the children authorizing such sales. The dividends paid on the above mentioned securities were credited to the accounts of Eva Marie and Ernst in petitioner's books. No entries for any interest due from petitioner were made in such books from 1935 through 1942. In 1937 the books of account of petitioner reflected that the securities transferred to Ernst's account earned $ 790 in dividends and that those transferred to Eva Marie earned $ 588.75. The account of Ernst also showed a capital loss from the sale of securities in the amount of $ 2,000 and that of Eva Marie showed a capital gain of $ 1,729. No tax returns were filed by or on behalf of Eva Marie or Ernst from 1935 to 1942. For the taxable year 1937 the dividend income from the securities purportedly transferred by petitioner to his children was reported as income in the return*221 filed by him and his wife, Toni Bendix. *683 Most of the securities which the books of petitioner showed as being transferred to his children under dates of December 31, 1935, and December 31, 1936, were kept in street names at Carl M. Loeb & Co. in a broker's account. The 120 shares of Central National Corporation "B" and 160 shares of Realty Corporation of New York were held in petitioner's name. From 1935 to 1943, inclusive, petitioner acted as a securities broker for the following number of people: [1935] (approx.) [32] 1936-1939 35 to 50 [1940] (approx.) [6] The accounts of petitioner's customers were kept in the same manner in his books as the accounts of his children which were created by the alleged transfers of securities made in December, 1935 and 1936. No certificates evidencing the securities which petitioner's books showed were transferred to his children were ever delivered to them. During the years 1937 and 1942 petitioner sustained financial losses which did not render him insolvent, but lessened his net worth. In 1943 petitioner's financial position had improved to the extent that his net worth then was at its highest since*222 1939. In August and September, 1943, Eva Marie and Ernst, respectively, indicated by letters that they wanted their mother, Toni Bendix, to act as trustee on their behalf to receive any funds payable to them. Ernst was then in the United States Army and Eva Marie was a student in college. The letter from Eva Marie reads in part as follows: In the first place, I am putting all my money, which consists principally of the deposit with Father, also some securities held for me by Father, into your hands as trustee, with the understanding that you will henceforth manage all of this property in your name as my trustee. This will mean that you are to do everything with respect to the property which I could do myself, i. e. you can buy or sell securities, collect dividends and interest, make purchases of goods of any kind and lend out the money as you see fit. In particular, you can lend any of the money to Father without any security. Secondly, I will be entitled to dispose of any income, but I already now authorize you to use whatever part you deem necessary to meet any expenses incurred for my benefit, such as tuition, clothing, board, pocket money, etc. Unless I direct otherwise, if*223 there is any balance, you can add it to whatever other property you hold and manage it along with it. As I told you, there is some interest coming to me from Father, and I am asking him to turn it over to you under this arrangement. Thirdly, we are agreed that I can make other arrangements whenever I wish, i. e. I can always withdraw this whole arrangement or part of it, or change the dispositions of either the capital or the income, but naturally, I will do so only *684 after consultation with you. If anything happens to either of us, the arrangement will naturally be terminated and I would take back my property, or you would turn it over to whoever is entitled to it. In the fall of 1943 petitioner sent a statement of purported interest accrued up to that time to his children. Both children returned the statement stating they found the interest accrued therein correct. The statement submitted to petitioner's children by petitioner computed interest on the balance from time to time in each account at the rate of 6 per cent. The statement showed interest due and payable as follows: To Eva Marie Bendix, $ 4,422.64; and to Ernst Bendix, $ 1,417.86. On December 7, 1943, petitioner*224 drew checks to the order of his wife, Toni Bendix, in trust for Eva Marie and for Ernst, in the amounts as above stated. The checks were delivered to Toni Bendix on or about December 7, 1943. Entries were thereupon made in the accounts of petitioner's children showing this transaction as a payment of interest. In 1941 petitioner submitted an offer in compromise to the collector of internal revenue for the purpose of compromising his income taxes for 1935 and 1936. In the "Statement of Financial Condition and Other Information" sworn to by petitioner on March 30, 1942, he stated that he had not disposed of any assets or property by sale, transfer, exchange, gift or any other manner except by sale for full value from one year prior to the taxable period therein involved to that date. The respondent made several adjustments to petitioner's income for the period involved. Only one of those adjustments is contested. With respect to the adjustment in issue, respondent, in the statement attached to the notice of deficiency, stated as follows: (a) The amount of $ 5,840.50 claimed as a deduction for interest paid has been disallowed for the reason that you have not established that the*225 amounts of $ 4,422.64 and $ 1,417.86 allegedly paid as interest to Eva Marie Bendix and Ernst Bendix, respectively, represent interest paid on your indebtedness during 1943 within the meaning of the Internal Revenue Code. Petitioner at no time made any valid gift to his children of the securities involved. OPINION. The respondent contends that the amount in question is not deductible as interest within the meaning of section 23 (b) "because petitioner made no valid gift of securities to his said children during 1935 and 1936" and because "petitioner has not proved that he paid the children $ 5,840.50 as interest during 1943." The petitioner, on the other hand, claims that that amount is deductible because it represented a payment of interest in the year 1943. *685 The payment of interest is supported by petitioner in his brief as follows: It has been demonstrated, supra, that the petitioner made a valid gift of the securities to the children in 1935 and 1936. Similarly, it has been shown that the children thereafter remained the owners of the securities and that, by continuing to trade the securities for the children's account, as a stockbroker, petitioner was under an obligation*226 to deliver the securities, or their