Lippman v. Commissioner

Mervin R. Lippman and Elaine Lippman, et al., 1 Petitioners v. Commissioner of Internal Revenue, Respondent Lippman v. Commissioner Docket Nos. 2112-65, 5897-65, 393-67 United States Tax Court 52 T.C. 135; 1969 U.S. Tax Ct. LEXIS 147; April 22, 1969, Filed *147 Decisions will be entered for the respondent. Petitioners, osteopathic doctors, paid in 1962 certain sums for staff fee assessments in order to secure staff privileges in a hospital. The hospital issued to the doctors its certificates entitled "Non-Negotiable Participation Debenture" in the face amount of the staff assessment fees paid. Later in 1962 the doctors surrendered the debentures to the hospital for cancellation and took charitable deductions on their income tax returns for the face amount of the debentures surrendered. Held, the so-called nonnegotiable participation debentures were not enforceable obligations or debts and their surrender to the hospital did not constitute gifts or contributions to the hospital within the meaning of sec. 170. I.R.C. 1954. Merrill R. Talpers, for the petitioners. Edward G. Lavery and Hugh C. McMahon, for the respondent. Mulroney, Judge. MULRONEY *135 Respondent determined deficiencies in petitioners' income tax as follows: Petitioner Docket No. Year Deficiency Mervin R. and Elaine Lippman 2112-65 [1962] $ 1,634.45 Charles G. and Jennie Stephens 5897-65 [1963] 789.54 William W. and Lucille Thompson 393-67 [1962] 3,230.45 These cases were consolidated for trial and opinion. The only issue for decision is whether the petitioners are each entitled to a charitable contribution deduction based on the surrender of nonnegotiable bonds to the hospital which issued them. FINDINGS OF FACT Some of the facts have been stipulated and they are found accordingly. Petitioners Mervin R. and Elaine Lippman, who were husband and wife in 1962, lived at the time their petition was filed in these proceedings*149 in Shawnee Mission, Kans., and Overland Park, Kans., respectively. They filed a joint income tax return for 1962 with the district director of internal revenue, Kansas City, Mo. Petitioners Charles G. and Jennie Stephens, husband and wife, lived at the time their petition was filed in these proceedings in Kansas City, Mo. They filed a joint income tax return for 1963 with the district director of internal revenue, St. Louis, Mo. Petitioners, William W. and Lucille Thompson, *136 husband and wife, lived at the time their petition was filed in these proceedings in Kansas City, Mo. They filed a joint income tax return for 1962 with the district director of internal revenue, St. Louis, Mo. Hereinafter the word "petitioners" will refer only to the husbands during the years involved. The petitioners in each case were osteopathic doctors on the staff of the Lakeside Hospital Association, an osteopathic institution. Lakeside, determined by the Commissioner of Internal Revenue to be a tax-exempt organization under section 501(c)(3), I.R.C. 1954, 2 is a charitable institution for purposes of section 170, I.R.C. 1954. *150 Petitioners were compelled to make a payment of money as a staff fee pursuant to a resolution unanimously adopted by the board of trustees of Lakeside on May 16, 1962. The resolution reads as follows: Whereas, this Hospital has received a commitment from B. C. Ziegler and Company of West Bend, Wisconsin in the principal amount of $ 700,000; and Whereas, said commitment requires as a condition precedent that the hospital procure the sum of $ 250,000 3 from its professional staff; and Whereas, in the opinion of the Board of Directors, the making of this mortgage loan is necessary for the completion of the facility situated at 87th and Troost, Kansas City, Missouri, which facility is required to be completed for the continued and successful operation of this institution. Now therefore be it Resolved, that each member of the medical staff be assessed a staff fee in an amount equal to the amount of his required purchase of bonds under the bond program previously instituted; Resolved further, That the payment of said staff fee be made in cash no later than June 30, 1962; and Resolved further, That a staff member's continued right to staff privileges shall be conditioned upon the tender*151 of said sum within the time prescribed herein. The money received as a result of the resolution was then applied a few months later to the purchase of certificates issued by Lakeside entitled "Non-Negotiable Participation Debenture." The following is a copy of one of these nonnegotiable debentures: Lakeside Hospital Association, a Missouri corporation organized under "The General Not-for-Profit Corporation Law," hereinafter called the "Corporation", for value received, hereby promises to pay to the sum of TWO HUNDRED FIFTY DOLLARS ($ 250.00) on August 1, 1975, at the office of the Corporation in Kansas City, Missouri. This debenture is one of a duly authorized issue of the debentures of the Corporation of like tenor and effect evidencing an aggregate indebtedness of TWO HUNDRED TEN THOUSAND DOLLARS ($ 210,000.00), and the following is a statement of the rights of the holder of this debenture and the conditions *137 to which this debenture is subject, to which the holder hereof, by the acceptance of this debenture, assents: 1. The debentures of this issue rank equally and ratably without priority over one another. No debenture shall be negotiable. 