Fargason v. Commissioner

J. T. FARGASON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Fargason v. Commissioner Docket No. 26272. United States Board of Tax Appeals 21 B.T.A. 1032; 1930 BTA LEXIS 1752; December 31, 1930, Promulgated *1752 1. Petitioner's father died prior to March 1, 1913, leaving a will in which he gave, bequeathed and devised all his property, both real and personal to petitioner and his sister. Held that the real estate owned by petitioner's father at the time of his death passed immediately to petitioner and his sister as tenants in common and was at no time owned by the estate of petitioner's father or the executors thereof. 2. Upon the evidence, held, petitioner and his sister made a gift with a condition subsequent attached to a donee of the class specified in section 214(a)(11) of the Revenue Act of 1921. 3. A gift otherwise absolute in form is not invalidated by reason of a condition subsequent attached which condition may or may not arise. 4. The basis for the calculation of the amount of the gift where the gift is other than money is the fair market value of the property given at the date of gift. W. D. Kyser, Esq., and Homer K. Jones, C.P.A., for the petitioner. Brooks Fullerton, Esq., for the respondent. LOVE *1032 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1922, in the*1753 amount of $5,821.88. Only a portion of the deficiency is in controversy. The petition alleges that the respondent erred in refusing to allow, under section 214(a)(11) of the Revenue Act of 1921, the deduction of an alleged contribution by the petitioner and his sister during the year 1922, of 14.68 acres of land to the Southwestern Presbyterian University. FINDINGS OF FACT. Petitioner is an individual residing at Memphis, Tenn. He and his sister, Mary Fargason Falls, were the only children of John T. Fargason, Sr. On January 15, 1904, John T. Fargason, Sr., made and published a codicil to his last will and testament in which he gave and bequeathed all his estate, real and personal and wherever situated, to his two children, share and share alike. The will, together with the codicil, was admitted to probate and ordered recorded on January 14, 1909, and was recorded on that date. The will contained the following provision: My estate may be kept together as a whole as long as the beneficiaries all desire it, but it may be divided at any time that one of my beneficiaries may wish it done. *1033 During the taxable year 1922, the estate of petitioner's father*1754 was still in the process of administration. The Southwestern University (also called and referred to as "Southwestern," "The Southwestern Presbyterian University," "Mississippi Valley College," and "Memphis College") was a corporation organized and operated exclusively for educational purposes, with no part of the net earnings thereof inuring to the benefit of any private stockholder or individual. It was formerly located at Clarksville, Tenn. About 1919 or 1920 it was decided to remove the university from Clarksville to Memphis. Early in 1921, a campaign was started in Memphis to raise $1,500,000 for this purpose. Many sites for the university were offered and considered, but the university decided that they wanted a 100-acre tract of land in the city of Memphis on North Parkway, which 100 acres included 74.68 acres then owned by petitioner and his sister under the will of their father. This 100-acre tract could not be purchased for less than $250,000, and the trustees of the university could raise only $150,000 with which to purchase it. On May 23, 1921, three separate contracts were entered into between the trustees for the university as party of the second part in*1755 each contract and (1) W. A. Hein, owner of 10 acres on the east side of the Fargason tract of 74.68 acres, (2) petitioner and his sister, and (3) the Memphis Investment Co., owner of 15.32 acres on the west side of the said Fargason tract. Hein and the Memphis Investment Co. agreed to convey their 10 and 15.32 acres, respectively, to the university for a consideration of $1 each. Petitioner and his sister agreed to sell 60 acres of the 74.68 acres to the university for $150,000, possession to be given when deed was delivered. With respect to the remaining 14.68 acres, the contract provided: And the said first party will give to said Mississippi Valley College the balance of said tract, namely 14.68 acres, more or less in a spot to be located by the officers of said College for the perpetual use of the College as an athletic field, and this tract shall be called and always known as "Fargason Field." In the event that the Mississippi Valley College should ever wish to dispose of this gift of 14.68 acres, or to divert it to other purposes than to that of an athletic field, or to allow it to be called by any name except Fargason Field, they are to pay to the heirs of J. T. Fargason*1756 deceased, in whose memory this field is named, the sum of Thirty Thousand ($30,000.00) Dollars in cash. This covenant shall be perpetual. Pursuant to the contract of May 23, 1921, petitioner and his sister both individually and as executors of the last will and testament of John T. Fargason, deceased, conveyed the whole 74.68 acres of land to the university. The deed contained the following provision with respect to the 14.68 acres in question. Within three (3) years after said "Memphis College" shall have been incorporated, or shall have been qualified to hold real estate in Tennessee, the *1034 officers of said institution shall select and designate in writing duly acknowledged and recorded not to exceed 14.68 acres out of said 74.68 acre tract, for the perpetual use of said "Memphis College" as an athletic field, and this tract shall be called and always known as "Fargason Field"; and in the event said "Memphis College" should ever wish to dispose of this gift of 14.68 acres, or to divert it to other purposes than to that of an