Kay v. Commissioner

HILDA KAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Kay v. Commissioner Docket No. 102405. United States Board of Tax Appeals 45 B.T.A. 98; 1941 BTA LEXIS 1180; September 12, 1941, Promulgated *1180 X, recently a widower, offered to give petitioner, his niece, 300 shares of A.T. & T. Co. stock if she would come to his home to live with him and his family in Illinois. Petitioner accordingly gave up a position in New York paying a salary of $5,400 a year and went to her uncle's home in Illinois. The arrangement was not satisfactory and while petitioner was away on a short trip she was told by her uncle not to return. Her uncle having failed to turn over the stock to her, petitioner brought suit against him for breach of contract. In settlement of this suit petitioner received in the taxable year certain money and securities. Held, under the facts, these receipts constituted taxable income and not a gift. Mark Eisner, Esq., for the petitioner. F. S. Gettle, Esq., for the respondent. KERN *98 Respondent determined a deficiency in petitioner's income tax liability for the year 1935 in the amount of $4,168.85, and also a penalty of $1,042.21 for the same year by reason of petitioner's failure to file a return. Petitioner contests this determination. *99 The questions presented are (1) Whether the amount of $28,281.25 (consisting*1181 of $2,000 cash and the fair market value of 250 shares of American Telephone & Telegraph Co. stock), received by petitioner during the taxable year is taxable income, and (2) if any part of the $28,281.25 constitutes taxable income, whether the 25 percent penalty provided by section 291 of the Revenue Act of 1934 should be added to the tax by reason of petitioner's failure to file a return for 1935. FINDINGS OF FACT. The parties have stipulated all the facts in this proceeding and, in so far as deemed material, they are set forth below. The petitioner, Hilda Kay, is an individual residing in Miami, Florida. Petitioner was always known as Hilda Kleinschmidt until 1918, when she changed her name to Hilda Kay and held herself out thereafter under that name to her friends and acquaintances, with their acquiescence and recognition. The petitioner did not attempt to obtain a court order authorizing the change of name. Shortly after his wife's death in 1932, Edward E. Kleinschmidt, petitioner's uncle, suggested that she come to Highland Park, Illinois, and live there as a member of his household and family. Kleinschmidt wrote numerous letters to her in January 1933 relative*1182 to this matter. Material portions of those letters are as follows: As of January 9, 1933: As I said when you were here I will give you 300 shares of A.T. & T. stock if you will come to live with us permanently. If for any reason it does not work out and you decide to go on your own again in the next few years it will be entirely up to you as to whether or not you wish to return the shares, in other words, there will be no strings to the transaction whatsoever; your own conscience will be the only control. I want to give you this stock so you will have sufficient income to be independent and one of our little family and so that you will not have the feeling that you are being paid to take care of us. As of January 13, 1933: If I marry you shall not feel obligated to return the shares. If you marry and you think you ought to return the shares it will be all right providing I accept them otherwise it will be entirely up to you. I know about the gift tax and it would be worth while to do some thinking as to how it could be avoided. If you can figure out some way let me know. As of January 19, 1933: So far as I can see we need nothing in writing. I want to give you*1183 the shares so that you will have sufficient income to be independent (you know that these in normal times are worth at least $60,000) and that covers everything. When I have given you the shares my obligations are completed. You are coming to live with us and I hope you will stay a very long time and I know we will be very happy together. All of the children will have a substantial income of their own and they will pay for their personal expenses out of their own income. Of course, as long as they live with me they will do so *100 as my guests but as long as they have independent incomes and are of age I do not feel obligated to provide a home for them. When you come out I want to consider you in the same light as regards these things as I do my children. When you come out you will do so as part of our family and I want to think of it in no other way. I am providing an income for my children so that they will be financially independent and so that they will get to know what money means. I did the same with Virginia and it worked out very well. In February 1933 petitioner gave up the employment that she then had in New York City and moved with all her belonging to*1184 her uncle's home in Highland Park. At that time petitioner was 35 years of age and had been employed since 1924 by the Metropolitan Life Insurance Co. as assistant secretary to Frederick Ecker, the president of the company, at a salary of $5,400 a year and with good opportunities for advancement, since her immediate superior was near retirement age and was then receiving about $9,000 a year. The first American