Malernee v. Commissioner

D. B. MALERNEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Malernee v. Commissioner Docket No. 63553. United States Board of Tax Appeals 31 B.T.A. 662; 1934 BTA LEXIS 1053; November 21, 1934, Promulgated *1053 Held, that petitioner made a valid and bona fide gift to his wife in 1919 of certain corporate stock sold in 1920, and that the evidence is insufficient to establish that the transfer was a mere subterfuge whereby petitioner sought to evade tax. Phil D. Morelock, Esq., for the petitioner. Willis R. Lansford, Esq., for the respondent. TRAMMELL *662 This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $4,572.23, and a penalty of $1,143.06, or a total of $5,715.29. The penalty is asserted by respondent on account of the failure of the petitioner to file a return for the taxable year. The issues are (1) whether petitioner made a valid and bona fide gift to his wife in 1919 of certain shares of corporate stock sold in 1920, and (2) whether or not he is subject to the delinquency penalty. FINDINGS OF FACT. Petitioner is an individual, residing at Oklahoma City, Oklahoma. In 1910 he went to Walters, Oklahoma, and engaged in the farm loan business, with offices in the Walters National Bank. In 1916 petitioner became interested in the oil business, and with three associates acquired*1054 a number of oil leases. Petitioner and his associates then organized the Southard Oil & Gas Co. for the purpose of drilling the leases, and exchanged their interests in the leases for the stock of the corporation, petitioner receiving 200 shares of stock for his interest. Later he acquired an additional 26 1/2 shares of the stock by purchase, so that in 1919 his holdings totaled 226 1/2 shares. Petitioner and his wife have been married for more than 39 years. In 1905 she inherited money from her grandfather, which money petitioner used when they went to Oklahoma. In the spring of 1918 an offer was made to one Pitts of Wichita Falls, Texas, to acquire the stock and assets of the Southard Oil & Gas Co. for $2,500,000. Pitts had his engineers investigate the property, and about July or August 1918 he made arrangements with the Chase National Bank of New York to obtain the money with which to consummate the deal. Engineers for the Chase National Bank investigated the properties and approved the loan. However, while in New York Pitts became very ill, and the deal was never consummated. During the negotiations with Pitts, petitioner discussed with his wife his intention to make*1055 a gift to her of *663 a part of the stock which he held in the Southard Oil & Gas Co. Petitioner realized he was engaged in a hazardous business, and that if he retained all the stock and later sold it he might lose the proceeds in unsuccessful drilling for oil. He, therefore, expressed his intention of transferring part of the stock to his wife for her protection and to provide for the education of their children. The matter of taxes was also considered, and petitioner was advised that a gift of the stock to his wife would reduce his tax liability. During these discussions petitioner had in mind the ultimate sale of the stock; in fact, since its acquisition, he had been more or less in the market to sell. In January 1919 petitioner took his certificates for 226 1/2 shares to the secretary of the Southard Oil & Gas Co. and requested him to issue 125 shares to his wife and 101 1/2 shares back to himself. On January 22, 1919, stock certificates for 125 shares were issued to petitioner's wife, one certificate being for 100 shares and one certificate for 25 shares. Petitioner placed his wife's certificates in his safe in an envelope containing other papers belonging to her. *1056 About June of 1919 Martin W. Littleton and his partner, Weeks, were given an option to purchase the stock and assets of the Southard Oil & Gas Co. for $2,000,000, but although the option was extended, they were unable to raise the money and forfeited the option. Early in 1920 the stock and assets of the Southard Oil & Gas Co. were sold to the National Oil Co. of Kansas City. Petitioner's wife sold 125 shares of stock and petitioner sold 101 1/2 shares. Petitioner received the money from the sale of his stock and deposited it to his credit in the Walters National Bank. Petitioner's wife received the money from the sale of her stock and deposited it to the credit of her own account in the Walters National Bank. The bank accounts of petitioner and his wife were not joint accounts but individual accounts, and neither had authority to draw on the account of the other. Subsequently petitioner lost the proceeds from the sale of his stock in drilling dry holes. His wife loaned $20,000 of her money to a son-in-law, gave petitioner a diamond ring costing over $3,000, and in the latter part of 1920 or early part of 1921 loaned petitioner a portion of her funds. On advice of counsel, *1057 petitioner did not file an individual tax return for the year 1920. OPINION. TRAMMELL: The principal issue in this proceeding is whether or not petitioner made a bona fide gift to his wife in 1919 of 125 shares of stock in the Southard Oil & Gas Co. Prior to the alleged gift *664 petitioner held 226 1/2 shares, and thereafter retained 101 1/2 shares. All the stock was sold in 1920. Respondent determined that a profit of $121,465.77 was realized from the