Rogan v. Delaney

110 F.2d 336, 24 A.F.T.R. (P-H) 490, 1940 U.S. App. LEXIS 4539

• Court: Court of Appeals for the Ninth Circuit
• Decided: March 14, 1940
• Docket: No. 9145
• Status: Published

Opinions

MATHEWS, Circuit Judge.

In 1930, appellee, A. J. Delaney, received a dividend of $126,500 on 1100 shares of stock of Delaney Petroleum Corporation (hereafter called Petroleum) and a dividend of $23,760 on 1,500 shares of stock of Delaney Producing & Refining Company (hereafter called Refining). In his income tax return for 1930, appellee reported one-half ($75,130) of these dividends as his income. His wife, in a separate return, reported the other half as her income. The Commissioner of Internal Revenue determined that the entire amount ($150,260) was income of appellee, and that, consequently, there was a deficiency of $4,968.07 in respect of appellee’s income tax for 1930.

This deficiency, with interest in the sum of $1,265.70 — a total of $6,233.77— was assessed against appellee and paid by him under protest. Appellee filed a claim for refund, which was disallowed. He then brought this action against appellant, Nat Rogan, Collector of Internal Revenue, to recover the $6,233.77. Appellant answered, jury trial was waived, the case was tried, and the court, having made and filed its findings of fact and conclusions of law, entered judgment in appellee’s favor for the full amount claimed. Appellant seeks reversal.

Appellee and his wife were married in 1907 and were, at all pertinent times, citizens and residents of California. In California, all property owned by a husband or wife before marriage, and that acquired afterwards by gift, bequest, devise or descent, with the rents issues and profits thereof, is his or her separate property. Civil Code of California, §§ 162, 163. With exceptions not here pertinent, all other property acquired after marriage by either husband or wife, or both, is community property. Id., § 164. It is conceded that the stock here involved — 1,100 shares of Petroleum and 1,500 shares of Refining ■ — was community property.

Formerly, in California, the wife’s interest in community property was not a present existing interest, but was a mere expectancy. United States v. Robbins, 269 U.S. 315, 325-328, 46 S.Ct. 148, 70 L.Ed. 285; Stewart v. Stewart, 199 Cal. 318, 249 P. 197; Id., 204 Cal. 546, 269 P. 439. Now, by § 161a of the Civil Code (added by Stats.1927, c. 265, p. 484, effective July 29, 1927), it is provided: “The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband * * But § 161a does not apply to community property acquired before July 29, 1927, Stewart v. Stewart, 204 Cal. 546, 269 P. 439; nor to property received in exchange for or purchased with, the proceeds of such community property, Hannah v. Swift, 9 Cir., 61 F.2d 307, 310; nor to income derived therefrom, Hirsch v. United States, 9 Cir., 62 F.2d 128; Shea v. Commissioner, 9 Cir., 81 F.2d 937, 939; Devlin v. Commissioner, 9 Cir., 82 F.2d 731.

Thus, in California, there are two types of community property: (1) Community property in which the wife has a present existing interest and (2) community property in which the wife has no such interest. If the property here involved — 1,100 shares of Petroleum and 1,500 shares of Refining— was community property in which appellee’s wife had a present existing interest, one-half of all dividends thereon was income of appellee, and the other half was income of his wife. United States v. Malcolm, 282 U.S. 792, 794, 51 S.Ct. 184, 75 L.Ed. 714. If it was not community property in which appellee’s wife had a present existing interest, all dividends thereon were income of appellee. United States v. Robbins, supra; Hirsch v. United States, supra.

