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Mackay v. United States

Decided: September 23, 1974.

DEWEY C. MACKAY AND LORRAINE MACKAY; W. DEAN BELNAP AND MARY ELEN BELNAP; ROGER A. BROWN; HUBERT C. BURTON AND ELAINE BURTON; LLOYD R. HICKEN AND ALICE C. HICKEN; DAVID H. WRAY AND NORENE WRAY, APPELLEES,
v.
UNITED STATES OF AMERICA, APPELLANT



Appeal from the United States District Court for the District of Utah No. C-260-72.

Lewis, Chief Judge, Moore*fn* and Doyle, Circuit Judges. Lewis, Chief Judge, concurring. Doyle, Circuit Judge, concurring.

Moore

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. ยง 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*fn1 (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).*fn2 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.*fn3

On or about October 1, 1966, notes*fn4 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.*fn5

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 such 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 ...


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