sale of said stock, and included the entire amount in petitioner's income in computing the deficiency in controversy. The issue presents a question of law, the parties being in substantial agreement as to the facts. The essential elements of a valid gift are stated by the court in , as follows: There must be a donor competent to make the gift, a clear and unmistakable intention on his part to make it, a donee capable of taking the gift, a conveyance, assignment, or transfer sufficient to vest the legal title in the donee, without power of revocation at the will of the donor, and a relinquishment of domininon and control of the subject matter of the gift by*1058 delivery to the donee [citing authorities]. There is no suggestion in the present record that petitioner was not competent to make, and his wife to take, the alleged gift, nor can there be any serious question as to the sufficiency of the transfer "to vest the legal title in the donee, without power of revocation at the will of the donor." The stock was transferred on the books of the corporation from petitioner to his wife. This constituted a sufficient delivery, and vested legal title in the donee. In ; certiorari denied, , in dealing with similar facts the court said: Transfer upon the books of the corporation in itself constitutes a delivery. . The transferee then becomes the legal owner. * * * The stock was not endorsed and re-delivered to her husband, and could not thereafter be transferred, or the dominion and ownership of the petitioner thereafter be regained, except through the independent and voluntary act of his wife. Respondent does not question the formalities of the gift, but attacks the bona fides of the transaction. He contends*1059 substantially that petitioner never intended to give the stock to his wife but only the proceeds of the sale, and hence the profit derived is taxable to petitioner. This contention, we think, is not supported by the evidence. At the time of the alleged gift in January 1919 the negotiations had with Pitts for the sale of the stock approximately a year previously had fallen through, and there was then no definite prospect of sale. It was some six months later that the option to purchase was given to Littleton and his partner, Weeks, but this sale also failed, the option being forfeited. In these circumstances, when no contract of sale had been entered into, and at a time when there was no immediate prospect of sale, it is difficult to understand how petitioner could have entertained an intention to give his wife a part *665 of the proceeds of a sale which was not consummated until more than a year later. However, disregarding petitioner's testimony as to his intention, the best evidence of what he intended to do is what he actually did. The undisputed fact is that he caused the stock to be transferred to his wife on the books of the corporation, without power of revocation. *1060 The stock certificates were not endorsed by his wife and redelivered to the petitioner, and it seems clear that the stock could not thereafter be transferred or the dominion and ownership of the petitioner be regained, except through the independent and voluntary act of his wife. But the respondent argues that the facts justify the conclusion that the petitioner never actually intended to relinquish dominion and control over the stock, "and that the entire deal was engineered for the primary purpose of reducing tax liability." Respondent points to the fact that petitioner's wife took no part in the transaction; that there is no evidence that she used any of the money placed in the bank to her credit, or received any benefit from the alleged gift, and that ultimately his wife contributed to the petitioner most of the money received for the stock. We are not impressed by this argument. The fact that the donee subsequently loaned a portion of the money to her husband, after he had got into financial difficulties as a result of losing his own money in drilling dry holes, is not sufficient, in our opinion, to invalidate the gift of the stock made more than a year previously. Nor*1061 is the fact important that the petitioner was moved to make the gift partly because it would reduce his tax liability. The motive which actuated petitioner is immaterial, if he intended to and did in good faith make a valid gift. ; ; . In the absence of fraud, a gift is not invalid because it results in the reduction of tax liability. ; ; ; ; . Again quoting from : There was nothing unlawful, or even mildly unethical, in the motive of petitioner, to avoid some portion of the burden of taxation. There is nothing illegal in a gift of shares of stock by a husband to his wife. In order to sustain respondent's position it would be necessary for us to find from the evidence that the transfer of the stock was a mere subterfuge*1062 whereby petitioner sought to evade tax. This, we think, the proof is wholly insufficient to establish. Respondent's action on this issue is disapproved. *666 The elimination from petitioner's income of that portion of the profit ascribable to the 125 shares of stock which he gave to his wife in 1919 leaves petitioner without net taxable income for 1920, as computed by respondent in the deficiency letter. There is therefore no basis for the computation of a delinquency penalty. Judgment will be entered for the petitioner.