Kralstein v. Commissioner

Max Kralstein and Bessie Kralstein, Petitioners, v. Commissioner of Internal Revenue, Respondent Kralstein v. Commissioner Docket No. 84257 United States Tax Court 38 T.C. 810; 1962 U.S. Tax Ct. LEXIS 85; September 10, 1962, Filed *85 Decision will be entered under Rule 50. 1. Petitioners received $ 60,916.15 (in cash and personal property) in 1956 in connection with a testimonial dinner given in honor of petitioner husband as vice president of the Bakery and Confectionery Workers' of America International Union. The funds used for this purpose were furnished by many persons, corporations, and business organizations whose motives and intentions in respect thereto were not uniform. Held: $ 12,000 of the amount received is excludible from gross income as a "gift." The remainder did not constitute a gift and is not excludible from gross income. Sec. 102(a), I.R.C. 1954. 2. Held, further, petitioners failed to substantiate certain claimed contributions disallowed by the Commissioner. 3. Held, further, petitioners' 1956 joint income tax return was timely filed; the Commissioner erred in imposing an addition to tax for delinquent filing under section 6651(a), I.R.C. 1954. Jacob P. Lefkowitz, Esq., for the petitioners. Warren S. Shine, Esq., and Stephen M. Miller, Esq., for the respondent. Raum, Judge. RAUM *810 The Commissioner determined a deficiency in petitioners' income tax for the taxable year 1956 in the amount of $ 28,971.80 and an addition to tax under section 6651 of the 1954 Code in the amount of *811 $ 1,446.56. By an amendment to his answer, the Commissioner claimed that petitioners received $ 1,000 more*87 additional income in 1956 than had been determined in the statutory notice of deficiency and requested that the Court determine the correct deficiency and addition to tax accordingly. The principal question presented is whether the stipulated sum of $ 60,916.15 (consisting of cash in the amount of $ 57,818.94 and other property having a cost and value of $ 3,097.21), received by petitioners in 1956 from moneys paid by persons in or having some connection with the baking industry in conjunction with a testimonial dinner honoring petitioner Max Kralstein, vice president of the Bakery and Confectionery Workers' International Union of America, is properly excludible from petitioners' gross income as a gift. Two other issues also presented are whether petitioners are entitled to deductions for charitable contributions in excess of the amount allowed by the Commissioner and whether petitioners are liable for an addition to tax for late filing of their 1956 income tax return under section 6651(a) of the 1954 Code. FINDINGS OF FACT. The facts stipulated by the parties are incorporated herein by this reference. Petitioners, husband and wife, filed a joint Federal income tax return for the*88 calendar year 1956 with the district director of internal revenue, Brooklyn, New York. Max Kralstein will hereinafter sometimes be referred to as petitioner. During the year 1956, petitioner held the position of vice president of the Bakery and Confectionery Workers' International Union of America, A.F.L.-C.I.O., in charge of district 1, which includes the metropolitan New York City area. Petitioner had become International vice president on November 24, 1947. Prior to that he had been an International representative for 3 years and a secretary of a local bakers' union for 6 years before that. Petitioner first joined a bakers' union as a bakery employee in 1922. Since the taxable year in issue, petitioner was elected president of the Bakery and Confectionery Workers' International Union of America on January 26, 1962. In 1956 as International vice president, petitioner's duties included assisting local unions within his district draw up their contract demands, negotiating contracts with employers, and attempting to settle contract negotiation deadlocks and contract disputes arising between the local unions under his jurisdiction and the employers. Local No. 3 of the Bakery and*89 Confectionery Workers' International Union of America, hereinafter referred to as local 3, constitutes an *812 amalgamation of locals 1, 3, 17, 164, 288, and 579, which were combined into one local union on June 23, 1955. Local 3 is within International district 1. As International vice president in charge of district 1, petitioner assisted in the merger of local 3. Petitioner personally attended each of the individual local membership meetings which had to ratify the merger proposal. Late in 1955 or early in 1956, the executive officers of local 3 and later the general membership decided that in June of 1956 in celebration of the first anniversary of the creation of the merged local 3, the union would sponsor a testimonial dinner in honor of petitioner. It was also decided that in conjunction with the dinner a souvenir journal would be published and that