Sheppard v. United States, KTC 1966-47 (Ct.Cls. 1966)

  
 
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UNITED STATES COURT OF CLAIMS

 
LAWRENCE B. SHEPPARD and CHARLOTTE S. SHEPPARD, Plaintiff, v. UNITED STATES, Defendant.
 
Docket: 195-62  Filed June 10, 1966
 
 
OPINION
 
PER CURIAM:
 
Before: COWEN, Chief Judge, LARAMORE, DURFEE, DAVIS and COLLINS, Judges.
 
This case was referred to Trial Commissioner Lloyd Fletcher with
directions to make appropriate findings of fact and to submit a recommended conclusion of law. The Commissioner has filed a report containing findings, an opinion and recommended legal conclusion. The court adopts the Commissioner's opinion and recommendations concerning "the charitable contributions issue" with minor modifications. The court rejects the Commissioner's opinion and conclusions as to "the depreciation issue." That part of the Commissioner's opinion which has been adopted by the court and the court's opinion on the second issue is as follows:
 
Only occasionally has the court been required to address its attention
to various attributes of members of the animal kingdom. <<ENDNOTE 1>> It must do so once again to resolve the dispute in this income tax refund case. The animal involved here is Star's Pride who, in recent years, has established himself as one of the country's great standard bred <<ENDNOTE 2>> stallions. Presently, he stands at stud and is owned by Hanover Shoe Farms, Inc. (hereinafter called "The Farms"). But this was not always so, and a determination with respect to the first issue <<ENDNOTE 3>> in this case requires a study of Star's Pride's early history.
 
 
THE CHARITABLE CONTRIBUTIONS ISSUE
 
Star's Pride was foaled in 1947 with a distinguished line of standard
bred ancestors. When he was a yearling colt in 1948, he was purchased by plaintiff-taxpayer, Lawrence B. Sheppard, <<ENDNOTE 4>> and E. Roland Harriman as equal co-owners. Both men have long been nationally prominent in standard bred racing and breeding circles, and there can be no doubt of their outstanding expertise in the field. For a number of years they raced Star's Pride as a trotter. He distinguished himself on the track and won his owners some $141,000. Then, in 1953, at the age of six, Star's Pride was retired to stud at The Farms, the world's largest breeding farm for harness racehorses. This farm is owned and operated by a closely-held corporation of which plaintiff is president. He owns 76.8 percent of its
outstanding stock.
 
Originally, The Farms took care of and managed Star's Pride under an informal, oral arrangement with his co-owners. In 1958, however, this arrangement was reduced to writing in the form of a lease agreement whereby The Farms, as lessee, agreed to care for and maintain Star's Pride at its sole expense and to use him solely for breeding purposes. The Farms also agreed to pay the owner-lessors $100 for each live foal produced by Star's Pride from The Farms' mares and to offer the horse for service to "outside" mares at a fee to be agreed upon between the lessors and lessee from season to season, such "outside" fees to be divided equally among the parties. In addition, it was agreed that the lessors could breed their own mares to Star's Pride at no charge. The lease was executed on January 1, 1958, for an original term of five years with a right of renewal in The Farms for an additional five-year term.
 
Star's Pride's initial stud fee was set at $750, a rather impressive
fee for an, as yet, unproven stallion. A period of time is required to
determine the true value of a breeding horse because his success will be measured by the performance of his "get," or offspring. For the first five years of his life at stud, Star's Pride's record was rather disappointing, and during this early period his "book" (reservations for breeding services) was never filled. Then, in 1958, the situation suddenly changed.
 
In August 1958, a 3-year-old filly by Star's Pride, named Emily's
Pride, won the $107,000 Hambletonian Stake which, for a 3-year-old
standard bred horse, is comparable to the winning of the Kentucky Derby by a thoroughbred horse. In addition, another of Star's Pride's get won second place in the Hambletonian. Emily's Pride went on to win the 1958 $53,000 Kentucky Futurity, and as a result of her victories was named the Harness Horse of the Year. Meanwhile, a 2-year-old colt, by Star's Pride, named Diller Hanover, was winning many of the two-year-old trotting classics in the country, and became the winter favorite for the 1959 Hambletonian.
 
The attentions of the standard bred horse experts immediately focused on Star's Pride. The spectacular successes of his get in 1958 caused a flood of applications to The Farms for his breeding services. <<ENDNOTE 5>> By 1960, Star's Pride had advanced to second place in the national standings of trotters. His book has been "full and closed" for every breeding season since 1958. During 1958, the plaintiff was also observing Star's Pride's progress with great interest. Despite some earlier misgivings about the horse's future, he was now convinced that, with proper development, Star's Pride could become one of the top-ranking stallions of the country. His interest was further sharpened by the fact that The Farms (which he controlled) already owned Hoot Mon, a great stallion descended from one dominant trotting line (Scotland), and by the fact that Star's Pride was descended from the other dominant trotting line (Volomite). He decided that The Farms should acquire Star's Pride, not only to perpetuate the Volomite Line but also to interbreed with the get of Hoot Mon from the Scotland line.
 
From his extensive experience, plaintiff had long ago concluded that it was not possible to develop the full potential of a stallion at stud
without having complete ownership and control of the horse. Accordingly, sometime prior to June 1959, plaintiff determined that, as a first step, The Farms should attempt to acquire Harriman's one-half interest in Star's Pride. On behalf of The Farms, plaintiff negotiated with Harriman who agreed to sell his interest for $100,000 plus a specified number of future free breeding services by Star's Pride for the Harriman mares. This proposal was agreeable to plaintiff, and he followed it through with a formal offer to Harriman on June 12, 1959.
 
