COMMISSIONER OF INTERNAL REVENUE v. PARK
No. 7210
Circuit Court of Appeals, Third Circuit
June 29, 1940
113 F.2d 352
At least 75% of all cotton produced in the United States in 1937 moved in interstate and foreign commerce, approximately 50% of which was shipped to foreign spinners. Almost all of that produced in the State of Texas entered such channels. In the great movement of cotton from farm to mill, it is impossible to distinguish between state, interstate, and foreign transactions. In this case, the probable foreign movement took place after resale by the first buyer from the producer. In many instances, cotton will return to the state of production for consumption therein after having been shipped out of the state. At the time the producer sells cotton, it is not always possible to know its destination, and regulation of interstate shipments could be easily evaded unless intrastate shipments were also regulated. To be effective, regulation must apply to all sales. Therefore, it may constitutionally so apply.6
The judgment appealed from is affirmed.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Norman D. Keller, and S. Dee Hanson, Sp. Assts. to Atty. Gen., for petitioner.
Joseph Gilfillan, of Philadelphia, Pa., for respondent.
Before BIGGS, MARIS, and CLARK, Circuit Judges.
MARIS, Circuit Judge.
This is a petition by the Commissioner of Internal Revenue for the review of a decision of the Board of Tax Appeals. The record discloses that on December 14, 1923, the taxpayer made and delivered to his wife his demand note under seal for $150,000. The note bore interest at the yearly rate of 6% and was secured by 6,000 shares of American Stores Company stock as collateral. For each of the succeeding years the petitioner paid his wife $9,000 as
The Commissioner disallowed the deduction and determined a deficiency for each of the three years. The Board of Tax Appeals reversed the Commissioner‘s determination and held that the payments were allowable deductions. 38 B.T.A. 1118. Upon the present review the Commissioner argues that the demand note in question did not represent an indebtedness within the meaning of the revenue acts; that the payments sought to be deducted were not interest payments; and that the transaction was but a device for giving the appearance of interest on indebtedness to what were in reality annual gifts by the taxpayer to his wife.
Under the law of Pennsylvania the note which the taxpayer gave his wife, being under seal, was a valid enforceable legal obligation as to which want of consideration was not a defense. Yard v. Patton, 13 Pa. 278; Balliet v. Fetter, 314 Pa. 284, 171 A. 466; Fritz’ Estate, 135 Pa. Super. 463, 5 A.2d 601. It must be conceded, of course, that not every obligation is an indebtedness. Illustrations may be found in Deputy v. DuPont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416, where the obligation was to return stock in kind; Del Rio v. Prudential Ins. Co. of America, 269 N.Y. 135, 199 N.E. 32, where a premium due on a life insurance policy was held not to be an indebtedness because there was no legal binding obligation to pay it; Sharpe v. First Nat. Bank of Antigo, 220 Wis. 506, 264 N.W. 245, where a contract of guaranty was held not to create an indebtedness because the contract of guaranty created a contingent liability merely; and Lenox Realty Co. v. Hackett, 122 Conn. 143, 187 A. 895, 107 A.L.R. 1306, where it was held that a mortgage debt not contracted by the corporate owner of the realty or assumed by it, was not an indebtedness of that
The obligation in the present case, however, is of a different nature. It is to pay a sum certain, upon demand, to the holder of the note. In other words, it is a sum of money unconditionally owed by the maker of the note to the payee. “Indebtedness” as used in the revenue acts has been properly defined as something owed in money which one is unconditionally obligated or bound to pay, the payment of which is enforceable. Gilman v. Commissioner, 18 B.T.A. 1277, affirmed 8 Cir., 53 F.2d 47, 80 A.L.R. 209. This is the ordinary meaning of the word1 and it squarely covers the note here involved. If Congress had intended to limit the meaning of “indebtedness” as used in
The Commissioner contends that the meaning of the word “interest” as used in the revenue acts must be restricted to payments which one has contracted to make for the use of borrowed money. This is one meaning of the word but not its sole meaning. Mr. Justice Douglas in Deputy v. DuPont, supra [308 U.S. 488, 60 S.Ct. 368, 84 L.Ed. 416], gave the term a wider meaning when he stated that: “In the business world ‘interest on indebtedness’ means compensation for the use or forbearance of money.” Interest, according to this authoritative definition, may therefore be not only the price paid for the use of borrowed money but also that paid a creditor for his forbearing to demand the payment of money legally due. See also Klein, Federal Income Taxation, Par. 16:4. The present case falls squarely within the latter category, for the payments were made to the wife so long as she forbore to make demand upon the taxpayer for the payment of the note.
The final question for our determination is whether the transaction must be treated as what it purports to be or as a mere colorable device to screen what are in reality gifts by the husband to his wife. There is no suggestion in the stipulation of facts which formed the basis of the Board‘s findings and decision that the transaction was colorable or in any way other than what it appeared on its face to be, or that it was entered into to avoid taxes. We are asked by the Commissioner to conclude the contrary solely from the relationship between the parties coupled with the wife‘s failure to demand payment over a period of eleven years. To do so, in the absence of any other evidence than this, would be to ignore the evidence of good faith furnished by the delivery of valuable collateral. It would be to declare as a matter of law that an enforceable demand note given by a husband to his wife and not promptly demanded may not form the basis for an interest deduction even though the note is amply secured and the parties act in perfect good faith. If such an exception is to be ingrafted upon the language of
The decision of the Board of Tax Appeals is affirmed.
BIGGS, Circuit Judge (dissenting).
The taxpayer in 1923 gave his wife a demand note under seal. The note was in the sum of $150,000, was secured by collateral and bore “interest” at the rate of six per centum per annum. For a period of eleven years the taxpayer has paid his wife $9,000 a year allegedly for her forbearance to sue upon the note or to foreclose upon the collateral. This transaction was entered into in Pennsylvania and the majority of this court are of the opinion that because a seal imports consideration and creates an enforceable obligation under the law of Pennsylvania, in contradistinction to the laws of many of the states, the sums paid by the taxpayer to his wife were interest on indebtedness and therefore deductible under the provisions of
Since consideration is completely lacking for the note and it is stipulated that it was “made, executed and delivered as an absolute gift * * *“, the note in itself is nothing more than a promise to make a gift in the future and the sums paid annually by way of “interest” are nothing more than gifts reduced to possession year by year.
I think that the respondent has done nothing more than attempt to reallocate income within the intimate group of his family and has tried to create a new economic unit for that purpose. As was made very plain by the Supreme Court in Commissioner v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 84 L.Ed. 788, regardless of the particular devices used to split up income within the intimate family group, the tax gatherer must look to substance of the transactions rather than at their form. The economic conceptions in the case at bar become sheerly metaphysical if the respondent‘s contentions be accepted. The deduction of which the respondent seeks to avail himself is in reality a part of his own income. The wife‘s income is really a part of her husband‘s income, a gift from her husband. In my opinion it may be deducted by the respondent only as a gift. The Clifford case may be distinguished from the case at bar because Clifford retained control of the trust while in the case at bar the respondent does not have control of the note or the collateral. It should be observed, however, that the respondent retains the equitable interest in the collateral and the income from it, the latter going to that fund, the husband‘s income, from which the wife‘s stipend is paid. Though the respondent does not retain control of the note or collateral, these facts do not seem to me to be sufficient to transform an annual gift into “interest * * * on indebtedness“.
The decision of the Board of Tax Appeals should be reversed and the cause remanded with directions to assess deficiencies for the taxable years in accordance with the determination of the Commissioner.