Nehring v. Commissioner

*1112 The respondent determined deficiencies in the income taxes of the petitioners as follows:

*1025 Deficiencies of $255.78 and $545.13 in the excess profits taxes of the Nehring Electrical Works for the years 1936 and 1937, respectively, were also determined by the respondent.

The sole issue is whether or not the petitioners are entitled to deductions for contributions to a church. There is no dispute that the church was a religious and charitable institution within the meaning of the statute.

FINDINGS OF FACT.

The petitioners, Paul M. Nehring, Elizabeth M. L. Nehring, Irene Edna Nehring, Paul A. Nehring, as trustee of the estate of Ruth Arlene Nehring, a minor, and Paul A. Nehring are individuals residing in DeKalb, Illinois. The petitioner, Nehring Electrical Works, hereinafter called the company, is a corporation organized under the laws of the State of Illinois, with its principal office and place of business in DeKalb, Illinois. The petitioners filed their income tax returns for the years 1936 and 1937 with the collector of internal revenue for the first district of Illinois.

The company is a family corporation whose stock, aggregating 550 shares, is owned by Paul A. Nehring, his wife, Elizabeth M. L. Nehring, his daughters, Irene Edna Nehring and Ruth Arlene*1026 Nehring, and his son, Paul M. Nehring, each holding 100 shares, and by his brother, A. C. Nehring, who owns 50 shares. Paul A. Nehring, is president of the company. He signs practically all checks of the company except the payroll checks, which are signed by the auditor and bookkeeper, Laverne Nehring, his cousin. Paul M. Nehring is assistant secretary and treasurer of the company.

Paul A. Nehring has always handled the individual business affairs of his family. For more than 20 years he and his family have been using the company account as a family personal bank account. When a member of the family made a purchase, the company would pay for it with a company check and charge the personal account on its books. Salaries and dividends due to the several members of the family by the company at the end of a year were credited to *1113 them on the company's books. Such credits may be withdrawn in cash at any time, but the members of the family prefer to let them stand from year to year.

Paul A. Nehring was a prominent member of the St. John's Lutheran Church of Sycamore, Illinois. In 1932 or 1933 he discussed with the Reverend H. E. Tessman, pastor of the church, a*1027 plan to erect a new church building, but due to hard times the idea was abandoned. The subject was revived in 1936 on the occasion of the sixtieth anniversary of the church. A small "building fund", totaling about $1,000, had been built up by members of the congregation and the fund was deposited with the synod as a loan but was disregarded as of no importance in the new plans of 1936. Eventually that fund was turned over to the church treasurer for current expenses.

The donations of Paul A. Nehring and his family were the only possible source from which the church might construct a new building. In June or July 1936 the petitioner, Paul A. Nehring, discussed with Tessman the selection of a building site. In 1936 Nehring purchased a lot and paid for it with the company's check. Nehring also stated that he did not want the church to erect a building too small for its needs and that the donations would be made by him and his family during two or three years. He told Tessman that in 1936 he, representing his family, would furnish $25,000 and the company would pay $10,000. Nehring divided the contributions for tax saving purposes in order to encourage larger donations by the*1028 individuals.

On September 12, 1936, by action of the church congregation, Paul A. Nehring was made custodian of the moneys paid for subscriptions and was authorized to act as treasurer of the building fund and to pay all necessary bills. He opened no new bank account as such treasurer but decided to use the company's books and bank account for all transactions relating to the church in the same manner as he and the members of his family had done. An account was opened on the company's books in the name of the church. The bills for the construction of the church were paid from this amount on the company's books. Nehring signed all construction contracts for the church.

No formal minutes of the company were kept nor have they been kept for 20 years or more. Since it is a family corporation, the stockholders and directors merely talk things over and take no formal action as either stockholders or directors. In 1936 Paul A. Nehring discussed with the other directors of the company the question of the company making a contribution of $10,000 to the church. Thereupon he directed the company's bookkeeper to charge the company *1114 and credit the church with that amount*1029 on the books of the company. In 1936 the bookkeeper made the entries as ordered as of December 31, 1936. No actual payments were made by the company during 19369 During the latter part of 1937 the bookkeeper received from Paul A. Nehring similar instructions relating to a credit donation to the church and pursuant thereto, as of December 31, 1937, the bookkeeper set up a credit of $20,000 to the church and charged the company with the same amount. Of this sum $18,113.10 was actually paid out by the company and deduction thereof was allowed by respondent. After the establishment of such credits to the church all disbursements for the building fund were drawn from the company's general bank account and charged to the church account.

In 1936 Paul A. Nehring directed the company's bookkeeper to charge his individual account with the sum of $15,000 as a contribution to the church and to credit the church building fund with a like amount. He gave similar orders several times in 1937 with respect to $22,197.10, to be contributed by him to the building fund.