The trial court found that the Petroleum shares were purchased by appellee and his wife on September 14, 1927, with community funds acquired after July 29, 1927, and that, therefore, the shares were community property in which appellee’s wife had a present existing interest equal to that of appellee. This finding is specified as error and is clearly erroneous. The evidence¹ establishes, without conflict, the following facts:

Petroleum was organized in 1926. Its organizers and chief stockholders were C. W. Weatherwax, Harry C. Hunt, Alvah ,M. Kaime and appellee. Petroleum was authorized to issue, and did issue, 5,000 shares of stock of the par value of $100 each. Of the 5,000 shares issued, 1,324 shares were subscribed for by appellee on February 9, 1927, and were issued to appellee op or before June 21, 1927.² Of the 1.324 shares issued to appellee, 100 shares were transferred to Harry F. Rasnear and are not here involved, 124 shares were transferred to appellee’s wife and are not here involved, and 1,100 shares are here involved. The 1,100 shares involved were not, at any time here pertinent, transferred or disposed of by appellee. Appellee, therefore, had no occasion to purchase them, and did not purchase them, on September 14, 1927.

All Petroleum shares were fully paid for before they were issued. The price paid for them was $100 a share. Of the 1.324 shares issued to appellee, 100 shares, not here involved, were paid for by Rasnear, and 1,224 shares were paid for by appellee. Of the 1,224 shares paid for by appellee, 1,124 shares, including the 1,100 shares here involved, were paid for with money loaned to appellee by Weatherwax, Hunt and Kaime. The loans were unsecured. The shares were not issued or transferred to Weatherwax, Hunt and Kaime, and were never owned or held by them. They never claimed ownership of the shares, but recognized appellee as the owner thereof, before as well as after the loans were repaid. ³ They could not have sold the shares and, so far as the evidence shows, never attempted or pretended to sell them.

The trial court found that the loans were made pursuant to two agreements, one of which was that appellee would become the owner of the shares when and if he repaid the loans. Thus, in effect, it was found that appellee agreed not to acquire the shares until the loans were repaid. We find no evidence of any such agreement. If however, there was such an agreement, it was not complied with, but was disregarded. For, as stated above, appellee did acquire the shares on or before June 21, 1927. The fact, if it be a fact, that he had agreed not to do so is, for present purposes, immaterial. For this is not a suit by-Weatherwax, Hunt and Kaime against appellee. It is, in effect, a suit by appellee against the United States. Moore Ice Cream Co. v. Rose, 289 U.S. 373, 382, 53 S.Ct. 620, 77 L.Ed. 1265. The United States was not a party to, nor bound by, any agreement between appellee and Weatherwax, Hunt and Kaime. Hence, the United States is not, nor is its Collector (appellant here), precluded from asserting that appellee acquired the shares — as in truth and fact he did acquire them — on or before June 21, 1927.

The other agreement, the court found, was that appellee was obligated to repay the loans only out of any salary he might receive from Petroleum. This agreement also, if made, was disregarded. The loans were repaid, but not out of salary. ⁴ Furthermore, whether complied with or disregarded, the supposed agreement could not and did not prevent or delay appellee’s acquisition of the shares.

The court found that the shares were, on June 21, 1927, “made out” in appellee’s name, but subject to the supposed agreements between him and Weatherwax, Hunt and Kaime. The finding is not supported by evidence. The evidence shows that the shares were issued — not merely “made out” — to appellee on or before June 21, 1927. There is no evidence that they were “made out” or issued subject to any agreement between appellee and Weather-wax, Hunt and Kaime. There is no evidence, nor is it claimed or contended, that Petroleum was a party to any such agreement, or that it had any rights or obligations thereunder. It should here be observed that, although Weatherwax, Hunt and Kaime were stockholders of Petroleum, they were not Petroleum. In re Marblehead Land Co., 9 Cir., 96 F.2d 72, 73. Having received full payment for the shares, Petroleum had no right to withhold them from appellee, or to limit or condition his ownership of them, nor is there any evidence that it attempted to do so.

It is said that, although executed on or before June 21, 1927, certificates for the shares were not removed from Petroleum’s certificate book until after September 14, 1927, and that, until such removal, there was no delivery of the shares to appellee. There is no merit - in this contention. The evidence shows that, at all pertinent times, the book and the certificates were in Petroleum’s office — which was also appellee’s office — in the custody of J. R. Covington. Covington was Petroleum’s secretary and, as such, had custody of the book. He was also appellee’s personal secretary and office manager and, as such, had custody of the certificates. The book was Petroleum’s property. As to it, Covington’s possession was Petroleum’s possession. The certificates were appellee’s property. As to them, Covington’s possession was appellee’s possession. Whether the certificates were in or out of the book is immaterial.