athletic field, or to allow it to be called by any other name than "Fargason Field" said "Memphis College" its successors, or assigns, shall*1757 pay to the heirs of John T. Fargason, deceased, in whose memory this field is named, - the sum of Thirty Thousand Dollars ($30,000.00) in cash, and should said 14.68 acre tract be at any time diverted to any use other than set out, and the consideration of Thirty Thousand Dollars ($30,000.00) not paid, the title to said 14.68 acres shall immediately revert to said heirs of John T. Fargason, deceased. It was also necessary for certain streets to be opened up next to the university on the west, and, therefore, the Memphis Investment Co. agreed that they would donate an additional 15 acres for these streets, provided petitioner and his sister, out of the purchase money for the 60 acres, would pay the Memphis Investment Co. the sum of $33,333.33, which was done. This left petitioner and his sister as receiving for the 60 acres the amount of $116,666.67. It was the understanding of all the parties interested that petitioner and his sister gave the 14.68 acres to the university. The fair market value of the 14.68 acres of land on March 1, 1913, was $40,370, or $2,750 per acre. The fair market value of the 14.68 acres of land on January 4, 1922, (date of conveyance) was $36,700, *1758 or $2,500 per acre. At the time of the hearing before this Board the said 14.68 acres were being used by the university as an athletic field, which was known as "Fargason Field." The respondent determined that the conveyance of the 14.68 acres to the university did not constitute a gift to the university, and, therefore, refused to allow petitioner any deduction from his gross income under section 214(a)(11) of the Revenue Act of 1921 on account of contributions or gifts made within the taxable year to or for the use of a corporation organized and operated exclusively for educational purposes. The net income of petitioner, as determined by the respondent before allowing any deduction for contributions or gifts, was $56,088.76. The respondent allowed petitioner a deduction of $175 on account of contributions or gifts other than the 14.68 acres of land which are in dispute. OPINION. LOVE: The question presented in this case is whether petitioner is entitled to any deduction from his gross income in 1922 under the provisions of section 214(a)(11) of the Revenue Act of 1921 on account of the conveyance to the university on January 4, 1922, *1035 of 14.68 acres of*1759 land, and, if so, the determination of the amount thereof. Section 214, supra, provides in part that in computing net income there shall be allowed as deductions: (11) Contributions or gifts made within the taxable year to or for the use of * * * any corporation * * * organized and operated exclusively for * * * educational purposes * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual * * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this paragraph. The same section provides further that: * * * Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary * * *. At the hearing, the respondent advanced four reasons for not allowing the deduction in question, namely, (1) that since the estate of John T. Fargason, Sr., had not been closed, this should be held to be a gift from the estate and as such could not be deducted from petitioner's income; (2) if the conveyance be held to be a gift by the executors, such*1760 gift would be void for the reason that the executors could not give away the corpus of the estate; (3) that a gift by the executors from the corpus of the estate, even though valid, is not deductible from the income of the estate, and hence not deductible from petitioner's income; and (4) that under any circumstances it should be held that no valid gift was made. The first three of the above reasons are based upon an erroneous premise, namely, that the real estate in question was owned prior to the date of conveyance on January 4, 1922, by the estate of John T. Fargason, Sr., deceased, or the executors thereof. Under the law of Tennessee, neither an administrator nor an executor acquires any right or title to the real estate of a decedent, except as it may be necessary to subject it to the payment of the debts of general creditors. ; Vance v. Fisher, 29 Tenn. (10 Humph.) 211. In the instant case the title to all the real estate owned by petitioner's father passed to petitioner and his sister, in fee simple, immediately upon the death of their father. See 40 Cyc. 1995 and cases cited. It follows, *1761 therefore, that if the conveyance on January 4, 1922, of the 14.68 acres in question amounted to a gift within the meaning of section 214(a)(11), supra, it was a gift from petitioner and his sister as tenants in common and not a gift from the estate of John T. Fargason, Sr., deceased, or the executors thereof. In the case of , we said: "A gift or contribution of land is completed by delivery of a deed therefor to the grantee, either actually or constructively." To the same effect see ; . *1036 The deed in the instant case, however, contained a "condition subsequent" which we have set out in full in our findings. The conditions specified were such that might never arise. It is the general rule of law that such conditions do not invalidate a gift otherwise absolute in form. See ; ; *1762 ; ; ; ; ; ; ; and ; . In , the heirs of a donor (Almira T. Metcalf) were seeking to recover possession of a tract of land for breach of condition contained in a deed of gift from the donor to the Brown University. The condition in the deed was as follows: Provided, however, and this deed is upon this express condition, that said Brown University and its successors shall forever hold said tract of land and devote the same exclusively to academic and scientific purposes, including the erection and maintenance on said premises of dwelling houses for the use of the professors, officers, and