Gagne v. Commissioner

Linwood A. Gagne, Petitioner, v. Commissioner of Internal Revenue, Respondent Gagne v. Commissioner Docket No. 17193 United States Tax Court 16 T.C. 498; 1951 U.S. Tax Ct. LEXIS 259; February 28, 1951, Promulgated *259 Decision will be entered under Rule 50. 1. Charitable contribution made subject to donee's compliance with certain conditions held deductible in year donee agreed to so comply and accepted the contribution. 2. The tax for the year 1943 imposed by Chapter 1 of the Internal Revenue Code includes the increase in tax for that year occasioned by section 6 of the Current Tax Payment Act of 1943 for the purpose of computing the 90 per cent victory tax limitation prescribed by section 456 of the Code. Guest v. Commissioner, 175 Fed. (2d) 868, followed. Sandow Holman, Esq., for the petitioner. John T. Rogers, Esq., for the respondent. Arundell, Judge. ARUNDELL *499 Respondent has determined a deficiency in the amount of $ 24,279.47 in petitioner's income and victory tax for the year 1943. The principal issue is whether a contribution to a tax exempt charitable institution made subject to the donee's compliance with certain conditions, and paid by a check that was delivered on December 31, 1942, to a payee who was not the donee, is deductible in that year or in the year 1943 when the donee agreed to comply with the conditions of the gift and accepted the check. The second issue is whether the tax for 1943 imposed by Chapter 1 of the Internal Revenue Code includes the increase in tax for that year occasioned by section 6 of the Current Tax Payment Act of*261 1943 for the purpose of computing the 90 per cent victory tax limitation prescribed by section 456 of the Internal Revenue Code. FINDINGS OF FACT. The petitioner, Linwood A. Gagne, is an individual residing at 126 Cedar Street, Carlisle, Pennsylvania. His income and victory tax return for the calendar year 1943 was filed on or about May 15, 1944, with the collector of internal revenue for the first district of Pennsylvania. During the years 1942 and 1943, the petitioner was engaged in the business of manufacturing quartz crystal used in the frequency control of radio transmitters and receivers. This business was conducted as a sole proprietorship under the name of The Standard Piezo Company, at Carlisle, Pennsylvania. On December 31, 1942, while in a hotel in Carlisle, Pennsylvania, with Rodney Fickel, brother of Dr. Creedin S. Fickel, the petitioner drew a check for $ 50,000 to the order of "Creedin Fickel & Trustees Carlisle Hospital," handed it to J. Rodney Fickel, and requested that it be turned over to Dr. Fickel, with oral instructions that it be delivered to the Carlisle Hospital as a gift upon the conditions that the proceeds be used for research and special work in venereal*262 disease and be administered under the direction of a board composed of the petitioner, Dr. Fickel, and a representative of the Carlisle Hospital. Shortly prior to midnight on December 31, 1942, J. Rodney Fickel delivered the check to Dr. Fickel and informed him of the purpose of the contribution and of the petitioner's desire to have some voice in the administration of the fund. *500 On January 1, 1943, Dr. Fickel offered the check to the superintendent of the Carlisle Hospital, and discussed with her the purpose of the gift. She refused to take the check at that time and stated that she had no authority to accept such a contribution. The next day, January 2, 1943, Dr. Fickel again brought the check to the superintendent who, upon the advice of the president of the board of trustees of the Carlisle Hospital, accepted the check tentatively and had it deposited in a special account opened that day in the Carlisle Deposit Bank & Trust Co. Dr. Fickel, learning that there might be some opposition to the acceptance of this gift by the trustees of the hospital, arranged to appear personally at the next meeting of the board of trustees held on January 12, 1943, to advocate its acceptance. *263 At this meeting, he explained to the trustees the purpose of this gift, the conditions attached to it, the need for the fund and urged its acceptance. Thereupon, the board of trustees passed a resolution accepting the gift and appointed Joseph P. McKeehan as the board's member to act with petitioner and Dr. Fickel on the committee of three which was to supervise the administration of the fund. Formal notification of the acceptance of the gift by the hospital was sent to petitioner by