On June 15, 1959, The Farms received a telegram from Daniel Green, Executive Director of the New York Chapter of the American Red Cross, advising that Harriman's interest in Star's Pride and The Farms'offer of June 12, 1959, had been assigned to it, and accepting The Farms' offer to purchase such interest. <<ENDNOTE 6>> Subsequently, The Farms received a letter of confirmation from Green, and thereupon issued its check for $100,000 to the Red Cross. On June 17, 1959, Green acknowledged receipt of The Farms' check and forwarded Star's Pride's registration certificate, properly endorsed to show the transfer to The Farms of the interest previously owned by Harriman. On the same day, Harriman and The Farms
executed a written agreement which specified in detail the breeding
services from Star's Pride which The Farms was to reserve for Harriman's mares. As of June 17, 1959, the fair market value of those breeding services was at least $50,000.
 
At about this time, plaintiff was also considering making substantial
charitable contributions to the Sisters of St. Joseph in the City of
Philadelphia (hereinafter called the "Sisters") and to The University of
Pennsylvania (hereinafter called the "University"). The Sisters owned and operated St. Joseph's Academy, a small school in Pennsylvania which plaintiffs children and grandchildren had attended and in which he had a deep interest. In early June 1959 plaintiff became aware of a serious financial problem at the Academy arising out of a threat by State fire safety officials to close the school unless extensive remodeling and renovation to its building were accomplished by the fall of 1959. The estimated cost for the required improvements was $50,000, and it did not appear that the Sisters, within the time allowed, would be able to raise any such sum. Plaintiff decided to defray the cost by a personal contribution.
 
Meanwhile, plaintiff had also learned of plans by The University of
Pennsylvania to build new facilities for its School of Veterinary
Medicine. He also had a deep interest in the welfare and progress of that School, and he intended to make a substantial contribution to its new construction program.
 
At no time did plaintiff intend to make his contributions to the Sisters and the University in the form of cash. From prior experience he was well aware of the legitimate tax advantages which flow to a donor through the making of deductible charitable contributions in the form of gifts in kind of appreciated property. Originally, he had planned to make the gifts in the form of certain shares of stock. By the middle of June, however, he had changed his mind and decided that, if acceptable to the prospective donees, he would donate to each of them one-third of his one-half interest in Star's Pride. <<ENDNOTE 7>> At this point it is important to bear in mind that this decision in no way indicated a lessening of plaintiffs confidence in Star's Pride's potential greatness. To the contrary, the gravamen of his plan was that, immediately following the gifts of the two one-sixth interests in Star's Pride, he would cause The Farms to offer to purchase those interests from the donees for $50,000 each. <<ENDNOTE 8>> Thereafter, he intended to sell his remaining one-sixth interest directly to The Farms, also for $50,000. Since The Farms had already acquired the Harriman interest, the end result would be that desired by plaintiff, namely, 100 percent ownership of Star's Pride by The Farms subject only to the Harriman breeding rights.
 
On June 16, 1959, plaintiff carried out his plan. He wrote letters to
the Sisters and to the University offering to each, as a gift absolute,
one-third of his right, title, and interest in Star's Pride, which he
described as a one-sixth interest in the horse with a current market value of $50,000. He attached no conditions or obligations to these offers. However, on the same day, in the case of the University, and on the following day, in the case of the Sisters, he sent each donee a letter from The Farms, signed by him as president, by which The Farms offered to purchase the interest of each donee for the sum of $50,000. Each letter contained a paragraph advising that, if the offer was found acceptable, the proper officers of the respective donees should execute and return an enclosed form of bill of sale, upon receipt of which The Farms would make immediate payment.
 
The significant facts surrounding the offer of the gift by Mr. Sheppard
and the offer of purchase by the Farms are the following: On receiving the letter offering the gift, the Mother Superior of the Academy called the Mother Superior General who was authorized to receive and convey property on behalf of the Order. The latter questioned the propriety of a Catholic school's keeping a horse which was directly involved in a betting scheme. Upon hearing this, the Mother Superior of the Academy called Mr. Sheppard who said he would see what he could do. It was on the next day that she received the Farms' offer which she took to the Mother Superior General who accepted for the Order. The University, however, maintained a somewhat more cautious, or perhaps more orderly, policy regarding the acceptance of gifts of an unusual nature which might contain restrictions. It did not wish to become involved with donors who had ulterior motives or to lend its tax-exempt status to any person who was trying to use it illegally. Consequently, the offer was not accepted by the University until careful inquiry was made by Dean Allam of the School of Veterinary Medicine to Mr. Gordon, Treasurer of the University. Mr. Gordon in turn consulted with Mr. Pemberton, the Business and Financial Vice President and Dr. G. P. Harnwell, President of the University. Pursuant to this policy, Dr. Harnwell asked Mr. Gordon whether the horse was a valuable one and whether the University by accepting the offer would incur any obligation of any kind to the donor or with respect to the subject matter of the gift. On receiving Mr. Gordon's assurance that, in his understanding, the horse would be a valuable one and that the gift would be unrestricted, Dr. Harnwell expressed the view that the University would accept it. As was customary in matters of this sort, Mr. Gordon also telephoned Calvin H. Rankin of the firm of Drinker, Biddle and Reath, in Philadelphia, counsel for the University. The University communicates with Mr. Rankin for advice and counsel on matters pertaining to gifts on an average of twice a day. Mr. Rankin advised Mr. Gordon, on the basis of the conversation between Mr. Sheppard and Dean Allam, that the proposed gift would not be objectionable from a legal or tax standpoint. Mr. Gordon then informed Dean Allam of his discussions, and Dean Allam informed Mr. Sheppard's secretary that the University would be willing to accept the gift.

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