members of the baking industry would be asked to participate in the journal by placing their names and greetings therein. Petitioner was not consulted on any of the plans for the testimonial dinner and when he learned of them he unsuccessfully sought to have local 3 cancel them. At no time did petitioner participate directly*90 or indirectly in the planning or arranging of the dinner and journal. Local 3's avowed purpose in sponsoring the testimonial dinner for petitioner was to honor him and express appreciation to him as one who had been instrumental in bringing about the merger of local 3 and as a respected labor leader in the baking industry. The specific aim of the officials of local 3 was to raise funds by the sale of dinner tickets and journal space in order to give to petitioner a sufficient sum to enable him to purchase a house of his own. In 1956, petitioner and his family rented the second-floor apartment of a two-family house in the Borough Park section of Brooklyn, New York. Testimonial dinners in honor of union officials were held frequently in the baking industry. Some, like the one planned by local 3 for petitioner, were for the purpose of presenting the guest of honor with a sum of money or something of value. Others were held in honor of a particular union official, but were for the purpose of raising money for some charitable organization or purpose. A committee of local 3 union officials was formed to plan the dinner and to solicit sales of tickets thereto and names for the journal. *91 Approximately 20 officers and officials of local 3 were engaged in active solicitation of funds for both dinner tickets and journal insertions. Tickets to the dinner were sold at a price of $ 25 per ticket. The cost for placing names in the journal ranged from a minimum of $ 50 to as high as $ 750. A total of $ 85,470 was raised through these solicitations, comprised of dinner ticket sales of $ 33,825, and $ 51,645 from the journal insertions. Some solicitation for the sale of dinner tickets and journal space was done by mail. In addition, local 3 business agents who regularly visited the approximately 750 employers who employed local 3 members *813 personally solicited participation by bakery employers. Business agents' normal duties included seeing that the union's contract was being observed in the individual bakeries, making or recommending adjustments with respect to grievances, and when necessary recommending to local 3 the use of a strike. Since journal insertions involved a larger amount of money than dinner tickets, the business agents in general tried to get the employers within their jurisdiction interested in journal insertions first. At least one business*92 agent told the employers he visited that if they did not contribute to him for the journal they would be visited a second time by members of the local 3 executive board. In some cases members of the dinner committee called upon certain employers for the initial solicitation or as a followup to an unsuccessful solicitation by a business agent. Those who participated by purchasing dinner tickets or journal insertions or both fell into the following six categories: (1) Employers of members of local 3. -- The vast majority of journal insertions were placed and paid for by this group. In nearly every case the employer paid by check drawn on the business account. Many, if not most, employers deducted the amount paid as a business expense for income tax purposes. Since local 3 business agents solicited participation by all employers of local 3 members, many employers agreed to place their names in the journal for the purpose of staying on good terms with the union. In some instances, the person or persons who controlled the employer-bakery knew petitioner personally and their participation in some of those instances was to some extent influenced by this factor. However, even these*93 employers paid for participation out of business accounts and not by personal checks. (2) Employer's trade associations and guilds. -- Payments for journal insertions and dinner tickets by this group were made with moneys contributed by the constituent employer-members as dues or assessments, which amounts were treated as business expenses of the employer-members and deducted for income tax purposes. Most of the employer-members of the trade associations and guilds had local 3 members in their employ. (3) Businesses supplying and servicing the bakery industry. -- Because they did business with the baking industry, this group considered participation in the journal as an advertising expense and treated the resulting expense as such on their books of account and income tax returns. (4) Local unions. -- This group consisted of local unions in the Bakery and Confectionery Workers' of America International Union and local unions in related labor organizations in the New York City area. Payments for journal