2. This debenture*152 shall bear interest at the rate of Three Percent (3%) per annum. 3. The principal sum and interest thereon are to be paid only when the Board of Trustees in its absolute discretion shall ascertain and declare funds for such payment are available out of net earnings after appropriating to the capital account such portions of net earnings as it shall deem advisable. In the event accumulated earnings of the Corporation are deemed by the Board of Trustees insufficient to pay the principal hereof at maturity or any unpaid interest due thereon, then this obligation shall be paid from net earnings when and as soon as net earnings are ascertained and declared by the Board of Trustees. 4. Rights of the holder hereof to the principal sum or any part thereof, is and shall remain subject and subordinate to the claims of all contract creditors of the Corporation, and upon dissolution or liquidation of the Corporation no payment shall be due or payable upon this debenture until all other contractors or creditors of the Corporation shall have been paid in full. 5. The Corporation may at any time at its own option, repay in whole or in part the principal sum of all outstanding debentures of this*153 issue upon thirty (30) days written notice served by mail to all the registered owners of this debenture issue. 6. The Corporation agrees that the holder hereof may at any time, at his option, apply in whole or in part the principal sum in full and complete satisfaction of any assessments or contributions, incurred by the said holder and due to the Corporation, provided however, that the holder shall be deemed to have waived any accrued and unpaid interest due thereon. 7. No holder of debentures of this issue shall institute any suit or proceeding for the enforcement of the payment of the principal. 8. The Corporation may treat the person whose name appears above as the absolute owner hereof for the purpose of receiving payment thereof, or on account of, the principal due hereon and for all other purposes. 9. This debenture is the obligation of the Corporation only, and no recourse shall be had for the payment thereof against any member, officer, or director of the Corporation, either directly or through the Corporation, by virtue of any statute for the enforcement of any assessment or otherwise, all such liability of members, directors, and officers as such being released by the *154 holder hereof by the acceptance of this debenture. In Witness Whereof, The Lakeside Hospital Association has caused this debenture to be signed by its President, and its corporate seal to be affixed hereto and attested by its Secretary, and this debenture to be dated as of October 1, 1962. Attest: (S) Walter R. Ehrnman, Secretary (S) Carl Migliazzo, President Petitioner Mervin R. Lippman received these debentures with a total face value in the amount of $ 3,500. He surrendered all of them to Lakeside for cancellation in 1962 and took a charitable deduction in the amount of $ 3,500 in his 1962 income tax return. *138 Petitioner Charles G. Stephens received these debentures with a total face value in the amount of $ 8,500. He surrendered part of them in the face amount of $ 2,750 to Lakeside for cancellation in 1963 and took a charitable deduction in the amount of $ 2,750 in his 1963 income tax return. Petitioner William W. Thompson received these debentures*155 with a total face value in the amount of $ 7,000. He surrendered all of them to Lakeside for cancellation in 1962 and took a charitable deduction in the amount of $ 7,000 in his 1962 income tax return. Respondent has determined in each case that the surrender of the bonds to Lakeside for cancellation did not constitute charitable contributions within section 170, I.R.C. 1954. OPINION Much of petitioners' evidence in this case is devoted to bringing out the circumstances surrounding the issuance of the certificates by the hospital. It seems that in 1957 the Lakeside Hospital Association began to formulate plans for the construction of a new hospital to replace the old one which was considered inadequate. Lakeside decided to issue mortgage bonds as one of the methods of financing this new construction. To do this it needed someone to underwrite the bonds. In 1962 Lakeside agreed with B. C. Ziegler & Co. on the terms of a commitment whereby Ziegler would underwrite the bonds to be issued by Lakeside. One of the conditions of this commitment required the procurement of not less than $ 200,000 from the members of the staff of Lakeside. In order to meet this condition, the board of*156 trustees of Lakeside met on May 16, 1962, and unanimously passed a resolution which called for the assessment of a fee from each member of the staff