United States v. Goodyear

99 F.2d 523, 21 A.F.T.R. (P-H) 1145, 1938 U.S. App. LEXIS 2915

• Court: Court of Appeals for the Ninth Circuit
• Decided: October 18, 1938
• Docket: 8725
• Status: Published

Opinions

HANEY, Circuit Judge.

Refund of estate taxes paid the United States was obtained by the judgment appealed from.

Ida P. Goodyear and W. E. Goodyear were married in .California- on August 18, 1891. They were at that time, and continued to be thereafter, residents of California. They acquired certain community property while married prior to July 29, 1927. Since the wife had only an “expectancy” in community property prior to 1927 (Stewart v. Stewart, 204 Cal. 546, 269 P. 439), it was held that community income could not be divided between the spouses for income tax purposes. United States v. Robbins, 269 U.S. 315, 46 S.Ct. 148, 70 L.Ed. 285. At that time California Civil Code § 172 provided that “The husband has the management and control of the community personal property, with like absolute power of disposition, other than testamentary, as he has of his separate estate” subject to certain exceptions. Likewise at that time, California Civil Code § 172a provided that “The husband has the management and control of the community real property, but the wife, either personally or by duly authorized agent, must join with him in executing any instrument by which such community real property or any interest therein is leased for a longer period than one year, or is sold, conveyed, or encumbered” subject to certain exceptions.

Likewise it was held that all of the community property for estate tax purposes, must be included in the value of a decedent’s estate. Wardell v. Blum, 9 Cir., 276 F. 226, certiorari denied 258 U.S. 617, 42 S.Ct. 271, 66 L.Ed. 793; Talcott v. United States, 9 Cir., 23 F.2d 897, certiorari denied 277 U.S. 604, 48 S.Ct. 601, 72 L.Ed. 1011; Title Insurance & Trust Co. v. Goodcell, 9 Cir., 60 F.2d 803, certiorari denied 288 U.S. 613, 53 S.Ct. 404, 77 L.Ed. 986.

In 1923 there was an amendment to the Civil Code, § 1401 (now § 201 of the Probate Code) provided that “Upon the death of either husband or wife, one-half of the. community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent, and in the absence thereof goes to the surviving spouse” subject to certain exceptions.

On July 29, 1927, § 161a, an amendment to the Civil Code became effective. It 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 as is provided in sections 172 and 172a of the Civil Code. This section shall be construed as defining the respective interests and rights of husband and wife in community property. * * *»

After that amendment, litigation ensued over the question as to whether the income of the community could then be divided for income tax purposes. The question was answered in the affirmative on January 19, 1931, in United States v. Malcolm, 282 U.S. 792, 51 S.Ct. 184, 75 L. Ed. 714.

Ida P. Goodyear and W. E. Goodyear entered into an agreement as of January 1, 1931, on July 9, 1931. The instrument provided in part:

“Whereas, the parties hereto are the owners of certain personal and real property, hereinafter described, as community property, all of the same having been acquired by them after their marriage on the 18th day of August, 1891; and,

“Whereas, all of said property was acquired by the parties hereto previous to July 29, 1927, or from income from property acquired previous to July 29, 1927; and,

“Whereas, it is the desire of the party of the first part to vest, in the party of the second part, a present, existing and equal interest in such community property and in all property acquired by them from income derived therefrom, the same as if said property had been acquired by the parties hereto as community property after July 29, 1927;

“Now, Therefore, the said party of the first part, in consideration of the love and affection which he has and bears unto the said party of the second part, does hereby give, grant, convey and confirm unto the party of the second part such an interest in the personal and real property herein described and referred to as will vest in her, with the party of the first part, a present, existing and equal interest in said personal and real property. * *

“It is not the intention of this instrument to create in the parties hereto a tenancy in common in said property to which reference is herein made, but rather to vest in the party of the second part such an interest in the community property as she would have at the present time were the property to be acquired now from earnings of either of the parties hereto accumulated or earned since July 29, 1927.”