insertions by union locals were made with funds accumulated from dues paid by union members. *814 (5) Lawyers and doctors. -- These persons, most of whom knew*94 petitioner personally, were associated in one manner or another in their professional capacities with union activities in the baking industry. Some of these persons deducted the amount spent for a journal insertion or dinner tickets or both as a business expense. (6) Bakery employees and other individuals. -- Participation by this group was based to some extent on friendship, admiration, affection, and respect for petitioner. Such participation, however, involved primarily the purchase of tickets rather than journal insertions. One such journal insertion in the amount of $ 50 was paid for by Elias Green of this group and was intended as a gift. The testimonial dinner in honor of petitioner was held on June 23, 1956, at the Waldorf-Astoria Hotel in New York City. Between 1,300 and 1,400 persons attended the dinner. At the dinner petitioner was presented with an oil portrait of himself and petitioner's wife was presented with a mink stole. After the dinner, petitioner received checks from the dinner committee in the total amount of $ 57,818.94. The souvenir journal was 216 pages in length. It included a biography of petitioner with many pictures of him during his career, *95 a history of local 3, and the names of over 400 contributors to the journal. Some of the bakeries which participated in the journal put their bakeries' names therein; others had only the names of the officers or owners put in the journal. No business addresses were included in the journal insertions. The majority of the names which appeared in the journal appeared as a facsimile of the contributor's handwriting, either his signature or the handwritten name of the business. The remainder appeared in ordinary printer's type. With each name that appeared in the journal a typed greeting was included such as "best wishes," "fraternal greetings and sincerest good wishes," "best wishes to Max, whom we love and respect," and "congratulations on your many great achievements." Most of these greetings, if not all of them, were placed with the individual names by the dinner committee or the printer and were not specifically requested by the particular contributor. The $ 85,470 which was collected by the sale of dinner tickets and journal space for the testimonial dinner honoring petitioner was disbursed by the dinner committee of local 3 during the year 1956 as follows: Printing and stationery $ 310.34 Printing of journal 6,250.00 Banquet expenses 17,963.26 Postage 30.00 Bank charge .25 Mink stole (presented to petitioner Bessie Kralstein) 1,650.00 Portrait of Max Kralstein (presented to petitioner Max Kralstein) 1,447.21 Check paid to petitioner Max Kralstein 57,000.00 Two checks payable to petitioner Max Kralstein, issued after payment of all expenses, representing money remaining in a special checking account maintained by the Max Kralstein Dinner Committee for depositing and disbursing funds collected in connection with the testimonial dinner 818.94 *96 *815 On or about June 25, 1957, petitioner purchased a house in Atlantic Beach, Long Island, New York, for the sum of $ 41,000. Petitioner used the proceeds he received from the testimonial dinner to purchase and furnish this house. On their 1956 joint income tax return, petitioners included the following statement: Note: A testimonial dinner was tendered to me in June 1956 by my friends and associates. As a result of this dinner I was presented with the sum of $ 56,691. I am excluding this item from my taxable income since I believe it not to be subject to income tax. Max Kralstein The deficiency notice sent petitioners, together with the Commissioner's amended answer herein, determined that the cash and personal property of a total value of $ 60,916.15 received by petitioners in 1956 in connection with the testimonial dinner constitutes taxable income to petitioners. Petitioners itemized certain charitable contributions on their 1956 income tax return in the total amount of $ 535. In addition petitioners claimed "miscellaneous" contributions in the total amount of $ 615. The Commissioner disallowed the claimed contributions to the extent of $ 615 "for lack of substantiation." *97 Petitioners' signatures on their 1956 joint income tax return are each dated April 12, 1957. Petitioners mailed the return to the district director of internal revenue, Brooklyn, New York, on April 12, 1957, at a mailbox located at the corner of Madison Avenue and 61st Street in New York City. The return was stamped as "received" in the district director's office on April 19, 1957. The Commissioner determined that petitioners' joint income tax return for 1956 was not filed within the time prescribed by law and that a 5-percent addition to tax is payable for delinquency in the filing of the return in accordance with the provisions of section 6651(a) of the 1954 Code. Of the total amount of $ 60,916.15 in cash and personal property received by petitioners in 1956 in connection with a testimonial dinner given in honor of petitioner Max Kralstein, $ 12,000 was intended as a gift; the remainder was not in fact a gift. Petitioners' joint income tax return for 1956 was timely filed. OPINION. 