Court Opinion

ID: 4624329
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:54:54.973161+00
Date Added: 2024-06-11T07:56:30.621446
License: Public Domain

L. C. MITCHELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mitchell v. CommissionerDocket No. 41610.United States Board of Tax Appeals28 B.T.A. 767; 1933 BTA LEXIS 1073; July 27, 1933, Promulgated *1073  1.  The word "mutual" used in a postnuptial contract which provided that each spouse should own a certain share of mutual property and income, constructed to cover only property which was joint or common and not to include the earnings of either spouse from an employment that was not joint or common.  2.  The stock of the corporation was purchased by a husband in his own name with money arising from a joint bank account and with the proceeds of bonds, in both of which the wife had an interest.  Held, the wife had a joint equitable interest in the stock.  Joseph Nievinski, Esq., for the petitioner.  George S. Adams, Esq., for the respondent.  MARQUETTE *768  Respondent has determined a deficiency in income tax for the year 1925 in the amount of $7,680.69.  The petitioner assigns as errors (1) the failure of the respondent to permit a division of income between the petitioner and his wife in accordance with a partnership agreement between them; and (2) that the respondent has increased the petitioner's income by adding to it an amount which in fact was income of his wife.  FINDINGS OF FACT.  The petitioner and his wife, Hattie, were married*1074  in Oregon on June 9, 1909.  At that time the petitioner had $300 in cash and his wife $400, which amounts they had saved prior to their marriage.  Shortly after their marriage they purchased a bakery business at McMinnville, Oregon, for the price of $1,200, on which they made a cash payment of $700 and the balance was to be paid at the rate of $75 per month.  Mrs. Mitchell desired a paper to evidence the fact that she had furnished a part of the capital, and such also was the desire of her family.  On June 25, 1909, the petitioner and his wife entered into an agreement in writing which had been drawn by an attorney.  The material part of that agreement reads: It is mutually agreed that in consideration of the amount of capital furnished by each of the parties hereto, that said Lloyd C. Mitchell shall own three-sevenths (3/7) of all Mutual property and income, and that the said Hattie Mitchell shall own four-sevenths (4/7) of all mutual property and income.  The above agreement was not recorded but was known generally to those who dealt with the bakery.  Both parties worked in the bakery and neither drew any wages.  The unpaid installments on the bakery were paid from the proceeds*1075  of the business.  In November 1911, the petitioner and his wife sold the bakery for $4,250, of which the amounts of $2,000 or $2,200 were paid in cash.  This, with the remaining installments as paid, was deposited in a bank account in the name of petitioner and his wife, on which either could draw.  From this time on the petitioner and his wife maintained such a bank account and neither thereafter had an individual bank account.  After the sale of the bakery the petitioner attended a bakery school in Chicago.  He returned to Oregon in the spring of 1912.  While *769  he was away Mrs. Mitchell worked a large part of the time and deposited her earnings in the joint bank account, from which the petitioner's expenses in Chicago were paid.  On his return to Oregon petitioner worked on a salary for a flour milling company in Portland testing flour.  He put in a laboratory at his home and Mrs. Mitchell, having been taught by him, assisted him at this laboratory in teaching others to test flour.  She devoted four or five hours a day to this work.  This laboratory work brought in between $600 and $700.  These amounts and petitioner's wages were deposited in a joint bank account.  Out*1076  of this account a house in Portland was purchased, the title to which was in petitioner and his wife.  The latter part of 1914 the petitioner went to Los Angeles, California, and accepted a position with a milling company as demonstrator of flour in the bakeries which were customers of the mill.  The house in Portland was sold.  The petitioner also conducted a laboratory for testing flour in which no charge was made for services to customers of the mill but charges were made to competitors.  His wife and he worked in the laboratory on Sundays and on many evenings.  The petitioner's salary, the income from the laboratory, and the proceeds of the sale of the house in Portland were deposited in a joint bank account.  Unregistered Liberty bonds were purchased with money withdrawn from this account.  Mrs. Mitchell purchased some of the bonds.  All the bonds were kept together.  In April 1919, the petitioner accepted a position in Ogden, Utah, at a salary of $75 a week with the Ogden Baking Co., a corporation with a capital stock of 60,000 shares, of which 57,000 shares were outstanding and 3,000 shares were retained in the treasury.  At this time the petitioner purchased 5,500 shares*1077  of the stock of this corporation, for which he paid $5,500.  This payment was made from the joint bank account.  In 1920 the petitioner purchased 29,000 shares from one Wright and 5,500 shares from one Wishart.  This stock was paid for with about $4,000 of the Liberty bonds and for the balance the petitioner executed his individual promissory notes, payable $500 per month.  