Hearn v. Commissioner

J. L. HEARN, AGENT, MRS. R. A. HEARN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hearn v. Commissioner Docket No. 19818. United States Board of Tax Appeals 15 B.T.A. 1101; 1929 BTA LEXIS 2730; March 26, 1929, Promulgated *2730 Held, that the alleged parol assignment by this taxpayer, now deceased, of income to arise in the future has not been proved, and does not relieve her estate from the liability for the tax thereon when the income was received. G. Drummond Hunt, Esq., for the petitioner. P. M. Clark, Esq., for the respondent. LOVE *1101 This proceeding is from a determination of the Commissioner of a deficiency of $5,346.69 in income taxes for the calendar year 1922. There is no substantial disagreement as to the material facts alleged by the petitioner except that the respondent denies that he has erred in the proposed deficiency assessment. FINDINGS OF FACT. The taxpayer was Mrs. R. A. Hearn of Kosse, Tex., for whom J. L. Hearn was agent. Mrs. Hearn died intestate on December 1, 1924, leaving her five children, J. L. Hearn, R. L. Hearn, E. F. Hearn, H. E. Heard, Mrs. L. A. McCallum, and a grandson, R. A. Markham, as her only heirs at law, and for whom J. L. Hearn is agent and attorney in fact. There has been no administration upon the estate of the said Mrs. R. A. Hearn, deceased. October 21, 1908, the will of R. A. Hearn, deceased, was filed*2731 for probate in Limestone County, Texas, and afterward duly admitted to probate. By the terms of the said will all of the property of R. A. Hearn was devised and bequeathed to his wife, Mary V. *1102 Hearn, referred to herein as Mrs. R. A. Hearn. Included in the property belonging to R. A. Hearn at the time of his death was an undivided one-half interest in a certain tract of land situate near Kosse, Tex., which said land was the community property of R. A. Hearn and Mrs. R. A. Hearn. The interest of R. A. Hearn in the land was a part of the property devised to Mrs. Hearn, and after his will was probated she became the owner in fee simple of the land. August 18, 1922, oil was being produced from a well in the vicinity of the said land, so that there was created by the discovery of the well a speculative value in the oil, gas and minerals in and under the land. Two days later a family meeting was held, those present being Mrs. Hearn, her five children, and her grandson. At this meeting she stated her desire to deed one-half of the land to these children and grandchild jointly and also a one-half undivided joint interest in all of the rents and revenues to be derived*2732 from said land, including any money that might be received from mineral leases or from royalties; the money so received to be divided one-half to her and the remaining one-half to be divided in six equal portions and so distributed among her five children and her grandchild. On the advice of her sons, J. L. Hearn and R. L. Hearn, and perhaps others of her children, no deed was executed, for the alleged reason, as testified by J. L. Hearn, that such a deed might have "the effect of delaying any sale of these oil leases or royalties which we might have a chance to sell. If she had done what she wanted to, instead of having to get one signature to a transfer or sale we would have had to have seven, which would take considerable time, as I found in my previous experience in the Mexia field. Time is very valuable in making sales in oil leases. I recommended to her that she would not do this." The witness testified that his mother then said: "All right, but I do want to have an understanding; I want to make a division at this time of one-half of the rents and revenues that I might derive from this property." This testimony was corroborated in part by that of the witness R. L. Hearn, *2733 and both were, over the objections of counsel for the respondent, admitted upon the assumption, later shown to be the fact, that so far as these alleged assignments were concerned there was no instrument or writing at any time. Within the next two days, that is to say, by August 22, 1922, J. L. Hearn, acting as agent for his mother, had negotiated escrow agreements with two other interests, which agreements, executed by "Mrs. R. A. Hearn" in person, were placed in the custody of the First State Bank of Kosse, Tex., as escrow agent. The total cash payments or bonuses provided for in these escrow agreements amounted *1103 to $60,500; but, after the resurveys were completed, certain adjustments of acreage made, and necessary expenses paid, the net amount received for the two oil and gas leases, also executed by "Mrs. R. A. Hearn" as above, and which replaced the escrow agreements, was $52,950.50, which was placed in the First State Bank of Kosse, Tex., on deposit to the credit of "J. L. Hearn, Special Account." A few days later, Mr. Hearn transferred this credit to the Farmers State Bank of Mexia, Tex., of which institution he was assistant cashier, to an account maintained*2734 there in the same name ("J. L. Hearn, Special Account") and informed his mother that he had completed the transactions, and was ready to make a distribution among her children in accordance with her wishes. Thereupon, in