letter dated January 14, 1943. The petitioner's gift was made and accepted under the express conditions that the fund be used for research and special work in venereal diseases and be administered under the direction and supervision of a three man board or committee consisting of the petitioner, Dr. Creedin S. Fickel, and a representative of the board of trustees of the hospital. After the funds were received they were used to institute a new fever therapy program in syphilis cases. Dr. Fickel was a staff member of the Carlisle Hospital, one of the chiefs of the medical service, the chief in charge of genital infectious diseases, and the director of the state venereal disease clinic at the Carlisle*264 Hospital. He was not an employee receiving compensation from the Carlisle Hospital nor was he authorized to solicit, receive, or accept gifts. He was not intended and did not regard himself as a donee; the Carlisle Hospital was the sole donee. He received the check for the purpose of delivering it to the proper hospital authorities. His name was inscribed as one of the payees to insure that he would have a voice in the administration of the fund. The petitioner and Dr. Fickel have been acquainted with each other since 1940. They occasionally hunted and fished together. During the latter part of November 1942, while on a hunting trip in northern Pennsylvania, they discussed the facilities available for the treatment of venereal diseases. Dr. Fickel then stated to the petitioner that the use of a machine to produce artificial fever in conjunction with the work in the state clinic would be a benefit to the patients. At various *501 other times they had discussions pertaining to the venereal disease condition existing in their community. The petitioner never mentioned to Dr. Fickel the possible use of the venereal disease clinic by his employees nor did he stipulate that*265 his employees were to receive preferential treatment or special benefits at the clinic. The venereal disease clinic at the Carlisle Hospital was a public clinic maintained by funds supplied by the State of Pennsylvania and no fees were collected from patients. At all times material to this proceeding, the Carlisle Hospital of Carlisle, Pennsylvania, was an organization of the character specified in section 23 (o) (2) of the Code, with respect to which contributions or gifts are allowable as a deduction from gross income under the provisions of section 23 (o) of the Code. The petitioner, in his original income tax return for the taxable year 1942, claimed a deduction for contributions paid in the amount of $ 63,540.10. Included in this amount were two charitable contributions to the Carlisle Hospital, one in the amount of $ 1,500 which was paid in 1942, and the other in the amount of $ 50,000 which was paid in 1943. In the summer or fall of 1942 the petitioner made a charitable contribution in the sum of $ 1,500 to the Carlisle Hospital. This sum was not given for any specific purpose or subject to any conditions and was reported by the petitioner as an operating expense in his*266 amended income tax return for the year 1942. During the year 1943 after filing his 1942 tax return, the petitioner entered into renegotiation proceedings with the Secretary of War for the purpose of determining the amount of excessive profits realized by him for the year 1942 with respect to certain Government contracts. In connection with the renegotiation proceedings, the petitioner made representations to the Secretary of War that the $ 50,000 contributed to the Carlisle Hospital was an item of cost for the year 1942 deductible in the same year. Allowance of the $ 50,000 as an item of cost deductible in the year 1942 was made by the Secretary of War in accordance with the petitioner's representations. The Secretary of War applied the amount of the donation as a reduction of petitioner's salary allowance for that year. Petitioner's salary allowance for the years 1942 and 1943 were $ 30,000 and $ 78,000, respectively. The determination of the Secretary of War was accepted by the petitioner. In 1944, petitioner filed an amended income tax return for the taxable year 1942 and claimed the sum of $ 63,540.10, which sum included the $ 50,000 contribution to the Carlisle Hospital *267 as operating expense deductions rather than contributions. In a letter to the Collector of Internal Revenue, petitioner stated he was amending his return to reflect various changes as the result of renegotiation. *502 