Court Opinion

ID: 4595205
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:14:33.713298+00
Date Added: 2024-06-11T07:51:23.972182
License: Public Domain

CAROLINE E. BURKE AND SEATTLE TITLE TRUST COMPANY, A CORPORATION, AS ADMINISTRATORS WITH THE WILL ANNEXED OF THE ESTATE OF THOMAS BURKE, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Burke v. CommissionerDocket No. 34821.United States Board of Tax Appeals22 B.T.A. 337; 1931 BTA LEXIS 2141; February 24, 1931, Promulgated 1931 BTA LEXIS 2141">*2141  COMMUNITY PROPERTY. - Real estate acquired in Washington by a resident thereof prior to his marriage is separate property and remains his separate property after marriage.  A building erected on the husband's separate property out of commingled separate and community funds is community property.  Income from the property after erection of the building should be apportioned to the husband and the community on the ratio of the respective values of the land and the building to the total value.  William G. McLaren, Esq., for the petitioner.  L. A. Luce, Esq., for the respondent.  ARUNDELL22 B.T.A. 337">*337  The respondent, holding that income from certain property was the separate income of the husband instead of community income as reported, determined deficiencies for the year 1924 and the period January 1, 1925, to December 4, 1925, in the respective amounts of $2,885.60 and $2,243.98.  Petitioner claims that the entire income from the property was community income, or, in the alternative, that a portion of the entire income determined by the proportion of the value of the improvements to the total value is community income.  By amended answer the respondent1931 BTA LEXIS 2141">*2142  claims that he erred in accepting separate returns on the community property basis for the period January 1 to December 4, 1925, and asks that the entire amount of income reported by the wife for that period be added to the income of the husband and the deficiency increased accordingly.  A stipulation of facts was filed which was supplemented by the testimony of two witnesses for the petitioner.  FINDINGS OF FACT.  In 1878 Thomas Burke, then single, purchased at sheriff's sale a lot in Seattle, Wash., hereinafter referred to as the Empire Building property.  At that time Burke had little or no money.  He was preparing to be married in the near future and his fiancee gove him $500 to apply on the purchase of the property.  He borrowed $800 from a banker.  Out of these funds he paid the purchase price of $1,250.  He paid off the indebtedness of $800 in monthly installments of $20 each.  22 B.T.A. 337">*338  In 1879 Burke and his wife, Caroline E. Burke, were married at Seattle, Wash., and the marital relation continued until terminated by Burke's death on December 4, 1925.  Burke had resided in Seattle for a brief period prior to his marriage and continued to reside therein until his1931 BTA LEXIS 2141">*2143  death.  At the time of his marriage in 1879 Burke had practically no property except the Empire Building property.  At the time of the purchase of the Empire Building property, the only improvement thereon was a small frame dwelling house of a story and a half standing on the lot, and which remained there until 1897.  During the year 1897, the ground under the frame building was excavated to the level of the street, extending back for twentyfive feet, and a one-story brick store building was constructed and the frame building set over it at a cost of $6,500.  There were no other substantial alterations to the building or improvements erected on the lot from 1897 until during the year 1906.  In that year the two-story building then standing on the lot was removed and a modern reenforced concrete building was erected on the premises at a cost of $392,742, which building was completed in 1908.  During the years 1906 to 1908, the lot, exclusive of any improvements thereon, had a value not in excess of $210,000.  During 1924 and 1925 the building bore the same proportionate value to the lot without improvements erected thereon as during 1906 to 1908.  Burke was a prominent practicing1931 BTA LEXIS 2141">*2144  attorney and subsequent to his marriage received a very substantial income from his profession.  The income from his law practice; all the net rentals from the Empire Building property and the properties he acquired after marriage; the dividends on stock and proceeds from the sales of securities; and all other income were deposited in one checking account in the Canadian Bank of Commerce at Seattle, Wash., from time to time, and during the year 1897 these accumulated funds were used for the payment of the $6,500 required to erect the brick store building on the Empire Building property.  During 1906 to 1908 these accumulated funds, together with credit obtained through short-time loans at the bank and the proceeds from $150,000 note and mortgage to the Northwestern Mutual Life Insurance Company on the Empire Building property signed and executed by Burke and his wife, were used to pay all the cost of the construction of the Empire Building.  