1. In 1956 petitioner Max Kralstein was vice president of the Bakery and Confectionery Workers' of America International *816 Union. On June 23, 1956, between 1,300 and 1,400 persons gathered*98 at the Waldorf-Astoria Hotel in New York City for a testimonial dinner in his honor, sponsored by local 3 of the international union. As a result of ticket sales to this testimonal dinner and payments received for placing names in a souvenir journal published in conjunction with the dinner, a total of $ 85,470 was collected. After the payment of all expenses, the balance of $ 60,916.15 was given to petitioners in the form of checks in the aggregate amount of $ 57,818.94, an oil portrait of petitioner Max Kralstein of a stipulated cost of $ 1,447.21, and a mink stole for petitioner Bessie Kralstein of a stipulated cost of $ 1,650. The only issue in relation to the foregoing is whether the $ 60,916.15 thus received by petitioners in 1956 qualifies for the statutory "gift" exclusion under section 102(a) of the 1954 Code. 1*99 The Commissioner has determined that none of this amount so qualifies. 2 Petitioners contend that the entire amount in controversy was intended as a gift to them and is therefore not subject to taxation. It is plain that not merely one purported gift is here in question, but literally hundreds of purported gifts. 3*101 Each person who bought a $ 25 banquet ticket or had his name or his business' name placed in the journal at a cost ranging from $ 50 to $ 750 in theory contributed part of the ultimate amount received by petitioners. 4 If we could *817 say on the record before us that all intended to make a gift to petitioners or that none so intended, our task would be an easy one. But after hearing the testimony of some 45 participants, though only a fraction of the total, we are convinced that some participants intended to make a gift but that *100 many more did not. It has been necessary, therefore, on the available evidence to attempt to apportion the total amount received by petitioners between that portion which was in fact intended as a gift and that portion which was in fact not so intended. By our ultimate finding that $ 12,000 of the amount received by petitioners was intended as a gift, we have made such an apportionment. *102 Recently in Commissioner v. Duberstein, 363 U.S. 278, the Supreme Court discussed and restated the applicable principles to be applied in determining whether or not a specific transfer to a taxpayer in fact amounts to a gift to him within the meaning of the statute. Quoting with approval language in the dissenting opinion of the earlier case of Bogardus v. Commissioner, 302 U.S. 34, 43, the Court indicated that "what controls is the intention with which payment, however voluntary, has been made." Commissioner v. Duberstein, supra at 286. If the transfer proceeds from a "detached and disinterested generosity," "out of affection, respect, admiration, charity or like impulses," it is a gift in the statutory sense. If, on the other hand, the transfer proceeds primarily from "the constraining force of any moral or legal duty," or from "the incentive of anticipated benefit of an economic nature," it is not a gift. Commissioner v. Duberstein, supra at 285. The testimonial dinner in honor of petitioner Max Kralstein and the accompanying souvenir journal*103 brought forth participation by persons with varying interests. In our findings we have classified these persons and participants in six groups. One group, consisting of businesses which supplied and serviced the baking industry, viewed participation primarily as an advertising expense and in no sense made any gifts to petitioner. In contrast, the group consisting of bakery employees and other individuals contained some personal friends of petitioner who participated out of friendship and affection for him and intended merely to contribute to a gratuity for his benefit. As to the other four groups -- the employers of members of local 3, the employers' trade associations and guilds, local unions, and the lawyers and doctors -- each had certain business reasons for participating, but each also included a few participants within its ranks who in whole or in part may have intended to make a gift to petitioner. For example, the employers of members of local 3 participated mainly for business reasons and not because of affection, generosity, or like motive; however, there were some in this group who had known petitioner for many years and whose participation was influenced to