addition to the one-half of the prospective income from the property which she had expressed a desire to give her children at the family meeting of August 20, 1922, Mrs. Hearn gave to her five children and her grandson, all the rest that had been received as bonuses from the sale of these leases, save and except $10,000 which she retained for herself. The witness testified that he made this division by means of two checks drawn against his special account in the Farmers State Bank of Mexia, Tex.; one of such checks to his own order for $45,155 and the other for $477, being payable to his mother, Mrs. R. A. Hearn. The proceeds of the check for $45,155 were distributed by being credited to sundry accounts in the Farmers State Bank, as follows: Mrs. R. A. Hearn $10,000 P. L. Hearn 7,100 E. F. Hearn 7,100 R. A. Markham 7,100 H. E. Hearn 6,850 Mrs. L. A. McCallum 7,005 45,155 The $7,100 received by the witness, J. L. Hearn, remained*2735 in his "Special Account." The $447 check is explained by the witness as follows: "The total amount to be distributed was $53,077. Giving $7,100 to each of the six heirs, and $10,000 to her (his mother) left $477 in odd money, and so I just gave her a check for the odd amount, which bears her endorsement. That closed the transaction." The check for $41,555, the checks above for $477 and $7,100 retained by J. L. Hearn in his special account, total $52,732, which is $345 short of the total amount to be distributed, according to the witness, of $53,077; but it is probable that this difference is accounted for by advances of $250 made to H. E. Hearn and $95 made to Mrs. L. A. McCallum, who in the final distribution received those amounts less than the $7,100 received by each of the other children. Assuming *1104 that to be the fact, there still remains an unaccounted for difference of $126.50 between the amount of $53,077 actually distributed, as above, and the amount of $52,950.50 asserted in the petitioner as having been determined by the respondent to have been part of the gross income of Mrs. R. A. Hearn in 1922; but the unreconciled discrepancy is small and not material*2736 to the determination of the issue. OPINION. LOVE: Upon the facts, we must decide the issue in favor of the respondent. It is admitted that for reasons that seemed expedient to those concerned, there was no transfer or assignment of the land itself or the oil and gas leases that were executed thereon. The title to these was in Mrs. R. A. Hearn and, for anything that appears in the record, so remained to the day of her death. The contention advanced is that at the family meeting of August 20, 1922, Mrs. Hearn then and there made a parol assignment of one-half of the rents and revenues that might be derived from this property. We are of the opinion that the evidence is not sufficiently strong to support the contention that such a parol assignment was actually made. According to the witness J. L. Hearn, his mother used the words: "I want to make * * * at this time" such a division. He is partly corroborated by his brother, Robert L. Hearn, who testified: "During this meeting my mother stated she wanted to deed us our father's undivided one-half interest in this piece of land. I objected on the ground I stated that we would never have an opportunity of getting anything*2737 out of it. * * * The others agreed with me. Then she said: 'If we do that, I would like to give a one-half interest of any rents or revenues that might be derived from the sale of this land, either rents, royalties or leases that might come in.'" The words "at this time" do not appear in the testimony of Robert L. Hearn, and except these two men, none of the others who were present at that meeting were called to the stand. The leasing of the oil and gas rights almost immediately followed the meeting and the distribution of the bonuses received on such leases was even more liberal and generaous than that which Mrs. Hearn proposed at the time of the meeting, but, even so, admitting the full strength of the petitioner's contentions on this point, it is far from certain that Mrs. Hearn understood that she was then making the gift rather than expressing her intention of making it as soon as the proceeds of the leases came into her possession. From the record it appears that such proceeds were not only in the future, but uncertain. She had no definite rents or revenues to give away on August 20, 1922, and no right in praesenti to any income, and it was *1105 not before*2738 September 5 in one case, and September 9 in the other, that these proceeds or bonuses were realized and came into her possession, or that of her agent. The checks are not in evidence, so we do not know to whose order they were drawn. The words that Mrs. Hearn is quoted as using at the meeting - "I do want to have an understanding; I do want to make a division at this time," and "I would like to give a one-half interest of any rents or revenues that might be derived from the sale of this land," are not explicit enough, in our judgment, to prove that then and there she did make the gift, or attempted to make it, rather than that she was expressing her desire and purpose to make it. The words