Crosby v. Commissioner , 46 B.T.A. 323 ( 1942 )

EVERETT N. CROSBY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Crosby v. Commissioner

Docket No. 104252.

United States Board of Tax Appeals

46 B.T.A. 323; 1942 BTA LEXIS 875;

February 18, 1942, Promulgated

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">*875 The petitioner performed services while a member of a marital community in California, but received payment therefor after an agreement of separation and division of property rights had been executed by petitioner and wife, making the income the separate property of the husband. Held, the petitioner is taxable upon the entire amount received as ordinary income.

Todd W. Johnson, Esq., for the petitioner.

E. A. Tonjes, Esq., for the respondent.

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DISNEY

">*323 This proceeding involves income taxes for the calendar year 1938. A deficiency was determined in the amount of $6,649.78, but only a portion thereof is involved, the parties having stipulated certain deductions which will be reflected under Rule 50. The question remaining is the effect of an agreement executed between the petitioner and his wife in the taxable year as to their marital affairs upon earnings thereafter received by petitioner, but received for services performed prior to the agreement.

The parties filed a stipulation covering the principal facts. Such facts are found as stipulated, but only those portions considered here pertinent will be set forth in connection with">*876 facts found from other evidence of record.

">*324 FINDINGS OF FACT.

The petitioner at all times herein involved was a resident of California, and filed his Federal income tax return for the taxable year on a cash receipts basis, with the collector at Los Angeles, California.

On April 19, 1927, he married and thereafter at all times, he and his wife lived together in California until 1937, since which time they have been separated, and divorced since April 29, 1938. One child, living at the time of the hearing, was born of the marriage.

In July 1927 the petitioner had no net worth, his liabilities being more than his assets, which consisted of his clothes and a secondhand automobile.

On February 11, 1938, the petitioner and his wife, Naomi M. Crosby, entered into a property settlement agreement. In material part the agreement provided that the parties had separated; that they were mutually desirous of fully determining and settling their property rights for the present as well as for the future, and to provide for alimony and support and custody of the child; that in consideration of the premises and agreements, they "do hereby alter and change their relations">*877 as to property and property rights", and custody of the child, and "in order to provide more effectually for their mutual maintenance and support" they agree that the petitioner will and does assign to the wife "as and for her sole and separate property and estate" certain items of personal property, including property out of the community property already itemized; and other personal property "set aside * * * as per oral agreement on February 3, 1938" - the nature and amount of which is not shown by the record; also including a promissory note from her father of the value of $7,016.17; that the husband will pay the wife's attorney fees, will pay the expense of supporting and educating the child during minority, will pay certain household bills and the wife's personal bills to the extent of $700 and will pay her "as and for alimony and her support and maintenance" $500 in cash and $21,500 in cash over a period of 73 months, unless the wife should remarry, in which case thereafter only a lesser sum (to wit,$100 per month until the end of the 73 months) should be paid. The wife on her part agrees to and does convey to the husband "as and for his separate property and estate" certain">*878 of the itemized community properties, real and personal, including a management contract with Bing Crosby." Each waived, renounced and relinquished to the other all right in the property of the other "and to any and all earnings, profits and income" of the other, and the wife waived all claims to support and maintenance, "alimony pendente lite or permanent alimony, excepting as herein provided", and the wife thereby granted to the husband all of her right, title, and interest, present or future to the property, income and ">*325 profits of the husband. The agreement recites that it is intended to be a full, complete and final adjustment and settlement of all the property, interests, and rights of the parties, which are to be the separate property of the respective parties; and that each party has read the agreement, had the same fully explained by his attorney, and fully understands it.

An interlocutory decree of divorce was entered on April 29, 1938, and an absolute decree was entered May 3, 1939, both in favor of the petitioner against his wife. The petitioner had obtained evidence of adultery on the part of the wife, but the ground for divorce alleged, and upon which divorce">*879 was granted, was cruelty.

Of the $22,000 which the petitioner agreed to pay to his wife, $3,500 was paid during 1938, and he has since paid the remainder. He also paid, under the terms of the settlement agreement, the wife's Federal income taxes for 1937, amounting to $1,856.77.

Between February 11, 1938, the date of the agreement, and December 31, 1938, the petitioner had income of $51,052.42, of which $10,000 was for services performed by him after February 11, 1938, and $41,052.42 was received for services performed by him prior to February 11, 1938, in negotiating contracts for the services of Bing Crosby. Between January 1, 1938, and February 11, 1938, petitioner received $6,065.22 income.

From August 29, 1934, the petitioner held a five-year contract "to negotiate contracts with other parties for hiring out the professional services of said Bing Crosby", on a basis of 10 percent of money received by Bing Crosby, and all of the $57,117.64 of petitioner's income herein involved was from that source.