as a condition to remaining on the staff. It was thought that such an assessment would result in a business expense deduction for those persons who paid it. There was concern, however, as to whether a business expense deduction would be allowed. It was agreed that the check paid pursuant to the resolution would be held by Lakeside until the tax consequences of this arrangement could be worked out. A revenue ruling was requested and at an oral conference with the Internal Revenue Service in Washington, D.C., it was learned that an adverse ruling would be issued which would disallow the staff fee as a business expense deduction. With a business deduction ruled out, petitioners sought to convert their staff assessments into charitable contributions. A new plan was devised by Lakeside whereby each member of the staff would receive certificates entitled "Non-Negotiable Participation Debenture," such as set forth in our Findings of Fact in return for *139 the money he had paid to Lakeside as his staff assessment fee pursuant to the*157 resolution of May 16, 1962. The debentures were issued to the members of the staff with the approval of B. C. Ziegler & Co. in the aggregate amount of $ 201,000. This plan was designed to accomplish a charitable deduction for each member when he would surrender the debentures to Lakeside for cancellation. The petitioners herein were issued debentures in the face amount of their staff assessments. Later they surrendered their debentures and took charitable deductions in the face amount of the debentures surrendered under section 170, which allows as a deduction "any charitable contribution * * * payment of which is made within the taxable year." The material facts in this case are almost identical with the facts in S. M. Howard, 39 T.C. 833 (1963), and Glenn L. Heigerick, 45 T.C. 475 (1966). In these cases there were no debentures issued but, as here, a group of osteopathic doctors were compelled to pay staff assessments in order to be members of the hospital staff. In the cited cases the doctors sought deduction of the sums they paid by way of staff assessments as business expenses. We held in both cases the doctors*158 were not entitled to deduct the expenditures in the year paid as business expenses. We said the expenditures constituted capital expenditures amortizable over a period of years in that they in effect secured staff privileges for as long as the doctors would probably practice. Petitioners in the instant case, however, make no argument that they are entitled to a business expense deduction. And they do not contend that what they paid as staff assessments should be treated as capital expenditures. Their only contention is as stated on brief that "The charitable contribution arises not with the purchase of the participating debentures but instead with its subsequent contribution, through surrender to Lakeside." There is no doubt that the surrender of a debt for cancellation can constitute a gift or contribution. See Helvering v. American Dental Co., 318 U.S. 322 (1943); Capitol Coal Corporation, 26 T.C. 1183 (1956), affd. 250 F. 2d 361 (C.A. 2, 1957); Nelson Story III, 38 T.C. 936 (1962). But it must be a valid, bona fide, enforceable debt before it can be considered*159 the subject matter of a gift or contribution. The courts have long held that a bona fide debt exists only when it is based on an actual debtor-creditor relationship and that such a relationship exists only when there is an unconditional obligation on the part of the debtor to pay the creditor, Zimmerman v. United States, 318 F. 2d 611 (C.A.9, 1963); W. S. Gilman, 18 B.T.A. 1277 (1930), affd. 53 F. 2d 47 (C.A.8, 1931), and Bercaw v. Commissioner, 165 F. 2d 521 (C.A.4, 1948), affirming a Memorandum Opinion of this Court. It requires nothing more than a cursory reading of the *140 debenture to see that it contains no such unconditional obligation to pay. The certificates entitled "Non-Negotiable Participation Debenture" are excellent examples of nondebentures. The printed certificates are impressive looking. They are loaded with words of obligation with, however, concomitant words of limitation and restriction that strip the documents of all value as certificates of any indebtedness. The surrender of such worthless pieces of paper for cancellation *160 was a meaningless gesture on the part of petitioners. They acquired no enforceable rights by virtue of the certificates being issued to them and they gave up no enforceable rights when they gave them back to the hospital. It is enough to say the so-called debentures do not evidence a debt and their staff assessments are not converted into charitable deductions by the surrender of such worthless documents. Decisions will be entered for the respondent. Footnotes 1. Cases of the following petitioners are consolidated herewith: Charles G. Stephens and Jennie Stephens, docket No. 5897-65; William W. Thompson and Lucille Thompson, docket No. 393-67.↩ 2. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩ 3. Later modified to require not less than $ 200,000.↩