During the years from 1907 to 1925, inclusive, the net rentals derived from the Empire Building were $642,273.60, or an average yearly rental of $33,803.97.  In arriving at the net rentals, no allowance has been made for interest paid on mortgage1931 BTA LEXIS 2141">*2145  indebtedness.  During this period from 1907 to 1925, Burke received net rentals from other properties in the city of Seattle which had been acquired 22 B.T.A. 337">*339  subsequent to his marriage aggregating $1,075,552.42, which rentals were deposited from time to time in the aforesaid checking account.  All the income derived from the Empire Building property was included by Burke as a part of his general income in making his returns for income tax purposes since 1913, and he always reported the income from this property in the same manner as the income from the other properties referred to above which had been acquired since his marriage.  Burke's will, dated November 3, 1925, contained the following declaration: SECOND: I acknowledge that all of the property of every kind and nature in which I now have any right, title or interest is the community property of myself and my wife, Caroline E. Burke.  I make this statement for the purpose of confirming upon my death in my said wife the absolute title of her one-half of all such community property.  My estate which I dispose of by this will is my one-half only of such community property.  On April 29, 1927, the probate court under1931 BTA LEXIS 2141">*2146  whose jurisdiction Burke's estate was administered entered a decree approving the final account of the administrators, which decree contained the following provision: VIII.  That all of the property of the deceased coming into the hands of said administrators as set forth in their inventory and supplemental inventory filed herein, was declared by the will of said deceased, and is the community property of the deceased and Caroline E. Burke, widow of the deceased, of which said property said widow is entitled to receive her community one half interest therein and that under the terms of the will of said deceased, it was provided that all of his debts, expenses of his funeral and last sickness, all estate taxes, inheritance taxes and similar charges which by law shall be a charge against his estate or which by law shall be required to be paid by his executor, should be paid out of his community half of said estate and that all of the remainder of said deceased's community half of said estate is devised and bequeathed to the Seattle Title Trust Company, a Washington corporation, to hold and dispose of as trustee under the terms and conditions of the will of said deceased.  In the1931 BTA LEXIS 2141">*2147  returns filed for 1924 and the period January 1, 1925, to December 4, 1925, the rentals from the Empire Building were reported as community income, Burke and his wife each reporting one-half thereof.  The respondent determined that the Empire Building rentals were the separate income of Burke.  OPINION.  ARUNDELL: The principal issue is whether the income from the Empire Building property was the separate income of Thomas Burke or community income in whole or in part of Burke and his wife.  Under the law of Washington rents, issues, and profits from 22 B.T.A. 337">*340  separate property of either of the spouses are the separate property of such spouse, ; , hence it is necessary to determine whether the Empire Building property was separate or community property.  Clearly the land itself was the separate property of Burke.  "The status of property is to be determined as of the date of its acquisition."  The land was acquired by Burke before his marriage.  When he received $500 to apply on the purchase of the land from Mrs. Burke prior to their marriage, that money became1931 BTA LEXIS 2141">*2148  his separate property.  She was not then his wife and the money could not possibly bear any community stamp.  Burke's testamentary description of the property as community property does not make it such.  His statement is at best a conclusion of law and is not supported by the evidence.  We are accordingly of the opinion that the land on which the Empire Building was erected was the separate property of the decedent.  The character of the land, however, does not necessarily establish that of the building.  The courts of Washington recognize that land may belong to one of the spouses and the improvements may be community property.  See ; . In that case Carmack in 1898, before his marriage, purchased a lot for $2,500 which in 1901 he deeded to his wife, whereupon it became her separate property.  Thereafter a building was erected on the lot and after Carmack's death in 1922 the property was worth about $50,000.  Among the pertinent findings in that case are these: [The] improvements were made with either the separate funds of Mr. Carmack or with community funds; that it was mortgaged, each member of1931 BTA LEXIS 2141">*2149  the community executing the note and mortgage; that it was managed by Mr. Carmack as community property, and that all taxes, assessments, repairs, and general charges were paid either thom his separate funds or from the community funds.  