A balance sheet of the community estate of the petitioner and his wife, as of February 11, 1938, shows book assets worth, at cost per books, $95,232.36 and at market value">*880 on February 11, 1938, $53,314.66; also, not on the books, the contract of management of Bing Crosby, with a cost to the community "nil" and market value $50,000; also an item of 10 percent interest profits from a moving picture, "Pennies from Heaven" (covered by the Bing Crosby contract), with cost "nil" and value $5,000. Total liabilities of $43,754.28 are shown, with net worth of community estate as $51,478.08 on basis of cash to community and $64,560.38 on the basis of value on February 11, 1938. We find the cost, asset values, and liabilities to be as set forth in the balance sheet.

The petitioner, in his Federal income tax return for 1938, returned one-half of the $57,117.64, or $28,558.82, as his income; the other half was included in the income tax return filed in the name of Naomi M. Crosby, his then wife. The Commissioner determined that petitioner had net income of $48,815.44, by determining that petitioner was ">*326 taxable upon $3,032.61, or one-half of the $6,065.22 received by the petitioner in 1938 prior to the property settlement on February 11, 1938, plus $51,052.42, all of the income received during the remainder of 1938 after the property settlement.

">*881 The petitioner in 1939 paid a tax of $1,728.01 for 1938 and at the hearing amended his petition to ask for a refund.

The $22,000 was paid to the wife as and for alimony.

OPINION.

DISNEY: The petitioner concedes his taxability upon $3,032.61 as one-half of the community income prior to the separation agreement, and upon $10,000 of the $51,052.42, received thereafter, since $10,000 was received for services performed after February 11, 1938. Therefore the only question to us presented is whether he is taxable upon $41,052.42, received after February 11, 1938, which is stipulated to have been "for services performed by him prior to February 11, 1938, in negotiating contracts for the services of Bing Crosby."

This conclusion depends upon the effect of the property settlement upon income from services performed before such settlement, but received thereafter. Upon brief the petitioner agrees (and the law is well settled) that the husband and wife could by the property settlement make the commissions in question the property of the petitioner when received, and that they did so. They were not paid to the wife. The question is therefore, whether, though received by the husband">*882 and not the wife after the property settlement, the amounts are, as contended by the petitioner, taxable to him only to the extent of one-half because earned during the marital community. Cases cited to the effect that the character of income as to whether community or not, is to be determined as of the date of inception of the contract from which they are derived, do not here apply, for the question here is as to the effect of a property settlement.

On that question the petitioner's argument in substance is, first, that the petitioner purchased the right to the income from his wife and had not in the taxable year recovered his basis of cost and was therefore not taxable; second, that if not a purchase and sale, the transaction was a division or partition of property, analogous to distribution in kind by a partnership, and that, applying the law as to partnerships, petitioner has not recovered his base; and third, that if there was no consideration for the assignment by the wife, then under Helvering v. Horst,311 U.S. 112">311 U.S. 112, and other cases, the wife was for tax purposes unable to assign income and was still taxable on her community one-half of what petitioner">*883 received in the taxable year. The respondent's view is in effect that after the property settlement separating the community property rights, both the parties and the ">*327 Government are bound thereby, rendering later receipts taxable in accordance with ownership.

We conclude, first, that there was consideration for the transaction agreement, and that the theory underlying the Horst case does not apply. The mutual agreements and covenants, specifically stated in the agreement to be the consideration therefor, and the division of the community property, plainly constitute ample consideration. Mutual consent is sufficient consideration. Sec. 160, Cal. Civ. Code. A gift is not involved. Wren v. Wren,100 Cal. 276">100 Cal. 276; 34 P. 775. Nor can we apply Mrs. Len Langston,23 B.T.A. 991">23 B.T.A. 991, cited by the petitioner, for that proceeding involved a mere donation of right to receive income, unconnected with any division or conveyance of property.

Petitioner's theory that there was distribution of partnership property calling for application of the basis of a partner, so that under section 113(a)(13), Revenue Act of 1938, no tax would">*884 be payable by him, is in our opinion untenable; and in any event no basis is shown. A marital community can not soundly be viewed as so completely a partnership as to require application of the Federal statutes as to income tax relative to that entity, as petitioner alternatively asks. The nature of the wife's interest in the community estate has been the subject of much discussion, with conclusions various; but we think it clear that the power of management in the husband, the grave question as to ownership in the wife, and her limited powers, well indicate that such relation was not contemplated by Federal income tax statutes as to partnership. Indeed, this is shown by section 113(a)(13), relied on by petitioner, for that section gives the partner, in case of distribution in kind to him, a basis of "such part of the basis in his hands of his partnership interest as is properly allocable to such property." Though, as petitioner argues, the allocation is to be in proportion with property values held and distributed at the time of distribution, yet the petitioner errs in finding a basis in cost to the partnership, thereby demonstrating the inapplicability of the partnership theory">*885 to a community estate. As shown by G.C.M. 20251, C.B. 1938-2, p. 169, cited in part by petitioner, a partner's base is not cost to the partnership, but his contribution to the partnership, proportioned to the property distributed in the ratio of its value to the value of all partnership assets. Here there was no contribution to a partnership, or to the community estate. At approximately the date of marriage, the petitioner's assets were nothing, as shown by his testimony, so that petitioner had no "basis in his hands of his partnership interest", in the words of section 113(a)(13), to allocate to the property distributed to him. This indicates that to a marital community, to which as such there is no contribution of property or money, should not be applied the statutes as to partnership. A husband and wife might ">*328 form a partnership and contribute money or property thereto, but they do not do so merely by marrying and living in a community property state. But in any event, as above set forth, petitioner has shown no basis to allocate in proportion to values at the date of contract.