servants of said Brown University, if said University shall so desire, and to the establishment and maintenance thereon of a botanical garden, which shall bear the name of my late husband, Whiting Metcalf, and that*1763 upon the breach of this condition at any time hereafter by said Brown University or its successors this deed shall become null and void, and the estate hereby granted shall be forfeited and shall thereupon revert to, and be vested in, the grantor, her heirs and assigns. The Supreme Court of Rhode Island in sustaining the lower court to the effect that a valid gift existed and that no forfeiture had occurred said: We think the conclusion of Mr. Justice Rogers was correct. In addition to the facts found by him, it appears from the testimony of Mr. William Goddard that Mrs. Almira T. Metcalf entertained a sentiment for the place, as the home in which she had enjoyed many happy years, and for a long time had cherished a desire to convey it to Brown University. Her intent expressed in the deed is not merely to give to Brown University a tract of land to be devoted exclusively to academic and scientific purposes, and cause to be established and maintained a botanical garden thereon, but forever to preserve the land, and forever to perpetuate the name of her husband, Whiting Metcalf. Place and person, home and husband, were happily associated, and she desired to permanently continue*1764 the association of name and place. The desire for perpetuation of names furnishes the strongest of motives; it has caused the construction of pyramids, the erection of monuments and memorial buildings; and perhaps one of the most practical methods of accomplishing such result is by connecting a name with some charitable or educational object through a corporation devoted to the same, likely to endure because worthy of enduring. Under the circumstances, a forfeiture should not hastily be inferred. A forfeiture would defeat the very end the donor had in view. The land would no longer be preserved. The heir would take it subject to no condition or restriction, and at no distant date, in all probability, it would be divided into house lots, and sold to different persons, having no interest in the perpetuation of the name of Whiting Metcalf *1037 which would soon cease to be associated with the place. New trial denied, and judgment rendered, on the decision of Mr. Justice Rogers, for the defendant for costs. In , it appears, from the evidence, that the intestate some time before his death said: All I've got I have carried to Joe*1765 Cook's, and there is where I expect to stay until I die. And this horse I have given to Joe Cook on condition that, when I want to ride, he is my horse, and when I have no use for the horse, it's Joe Cook's and all that I have. The court there held that the reservation of the right to use was a condition subsequent, and did not invalidate the gift though made by parol. In , the donor delivered a note to another with no limitations or qualifications except that the donor "reserved the right to use such portion of the avails of the note as she might require during her lifetime." The Supreme Court of Vermont held the transfer to constitute "a valid gift" and said: "The condition annexed to the gift does not nullify it." In our opinion the conveyance of the 14.68 acres in the instant case was a valid gift notwithstanding the fact that there was attached thereto a condition subsequent which might or might never arise. The statute does not specify that only certain kinds of gifts are deductible. The only limitation found in the statute is as to the class of "donees" and in an amount not to exceed 15 per centum of the taxpayer's net*1766 income as computed without the benefit of that paragraph of the statute. We conclude, therefore, that a gift with a condition subsequent attached, such as is present in the instant case, comes within the statute, and, if made to a donee of the class prescribed, is deductible up to the 15 per cent limitation. The Southwestern University was a corporation organized and operated exclusively for educational purposes, no part of the net earnings of which inured to the benefit of any private stockholder or individual. It only remains for us to determine the amount of the deduction. The statute does not specify any basis for the calculation of the amount of the gift where the gift is other than money. We think, however, that the basis in such cases should be the fair market value of the property at the time of the gift. This view is in accord with the respondent's regulations on the subject as amended by Law Opinion No. 1118, published in Cumulative Bulletin II-2, at pages 148 to 151. We have found as a fact that the fair market value of the 14.68 acres of land on January 4, 1922, was $36,700, or at the rate of $2,500 per acre. The petitioner's one-half interest therein before*1767 the gift would amount to $18,350. If the gift in question had been an unconditional gift, the amount of $18,350 would be the amount of the *1038 deduction to be allowed on account of the gift, provided it and the amount of any other gifts, if any, did not exceed the 15 per cent limitation. But where, as in the instant case, a condition subsequent which may or may not arise attaches to the gift, we do not think that such a gift is worth as much as one without any condition attached. We do not think, however, that the objection just stated is applicable here from a practical standpoint, for the reason that the maximum amount allowable under the statute in the instant case is $8,238.31 (15 per cent of $56,088.76, less $175) and we are convinced, and so find, that petitioner's share of the gift with the condition subsequent attached was worth at least the amount of $8,238.31. The deficiency should be recomputed upon the basis of a net income of $47,675.45 instead of $55,913.76. Reviewed by the Board. Judgment will be entered under Rule 50.