Before MAJOR, Chief Judge, and DUFFY and SCHNACKENBERG, Circuit Judges.
Arthur T. Galt, petitioner (sometimes referred to as the taxpayer), petitions for a review of two separate decisions of the Tax Court, entered May 22, 1953, in which it was decided in Tax Court Docket No. 27,844 that there was a deficiency in petitioner's gift tax for the year 1946, in the amount of $768.84, and in Tax Court Docket No. 29,528 that there was a deficiency in petitioner's income tax for the same year in the amount of $68,318.17. Respondent, Commissioner of Internal Revenue, had asserted a deficiency in gift taxes for the year 1946 in the amount of $68,079.00, and a deficiency in income taxes in the amount of $69,622.52. Petitioner sought from the Tax Court a redetermination of the deficiencies asserted by the Commissioner, which resulted in the aforesaid decisions by the Tax Court. The two proceedings were consolidated for hearing before the Tax Court and they are presented likewise here.Respondent has abandoned a cross-petition to review the Tax Court's decision in the gift tax case.
Preliminary to a statement of the contested issues, we think it appropriate to make a statement of the facts, about which there is little, if any, dispute and, in the view which we take of the legal issues presented, as subsequently disclosed, we think this statement may be brief as compared to the extensive findings entered by the Tax Court.
Petitioner, in 1922, acquired certain real estate (sometimes referred to as the "Fair Grounds" property), situated near Maywood, Illinois, a suburb of Chicago. From that time until 1946, the property was used for numerous purposes, with the income derived by the taxpayer little, if any, more than sufficient to pay the real estate taxes. In 1939, the property was leased to the Cook County Fair Association which improved the property by the construction of a track for harness races and a grandstand and other permanent improvements for the accommodation of spectators. This venture was unsuccessful and taxpayer continued to receive little, if any, net income. In July, 1945, the State of Illinois legalized pari mutuel harness racing in Illinois and on February 26, 1946, petitioner entered into a twenty-year lease with Maywood Park Trotting Association, Inc., as lessee (sometimes referred to as Maywood Park). The lease covers fifteen pages of the printed record and contains forty-six sections.
At this point, we think it material to relate only a portion of Secs. 1, 2 and 4. After providing that the lessee was to have and hold the property from January 2, 1946 until the 31st day of December, 1965, Sec. 1 provided that the lessee, in consideration of the demise, covenanted and agreed to pay the lessor as rent for said demised premises the sum of seven hundred thousand dollars ($700,000), at the rate of thirty-five thousand dollars ($35,000) per year, with the first annual rental payable July 1, 1946, and thereafter the annual rental was to be paid in advance on January 2 of each and every year of the term of the lease. This annual rental was characterized as "the guaranteed fixed rental." Sec. 2 provided that the lessee, in addition to the guaranteed fixed rental provided in Sec. 1, pay the lessor the following sums:
"One per centum of the First Ten Million ($10,000,000) Dollars wagered on said premises in any one calendar year and * * * two per centum on all amounts wagered in excess of Ten Million ($10,000,000) Dollars in any one calendar year."
"Any sums that may be due under the provisions of Section 2 of this lease shall be paid as follows:
40% to Arthur T. Galt, Lessor
20% to Arthur T. Galt, Jr.
"The above persons designated to receive 20% each are sons of the Lessor who have irrevocably been given said interests by the Lessor, Arthur T. Galt, and any sums due them hereunder shall be paid to them by mailing the amount so due to their respective residences."
Arthur T. Galt, Jr., Raymond M. Galt and William C. Galt, named in Sec. 4 of the lease, at the time of its execution were adults. On February 26, 1946 (the same date on which the lease was executed), petitioner delivered to each of the three named sons a letter which, after reciting facts with reference to the execution of the lease, stated in part as follows:
"I want each one of you boys to have a part of the proceeds, if any there shall be, from the wagering that the Lessee speculates may take place. I therefore give you each a one-fifth (1/5) interest under the contingent percentage clause of the lease.This gift to each of you is absolute and irrevocable and I have provided in the lease that any sums, when, as and if, they become due, shall be payable to each of you in the amount of 20% directly by the Lessee. I have by proper provision in the lease divested myself of all dominion and control of the amounts if any should become due to the extent of the gift I am hereby giving you and further by this evidence of the gift to you, divest myself of any control or dominion over such amount. * * *
"You will all know, of course, that in making this gift, I am prompted by my love and affection for you. I hope with all my heart that there will be revenue coming and that you may enjoy the share that I have given you in such possible revenue, and take care of it, if the sum coming to you should be enough to provide you with more than a small part of your current living expenses.
"I am now in my sixties and never felt better or was in better health in my life than I am at this date, and as I come from a long lived family - my father having died at about ninety-two, I fully expect to live during the entire life of the lease, and share with you the fullest association of our mutual company.
"Assuring you of my fondest paternal affection,
During 1946, the percentage rental provided in Sec. 2 of the lease amounted to $39,873.05, of which $15,949.22 (40%) was paid to petitioner and $7,974.61 (20%) to each of the three sons, as designated in the lease. Maywood Park, on October 22, 1946, made payment to each of the sons by its check, in which each was named as payee. A letter accompanying each check stated that the money thus paid "is your share under the terms of the lease." These checks were endorsed by the sons, deposited in their respective bank accounts and reported in their separate income tax returns as income. Petitioner in his federal income tax return for 1946 reported as rental income received from Maywood Park in that year in the amount of $50,949.22 ($35,000, the guaranteed rental, plus $15,949.22, 40% of the percentage rental). He did not report any of the amounts paid by Maywood Park to his sons.
As noted, the Commissioner determined a deficiency of $69,622.52 in taxpayer's income tax for 1946, which resulted in part from inclusion in his income of the aggregate of $23,923.83, received during that year by the sons as rental from Maywood Park. The Tax Court reduced the deficiency to $68,318.17, which also resulted in ...