Bekins v. Commissioner

KATHERINE BEKINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bekins v. Commissioner Docket No. 24522. United States Board of Tax Appeals 20 B.T.A. 809; 1930 BTA LEXIS 2029; September 15, 1930, Promulgated *2029 Basis for reporting interest received on certain notes determined. Ewell D. Moore, Esq., for the petitioner. J. Arthur Adams, Esq., for the respondent. SEAWELL *809 This proceeding involves deficiencies in income tax as determined by the Commissioner for 1921, 1922, and 1923 in the respective amounts of $1,996.13, $2,180.86, and $1,180.06, and the one question in controversy is how certain interest should be accounted for in her return. FINDINGS OF FACT. On and prior to August 30, 1918, petitioner and her husband, Martin Bekins, were the owners of a certain business then being carried on by them. The real estate connected with such business was owned by the petitioner. On August 30, 1918, petitioner and her husband sold the business, including the interest of both the petitioner and her husband, for $1,100,000, such consideration being in the form of notes bearing interest and due annually in the amount of $41,000, except as to the last note, which made up a difference of some smaller amount than $41,000. The following stipulation was entered into between the parties as to the ownership of the notes and the accounting for profit*2030 included in the same: It was stipulated by counsel for petitioner and Commissioner that Martin Bekins has returned as profit on each installment of $41,000 the sum of $1,137, *810 and that K. Bekins' profit on each installment note of $41,000 has been returned as $8,356. Further stipulated that of the total property sold by Martin Bekins and Katherine Bekins during the year 1918, 80.73 per cent was determined by the examining revenue agent and by the Commissioner to be the separate property of Katherine Bekins, and 19.27 per cent was determined by the examining agent and by the Commissioner to be the separate property of Martin Bekins. That of the $41,000 principal received each year from the sale of said property, the percentages named above belonged to each, or, to Martin Bekins $7,888, and to Katherine Bekins $33,112; and that from said principal amount the profit to Martin Bekins was returned by Martin Bekins at $1,137, and from the amount received by Katherine Bekins the profit returned was $8,356, which determination of profit accruing to each from said principal is now not disputed in this appeal and has never been objected to by either Martin Bekins or Katherine*2031 Bekins. It was further stipulated by and between the attorneys for the respective parties that the examining revenue agent and the Commissioner have determined that the interest paid on the unpaid notes belonged to Mrs. Katherine Bekins and to Martin Bekins in the same proportion that the principal of said notes belonged, and in the same proportion that each has reported the profits from said notes, and that the sole issue involved in this appeal is whether or not the interest should be reported on the basis determined by the Commissioner or upon a basis of one-half to Martin Bekins and one-half to Mrs. Bekins. OPINION. SEAWELL: Under the stipulated facts, there seems no question as to the ownership of the notes which were received in the sale of certain property and as to how the profit included therein should be accounted for in the separate returns of the petitioner and her husband. That is, as we understand the situation, it is not questioned that 80.73 per cent of each of the notes was the separate property of the petitioner and 19.27 per cent thereof the separate property of her husband, and that the petitioner and her husband each properly reported profit included*2032 in the notes, as the notes were paid, on the basis of the foregoing percentages. Not only, however, was there profit to be accounted for in the payment of the notes, but also interest was paid thereon and the petitioner contends that she and her husband should each report one-half of this interest in their respective separate returns. Since the separate properties of the petitioner and her husband produced the profit as well as the interest, we fail to see why a different rule should be applied in reporting the profit included in these notes than in accounting for the interest therefrom. The same reasoning that would lead to the conclusion that the profit constituted separate income to the petitioner and her husband in proportion to their ownership in the notes and was in no sense community property would require a like *811 conclusion with respect to the interest. In fact, we can here well apply the metaphor of Justice Holmes in , and attribute the fruit to the tree on which it grew. The petitioner, however, would avoid this result by seeking to show an understanding between her and her husband through which, by means of*2033 a transfer of certain securities from the one to the other, one-half of the interest was to belong to each of them when received. While the evidence is unsatisfactory both as to what was transferred and as to the agreement effected thereby, at best it would seem to amount to nothing more than a contract for the future assignment of income which would not alter the status, for tax purposes, of the person to whom the income belonged in the first instance. On the whole, we are satisfied that the action of the Commissioner was correct in including the interest from the notes as income in the return of the petitioner on the same basis that her ownership in the notes is conceded to exist. Cf. ;; ; ; ; and . Judgment will be entered for the respondent.