This leaves for consideration petitioner's theory that he purchased from">*886 his wife the right to the income involved, and has not recovered his base therein. Though we have above held that consideration was involved in the contract, that fact alone does not demonstrate that there was a sale, within the purview of the Federal income statutes. The parties may, in California, agree to divide community by a contract not amounting to a conveyance. The California statute, section 159, Civil Code, merely provides that a husband and wife may by contract alter their legal relations as to property. A sale is not required. Was there in fact a sale herein? The petitioner relies in part upon the fact that he received the greater portion of the community property, assumed the community debts, and agreed to pay $22,000, and contends that the $22,000 was not for alimony, but for the wife's interest in the property rights. We find no assumption of the community debts, except certain items. Petitioner asserts that he received all of the community property, except the promissory note of $7,016.17. The record shows that other community property was received by the wife, and, further, by a blind reference in the agreement of February 11, 1938, to division to the wife">*887 of personal property covered by a previous division of property on February 3, 1938, fails to show what proportion of the entire community property was received by the wife. Though the petitioner testified that the $22,000 was not paid for alimony, the agreement specifically in a separate paragraph, covers the matter; states that it is paid "as and for alimony and her support and maintenance"; and earlier, after reference to settlement of property rights reads: "and to provide for alimony and the support and maintenance of said Second Party * * *." Moreover, the money payments upon the $22,000 total were to be cut down in case of remarriage of the wife, she in that event thereafter to receive payments of only $100 per month, only until 73 months from the date of the agreement. Elsewhere the agreement provides a release by the wife of "all claims for alimony pendente lite or permanent alimony, excepting as herein provided." The contracting parties particularly agreed that the agreement had been read and explained by counsel, and was fully understood. From all this we must and do conclude, notwithstanding petitioner's statement that payment of the $22,000 (or lesser amount, if the">*888 wife had remarried) was not for alimony, that it was, and was particularly so made and understood.

That the petitioner had evidence of such grounds for divorce as would preclude alimony to the wife is not controlling. The divorce ">*329 was not sought or obtained on such grounds. Moreover, we can not anticipate whether a divorce court would have believed the evidence; therefore, we can not say that alimony to the wife was impossible. It was particularly in the minds of the contracting parties, and a plain part of the consideration.

We think that we have before us here a mere agreement, within the California statute, to alter the legal relations of the parties as to property, which includes income, not essentially different from that involved in Frances R. Walz, Administratrix,32 B.T.A. 718">32 B.T.A. 718. The petitioner seeks to distinguish that case because he says therein no money was paid to the wife. This is error, since there the husband executed his promissory note, just as the petitioner here agreed to pay in the future. No real difference can be seen in the cases. Yet we held that there was "no sale or exchange of the property in question, but a division">*889 of property." Here the parties agreed that the execution of the agreement "is intended to be and is a full, complete and final adjustment and settlement of all the property interests and rights of the parties hereto." Such, and not sale, we consider the nature of the transaction to be, and consider the right to income included. In Kaltschmidt v. Weber,79 P. 272, it was said that the parties to a marital community may agree that "future as well as past earnings" shall be separate property and that "the effect of such an agreement will be to convert such earnings from the status of community property to that of separate property of the wife." In F. Eldred Boland,41 B.T.A. 930">41 B.T.A. 930, an attorney and wife, a marital community in California, agreed that his earnings should be separate, and we held that the agreement served to make the husband taxable upon his earnings. Though the taxable year was several years after the agreement, earnings as an attorney may have included those from services performed prior to the agreement, and no distinction was made. Very recently in ">*890 Johnson v. United States,124 Fed.Supp. 518, the United States District Court for the Southern District of California had the present question before it, that is, whether a property settlement between husband and wife covered past earnings collected after the agreement. The Government contended, and the plaintiff conceded, that the transaction between husband and wife constituted division or partition of property, and not a sale or exchange of properties. The court held that under sections 158 and 159, California Civil Code, the agreement rendered the collections upon past earnings the sole property of the husband and that he was taxable upon the full amount thereof, no capital transaction being involved. We agree with the conclusion there set forth. Though in a sense the parties were disposing of property rights, the right received by the petitioner was merely contractual, and can not soundly ">*330 be considered to have a base, as petitioner argues, in the amount of the value of the property and money which passed to the wife, not only because the money was "as and for alimony", but because there was division, and not sale, of the community rights, with">*891 no basis, of cost or otherwise, in the contract as to the services of Bing Crosby. The right received by the petitioner was one to receive ordinary earnings, and not property acquired through capital expenditure.

We therefore conclude and hold that the petitioner received ordinary income in the entire amount of the earnings collected after February 11, 1938.

Decision will be entered under Rule 50.