Mercil v. Commissioner

William Francis Mercil, Petitioner, v. Commissioner of Internal Revenue, Respondent Mercil v. Commissioner Docket No. 37720 United States Tax Court 24 T.C. 1150; 1955 U.S. Tax Ct. LEXIS 85; September 30, 1955, Filed *85 Decision will be entered under Rule 50. Petitioner's father in substantial part financed petitioner's college and medical education. Approximately 20 years later, petitioner's father, who was then retired, fractured his hip and incurred a $ 560 hospital bill. Petitioner, who was then and for approximately 17 years had been a practicing physician, paid the hospital bill of $ 560 and, beginning some 2 months later, thereafter paid his father $ 100 per month. Held, that petitioner, by his proof, has not overcome the presumption that the money advanced for his college and medical education was a gift or advancement. Held, further, that by reason of such advances there was no indebtedness within the meaning of section 23 (b) of the Internal Revenue Code of 1939 and the $ 100 monthly payments made by petitioner to his father during the year herein were not interest deductible under section 23 (b). Curtis C. Goodson, Esq., and Joseph J. Dudley, Esq., for the petitioner. Merl B. Peek, Esq., for the respondent. Turner, Judge. TURNER *1150 The respondent determined a deficiency in income tax against the petitioner for the calendar year 1946 in the amount of $ 744.57. The only question to be decided is whether the respondent erred in disallowing a deduction of $ 1,200 claimed by petitioner as interest paid. FINDINGS OF FACT. Petitioner is an individual, and resides at Crookston, Minnesota, where he is engaged in the practice of medicine. He filed his income *1151 tax return for 1946 with the collector of internal revenue for the district of Minnesota. Petitioner was born on October 4, 1903, and was reared in Crookston. He graduated from high school in 1921. He attended the University of Notre Dame for 2 years, in preparation for medical school, and then studied medicine at the University of Minnesota for the next 4 years, graduating in the spring of 1927. He began the practice of medicine in Crookston in April of 1928, after approximately 1 year of internship at St. Mary's Hospital*87 in Duluth. He was married in February of 1928, to which marriage four children were born, with three surviving. Petitioner earned some money at different types of jobs during the school years and during vacations, and, in addition, received funds in various amounts from his father, O. Mercil, to finance his premedical and medical education. In August of 1927, he received $ 20 from his father for the trip to Duluth, and on December 24, 1927, $ 99.50 for the purchase of a suit and overcoat. In addition to the financing of petitioner's college and medical education, O. Mercil also supplied the funds for the college education of his three daughters. One daughter was older and two were younger than petitioner. The daughters studied to become teachers. The cost of such a college education was less than that for a medical education. On a sheet in his ledger, O. Mercil entered the amounts advanced to petitioner for his college and medical education. The entries were not made currently with the making of the advances, but were made after the end of each school year and purported to cover the aggregate of the advances which had been made during the year. The entries began with the school*88 year 1921-1922 and included the school year 1926-1927. For the school years 1924-1925 and 1925-1926 the amounts shown as advanced for each year was an even $ 1,000. Entries were also made for the $ 20 advanced in August 1927 for the trip to Duluth and the $ 99.50 made on December 24 of that year for the suit and overcoat. The account was closed at February 11, 1928, by a credit entry of $ 5,164.39, that amount being the aggregate of the advances shown to have been made. After such closing, however, and under the same date, a new debit of $ 5,164.39, described "To Bal Date of Marriage," was entered. O. Mercil similarly kept an account of the funds advanced to his three daughters to cover the cost of their college education. O. Mercil operated a grocery business in Crookston for approximately 41 years. He retired from that business in 1941, at the age of 70 or 71 years. During 1945 O. Mercil suffered a fractured hip, and was confined in a hospital. In August of that year, petitioner paid his father's hospital *1152 bill of $ 560, and beginning with October 1 through the year 1946, paid his father $ 100 each month. He continued the $ 100 monthly payments after 1946. Under*89 date of March 11, 1946, O. Mercil prepared a statement purporting to show an account with petitioner. The principal was shown at $ 5,164 and "Interest at 5% from Dec. 22nd, 1927 to Aug. 4th, 1945," as $ 5,664. He similarly showed amounts purporting to be interest on the amount of principal for the period August 4, 1945, to October 1, 1945, and for the months of October, November, and December of 1945, bringing the total shown as interest at January 1, 1946, to $ 5,757.43. A total credit of $ 860 was shown against interest, bringing the balance thereof at January 1, 1946, to $ 4,897.43. The $ 860 so credited represented the hospital bill of $ 560 and $ 100 for each of the months October, November, and December, 1945, which had been paid by petitioner to or on behalf of his father. On the ledger sheet described above, O. Mercil entered a debit under date of January 1, 1946, of $ 5,757.43, described as "To Interest at 5% to Date." On the credit side and under date of August 4, 1945, an entry of $ 560, described as "By Hospital Bill," was made. Thereafter a credit of $ 100 was made for each month, beginning with October 1945, the last such credit being made under date of May 8, 1948. *90 Beginning with January 1, 1946, O. Mercil made his computations of purported interest at a rate of 4 per cent, compounded monthly, on