Before this latter purchase was made the petitioner and his wife called Wright's attention to their agreement of 1909 and requested that this stock be issued three sevenths to the petitioner and four sevenths to his wife.  This Wright refused to do, stating that he did not wish any woman mixed up in the deal, that he did not desire to be compelled to take any action against a woman.  When this purchase was proposed to the petitioner he informed Wright that he was financially unable to make the payments.  Wright replied that the petitioner could raise his salary.  It was then agreed that the installment payments would be made out of his salary and out of the dividends on the stock.  The petitioner's salary *770  was increased to $150 a week and then to $1,000 a month.  The stock so purchased was paid for out*1078  of the petitioner's salary and the dividends on the stock.  Two hundred and fifty shares of the stock of the company were placed in Mrs. Mitchell's name in order that the might act as a director.  These 250 shares constituted the only stock that ever stood in her name.  Mrs. Mitchell did some work for the company but drew no salary.  In 1924 the Continental Baking Corporation desired to buy all the stock of the Ogden Baking Co.  In order to effectuate this sale it became necessary for the petitioner to purchase all the outstanding stock which was not then in his name or that of his wife.  He purchased this stock for cash derived from money borrowed on notes.  The sale to the Continental Baking Corporation was made in 1925 for $225,000 cash.  Out of this the notes were paid, leaving a balance in the neighborhood of $165,000.  Of this amount $100,000 was set aside for future investments and was invested; $30,000 was turned over to Mrs. Mitchell to be and was placed in a trust fund for the education of their daughter, and the petitioner received what was left, somewhere between $31,000 and $33,000.  About the same time Mrs. Mitchell received from the petitioner $7,000 or $8,000 arising*1079  from the sale of property which stood in his name.  The installment payments which constituted this transfer were permitted to stand in the petitioner's name.  Neither the petitioner nor his wife ever made a purchase or a sale or entered into any transaction without consulting the other.  No partnership income tax return was ever made by the parties.  In his income tax return for 1925 the petitioner reported all of his salary from the Ogden Baking Co. and all the dividends from the stock in that company which stood in his name and from the 250 shares which stood in the name of his wife.  He took as a deduction a loss sustained on the sale of certain real estate.  He reported gain from the sale of the stock of the Ogden Baking Co. in the amount of $29,672.82.  His wife made a separate return for 1925 in which she reported but one item of income, to wit, the amount of $39,564.27 arising from the sale of this stock.  She took no deductions.  Respondent allowed the loss on the sale of the real estate but in an amount less than that reported.  He determined the cost of the stock of the Ogden Baking Co. purchased in 1919 at $5,500 and the cost of the stock purchased in 1920 at $39,000*1080  and determined a capital net gain on the sale of these stocks of $83,850.67.  He determined the cost of the stock of the Ogden Baking Co. purchased in 1924 at $10,000 and of that purchased in 1925 at $71,050 and determined a gain on the sale of these stocks at $8,987, all of which gains he taxed to the petitioner.  *771  OPINION.  MARQUETTE: Shortly after their marriage and on the eve of acquiring the bakery business in McMinnville, Oregon, the petitioner and his wife entered into the contract of June 25, 1909.  Respondent contends that this contract related only to the capital invested in and the income derived from this particular business.  The petitioner asserts that this contract was in the nature of a marriage settlement which fixed the proportions in which the petitioner and his wife were to own all property acquired by either during the marriage.  The contract contains no provisions which in terms show that it applied only to the baking business.  On the other hand it speaks of "all" mutual property and income - a very general term.  In this state of case the mutual understanding of the parties should be given consideration.  Both testify that it was their understanding*1081  that it was to continue in effect so long as they were married.  This contemporaneous construction by the parties interested in our opinion resolves the doubt in favor of their construction.  When we come to the question of what property was embraced by the contract we find that the words "property" and "income" are modified by the adjective "mutual." This adjective is used twice and evidently for a definite purpose and that purpose was, we think, one of restriction.  Not all property and all income were to be owned by the husband and wife in the proportions stated but only such property as was mutual.  The primary meaning of this word is reciprocal.  It also imports the idea of common or joint, Webster's New International Dictionary.  ; ; . Here the parties were about to invest their capital and contribute their labor to a common or joint enterprise.  