The loans were repaid by appellee on September 14, 1927. Such repayment did not, as the trial court supposed, constitute a purchase of the shares. It was merely the payment of a debt. Acquisition of the shares did not await or depend on repayment of the loans. It occurred on or before June 21, 1927. At that time, appellee’s previously inchoate title to the shares became a fully vested legal and equitable title. Hence, Russell v. Laugharn, 9 Cir., 20 F.2d 95; Vieux v. Vieux, 80 Cal.App. 222, 251 P. 640, and other cases dealing with inchoate titles are not in point.

The loans preceded the acquisition of the shares. At the time they were made and at the time the shares were acquired, appellee owned no separate property. Presumably, therefore, the loans were made on the faith and credit of the community. In that community — the only community which then existed — appellee’s wife had no present existing interest. Henee, the borrowed money and the shares therewith acquired were community property in which appellee’s wife had no present existing interest. Schuyler v. Broughton, 70 Cal. 282, 11 P. 719; Dyment v. Nelson, 166 Cal. 38, 134 P. 988; Estate of Ellis, 203 Cal. 414, 264 P. 743; Woods v. Naimy, 9 Cir., 69 F.2d 892, 895.

Nor was their status, as such community property, altered by the fact, if it be a fact, that the money with which the loans were repaid was community property in which appellee’s wife had a present existing interest. Palen v. Palen, 28 Cal.App.2d 602, 83 P.2d 36; Woods v. Naimy, supra. Therefore, we need not determine when, if at all, appellee earned the money with which the loans were repaid. ⁵

The trial court found that the Refining shares were purchased by appellee on May 28, 1928, with funds borrowed from Petroleum on the community credit, and that, therefore, they were community property in which appellee’s wife had a present existing interest. The finding is specified as error and is clearly erroneous. There is no evidence that the Refining shares were purchased with borrowed funds. The evidence establishes, without conflict, that they were purchased by appellee, or by Petroleum as appellee’s agent, with the proceeds of 4,250 shares of stock of California Petroleum Corporation which appellee had acquired in January, 1927, and which, it is conceded, were community property in which appellee’s wife had no present existing interest. Consequently, the Refining shares also were community property in which appellee’s wife had no present existing interest. Hannah v. Swift, supra.

As all the shares involved — 1,100 shares of Petroleum and 1,500 shares of Refining —were community property in which appellee’s wife had no present existing interest, all dividends thereon were income of appellee.

The trial court found that, in computing his net income for 1930, appellee was entitled to a deduction of $1,470.60 which the Commissioner disallowed. Appellant concedes that this finding is correct, and that disallowance of the claimed deduction resulted in an overassessment and overpayment of appellee’s tax. The amount of such overpayment remains to be determined. For that purpose, and for the entry of such judgment as may be proper, the case is remanded.

Reversed and remanded.

1 The evidence consists of a stipulation of the parties, fifteen exhibits attached to and made part of the stipulation, other documentary evidence, and the testimony of six witnesses, including appellee.

2 One share was issued before June 21, 1927. The others were issued on June 21, 1927.

3 On August 4, 1927 — a month and ten days before the loans were repaid— Weatherwax, Hunt, Kaime and appellee attended and participated in a meeting of Petroleum stockholders, the minutes of which show that appellee was then and there recognized as owning, was permitted to vote, and did vote, 1,224 shares of Petroleum stock, including the 1,100 shares here involved, and that his right to do so was not questioned.

4 The loans were repaid by appellee from a so-called bonus of $125,000 paid to him by Petroleum on September 14, 1927, pursuant to a resolution of its board of directors dated August 4, 1927.

5 If, as appellee claims, the money was earned by him after July 29, 1927, his wife may be entitled to reimbursement from him for her one-half interest. Spreng v. Spreng, 119 Cal.App. 155, 6 P.2d 104. But, as this is not a suit between appellee and his wife, we express no opinion on that subject.