the aggregate of the amount shown as principal and interest. On sheets separately maintained, the $ 100 monthly payments were credited against the amounts debited as interest, and beginning with January 1, 1946, the amounts thereafter computed and shown as interest were debited monthly. O. Mercil filed an income tax return for 1946, in which he reported income of $ 1,955.72, which amount was shown as net rentals from an apartment building of $ 627.60, miscellaneous earnings of $ 12.56, and interest of $ 1,315.56. He claimed exemptions for himself and wife. He reported a total tax of $ 146. The $ 1,315.56 included the $ 1,200 received from petitioner through the above $ 100 monthly payments. In his return for 1946, petitioner claimed a deduction of $ 1,200 as interest paid to O. Mercil. The deduction so claimed was disallowed by the respondent in his determination of deficiency. OPINION. The only question for decision is whether or not the monthly payments of $ 100 each made by petitioner to his father in 1946 were payments of interest within the*91 meaning of section 23 (b) of the Internal Revenue Code of 1939. By that section, it is provided that in computing net income, there shall be allowed as deductions *1153 "all interest paid or accrued within the taxable year on indebtedness." It is thus apparent that the existence of an indebtedness upon which interest is paid or accrued is the sine qua non of the deduction claimed. Essential to the existence of an indebtedness is a debtor-creditor status. There must be an unconditional obligation to pay, or, stated otherwise, the amount claimed as the debt must be certainly and in all events payable. Bercaw v. Commissioner, 165 F. 2d 521, affirming a Memorandum Opinion of this Court; Gilman v. Commissioner, 53 F. 2d 47, affirming 18 B. T. A. 1277; Evans Clark, 18 T. C. 780; Estate of Carr V. Van Anda, 12 T. C. 1158, affd. 192 F. 2d 391; E. J. Ellisberg, 9 T. C. 463; and Paul Autenreith, 41 B. T. A. 319, affd. 115 F. 2d 856.*92 It is the position of the respondent that there was no unconditional obligation or liability on the part of the petitioner to pay any amount to his father, either as principal of an indebtedness or as interest thereon, and accordingly there was no payment of interest within the meaning of section 23 (b). It is the claim of the petitioner, on the other hand, that it was the intention of the parties at the time his father made the advances to him that he should be obligated to repay the amounts to his father on demand, with interest thereon; that in 1945 such demand was made; that interest had accumulated on the amount of the advances at the rate of 5 per cent; that the monthly payments herein were intended to be and were payments of such interest, and that the payments so made are deductible under section 23 (b). The transaction herein was not at arm's length, as between strangers, but was between father and son, and being so, it is subject to rigid scrutiny for the purpose of determining its actualities. Evans Clark, supra;Estate of Carr V. Van Anda, supra; and Jacob Grossman, 9 B. T. A. 643.*93 Furthermore, there is in the law a presumption that money or property transferred by a parent to his child is a gift or advancement, and not a loan. Jacob Grossman, supra;Storey v. Storey, 214 F. 973; Jenning v. Rohde, 109 N. W. 597 (Minn.); Stahn v. Stahn, 256 N. W. 137 (Minn.); State v. One Oldsmobile Two-Door Sedan, 35 N. W. 2d 525 (Minn.); Oliva v. Fernandez, 68 F. 2d 338; and Bankers' Trust Co. v. Bank of Rockville Center Trust Co., 168 Atl. 733 (N. J.). And in the case last cited, the court said: To overcome such presumption of gift from a father to a son, the proof offered to accomplish it must be certain, definite, reliable, and convincing, and leave no reasonable doubt as to the intention of the parties. * * * As rebutting the above presumption, we do have in the instant case the stated conclusions of both petitioner and his father that petitioner was obligated to repay the said advances, with interest. It is our opinion, however, that*94 the proof of record does not overcome the presumption that the advances were gifts or advancements, and we are not persuaded that there was an intent or agreement between the *1154 petitioner and his father that petitioner was or should become unconditionally liable to repay the moneys advanced to him for his college and medical education, either with or without interest. We have here a situation where petitioner and his father, after more than 20 years and when conditions and circumstances were drastically changed, were attempting to reconstruct and fill in essential details of conversations and understandings had at a time when they were father and minor son, so as to support the petitioner's claim that an indebtedness was created through his father's financing of his college and medical education. There was no written agreement and no notes or other written evidence of indebtedness, and it is admitted that there was no agreement or understanding, either oral or written, as to the rate of interest it is said was to run. The only writings were the entries on the sheets in the father's ledger, and it appears that on other sheets he had similarly recorded the advances made to*95 his three daughters to cover their college costs, but as to the daughters, it was the father's testimony that no interest had been charged or intended and that he had never anticipated full repayment of the advances themselves. Certainly the keeping of the ledger sheets is in no way persuasive of the conclusion that the expenditures made were loans rather than advancements, since by the very nature of advancements a recording of transfers of money or property by a parent to his children is most desirable. See Hill v. Hill, 122 Ky. 681, 92 S. W. 924. Similarly, the father's explanation that the petitioner wanted a higher education, and having an older daughter and two younger ones, he did not "feel like giving it to him outright," is likewise in complete harmony with a conclusion that the expenditures were advancements rather than loans. Neither do we feel that the assertion of a minor son that he would at some later time repay his father, with interest, for the cost of the anticipated college and medical training in and of itself necessarily indicates or requires the conclusion that there was an agreement that he was at some future*96 time to become unconditionally liable for repayment of the advances made. As to the claimed agreement, it was petitioner's testimony that he was obligated to repay the advances, with interest, on demand, whereas it was his father's testimony that petitioner's promise to repay was conditioned on his becoming able to pay, namely, that he was to repay the advances, with interest, "as soon as he could" on demand. Assuming such a conditional promise, there still can be no indebtedness unless or until the condition specified is satisfied. Evans Clark, supra, and the cases therein cited. While there is in the testimony of both petitioner and his father some statement to the effect that the father did demand repayment, we are not advised as to just how and in what terms the demand was made, and we find no proof directed *1155 to petitioner's ability to repay, when and if demand was made. It is clear, however, that if the demand was for the payment of the principal sum, with interest, we must conclude that it was either ignored as to principal and most of the claimed interest, or that petitioner was still not able to pay, since the amount so paid was*97 only a small fraction of the amount of the advances and the alleged interest thereon. Aside, however, from such considerations and conjectures, we not only feel that the petitioner, under the cases cited above, has not overcome the presumption that the advances were gifts or advancements and not loans, but on the evidence, we are persuaded that unconditional liability to repay was never intended and that the advances should be regarded at least as advancements, if not gifts. And, while as the result of his father's accident some arrangement or understanding, whether formal or on a for granted basis, may have and possibly did occur between petitioner and his father whereunder the petitioner did pay his father's hospital bill and began the monthly payments herein and the father did make a computation of the claimed interest, such an arrangement and understanding could not then convert the advancements into an indebtedness, it being settled law in Minnesota that an advancement is a gift and where such a gift is "fully executed, a promise by the donee to repay it is without consideration." Kuhne v. Gau, 138 Minn. 34, 163 N. W. 982, and*98 Kragnes v. Kragnes, 125 Minn. 115, 145 N. W. 785. Other facts of record and statements in the testimony of petitioner and his father appear to be in refutation of the claim of indebtedness, while others, standing unexplained, supply some basis for questioning its soundness. The statement of the father that he would never have enforced payment by his son is perfectly normal as between father and son, but is not the normal thing in a debtor-creditor relationship. Also revealing, we think, is petitioner's statement relating to the payments made to and in behalf of his father, which was to the effect that though there were no claim of debt, he still would have paid his father's hospital bill and would have made the monthly payments which followed. Of possible significance, also, is the fact that as shown by the ledger sheet $ 99.50 of the claimed indebtedness covered the cost of a suit and overcoat for petitioner while he was an intern in St. Mary's Hospital in Duluth and that the date of entry indicated that he received the money from his father on the day before Christmas. Of interest, also, is the fact that a balance was struck *99 on February 11, 1946, at or about the date petitioner was married, and although entered as a debt, it was described by the words "To Bal Date of Marriage." Whether of significance or not, the entry is not further explained in the record here, and there were no further entries until after the petitioner had paid his father's hospital bill and possibly several of the $ 100 monthly payments. *1156 We are also inclined to the view that most likely the first computation of the alleged interest was not made until on or about March 11, 1946. Attached to the record as maintained by petitioner's father of the payments received and his computations of compound interest as set forth above, is a formal statement purporting to show as of March 11 the principal sum of the advances, $ 5,164, interest at 5 per cent from December 22, 1927, to August 4, 1945, $ 5,664, and individual sums as interest for the period from August 4, 1945, to October 1, 1945, and for the months of October, November, and December, as well as credits of $ 560 paid to the hospital and the $ 100 payments for October, November, and December. It is quite likely, we think, that this statement prepared by petitioner's father*100 under date of March 11, 1946, could have supplied the basis for the entries made on the ledger sheet, and, if so, could be some further indication that the concept of unconditional liability for the principal sums, carrying with it the claim of interest, did not crystallize until after the father's need arose and sometime after the hospital bill and a number of the monthly payments had been made. Due to the vagaries of the human memory, it is often most difficult, when recalling an occurrence of the past, to avoid and refrain from casting it in the form to which it appears best suited at the time of remembering. It is our opinion that the petitioner has not made his case, and his claim is accordingly rejected. We express no view as to his right to a dependency credit since that question is not at issue herein. Decision will be entered under Rule 50.