In 1936 Paul A. Nehring mentioned to the members of his family, all petitioners, the subject of their making donations to*1030 the building of the church. They were all in favor of the action. The two daughters wanted to donate the organ. In 1937 the family discussions resulted in the agreements for donations of $10,000 each by Elizabeth, Irene, Paul M., and Ruth, a minor, through her trustee. In that year Paul A. Nehring so reported to the minister of the church and also instructed the company's bookkeeper to make appropriate entries reflecting the donations.

Although the company's bookkeeper was directed to make the proper entries relating to the donations of the individuals, no entries of individual donations were actually recorded until January 1938, when the following entry was made charging Paul A. Nehring for $15,808.53 and crediting St. John's Lutheran Church for $15,808.53. The explanation is: "To record donation made by P.A.N. to the church for the year ending December 31, 1936." (The $808.53 represented contributions to the church for purposes other than the erection of the building.)

In January 1938 the bookkeeper also made entries charging the petitioner, Paul A. Nehring, with $22,197.10, and the petitioners, Elizabeth, Paul M., Irene, and Ruth Arlene with $10,000 each and crediting*1031 the church with $62,197.10. The explanation accompanying the entry is as follows: "To record donations made by the above to the St. John's Lutheran Church of the year ending December 31, 1937."

The delay and oversight of the bookkeeper in making prompt entries on the company's books were caused by the fact that the company *1115 was building a new plant; that it was housed in temporary quarters; and that it was very busy. On December 31, 1936, and December 31, 1937, the following balances were credited to the petitioners on the company's books:

In 1936 and 1937 the minimum bank balances of the company were about $267,000 and $327,000, respectively, and its maximum bank balances were about $689,000 and $1,020,000, respectively.

In June 1936 Paul A. Nehring purchased for $2,960.20, paid by the company's check, the lots on which the new church was erected. That amount was charged against his personal account on the company's*1032 books. Because of a defect in the title Nehring did not convey the lots to the church until 1938.

In 1936 work was stated on clearing the church lots. In October 1937 actual construction of the building was begun. The cornerstone was laid on November 28, 1937, and the church was dedicated in June 1938.

In 1936 no charges were made against the church building fund (appearing on the company's books as "St. John's Lutheran Church"). In 1937 the company paid by its checks $18,113 for construction bills, that amount being charged to the building fund account. In 1938 the sum of $74,894.28 was so paid out and so charged. In 1938 company made cash expenditures of $862 for the benefit of the church and charged that amount to the church account. In 1939 the sum of $14,136.35 was paid out of the building fund account for the purchase of an old bank building in Sycamore as an investment for the church. The church fund account was thereby closed.

The petitioner, Nehring Electrical Works, kept its books and filed its income tax returns on the accrual basis. The individual petitioners filed their income tax returns on the cash basis.

The respondent allowed as a deduction of*1033 the company the amount of $18,113 actually paid out in 1937. He disallowed all other deductions claimed.

OPINION.

VAN FOSSAN: Respondent submits as a matter of law that a contribution to a religious or charitable organization is not deductible unless the sum is actually paid to he donee.

*1116 As to corporations the law unquestionably is as respondent contends. The statute permits deductions for "contributions or gifts made within the taxable year." Article 23(q)-1 of Regulations 94 provides that

Corporations may deduct, for a taxable year beginning after Decembeer 31, 1935, to the extent provided by section 23(q), contributions or gifts to organizations referred to in that section, only for the taxable year in which they are actually paid, regardless of when pledged and regardless of whether the books and records of the corporation are kept on the cash receipts and disbursements basis or the accrual basis.

This regulation was promulgated by the Commissioner, with the approval of the Secretary, pursuant to the specific authority of section 23(q) of the Revenue Act of 1936. We believe it to be a valid and reasonable regulation. Therefore, as to the deductions*1034 claimed by the Nehring Co., which respondent allowed to the extent of sums paid out and denied as to the balance, we affirm the Commissioner.

As to the individual claims for deductions, the statutory situation is not quite so clear. There phraseology of the statute is the same, i.e., "contributions or gifts made within the taxable year," but there is no comparable regulation. Article 23(o)-1 does not lay down specifically that the sums must be "actually paid."

It is to be noted that the individuals reported their income on a cash receipts and disbursements basis. A cogent argument could be predicated on this fact to the effect that since no cash was disbursed no deduction can be allowed. We need not, however, rest our decision on this single ground. The simple fact is that in the situation as it existed throughout 1936 and 1937, the taxable years, the individuals had not given up beyond recall their right to exercise dominion over the funds in question; they could have countermanded the instructions previously given the bookkeeper and withdrawn their several pledges. *1035 . There being no consideration, the gifts could not have been enforced nor could they have been held liable to anyone for such action. The action taken in the taxable years fell short of culminating the gifts. Whether in the peculiar set of facts the donations would have been allowable as deductions if the entries had been made on the books in the taxable years, we need not decide. For whatever consequence it has, the fact is the entries were not so made. Cf.

Under the facts here present it can not be held that petitioners "made within the taxable year(s)" the contributions in question. The majority of the payments out of the company funds actually took place in 1938, but that year is not before us.

Decisions will be entered under Rule 50.