That instrument was acknowledged on July 9, 1931, and recorded in the proper county in California on the following day.

On September 3, 1933, W. E. Goodyear died in California. On October 2, 1933, Ida P. Goodyear was appointed executrix of his estate, qualified, and since has acted as such. On June. 12, 1934, the executrix, hereafter called appellee, filed an estate tax return, including therein only one-half of the value of the community property, and on that day paid the amount of tax shown to be due by the return. The Commissioner of Internal Revenue audited the return, and determined that the entire value of the community property should have been included in the return. On December 21, 1935, appellee paid the additional tax and interest demanded, in the sum of $7,671.22.

On January 22, 1936, appellee filed a claim for refund, which was denied on April 10, 1936. On April 18, 1936, this action against appellant was commenced to recover the amount of the additional tax paid with interest. The trial court held that the agreement gave Ida P. Goodyear the same interest in the community property as she would have had if the property had been acquired after the effective date of § 161a of. the Civil Code. Judgment was entered on July 21, 1937. This appeal followed.

The' applicable statute is § 302 of the Revenue Act of 1926 (44 Stat. 9). The Act of March 3, 1931 (46 Stat. 1516) amended subdivision (c) of that section. In quoting that section the matter added to the amendment is shown in italics. Section 302 provides in part:

“The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — * * *

“(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under Which the transferor has retained for, his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons zvho shall possess or enjoy the property or the income therefrom; except in case of a bona fide salé for an adequate and full consideration in money or money’s worth.

“(d) To the extent of any interest therein.of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person,' to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * * ”

First Although it had been decided that local law was controlling in determining who owned community earnings with regard to income tax, the Supreme Court had not, until recently ruled with respect to estate taxes. In Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77, 77 L.Ed. 199, it was said that “state law may control only when the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law”.¹ In accordance with that rule, thé Supreme Court had applied that rule, and held with respect to1 ownership of property, and the extent thereof, that general law would apply, rather than local law, and had reached a result opposite to what it would have reached had local law been applied. See cases cited in Welch v. Kerckhoff, 9 Cir., 84 F.2d 295, 298, 106 A. L.R. 1434.

The primary question was,, then, whether § 302 was to depend on ownership, as defined by local law. Construing that section, it was said in Porter v. Commissioner, 288 U.S. 436, 441, 53 S.Ct. 451, 452, 77 L.Ed. 880: “The net estate as there used does not mean an amount to be ascertained as such under any general rule of law or under statutes governing the administration of estates, but is the gross estate as specifically defined in section 302 * * * less deductions permitted by section 303 * * * ”

It is obvious that statutes relating to community property govern “the administration of estates” and therefore, under the language used, it would seem that such statutes would not be applicable. We so held in Bank of America Nat. T. & Sav. Ass’n v. Com’r of Int. Rev., 9 Cir., 90 F.2d 981, 983, saying that we believed local law “to be immaterial”. Thereafter, that statement was said to be “inaccurate” and community property law was applied under § 302, in Lang v. Commissioner, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331, May 16, 1938, the opinion making no explanation of, or reference to, Porter v. Commissioner, supra. In view of Lang v. Commissioner, supra, the present rule seems to be that community property law is applicable in determining the amount of the gross estate under § 302, and we consider the instant case on that assumption.

Second. Appellant contends that the agreement did not operate ás a “transfer” because it “merely attempted to define a. tenancy without creating one and did not establish an interest in and to property by any recognized conveyance”. In view of the granting words, we think the agreement was sufficient in form to operate as a conveyance.

Appellant further contends that there was no transfer'because decedent “gave up none of his statutory rights, powers or privileges with regard to community property acquired in California prior to 1927, and she by the same token gained no additional rights, powers or privileges in and to such property”. We believe this contention cannot be sustained.