The respondent in his 90-day letter determined that the petitioner's ordinary net income for the taxable year 1943 was $ 467,808.35. He computed the petitioner's income tax liability as $ 387,451.57, plus the increased tax under section 6 (a) of the Current Tax Payment Act in the sum of $ 53,012.22. The entire amount of the victory tax asserted by the respondent in the sum of $ 22,891.27, when added to the total income tax of $ 440,463.79, is in excess of 90 per cent of petitioner's net income for the taxable year 1943. The income taxes paid by the petitioner for the calendar year 1943 were paid within three years before the execution of an agreement by the respondent and the petitioner pursuant to section 276 (b) to extend beyond the time prescribed in section 275 the time within which the respondent might assess the tax and such agreement was executed within three years from the time the return for the taxable year was filed by the petitioner. OPINION. The principal*268 question before us is whether the contribution to the Carlisle Hospital was paid in the taxable year 1942 as contended by respondent or in the taxable year 1943 as contended by petitioner. Petitioner seeks a deduction for this contribution under section 23 (o)1 which, as amended by the Revenue Act of 1938, allows as a deduction in computing net income of an individual only those "contributions or gifts payment of which is made within the taxable year." Regulations 111, section 29.23(o)-1. 2 *269 It is essential to a gift inter vivos that it be given absolutely, and that there be an irrevocable delivery to the donee. Copland v. Commissioner, 41 Fed. (2d) 501. A gift given subject to the donee's compliance with certain conditions does not take effect until the donee agrees to so comply and accepts the gift. 28 C. J. 646; 24 Am. Juris. 741. The donor must vest legal title in the donee without reserving a power of revocation, and he must relinquish dominion and control of the subject matter of the gift by delivery to the donee. Copland v. Commissioner, supra;Edson v. Lucas, 40 Fed. (2d) 398; Jacob v. Commissioner, 139 Fed. (2d) 277; Steele's Mills, 4 B. T. A. 960. The gift in the instant case was not given absolutely but was given subject to substantial conditions which the donee did not agree to comply with until January 12, 1943. Until that date there was no delivery *503 and payment of the gift, and petitioner is, therefore, entitled to deduct the amount of the contribution from his net income *270 for the taxable year 1943. The Estate of Modie J. Spiegel, 12 T. C. 524, is not contrary. In that case the gift was absolute and delivery of the check was made to the donee within the year the deduction was allowed. See L. M. Fischer, 14 T. C. 792, at p. 797. We find no merit in respondent's argument that when petitioner gave the check to Dr. Fickel he was, in effect, creating a charitable trust, having as trustees Dr. Fickel and the trustees of Carlisle Hospital, and having as beneficiary the state clinic. Petitioner had no intention of creating a charitable trust or making a gift to a charitable trust. Restatement of the Law of Trusts, § 351; Scott, The Law of Trusts (1939) § 351. Petitioner's gift was made to the Carlisle Hospital. In computing the deficiency under Rule 50, the victory tax imposed by section 450 of the Code will be computed subject to the limitation of section 456 as interpreted in Guest v. Commissioner, 175 Fed. (2d) 868. Our decision in Amy Guest, 10 T. C. 750, revd. in Guest v. Commissioner, supra,*271 will no longer be followed. See Emily Marx, 13 T. C. 1099. Any adjustment necessary to give effect to our finding that the sum of $ 1,500 paid to Carlisle Hospital in 1942 was a charitable contribution may be given effect in the final computation. This sum is deductible pursuant to section 23 (o) of the Internal Revenue Code and is subject to the limitation contained in that section. Decision will be entered under Rule 50. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (o) Charitable and Other Contributions. -- In the case of an individual, contributions or gifts payment of which is made within the taxable year * * *.↩ 2. SEC. 29.23 (o)-1. Contributions or Gifts by Individuals. -- A deduction is allowable under section 23 (o)↩ only with respect to contributions or gifts which are actually paid during the taxable year, regardless of when pledged and regardless of the method of accounting employed by the taxpayer in keeping his books and records.