1926 BTA LEXIS 2677 | B.T.A. | 1926
Lead Opinion
: The only question presented by this appeal is whether or not the taxpayer, in computing his net income for the years 1920 and 1921, is entitled to deduct the amounts of $319,468.37 and $4,654.65, respectively, paid by him to Elizabeth H. Bettendorf in those years, under the circumstances set forth in the findings of fact herein. The taxpayer contends that the payments in question represented interest on indebtedness and are deductible under the provisions of section 214 (a) (2) of the Kevenue Acts of 1918 and 1921, which respectively provide that, in computing net income, there shall be allowed as deductions:
(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, in the ease of a nonresident alien individual, the proportion of such interest which the amount of his gross income from sources within the United States bears to the amount of his gross income from all sources within and without the United States.
(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.
The Commissioner urges that the payments involved herein, made ■ by the taxpayer to Elizabeth H. Bettendorf, were not interest on indebtedness, but constituted a part of the damages to which she was found by the court to be entitled on account of the taxpayer’s conversion of her property and property rights.
Interest is given on money demands as damages for delay in payment, being just compensation to tbe plaintiff for a default on tbe part of his debtor. Where it is reserved expressly in the contract, or is compelled by the nature of the promise, it becomes part of the debt, and is recoverable as of right; but when it is given as damages, it is often matter of discretion.
It is therefore necessary, in order to arrive at a proper solution of the question presented herein, first to determine whether the interest included in the decree of the District Court for Scott County, Iowa, as modified by the Supreme Court, in the suit referred to in the findings of fact, was compensation for the use or forbearance of money or damages for the detention of money. From the opinion of the Supreme Court of Iowa in that case, reported in 190 Iowa, 83, it seems clear to us that the interest included in the decree was given as damages for the wrongful detention by the taxpayer of money which he, as trustee, held for the use and benefit of Elizabeth II. Bettendorf. The court in its opinion, speaking of the alleged contract of settlement of February 8, 1913, said:
Tbis was not a case where tbe fraud was perpetrated by parties dealing at arm’s length; tbe plaintiff bad a right to rely upon defendant, and was not at fault in not doubting tbe fairness of all bis transactions; and we are of tbe opinion that it cannot be said that tbe plaintiff should be estopped by tbe .contract of 1913 from claiming damages ⅜ * *.
The court, in awarding interest on the difference between the value of the stock which the taxpayer acquired from Elizabeth H. Bettendorf and the amount he had paid her therefor, said:
The defendant acquired plaintiff’s stock at that time, and has since enjoyed all tbe advantages of its ownership, and so manipulated it that restoration is impossible. There seems no good reason for denying plaintiff compensation for tbe use of tbe money which she should then have been paid for tbe stock, and which through deception defendant avoided paying. What happened was tantamount to the conversion of the deficiency in the purchase price by defendant in his trust capacity, and is clearly within the rule which includes interest from the date of conversion as part of the damages allowed. See Doyle v. Burns, 123 Iowa, 488; In re Estate of Young, 97 Iowa, 218; Hook v. Payne, 14 Wall. 252; Ludington v. Patton, 121 Wis. 649; 99 N. W. 614. The award is merely for the difference between what the fiduciary actually paid and what he should have paid for the stock, and simple interest thereon at*384 the legal rate is not only just, as lie lias enjoyed the income from the stock, but adequate inasmuch as the cestui que trust intentionally parted with said stock.
The taxpayer contends that, even if the amount included as interest in the decree referred to was awarded as damages, it is interest nevertheless. Assuming that contention to be true, we are, nevertheless, of the opinion that such interest is not deductible in computing the taxpayer’s net income as “ Interest paid or accrued * * * on indebtedness.” The relation of trustee and cestui que trust is entirely different from the relation of debtor and creditor. A trustee holds the legal title to property for the use and benefit of the cestui que 'trust, the equitable title thereto being in the cestui que trust. There is no debt due from the trustee to the cestm que trust, but the trustee must account for the trust property and the income and profits therefrom, or, if he converts them to his own use, respond in damages. In the case under consideration the court expressly held that the taxpayer, at the time he induced Elizabeth H. Betten-dorf to assign and transfer her interest in the patents and royalties owned by and due to the estate of her husband, and to sell her shares of stock in the Bettendorf Axle Co., was a trustee for her, and he continued to be, until the day of the decree, a trustee for her for the amounts by which he had benefited on account of the assignment of the patents and royalties and the amount of the difference between the actual value of the shares of stock at the time of the sale and the amount paid her' at that time. It therefore appears that the relation of debtor and creditor did not exist between the taxpayer and Elizabeth II. Bettendorf at any time during the period June 8, 1910, to June 5, 1916, and that the interest included in the decree of the court in the case of Bettendorf v. Bettendorf was not interest on indebtedness, within the purview of section 214 (a) (2) of the Revenue Acts of 1918 and 1921, and hence is not deductible in* computing the taxpayer’s net income for the years in which it was paid.
With reference to the amounts of $170,259.86 and $4,654.65 paid by the taxpayer to Elizabeth H. Bettendorf on December 30, 1920, and February 28, 1921, respectively, as interest on the judgment rendered in the case of Bettendorf v. Bettendorf, as modified by the Supreme Court of Iowa, a different situation exists from that presented by the payment of the amounts included as interest in the judgment. Whatever may have been the legal relation of the taxpayer and Elizabeth H. Bettendorf prior to June 5, 1916, he was from that date and until February 28, 1921, indebted to her in the amount of the judgment rendered against him. A judgment is an obligation for the payment of money, 33 Corpus Juris, 1056; a