UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
July 17, 1950
MANNING, Collector of Internal Revenue (two cases)
The opinion of the court was delivered by: MADDEN
These actions arise from the same factual background and present exactly the same question of law. For convenience the Court will consider them as though consolidated. The statutory conditions precedent to bringing the action have all been complied with and the sole issue is whether or not plaintiffs should prevail upon the merits.
Briefly, the facts are as follows. Plaintiff sisters were employed by their father during the years in question in his business known as the R. G. Smith Tool and Manufacturing Co. He paid the sisters certain salaries and claimed such payments in full as deductions as ordinary and necessary business expenses. The sisters reported the full salaries as income and paid income taxes thereon. Upon examination of his returns by representatives of the Bureau of Internal Revenue, only portions of the salaries paid were allowed as business deductions and, therefore, additional taxes were assessed against and paid by the father to the Treasury Department. The sisters thereupon filed claims for tax refunds on the basis that the amounts paid them by their father and not allowed as salaries by the tax authorities must be considered as gifts and, therefore, not taxable to them as income. Appropriate gift tax returns were filed by Mr. Smith and the plaintiffs. The claims for refund were denied by the Bureau of Internal Revenue and the instant actions were instituted. The amounts involved are set forth in the following schedule:
Received From Allowed as
R.G. Smith Salaries Difference Refund Asked
Aida S. Smith
1940 $ 11,935.00 $ 5,000.00 $ 6,935.00 $ 775.10
1941 15,300.00 5,000.00 10,300.00 3,946.25
Irma M. Smith
1940 14,075.00 9,000.00 5,075.00 736.02
1941 16,300.00 10,000.00 6,300.00 2,723.32
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