Telephone & Telegraph Co. dividend date after petitioner arrived at Highland Park was April 15, 1933. Shortly after that date, Kleinschmidt gave petitioner a check in an amount exactly equal to the amount of dividends due April 15, 1933, on 300 shares of American Telephone & Telegraph Co. stock. An amount equal to the dividends paid thereafter by the American Telephone & Telegraph Co. was paid to petitioner by check of Kleinschmidt shortly after receipt of such dividends by him. Except as hereinafter set forth, Kleinschmidt did not cause to be transferred to the name of petitioner the 300 shares of stock, although, on several different occasions during the petitioner's stay in her uncle's home she requested that such transfer be made. Under date of April 2, 1934, petitioner*1185 received from Kleinschmidt a letter while she was in New York City. This letter read as follows: DEAR HILDA: It must be apparent to you that your stay in Deere Park is not working out successfully. When we last discussed the subject I suggested that we try it out for a while longer to see if the situation would work itself out. It has not worked out so far as I can see. I fact we seem to be happier by ourselves as the last week has demonstrated. I thought I would write to you while you are in New York so that you can make arrangements while you are there to return which you will no doubt want to do. As regards the financial situation I will give you an amount that will take care of your expences [sic] until you can find a position again. Sincerely UNCLE EDWARD. In April 1934 petitioner, through her attorneys, caused a summons to be served upon Kleinschmidt, in New York City. Thereafter, Kleinschmidt appeared by attorneys, and a complaint was served and filed alleging that petitioner had entered into an agreement with Kleinschmidt whereby she agreed to assist him in the maintenance of his *101 home and in he bringing up of his minor child and Kleinschmidt*1186 agreed immediately to give to her, without condition, the 300 shares of common stock in the American Telephone & Telegraph Co. and keep her in his home on the same basis as a member of his immediate family. The complaint alleged that these were mutual considerations and that the agreement constituted a contract, whch was breached by Kleinschmidt both by his improper treatment of petitioner and thereafter discharging her without right or cause, by reason of which petitioner was deprived of the benefit of the contract and of the means of earning her living, to her damage in the in the sum of $90,000. Judgment in that amount, with interest from January 19, 1933, was demanded. Kleinschmidt's answer was a blanket denial of all allegations except that he admitted that he did not deliver 300 shares of common stock of the American Telephone & Telegraph Co. Prior to any trial of that suit and before noticed for trial, the suit was settled by payment and delivery by Kleinschmidt to petitioner of 250 shares of stock of American Telephone & Telegraph Co. and $2,000 in cash. The fair market value of these 250 shares at the time of settlement and the stock transferred of record to petitioner*1187 was $28,281.25. Petitioner did not file a donee return nor did she file an income tax return for the year 1935. In that year petitioner did not keep books of account and for tax purposes was on the cash receipts and disbursements basis. From the foregoing evidentiary facts we find as an ultimate fact that Kleinschmidt's promise to transfer stock to petitioner became a valid contractual obligation upon him when petitioner assumed her position in his household, and that the stock and money received by petitioner in the taxable year was in satisfaction of this obligation and not a gift. OPINION. KERN: The first issue to be considered is whether the $28,281.25 received by petitioner during the taxable year is taxable income. Respondent asserts that a contract existed between Kleinschmidt and petitioner, and that any amounts received by reason thereof, whether in performance of the contract, by judgment of court, or by way of settlement, constitute income within the meaning of section 22(a) of the Revenue Act of 1934. Petitioner, on the other hand, argues that a contract never existed between herself and Kleinschmidt; that Kleinschmidt's offer was clearly to make a gift, *1188 and therefore, any stock or money received by her pursuant to his gratuitous promise was nontaxable. Consequently, our initial inquiry must be whether or not the negotiations between petitioner and Kleinschmidt constituted a contract. *102 It is frequently a matter of the greatest difficulty to clearly ascertain the dividing point between promises creating legal obligations and mere gratuitous agreements. As the courts have often said, each case depends so much on its own peculiar facts and circumstances that it is of little aid in determining later cases with differing facts. The promise or agreement, the relation of the parties, benefits to the promisor, detriment to the promisee, the circumstances surrounding the promise, and the intent of the parties as it may be deduced from all the facts in evidence, play important parts in the inquiry. If it can be ascertained that the sole purpose was to confer a benefit on the promisee merely from affection or generosity, the agreement