Higgins v. Commissioner , 16 T.C. 140 ( 1951 )

Mark B. Higgins, Petitioner, v. Commissioner of Internal Revenue, Respondent

Higgins v. Commissioner

Docket No. 23197

United States Tax Court

16 T.C. 140; 1951 U.S. Tax Ct. LEXIS 306;

January 19, 1951, Promulgated

---

Decision will be entered for the respondent.

Petitioner and his wife owned real estate in Pennsylvania by the entireties, and prior to 1946 he reported half of the income, and claimed half of the deduction for taxes and mortgage interest. For 1946 the taxes were paid by the company managing the rental of the property, and deducted from the net income remitted to the joint order of petitioner and wife. The net income for 1946 was deposited in the joint bank account of petitioner and wife. By his check on that account petitioner paid the mortgage interest. Each reported for 1946 one-half of the net income from the property but petitioner claimed the entire deduction for taxes and interest. Reliance was placed solely on the fact of such returns, as proof of agreement dividing the tenancy. Neither petitioner nor wife testified. Held, no agreement dividing property or bank account was shown, and the Commissioner did not err in disallowing the deduction to the extent of one-half thereof.

Samuel K. McCune, Esq., for the petitioner.

George C. Lea, Esq., for the respondent.

Disney, Judge.

---

DISNEY

This case involves income tax for the calendar year 1946. Deficiency was determined in the amount of $ 1,144.68. The only question presented is whether the petitioner is entitled to deduct 100 per cent of interest paid by him out of a joint bank account of himself and wife, upon mortgage upon property owned by them by the entireties, and 100 per cent of taxes paid upon such property by the company managing it out of gross income from the property before remitting the remainder to the petitioner and wife who deposited it in a joint bank account.

The facts were largely stipulated and we find the facts as so stipulated. In addition the income tax returns of petitioner and his wife were introduced in evidence by the respondent. We, therefore, include only such part of the stipulated facts as considered necessary in connection with discussion of the issue, with other facts found from the evidence, in our findings of fact.

FINDINGS OF FACT.

The petitioner and his wife Jean G. Higgins live in Pittsburgh, Pennsylvania. For 1946 each filed a separate income tax return with the collector at Pittsburgh, Pennsylvania, in April 1947 and each reported 50 per cent of the income from real estate known as Hiland Hall. The wife took no deductions with respect to interest and taxes. She reported income of $ 5,898.24. He reported income of $ 30,683.20. The premises had been acquired in 1942 by the petitioner subject to a mortgage as to which he assumed no personal liability. Shortly thereafter petitioner and his wife conveyed the property to one Frazer who on the same day reconveyed it to them as tenants by the entireties. During 1946 and for several years prior thereto Hiland Hall had been under the management of a real estate company which kept the premises rented, collected the rents, and paid expenses from such collections. The gross income from Hiland Hall for 1946 was $ 15,427.50. Therefrom the real estate company paid expenses of $ 6,685.96, including real estate taxes due and paid in that year in the total amount of $ 2,295.43, leaving net receipts of $ 8,741.54, which amount was transmitted to petitioner and his wife periodically during the year 1946 by checks drawn by the real estate company to the joint order of petitioner and wife. Periodical statements showing the operation of the premises accompanied the checks. The account was carried in the joint names of petitioner and his wife on the records of the real estate company. The $ 8,741.54 was deposited by petitioner and his wife in a joint bank account upon which both were authorized to and did draw checks. During 1946 $ 1,739.10 interest became due and was paid upon the mortgage on the property, by check drawn by the petitioner on the joint bank account.

The petitioner deducted the entire $ 1,739.10 in his separate individual income tax return for 1946. He also deducted the entire $ 2,295.43 taxes paid upon Hiland Hall by the real estate company.

For the year 1942 the petitioner filed a gift tax return showing the conveyance by him to his wife of "a one-half undivided equity interest" in Hiland Hall subject to the mortgage. After the specific exemption claimed no gift tax was payable. The petitioner filed a separate individual income tax return for the year 1942. Therein he reported as his income all of the net income from Hiland Hall from January 1, 1942, to July 31, 1942, (the property had been acquired by petitioner on January 3, 1942, and was conveyed to Frazer by petitioner and his wife on July 29, 1942) and one-half of the income (called "joint") from August 1, 1942, to December 31, 1942, the other one-half being indicated on the return as that of his wife. He deducted from the income for the period from August 1, 1942, to the end of the year one-half of the taxes paid. Interest paid on Hiland Hall is referred to as "sole" for the period from January 1, 1942, to July 31, 1942, and as "joint" from August 1, 1942, to the end of the year.

For each of the years 1943, 1944, and 1945 petitioner filed his separate individual income tax return and as to Hiland Hall reported one-half of the net income after the deduction of expenses, including taxes and interest.

OPINION.

Is the petitioner entitled to deduct all or only one-half of the real estate taxes and mortgage interest paid, as to Hiland Hall, owned by the entireties by himself and wife? We dispose at once of the taxes. They were not paid by the petitioner but were simply paid by the real estate company manager, the agent of both petitioner and his wife -- out of rentals collected and the balance after expenses were paid was remitted to their joint order and was deposited in their joint bank account. It is crystal clear, therefore, that such bank account was therefore depleted as to each of them in equal amounts by the payment of such taxes on their property held by the entireties and that in that manner each paid one-half of the taxes. We can see no possible ground for holding that the petitioner paid all of the taxes. The respondent did not err in this regard.