Upon these facts, after finding that the land was the separate property of Mrs. Carmack, the Court held: But the community money and efforts greatly increased its value.  This situation would unquestionably give the community a large interest in, but not the entire ownership of, the property, because there can be a segregation of the community interest from the separate interest of Mrs. Carmack.  The bare lot was hers, the improvements thereon belonged to the community.  There is no testimony to show the value of the lot without the improvements.  This testimony can of course be easily obtained.  Assume that the bare lot would be worth at this time $10,000, and the lot and improvement worth $50,000, them Mrs. Carmack would have a separate interest in the property to the extent of one-fifth of its total value and the community would have a four-fifths interest.  22 B.T.A. 337">*341  Save for the fact that in this case we have the relative values of the1931 BTA LEXIS 2141">*2150  land and improvements stipulated, the facts in the two cases are closely parallel.  The respondent attempts to draw a distinction by saying that although the building was constructed from joint funds, the net rentals were more than sufficient to reimburse the community for the amounts advanced by it.  The answer to this is, that as far as the record shows there was no actual reimbursement to the community.  Property once established to be community property is presumed to continue as such.  Its community character can not be destroyed as easily as suggested by the respondent.  Cf. . The evidence shows that after petitioner's marriage he made no separation between his separate income, if any, and that which upon its receipt immediately became community property.  All of his receipts went into, and all payments were made out of one general fund.  Where funds are so intermingled and confused it is the rule in Washington that they will be regarded as community property on the grounds of "the favor with which community property is regarded and the presumption in favor of it." 1931 BTA LEXIS 2141">*2151 ; . It is our conclusion that the Empire Building itself must be regarded as community property.  It is stipulated that at the time of erection of the Empire Building the land itself had a value not in excess of $210,000; that the building was constructed at a cost of $392,742, and that in 1924 and 1925 the land and building had the same proportionate values to each other as at the time of the erection of the building.  We are of the opinion that the income from the Empire Building property in 1924 and 1925 should be determined on the basis of these stipulated figures.  That is, 210,000/602,742 of the income from the property is attributable to the land and will represent the separate income of Burke.  The remainder is community income and is properly taxable one-half to each of the spouses.  Cf. . Petitioners contend that we are bound by the decree of the probate court finding that all the property that came into the administrator's hands was community property.  While it is the rule that descent and distribution are governed by State law (1931 BTA LEXIS 2141">*2152 ; ) and the Federal courts will ordinarily adopt and follow State decisions which establish rules of property () it does not follow that every decree of a State court is binding as establishing a rule of property.  In this case we have examined the decisions of the courts of Washington and we find that the established rules 22 B.T.A. 337">*342  of property in that State are as we have set them out above.  As far as we can determine from the evidence there was no contest in the probate court as to the nature of the property embraced in the estate, and upon representations to the court that it was community property there was no occasion for the court to inquire into the matter.  Certainly not every consent decree entered by a State court can be said to establish a rule of property so as to preclude the Federal Government from showing the true facts in the collection of taxes.  Moreover, the decree of the probate court deals with the status of the property only as of the date of death of the testator and does not purport to determine1931 BTA LEXIS 2141">*2153  its nature during any period prior to that date.  As we are concerned with the nature of the property during 1924 and the period of 1925 up to the date of Burke's death, we have a problem that is not affected by the decree of the court.  As set out above, we find from the decisions of the Washington courts that, as to the Empire Building property, the land itself was the separate property of Burke and the improvements were community property.  The respondent's claim, made by amended answer, that he erred in accepting separate returns for the period January 1 to December 4, 1925, is denied on authority of . Reviewed by the Board.  Decision will be entered under Rule 50.TRAMMELL concurs in the result only.  MARQUETTE dissents.