Dewey C. MacKay v. United States

503 F.2d 591, 34 A.F.T.R.2d (RIA) 74

• Court: Court of Appeals for the Tenth Circuit
• Decided: September 23, 1974
• Docket: 73-1915
• Status: Published

Opinions

MOORE, Circuit Judge:

United States of America (the government) appeals from a judgment awarding plaintiffs the sum of $8,669.22 plus interest allegedly erroneously assessed and collected by the government for their taxable year 1967. Jurisdiction exists through 28 U.S.C. § 1291.

No opinion was written by the court below. At the close of the testimony, the district court merely said: “The judgment in this case will be for the doctors and against the United States.” Findings of Fact and Conclusions of Law were thereafter entered.

•The sole issue on appeal is whether the gift by plaintiffs-taxpayers of certain notes owned by them to a hospital (a charitable organization) entitled them to a deduction as a charitable contribution upon the particular facts of this case. Consideration must primarily be given to the bona fides of the transaction; the circumstances and purpose under, and for, which the notes were issued; their real value; and the effect, if any, upon the financial condition of the respective donors after the alleged gift.

Taxpayers ¹ (frequently referred to as “the doctors”) are physicians practising in Bountiful, Utah. Prior to 1960 they, with others, desirous of having a hospital in Bountiful (the hospitals in Salt Lake City being some 20 miles distant), decided to construct a hospital. For this purpose, they formed a partnership, the South Davis Medical Center (the Center).² A corporation, South Davis Hospital Development, Inc. (Development), created to finance, construct and operate the hospital, was incorporated on November 23, 1960. The total construction cost was $791,158.68. By 1967 normal depreciation of $118,843.91 gave the physical plant an adjusted basis of $672,314.77. However, appraisal figures justified an appraised value in excess of $800,000 as of January 1967.

In an attempt to gain additional backing from the community, a non-profit corporation, South Davis Community Hospital, Inc. (Community) was organized by the doctors to operate the hospital. Development then leased the hospital to Community for $6,000 a month under a 20-year lease. Prior to October 1966 these loans had not been evidenced by notes.³

On or about October 1, 1966, notes⁴ were issued to the doctors to reflect their respective advances and', thereupon, these amounts were transferred to the notes payable ledger.

The doctors believed that it would be advantageous from their viewpoint and that of the community to transfer ownership of the hospital from Development to Community. Negotiations ensued for this purpose between representatives of both organizations. Apparently Development wanted to receive $800,000 as the purchase price. Community could pay only $675,000. To enable Community to pay the $800,000, the doctors gave to Community the notes evidencing Development’s obligations to them, having a face value of $125,000, which in turn Community used as a $125,000 down payment in the purchase. The doctors then treated these transfers to Community as charitable contributions on their income tax returns.⁵

To defeat what otherwise would be a deductible charitable contribution, the government makes several unwarranted factual and legal assumptions and reaches the conclusion that the transaction was, in effect, a sham. The case, however, will not lend itself to any Procrustean treatment. The facts are undisputed and disclose that:

1. The doctors advanced over $125,000 out of their own or controlled funds to Development.

2. On October 1, 1966, these advances were evidenced by 6% notes. (No claim is made that these notes were without consideration or that they were issued as a first step in the subsequent sale.)

3. The fair market value of the notes was $125,000.

4. The sale price of the hospital demanded by Development was $800,000.

5. A fair appraisal value of the hospital was at least $800,000.

6. Community was either unwilling or unable (it matters not) to pay more than $675,000.

7. To enable Community to pay the $800,000, the doctors gave Community their $125,000 in notes for this purpose.⁶

8. After the gift the doctors no longer had any claim on Development for the payment of their notes or for the re-coupment of their original advances.