seem to us to import an intention and a purpose to be later fulfilled; an "understanding" that "the rents and revenues that might be derived from the sale of this land" shall be partitioned as and when received, in accordance with the division determined upon at the family gathering of August 20. To construe them as constituting an actual and absolute assignment as of that date would be, we think, to attach to them an implicit meaning which their explicit expression is far*2739 from warranting. The consideration of delay that might affect the negotiations, which is advanced as the reason preventing the outright deed of a one-half interest in the land itself or the leases thereon, has no weight in connection with the assignment of the profits from such land or leases; and we are of the opinion that if such a gift had irrevocably been intended by her as of the date of the meeting, common caution and prudence on the part of the prospective beneficiaries would have dictated the execution of some instrument or writing that would have placed such intention on her part forever beyond doubt or cavil. The well settled rule at common law seems to defeat the assignment or transfer of property not in existence and not in the actual or potential possession of the assignor at the time of the assignment, or the assignment of a possibility not founded on a right or coupled with an interest. But even a mere possibility, if coupled with an interest, is capable of being conveyed or assigned at common law. Thus, where the assignor has a present interest in that of which the thing assigned is the product, growth, or increase, he has a present vested right to such future*2740 product, growth, or increase when it shall come into existence, which right is assignable. In the instant case, however, it is admitted that there was no assignment in writing, and we do not find the evidence of sufficient strength to establish an assignment by parol, so that there is no necessity to inquire into the purpose and effect of those Texas statutes which might otherwise be applicable. This contention of the petitioner is denied. *1106 The petitioner contends further that when the money was turned over by the escrow agent to J. L. Hearn, there was then effective a trust in favor of the children, impressed upon one-half of the money, having been voluntarily created by the antecedent declarations, directions and acts of Mrs. R. A. Hearn, the owner of the land. We do not concur. The two escrow contracts were executed by Mrs. R. A. Hearn in person. When their terms had been complied with and the escrow agent released thereunder, one such release was signed "Mrs. R. A. Hearn, by J. L. Hearn," and the other "Mrs. R. A. Hearn, J. L. H." We do not know to whose order the check or checks were drawn by the escrow agent, the First State Bank of Kosse, Tex.; but it*2741 is in evidence that it or they were deposited to the credit of "J. L. Hearn, Special Account," and not to his account as trustee. If an explicit or implied trust had been created, Mr. Hearn could then have proceeded to divide the funds in accordance with the well understood terms and provisions of that trust, but he did not do that. Instead, he told his mother that he had completed the two transactions, that he had paid all necessary expenses, commissions, and so forth, and that he was ready to make a division according to her agreement with her children. The inference is so strong as hardly to be avoided that he went to his mother for instructions as to how the division should be made, and here the indefinite article italicized above is significant, not the division that already had been actually determined and agreed upon, but some division, the portions of which were then to be decided. And those portions were wholly different and much more generous than those in contemplation at the family meeting of August 20. At that time, according to the evidence, Mrs. Hearn was to retain for herself 50 per cent of the net amount received; in the actual distribution she did retain*2742 less than 19 per cent. Under such circumstances, we can not concede that any specific or implied trust in favor of the children was impressed upon one-half of the net proceeds of these oil and gas leases at the time of and coincident with the receipt of this money from the escrow agent. J. L. Hearn undoubtedly held the money in trust for his mother and it is our opinion that she could then have lawfully demanded all of it, and that no trust in favor of her children and grandson arose or was created until "a few days before the distribution of this amount was made," when she gave to her agent specific instructions as to its final apportionment and disposition. This contention, also, of the petitioner is denied, and the third, unsupported, falls of its own weight. The Board has, in a number of cases, held in effect that income to arise in the future is not assignable in such a way as to avoid taxation to the assigning taxpayer. See ; *1107 ; *2743 ; and . These cases all differ in certain aspects, but we have nothing before us which we recognize as demanding a different conclusion here. Judgment will be entered for the respondent.