The interest, however, was actually paid by the petitioner, with a check drawn upon the joint bank account of himself and wife. The gist of the petitioner's argument for his view that the entire amount of the interest is deductible by him is that he actually paid it; that G. C. M. 15530 rules that where property is held by husband and wife by entireties either may deduct taxes paid by him or her in connection with such property; that cases uphold that idea; that payment was made by the petitioner with his own separate funds by reason of the understanding and action of the parties, which understanding was indicated from the manner in which he and his wife made their separate returns, and that even disregarding the understanding and action of the parties the fact that the payment was made from joint funds is immaterial. This understanding petitioner says is under the law of Pennsylvania, the situs of the matter, controlling as to the ownership of the funds used to pay interest (as well as taxes) and is not affected by the fact that there was a joint bank account or that the parties permitted the real estate company to carry the account in their joint names. It is argued that in the case of personal property the agreement of the parties ends the joint ownership of the property and that thereafter each holds his or her share separately, and that, therefore, the requirement that payment must be made by petitioner from his separate funds has been satisfied.

We find no such agreement or understanding as contended for by the petitioner. The mere fact of the filing of separate Federal income tax returns for 1946 wholly fails, in our view, to establish any understanding or agreement sufficient to terminate the tenancy by the entireties or the joint ownership of the bank account, therefore fails to demonstrate that petitioner paid the interest from his separate funds. Neither petitioner nor his wife testified as to any understanding between them. Obviously the mere filing of returns in which he claimed the entire deduction for taxes and interest and she did not, proves no division of property as to either the real estate or the bank account. If such filing tends to indicate anything, it would at most suggest division of income, for tax purposes, which of course is without effect, Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579. However as to Hiland Hall for 1946 each reported one-half of the income. Moreover petitioner may have so claimed the deductions without consulting his wife and merely informed her of his action. The interest and taxes were paid before any understanding indicated by the returns, for the returns were filed in April 1947 and the interest and taxes were paid in 1946. It is not necessary to discuss Pennsylvania law as to agreements dividing property held by entireties, for no such agreement is shown to us here. This leaves a situation where interest on a mortgage on property owned by both petitioner and his wife is paid from an account owned by both of them, into which the rents from such real estate had been deposited in an amount far greater than necessary to pay the interest. The record does not indicate whether moneys other than from the real estate went into the joint bank account. For three and one-half years prior to the taxable year, and from the time the property became owned by entireties, petitioner had reported only one-half the income, and claimed only one-half of the deduction for interest and taxes, all consistent with the estate by entireties and with his gift tax return for 1942 reporting a gift to his wife of "a one-half undivided equity interest" in the real estate. Yet for 1946, still reporting only one-half of the income, petitioner drew a check on joint funds of himself and wife to pay the interest, therefore claims the deduction for all. The wife's funds paid one-half. The interest was paid for the benefit of both. It was not paid from separate funds. Not only did petitioner's gift tax return recognize that the wife was given an equitable undivided one-half interest but Pennsylvania law so recognizes, though the estate is held by entireties, O'Malley v. O'Malley, 272 Pa. 528">272 Pa. 528, and action such as payments by one spouse is presumably by authority and on behalf of the other. Gasner v. Pierce et al., 286 Pa. 529">286 Pa. 529. For purposes of the present deductions, where the paying check was on a joint bank account, wherein the rentals from the property were deposited, no different rule is justified by the Revenue Act. Moreover, we find in the law of tenancy by entireties no principle dictating, under the circumstances here, the treatment of tax deductions under the Internal Revenue Code. Corliss v. Bowers, 281 U.S. 376">281 U.S. 376.

So far as reliance is placed on G. C. M. 15530 by the petitioner, we find it no authority for the deduction in the absence of payment from separate funds, and the cases cited indicate nothing more. The petitioner agrees that one of them, F. C. Nicodemus, Jr., 26 B. T. A. 125, was a case where payment was made by a spouse from separate funds, and that the other citations do not indicate the source of funds. Review of the cases cited shows:

In William R. Tracy et al., 25 B. T. A. 1055, taxes were paid by and deduction allowed to the husband alone, on property held by the entireties. But there is no suggestion that they had a joint account or that payment was made therefrom so the instant question did not arise.

The fact that in F. C. Nicodemus, Jr., supra, conclusion that a husband could deduct taxes and mortgage interest paid by him on property owned by the entireties, was carefully placed on the ground that he paid from his separate funds, plus the fact that as one owner by the entireties he had a duty and right to pay, indicates that the petitioner's contention here is unsound, for it is based only on the duty and right to pay under tenancy by entireties. Had the petitioner's view here been that of the Board there, no attention by the Court would have been necessary to payment from separate fund, and the fact would have been immaterial.

Charles F. Fawsett, 30 B. T. A. 908, involved no question involved here. In George A. Neracher, 32 B. T. A. 236, no contention appears that the husband paid with joint funds, and deduction of interest paid by him was based only on the fact that he paid interest upon a note signed by him upon which he was jointly and severally liable. The case is of course not material here. In Al Jolson, 3 T.C. 1184">3 T. C. 1184, the husband paid his wife's California income taxes apparently from his separate funds, since they were paid by him after an agreement of separation between him and his wife. Moreover, the only point decided was that he was, under California law of community property, liable for the income taxes of his wife, therefore had a right to deduct them. On both points the case is distinguishable from the instant matter.

We find no error on the part of the respondent in denying one-half of the deduction claimed.

Decision will be entered for the respondent.