some extent*104 by this factor. *818 From this mixture of interests and purposes, the money was raised and the net proceeds ultimately given to petitioner. It is clear that some participants had the requisite "detached and disinterested generosity" and affection or respect for petitioner to indicate that the dominant reason for their purchasing banquet tickets or a journal insertion or both was to make a gift to petitioner. Commissioner v. Duberstein, supra; cf. J. Marion Wright, 30 T.C. 392. Many others it is equally certain participated for reasons wholly apart from any donative intent toward petitioner. These persons agreed to participate, as indicated above, primarily for a variety of business reasons. They anticipated, whether rightly or wrongly, that some benefit (whether specifically contemplated or of some undefined nature) might result to their individual businesses from such participation, or that failure to participate might have some unfavorable business consequences to them. In the special context of this case, where labor solicited management for contributions and one local union canvassed other local unions*105 to pay tribute to an officer of the international union, many subtle and some not so subtle economic and business pressures appear to have caused considerable participation. And payments made by such participants, who in our appraisal of the evidence were responsible for the greater part of the so-called contributions, do not qualify for the statutory gift exclusion. Cf. Commissioner v. Duberstein, supra;Commissioner v. LoBue, 351 U.S. 243; Bogardus v. Commissioner, supra. As already noted, the Commissioner determined that the entire amount received by petitioners fails to qualify as a "gift" under the statute. In support of this position, the Commissioner points to the testimony of several witnesses who, though asserting that a gift to petitioner had been intended, admitted that the amount involved had been paid by a business check (corporate, partnership, or sole proprietorship) and had been deducted or was probably deducted as a business expense for income tax purposes. Other witnesses, while professing no knowledge of how their accountant or bookkeeper actually treated the*106 outlay involved, also testified that they used a business check for the purpose of payment and gave every indication that the amount was probably deducted as a business expense. The Commissioner argues that such evidence undercuts any donative intent testimony from these same witnesses and that such handling of the dinner ticket and journal insertion expenses indicates that few if any in fact intended the payment to be a gift. We have taken this testimony into consideration in the apportionment we have made. As was stated in Alex Silverman, 28 T.C. 1061, 1066, affirmed 253 F. 2d 849 (C.A. 8): "The corporation's treatment of the disbursement as an expense on its books and tax return is evidence that the corporation did not regard it as a gift." Of course, the same evidentiary inference *819 applies equally to partnerships and sole proprietorships. But we have also heeded the observation of the Supreme Court in the Duberstein case, 363 U.S. at 287-288: "The taxing statute does not make nondeductibility by the transferor a condition on the gift exclusion * * *. The conclusion whether a *107 transfer amounts to a 'gift' is one that must be reached on consideration of all the factors." We are satisfied on the record as a whole that some, but not many, persons who may have deducted their payments for the dinner or journal or both as a business expense in fact may have intended to make a gift to petitioner Max Kralstein. Many, whether or not they deducted the payments, did not intend a gift. Our apportionment of the total received by petitioners has been extremely difficult. Considering the spectrum of purposes and intentions expressed in the testimony of the witnesses who appeared at the trial, it was not possible with any degree of certainty to know the dominant reason that explained the participation of all of those who contributed, particularly of the hundreds who did not testify. An apportionment was clearly called for and we have done our best on the basis of the evidence presented, bearing in mind that the burden was on the petitioners to prove qualification for the statutory gift exclusion. Cf. Cohan v. Commissioner, 39 F. 2d 540, 544 (C.A. 2). 