is clearly gratuitous. But if the purpose is to obtain a quid pro quo, the promise is not gratuitous and becomes in time a legal obligation. *1189 ; ; ; . Upon an examination of the facts in our instant case, we note that Kleinschmidt did not attempt to induce petitioner to come to Highland Park through any pity for her, nor can we conclude that it was merely affection or generosity which motivated his offer. His wife had just died and he needed someone to fill her place in the running of his household. If she came to Highland Park and assumed this role, it would clearly be beneficial to Kleinschmidt. The fact that she was gainfully employed in New York, receiving $5,400 a year, and had good chances for advancement meant that she would have to forego this lucrative career if she accepted Kleinschmidt's offer. This she ultimately determined to do. The intent of the parties is perhaps a trifle difficult to ascertain. Frequently Kleinschmidt spoke of the stock as a gift to petitioner and he even asked petitioner's assistance in devising a plan to avoid payment of a gift tax. In his letter of January 9, 1933, he said that "there will be no strings*1190 to the transaction whatsoever"; and in his letter of January 19, 1933, he said: "So far as I can see we need nothing in writing. I want to give you the shares so that you will have sufficient income to be independent * * *." But in the January 9 letter he said: "I want to give you this stock * * * so that you will not have the feeling that you are being paid to take care of us." We interpret this to mean: "Actually you are being paid to take care of us but I don't want you to be constantly reminded of this fact by receiving monthly amounts from me, or the like." In the April 2, 1934, letter, writter when Kleinschmidt had determined that the set-up was not working well, he did not mention the stock at all, although he had never turned it over to petitioner. He merely said: "As regards the financial situation I will give you an amount that will take care of your expences [sic] until you can *103 find a position again." It would seem that Kleinschmidt felt that petitioner's services did not merit the stock, even though he had told her in an earlier letter that, if for any reason the arrangement did not work out and petitioner decided to go on her own again after a few*1191 years, it would be entirely up to her as to whether the shares should be returned to him. When petitioner verified her complaint in May 1934, she swore that her relationship with Kleinschmidt had been a contractual one and that, pursuant to the agreement between herself and her uncle, he was obligated to turn over the 300 shares of stock to her. Kleinschmidt formally denied that any contractual agreement had ever been entered into, but subsequently, and apparently under advice of counsel, he agreed to and did settle the dispute by payment of 250 shares of stock and $2,000 in cash to petitioner. While petitioner's position at that time does not estop her now from asserting otherwise, it is strongly indicative of her conception of the purpose, intent, and effect of Kleinschmidt's promise. Upon all the facts in the case we are impelled to call the relationship between petitioner and Kleinschmidt a contractual one. Benefit to the promisor was anticipated and detriment to the promisee was inevitable. Under these circumstances it is a fair conclusion that a unilateral contract existed. Williston on Contracts, Rev. Ed. vol. 1, p. 380; *1192 ; . Petitioner had a legal claim against her uncle for services rendered pursuant to this agreement. The fact that the amount petitioner eventually received resulted from a settlement of her suit can not alter the fact that, basically, the payment was a mere substitute for compensation under the agreement. . In the Hort case, the Supreme Court said: That the amount petitioner received resulted from negotiations ending in cancellation of the lease rather than from a suit to enforce it cannot alter the fact that basically the payment was merely a substitute for the rent reserved in the lease. Applying this theory in the present case, we see that, regardless of whether petitioner had prosecuted her suit to recovery or accepted, as she did, stock and money in settlement, the payment was merely a substitute for the payment provided in the agreement. This being the case, the total amount received is ordinary gross income, and taxable as such. We can see no merit in petitioner's contention that there was a symbolic delivery*1193 of the stock to her in 1933 by virtue of Kleinschmidt's payment to her of an amount equal to the amount of the dividends due thereon April 15, 1933. In the first place, this contention is based on the premise that Kleinschmidt had an intention to *104 make a gift of the stock, with which, as we have shown above, we can not agree. In the second place, even if he had an intention to make a gift, there is nothing in the stipulated facts to show that there was an intention to make a present gift rather than a gift in futuro. The remaining issue concerns the 25 percent penalty provided by section 291 of the Revenue Act of 1934 for failure to file a return. Having determined that the deficiency exists, the penalty is mandatory. ; affd., ; certiorari denied, . Decision will be entered for the respondent.