California Civil Code, § 158 provides that “Either husband or wife may enter into any engagement or transaction with the other * * * respecting property, which either might if unmarried * * * ”. Section 159 provides: “A husband and wife cannot, by any contract with each other, alter their legal relations, except as to property is apparent that husband and wife may make a valid contract with each other, and may alter their legal relations with respect to property. Here decedent granted a present and equal interest in the property to which his wife then became entitled by virtue of the grant. Her legal rights were changed from an “expectancy” to a present and equal interest in the community property. The grant took effect, we think, upon delivery of the grant by virtue of § 1054 of the Civil Code, which provides: “A grant takes effect, so as to vest the interest intended to be transferred, only upon its delivery by the grantor”. * * ”. Thus, it

Third. Appellant further contends that even if the agreement did constitute a transfer, it was “intended to take effect in possession or enjoyment at or after death” and therefore the entire value should have been included in the gross estate pursuant to § 302(c), before amendment. Vesting of the interest, however, took place upon execution and delivery of the agreement, and was intended as such, and not at the death of the decedent. While such interest vested immediately, other rights, such as disposal, accrued to her upon the death of decedent. There is here no contention that such rights were sufficient to authorize taxation of the privilege of disposing of them. Compare Tyler v. United States, 281 U.S. 497, 50 S.Ct. 356, 74 L.Ed. 991, 69 A.L.R. 758; Gwinn v. Commissioner, 287 U.S. 224, 53 S.Ct. 157, 77 L.Ed. 270.

Fourth. Appellant further contends that decedent “retained for his life * * * the possession or enjoyment of * * * the property” ánd therefore the entire value should have been included in the gross estate under § 302(c) as amended. Eliminating redundant parts of the statute, we find that there must be included in the value of the gross estate “all property * * * To the extent of any interest therein of which the decedent has at any time made * * * a transfer under which the transferor has retained for his life * * * . the possession or enjoyment of * * * the property”. We think what decedent retained was his own interest. Both spouses had possession and enjoyment of the property and owned the income therefrom, although the property was subject to “management and control” by decedent. The terms “management and control” are not synonymous with “possession and enjoyment”. That one may manage and control property- without either possession or enjoyment is illustrated by the situation where an agent manages real property for the owner. In such case although the agent may have absolute control in managing and renting the property and in collecting rents, the rents belong to the owner who enjoys them. We think that theoretically each spouse had possession and enjoyment of his particular' in-s terest. Decedent, therefore, did not possess and enjoy his wife’s interest. If in controlling and managing the property, decedent transferred possession and enjoyment to' a third person, the fruits received for such transfer, were then owned by both spouses. See the cases in the dissenting opinion in Bank of America Nat. T. & Sav. Ass’n v. Com’r of Int. Rev., supra, page 985.

Fifth. Appellant further contends that while the agreement is irrevocable, decedent could have used the property so as to “alter, amend or revoke” the effect of the agreement, and therefore the entire value should be included pursuant to § 302(d). We do not understand that decedent had such power, however. By Civil Code § 172, he could not make a gift of, or dispose of, the community personal property, except for a valuable consideration, without the written consent of the wife. Civil Code § 172a, quoted above, discloses that except for leases for less than a year, the wife is required to join in executing an instrument. If on disposal of either kind of property, consideration is received, then such consideration becomes community property. See the dissent in Bank of America Nat. T. & Sav. Ass’n v. Com’r of Int. Rev., supra, page 985.

Sixth. The remaining contention of appellant is that if only one-half of' the community property is included, then only one-half of the community debts should be deducted. Section 303 of the act in question, 44 Stat. 72, permits deduction of “claims against the estate”. Article 36 of Regulations 80,.is applicable, and provides that there may be deducted amounts which “represent personal obligations of the decedent existing at the time of his death”. It was stipulated by the parties that the deduction was “the amount of $5,696.91, representing 100% of the debts of said W. E. Goodyear at the date of his death”. Since those debts were personal debts of decedent, and not debts of the community, the deduction was properly, made.

Affirmed.

1 The effect of Erie Railroad Company v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487, April 25, 1938 and Ruhlin v. New York Life Ins. Co., 304 U.S. 202, 58 S.Ct. 860, 82 L. Ed. 1290, May 2, 1938, if any, on this rule is yet to-be determined;