2. On their joint income tax return for 1956, petitioners claimed a deduction for*108 contributions in the total amount of $ 1,150. Itemized contributions in the total amount of $ 535 were listed, after which "miscellaneous" contributions in the amount of $ 615 were claimed. The Commissioner disallowed the claimed contributions to the extent of $ 615 "for lack of substantiation." Petitioner Max Kralstein testified only that "a great number of these contributions were made by cash," and that he could not now say specifically which had been paid in cash and which by check. He did not testify to whom the "miscellaneous" contributions had been paid nor was any other evidence offered in petitioners' behalf to support the amount claimed for these purported contributions. In this state of the record, where there was no proof that any part of the amount disallowed by the Commissioner was in fact paid by petitioners to a qualifying organization under the statute, there is no basis for an apportionment under the rule of Cohan v. Commissioner, supra.Because petitioners have failed to substantiate the disallowed portion of the claimed contributions, the Commissioner's determination in this regard is upheld. 3. The remaining question is whether*109 the Commissioner correctly imposed an addition to tax of 5 percent for late filing of petitioners' 1956 joint return pursuant to section 6651(a) of the 1954 Code. The return was due to be filed on or before April 15, 1957. Sec. 6072(a), I.R.C. 1954. The return is stamped "received" by the district director's office on April 19, 1957. Petitioners' signatures on the return are each *820 dated April 12, 1957. No check was enclosed since the return claimed an overpayment. Petitioner Max Kralstein testified that he recalled personally mailing the return at a mailbox at the corner of Madison Avenue and 61st Street in New York City on April 12, 1956, the Friday before the date due for filing, after having had the return prepared in a nearby building. We believed this testimony and have found as a fact that the return was so mailed. It is a fair inference that the return, thus mailed on April 12, would have been received not later than April 15. In the circumstances, we think that the petitioners have put forward a prima facie case proving the timely filing of their return. The Commissioner presented no rebuttal evidence regarding actual receipt of the return and failed to *110 produce the envelope in which the return was received. Cf. Ruth W. Oppenheimer, 16 T.C. 515, 527. Based on the evidence of record, we have made a finding that petitioners' return was timely filed. We hold, therefore, that the Commissioner erred in imposing the addition to tax in issue. Decision will be entered under Rule 50. Footnotes 1. SEC. 102. GIFTS AND INHERITANCES. (a) General Rule. -- Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.↩ 2. The deficiency notice sent petitioners determined that $ 59,916.15 received by them as a result of the testimonial dinner constituted additional income. The Commissioner increased the amount to $ 60,916.15 by amendment to his answer herein. The parties stipulated that petitioners in fact received $ 60,916.15 in cash and property from the net proceeds of the testimonial dinner, so no question of burden of proof on the amount involved has arisen.↩ 3. On brief the petitioners for the first time stated the alternative position that the dinner committee of local 3, which received and disbursed all funds connected with the testimonial dinner and journal, might be considered the donor of the contested gift to petitioners rather than each individual who purchased a dinner ticket or a journal insertion. We see no merit in this contention. All of the evidence points to the fact that the committee served as merely a collector of and conduit for the money raised. There is no indication that any money was given to the committee for use for any purpose the committee might choose. Thus, it is the intent of each individual participant which must determine the nature of petitioners' receipt and not the intent of the committee which was formed only to gather and pay out the funds. Cf. J. Marion Wright, 30 T.C. 392↩. Moreover, the point is not properly before us. It was not raised in the pleadings nor was the case tried on this theory. 4. Thus, while dinner ticket sales amounted to $ 33,825, the expenses of the dinner amounted to only $ 17,963.26. Similarly, $ 51,645 was raised for journal insertions, while the printing of the journal cost only $ 6,250. Other expenses for printing and stationery, postage, and bank charges totaled $ 340.59. Hence, the net amount of $ 60,916.15 which was ultimately used for petitioners' benefit resulted from both participation in the dinner and the journal, in the proportions of approximately one-quarter and three-quarters respectively. Of course, each person who purchased a $ 25 dinner ticket was entitled to get a dinner for such ticket and at best, unless he never intended to attend the dinner, could have intended a gift of only the difference between the cost of such dinner and $ 25. Similarly, each person who placed his or his business' name in the journal at best could have intended a gift to petitioners of only the payment made for such insertion less the cost of publishing the name. We have taken this into consideration in our apportionment of the net proceeds received by petitioners.↩