Couchman v. Commissioner

WILLIAM VENNING COUCHMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Couchman v. Commissioner Docket Nos. 67729, 70957. United States Board of Tax Appeals 30 B.T.A. 118; 1934 BTA LEXIS 1364; March 20, 1934, Promulgated *1364 Petitioner borrowed money from his father's estate with the consent of his brother, who imposed a condition that he share in any profit from the ownership of the stock exchange seat which petitioner bought with the borrowed money. When the value of the seat increased substantially petitioner acknowledged in writing his indebtedness to the brother in an amount equal to one half the increase in the value of the seat. Petitioner thereafter paid interest on the indebtedness to his brother and curtailed the principal. Held, the interest so paid is deductible. Theodore B. Benson, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. ARUNDELL *118 The respondent has determined deficiencies for the calendar years 1929 and 1930 in the respective amounts of $4,069.51 and $1,880.99. The dispute between the parties arises from the disallowance of certain alleged interest deductions in the respective years on indebtedness to petitioner's brother, and the payment to his mother of $6,000 a year, incident to borrowings from his father's estate. FINDINGS OF FACT. Petitioner and his brother Carl are remaindermen under the will of their*1365 father, the income for life going to their mother. Petitioner in May 1926 was desirous of purchasing a seat on the New York Stock Exchange, and at the time was without sufficient funds to do so. He discussed the matter with his mother and brother and received their permission to sell sufficient securities belonging to his father's estate to raise the necessary funds to make the purchase. This permission was obtained on the condition imposed by petitioner's brother Carl that any profit which would accrue from the ownership of the seat should be divided equally between the two brothers. Carl insisted that this be done, as he claimed that one half of the capital which was being used to purchase the seat was *119 really his by reason of being one of the two remaindermen of his father's estate. The agreement between the parties at this time was oral, but pursuant to the agreement petitioner borrowed funds from the estate and purchased a seat on the exchange. Thereafter the agreement was reduced to writing, on January 13, 1928, and this agreement was further modified by written agreement of January 1, 1929, signed by all the interested parties. In the latter agreement petitioner*1366 acknowledged his indebtedness to the estate in the sum of $205,342.57, on which he agreed to pay interest at the rate of 6 percent per annum. The due date of the principal was fixed as January 1, 1939, or sooner, under certain circumstances net here important. Petitioner further acknowledged in the agreement of January 1, 1929, his indebtedness to his brother Carl in the sum of $208,000, with interest thereon at the rate of 6 percent per annum, and the payment of the principal of the debt was fixed at January 1, 1934, or upon the sale of the stock exchange seat owned by petitioner, or upon the death of petitioner, whichever was sooner. At the time of petitioner's purchase of the seat on the exchange there was no idea that the value of seats would increase to the extent that they did, but at January 1, 1929, the price at which they were sold was so high that it became desirable that petitioner's contingent liability to his brother Carl to pay him one half of the profit on the sale should be reduced to some definite figure. It was finally agreed between petitioner and his brother that for the purpose of fixing the amount of the profit on the stock exchange seat without actually*1367 selling the seat, which petitioner did not want to do as he had built up a business as a broker, the last price of a seat should be accepted, which price was $575,000. By taking the cost price of petitioner's seat of approximately $159,000, a profit was shown of $416,000, and one half of this amount so arrived at, or $208,000, was acknowledged by petitioner as due to his brother Carl and is the sum stated as due and owing in the agreement between the parties dated January 1, 1929. It was further provided in that agreement that if, when petitioner had paid the $208,000, the last sale of a seat was for more than $600,000, petitioner would become indebted to Carl in an additional amount equal to 10 percent of the amount by which such sale price exceeded $600,000. In October 1930 petitioner and his mother and brother entered into a written agreement canceling that of January 1, 1929, but restating petitioner's liability to the estate and to his brother in the same amount and payable at the same times as the prior agreement. The differences between the two agreements relate to matters not involved here. *120 During the taxable years 1929 and 1930 petitioner paid to his brother*1368 Carl by way of interest $9,149.10 and $7,266.67, respectively. Petitioner has also paid Carl $128,000 on the principal sum due. He also paid interest on the money borrowed from the estate, the deductibility of which is not in dispute, and $6,000 per year to his mother. OPINION. ARUNDELL: As we understand respondent's position in this matter, it is that petitioner and his brother had a joint interest in whatever profit was to be realized on the sale of petitioner's seat on the New York Stock Exchange, and that until the seat was actually sold at a profit Carl had no claim on petitioner and there was no indebtedness due him by petitioner. Respondent cites as authority for his position various cases which hold that interest on a promise to make a gift is not deductible. ; . This does not appear to us to be the situation. There came a time between the two brothers when it was desirable to reach a more definite agreement than they had. Petitioner did not want to sell his seat on the exchange, around which he had built a substantial business. He and his brother wanted to know, *1369 however, how they stood, and to that end it was agreed between them that petitioner was definitely indebted to the extent of $208,000, and the written contract of January 1, 1929, definitely acknowledged that this sum was due Carl, which sum was due at January 1, 1934, with interest at the rate of 6 percent per annum. Petitioner had been able to obtain the funds with which to purchase the stock exchange seat only with the consent of his brother Carl, who imposed the condition of the profit-sharing arrangement. When the time came that petitioner wanted to have his liability more definitely fixed than under the arrangement theretofore existing, seat prices were on the way up and Carl was in a position where, as far as events could then be foreseen, he would receive substantially more than $208,000 if he insisted on standing on the original agreement. Had he done so, petitioner would have been unable to determine the amount of his liability at January 1, 1929, when it became desirable for petitioner to have it more definitely fixed. The agreement whereby Carl was to have 10 percent of the amount by which the last sale exceeded $600,000 was thus inserted as a consideration for his*1370 waiving claim to a further share on a 50-50 basis. The original loan and the waiver of claim to additional profits were adequate consideration for petitioner's agreement to pay $208,000. The fact that interest has been regularly paid and that the principal of the indebtedness has been substantially curtailed indicates only too clearly *121 that the agreement was genuine and existing. There is nothing in the record that we can find that would warrant the disallowance of the deduction as interest on an indebtedness. On this point the respondent is reversed. No evidence was offered on the deductibility of the $6,000 paid by petitioner to his mother, and on the record we find no reason for disturbing the respondent's action in disallowing the deduction. Decision will be entered under Rule 50.