The government takes an artificial seven-league step by arguing that the sale and the price was pre-arranged (as indeed it was); that the sale was in reality only for $675,000; that the contribution was “purported” and “illusory” ; and that “Community, Inc., derived no economic benefit from its temporary ownership of these notes.” It then makes the additional assumptions that Community would not have purchased the hospital but for the additional $125,000 contributed by the doctors and that the gift was for the purpose of creating tax deductions for the doctors.

In making this argument, the government would appear to be transgressing its own “form over substance” theory. If it had established that the $125,000, which the doctors contributed, immediately found its way back into the doctors’ own pockets, then a warning flag would definitely have been raised. However, except for the statement that the notes were used in part payment to Development, “their [the doctors] controlled corporation,” there is nothing to indicate that Development was not a separate legal entity or that the doctors by a liquidating dividend or distribution of capital would have been able to recoup themselves for the full amount of their gift. Short of such proof, the transaction would seem to have been on the same footing as a gift of the notes to any charitable organization — a Salt Lake City hospital, for example.

Both parties cite many cases in support of their respective positions but it is usually the best policy not to be diverted by the different fact situations presented in such cases unless some particularly applicable principle of law may be derived therefrom. Therefore, staying within the confines of this record and looking carefully for any fraud, sham, deception or tax evasion (in contrast to proper avoidance), we find that the gift of the respective notes was an allowable deduction under the provisions of section 170, Internal Revenue Code of 1954, 26 U.S.C. § 170.

Judgment affirmed.

1 . Plaintiffs, doctors and wives, are: Dewey C. MacKay and Lorraine MacKay; W. Dean Belnap and Mary Elen Belnap; Roger A. Brown (for some reason Beverly A. Brown was not joined as a plaintiff, although she and Roger filed a joint return) ; Hubert C. Burton and Elaine Burton; Lloyd R. Hicken and Alice C. Hicken; David II. Wray and Norene Wray.

2 . The assets of the jiartnership were subsequently transferred to South Davis Medical Center, Inc., a professional corporation, incorporated, December 30, 1924.

3 . Over a period of some six years from 1960 to 1966, the doctors individually and through organizations in which they were partners (South Davis Investment Company, South Davis Medical Center, Inc.), had made loans to Development, the amounts thereof being in an aggregate amount in excess of $128,000. The accountant-witness stated that tiiese advances were reflected “in the accounts payable or loans payable ledger” of Development,

4 . The notes, found by the district court to reflect the amounts of the contributions were:

Dewey C. MacKay and Lorraine MacKay ..................$17,251.00

W. Dean Belnap and Mary Elen Belnap......................$17,251.00

Roger A. Brown .........................................$17,251.00

Hubert C. Burton and Elaine Burton........................$15,870.00

Lloyd R. Hicken and Alice C. Hicken ....................$17,251.00

David H. Wray and Norene Wray..........................$17,251.00

The district court correctly listed the notes given to each of the plaintiffs in this case. However, the discrepancy between the amount itemized by the district court ($102,125) and the $125,000 figure discussed in the case is accounted for as follows:

Non-plaintiff creditors, whose notes were also given to Community, consisted of:

Thomas A. Halverson........$ 4,875.

William S. Dunford..........$ 2,875

K. Ross Tucker..............$ 6,875

Calvin MacKay..............$ 8,250

Total.......................$22,875

plus notes issued to Xilaintiffs $102,125

EQUALS $125,000

5 . As a result of the disallowance of these contributions, deficiencies were assessed as follows against the plaintiffs:

Dewey C. MacKay and Lorraine MacKay....................$1,392.04

W. Dean Belnax) and Mary Elen Belnap ....................$1,559.32

Roger A. Brown...........................................$1,529.23

Hubert C. Burton and Elaine Burton ........................$1,485.35

Lloyd R. Hicken and Alice C. Hicken ........................$ 614.02

David H. Wray and Norene Wray ..........................$2,089.26

6 . As Dr. Belnap testified in his deposition, the gift of the $125,000 in notes was intended to give to Community enough money to enable it to meet the $800,000 purchase price and give the doctors a charitable contribution tax benefit.