The capital of each was to be jointly used and the income which was to be shared was that derived from the joint use of their capital and the common contribution of their labors. *1082  Giving to the word "mutual" the only meaning which is applicable to the situation and construing it in the light of the enterprise about to be begun, it seems clear that the word as used imports the idea of common or joint.  Thus, it certainly could not be successfully contended that property acquired by either from sources that were not mutual was to be owned by both, as, for instance, property acquired by devise or bequest.  By the same token we think that this word does not cover the earnings of either which were not derived from a mutual source.  This contract was valid in Oregon (Oregon Laws, secs. 9743, 9744, 9745; ; ) and being intended to cover after-acquired property to the extent we have *772  indicated, it was valid in California and Utah.  ; , and authorities cited.  Under this construction all the income derived from the school in Portland and the laboratory in Los Angeles was mutual.  On the other hand, the petitioner's earnings from his employment in the mill in Oregon Became his separate property and his earnings*1083  from his position in Los Angeles were community income, which under the laws of California were his income.  . But when the petitioner deposited his earnings in the joint bank account in Oregon they at once became mutual and were owned in the proportions fixed by the contract of 1909.  The same is true of the deposits made in the bank in California.  , and cases cited.  By virtue of the agreement of 1909 the interest of each in the joint deposit was in the ratio of three to four.  The purchase in 1919 of 5,500 shares of the stock of the Oregon Baking Co. was made with money drawn from the joint bank account in which Mrs. Mitchell had an undivided four-sevenths interest, with the result that she became the equitable owner of four sevenths of the stock then purchased.  ; ; affd., ; . The petitioner owned the other three sevenths. In 1920 the petitioner purchased 29,000 shares from Wright and 5,500*1084  shares from Wishart.  On this purchase a down payment amounting to $4,000 was made in Liberty bonds which had been purchased with money drawn from the joint bank account.  Although it is not clear whether an indefinite number of these bonds belonged to Mrs. Mitchell, it would seem that the only effect of such a transaction would be to increase her share.  Not being informed as to the amount, if any, of the bonds which she may have separately owned, we find that she was the equitable owner of the stock then purchased to the extent of her four-sevenths interest in the bonds used in the acquisition of this stock.  For the remainder of the purchase price the petitioner executed his personal notes which according to the understanding between him and Wright, were to be paid out of his salary and from the dividends.  This agreement was carried out.  None of this money came from a mutual source but all from the earnings and property of the petitioner.  The stock so purchased, except to the extent of Mrs. Mitchell's interest in the Liberty bonds, was the petitioner's stock.  What we have said with reference to this stock applied equally to that purchased in 1924 and 1925 in order to effect*1085  the sale to the Continental Baking Corporation.  All of this stock belonged to petitioner.  *773  As against this conclusion the petitioner makes two contentions.  The first is that when he purchased the stock from Wright it was his desire that four sevenths of it be placed in the name of his wife, a request with which Wright refused to comply.  We attach little importance to this for two reasons.  First, the petitioner agreed to it and, second, if he was in fact in earnest about this being done, he could easily have placed four sevenths of the 5,500 shares purchased in 1919 in his wife's name.  Wright could not have objected to this since that stock was paid for in cash and Wright or whoever owned it would not have been compelled to sue Mrs. Mitchell.  Besides, 250 shares of this stock were placed in her name in order that she might qualify as a director.  The second contention of petitioner is that the division in 1925 of the proceeds of the sale was made in accordance with the contract of 1909.  We are unable to find that any such division was made.  The testimony on this question is quite hazy.  We do not know what became of the $100,000 fund that was set aside.  We do*1086  not know how or in whose name it was invested.  We are informed that $30,000 was turned over to Mrs. Mitchell, but this amount was to be and was placed in trust for the education of their daughter, a duty which rested just as much on him as on her.  The petitioner retained between $31,000 and $33,000.  It is true that Mrs. Mitchell received between $7,000 and $8,000, but this came not from the proceeds of the sale of the stock but from a sale of land which stood in the petitioner's name.  The record does not disclose that Mrs. Mitchell then or thereafter received four sevenths of the proceeds of the sale.  The respondent's determination is sustained except to the extent of the gain arising from the sale of Mrs. Mitchell's equitable interest in the stock of the Ogden Baking Co. by reason of the investment therein of her four-sevenths interest in the joint bank account and in the Liberty bonds.  Judgment will be entered under Rule 50.