equivalent, to the children, on demand. Interest which is deductible means an amount paid on an unconditional and enforceable obligation. I. T. 3545 (1942). Since, under state law, the petitioner was under an unconditional duty to deliver the securities to his children, this requirement is met. We do not agree with petitioner's contention that he made a valid gift of the securities involved to the children in 1935 and 1936. We set forth the factors prerequisite to the establishment of a gift in Adolph Weil, 31 B. T. A. 899; affd., 82 Fed. (2d) 561; certiorari denied, 299 U.S. 552, as follows: * * * (1) a donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control*227 over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; * * * See also H. S. Richardson, 42 B. T. A. 830. We do not believe that under the facts and applicable law petitioner has proved that he had either a clear and unmistakable intention to absolutely and irrevocably divest himself of the title, dominion, or control of the subject of the gift, or that he made an effective delivery of the subject of the gift. Section 162 of the Uniform Stock Transfer Law (Book 40, Personal Property, McKinney's Consolidated Laws of New York, Ann., p. 856) provides: § 162. How title to certificates and shares may be transferred. Title to a certificate and to the shares represented thereby can be transferred only, (a) By delivery of the certificate indorsed either in blank or to a specified person by the person appearing by the certificate to be the owner of the shares represented thereby, or (b) By delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign*228 or transfer the same or the shares represented thereby, signed by the person appearing by the certificates to be the owner of the shares represented thereby. Such assignment or power of attorney may be either in blank or to a specified person. *686 (c) By delivery of a separate instrument containing a written assignment of the certificate, or an interest therein, executed by the officer who levies an execution against property upon such certificate, or such interest therein, and sells the same, to the purchaser on the execution sale, and such assignment shall, together with delivery of the certificate, effect a transfer of the title to the certificate, or the interest therein levied upon and sold as specified in such assignment, and the shares represented by such certificate, or such interest therein, to the purchaser at the execution sale. Petitioner's only action to effectuate transfer of title to the shares of stock in question, so far as the record shows, was to issue instructions that accounts be opened in the names of the children in his private books. We do not believe in view of the above statute that this was a sufficient act to constitute a delivery by the donor to*229 the donee of the subject of the gift. Adolph Weil, supra. A New York court stated in Agar v. Orda, 258 N. Y. S. 274; affd., 264 N. Y. 248; 190 N. E. 479, as follows: Plaintiff contends that title to 200 shares of stock passed to the defendant at the moment the seller received stock sufficient to meet its obligation to the defendant. No weight can be given to this contention, in view of the provision of the Uniform Stock Transfer Act that title to shares of stock can be transferred only by delivery. Personal Property Law, § 162, as added by Laws 1913, C. 600 * * *. It was held by the Federal District Court for the Southern District of New York in In re Broomhall, Killough & Co., 47 Fed. (2d) 948, that mere placing of stock in new names of purchasers without transfer of physical possession of certificates was not a transfer within New York law. (Sec. 162, supra.) See Sizer v. United States, 65 Ct. Cls. 450; R. C. Coffey, 1 T. C. 579; affd., 141 Fed. (2d) 204.*230 In addition to the failure to transfer any certificates to the children, which is clearly required by New York law, to transfer title to shares of stock, no income tax returns were ever filed by the children from 1935 to 1942, although the record shows that certain of the securities in question were sold and that some of them earned dividends. In fact, for the taxable year 1937 petitioner and his wife reported the income from those securities in their tax return filed for that year. In addition, in the "Statement of Financial Condition and Other Information" sworn to by petitioner on March 30, 1942, he stated that he had not disposed of any assets or property by sale, transfer, exchange, gift, or any other manner except by sale for full value from one year prior to the taxable period 1935 and 1936 to that date. In view of the above, we do not believe that petitioner has sustained his burden of proving that gifts were made to his children in 1935 and 1936, as contended. Petitioner states that he "did all that was within his power to effect delivery to the children," citing Lillian K. Blake, 23 B. T. A. 554; Harry C. Moores, 3 B. T. A. 301;*231 and Emil Frank, 27 B. T. A. 1158. In *687 all those cases the evidence clearly established a gift. In Lillian K. Blake, supra, the taxpayer placed in her safe deposit box an envelope which contained certificates for shares of stock and on the outside of the envelope she wrote a notation to the effect that 300 shares of stock belonged to her son. In addition, she later executed "an irrevocable stock power of attorney assigning 300 shares of stock" to her son. She returned all the income from those shares of stock as income of her son and, finally, a certificate for 300 shares of stock was issued in the names of the taxpayer and a trust company as trustees for the taxpayer's son. In Harry C. Moores, supra, the taxpayer directed the secretary of a company to cancel 160 shares of his common stock and issue certificates of 100 shares to his wife and 30 shares to each of his two children. Subsequently the certificates were duly issued and delivered to the three donees. We stated, at page 304, as follows: The certificates denoting the transfers were duly executed and handed to the assignees*232 and the shares of stock which were so assigned thereafter became their [the donees'] property. In Emil Frank, supra, certificates of stock were issued in the names of the daughters and in subsequent transactions involving those shares of stock powers of attorney were executed by the daughters and given to the taxpayer from time to time. Those facts clearly are not present in the case at bar. The other cases which petitioner mentions on brief are also distinguishable. It follows that respondent did not err in his determination. Decision will be entered for respondent. Footnotes 2. Value listed includes total for all Potrero Sugar securities transferred to both children.↩ 1. Value listed includes total for all Rome Cable securities transferred to both children.↩