Court Opinion

ID: 4592904
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:56.768935+00
Date Added: 2024-06-11T07:50:57.282759
License: Public Domain

F. ELDRED BOLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boland v. CommissionerDocket No. 95157.United States Board of Tax Appeals41 B.T.A. 930; 1940 BTA LEXIS 1120; April 24, 1940, Promulgated 1940 BTA LEXIS 1120">*1120  Petitioner and his wife, living apart, entered into an agreement whereby he assigned to her 25 percent of his earnings, payable monthly for her life unless she remarried.  The monthly payments were not to fall below a specified minimum.  Petitioner's wife, in return, released all rights which she had or might have by virtue of the marriage relation with the exception of her interest in the assigned income and certain specified property.  Held, that the separation agreement destroyed the community property interests of petitioner and his wife and petitioner's entire earnings are taxable to him in the taxable years.  J. W. Radil, Esq., for the petitioner.  Harry R. Horrow, Esq., for the respondent.  VAN FOSSAN 41 B.T.A. 930">*930  This proceeding was brought for the redetermination of deficiencies in petitioner's income taxes in the following sums: 1934$170.631935507.4519361,004.82Total1,682.90The single issue before the Board is whether or not a separation agreement entered into by petitioner and his wife converted all his earnings for personal services from community property to his own separate property.  FINDINGS OF FACT. 1940 BTA LEXIS 1120">*1121  The petitioner is an attorney at law and at all times since a date prior to February 28, 1929, has been engaged in the practice of law and has resided in San Francisco, California.  41 B.T.A. 930">*931  About January 10, 1929, petitioner and his wife, Genevieve L. Boland, separated.  On that date, and at all times thereafter, petitioner's wife was a citizen and resident of the State of California.  From the date of separation, petitioner continuously lived separate and apart from his wife.  Petitioner and his wife were not divorced until after the taxable years.  On February 28, 1929, petitioner and his wife entered into an agreement for her support and maintenance, the settling of their respective community interests, and the adjustment and settlement of their disputes and differences.  "For the purpose of providing for the permanent maintenance and support" of the wife "and in consideration of the release" by her "from all claims and demands which" she might have against petitioner for support and maintenance, petitioner assigned to her 25 percent of his income for personal services, whether rendered individually or as a member of a partnership, and such additional portion of his1940 BTA LEXIS 1120">*1122  income necessary to make the amount assigned equal to $500 per month.  Petitioner agreed to notify any partnership, of which he might thereafter become a member, of the agreement and assignment.  He further agreed to secure the assent of the partnership to the assignment and to obtain an agreement by the partnership to pay the income assigned directly to the wife.  Petitioner agreed that if it should appear at the end of any month that the monthly payments, when cumulated over the elapsed portion of the calendar year (in 1929, the period commencing March 1, 1929) would be less than an average of $500 per month for the elapsed portion of the year, he would immediately pay the wife an amount sufficient to bring the total amount paid to an average of $500 per month.  The agreement stated that it was the intent of the parties that the wife receive an average minimum of $500 per month throughout each calendar year.  The assignment of income was to become inoperative upon the remarriage of the wife.  Petitioner agreed that the community property of the parties consisted of 129 shares of American Telephone & Telegraph Co. stock, represented by a certificate or certificates issued1940 BTA LEXIS 1120">*1123  in the wife's name, certain real property in the city of Glendale, California, and certain life insurance policies.  He further agreed that the described community property, the amounts payable to the wife from his income, and any other property in possession or under control of the wife at the date of the agreement should be the separate property of the wife.  The parties agreed that the assignment of income and community 41 B.T.A. 930">*932  property to the wife should be in lieu of the obligation of the petitioner to support her.  She released petitioner from all claims for maintenance and support which she had or might have.  Petitioner released all rights which he had or to which he might become entitled by virtue of the marital relation in any property belonging to the wife, including the community property assigned to her by the agreement of February 28, 1929.  Each party agreed to execute, upon request of the other, deeds and instruments for the transfer of property of the requesting party whenever necessary to enable the requesting party effectually to transfer any of his or her separate property.  The agreement further states: (6) The party of the second part [wife] covenants1940 BTA LEXIS 1120">*1124  and agrees to and hereby does release and surrender any and all rights, interests, claims, demands and privileges to which she is now or may hereafter be entitled to as wife, widow or otherwise howsoever, in and to any property real or personal which the party of the first part [petitioner] now owns or may hereafter acquire, (excepting only her right to receive the portion of the income of the party of the first part [petitioner] referred to in paragraph (1) hereof, [hereinbefore referred to] and her rights in and to the community property and other property described and referred to in paragraph (2) hereof [stock, Glendale real property and insurance policies]) to the end that the party of the first part [petitioner] may acquire, possess, enjoy, convey, devise and bequeath the same with the same effect as if he were and always had been unmarried, and said party of the second part [wife] hereby agrees that the portion of the income of the party of the first part [petitioner] not hereinabove in paragraph (1) hereof assigned to the party of the second part [wife] and any proceeds from the investment or reinvestment of said portion of said income shall be and become the1940 BTA LEXIS 1120">*1125  separate property of the party of the first part [petitioner].  * * * (8) It is mutually understood and agreed that each of the parties hereto will, from and after the 1st day of March, 1929, pay his or her own living and personal expenses, and that neither will make any claim or demand upon the other or upon his or her estate for or upon any account whatsoever, each of the parties hereto expressly agreeing not to incur any debt for which the other party shall be liable.  (9) It is mutually understood and agreed that each of the parties hereto does hereby waive any claim for family allowance against the estate of the other and any right to inherit from or administer on the estate of the other.  The agreement of February 28, 1929, was modified by an agreement between petitioner and his wife dated May 31, 1936.  Under the modifying agreement, the wife received the sum of $5,750 from the firm of Knight, Boland & Riordan, a copartnership consisting of Samuel Knight, John H. Riordan, F. J. Kilmartin, and J. W. Radil.  The minimum monthly amount payable to the wife was reduced from $500 to $250.  Under the modifying agreement, the wife released and discharged petitioner from1940 BTA LEXIS 1120">*1126  all liability for any sums which had become due her 41 B.T.A. 930">*933  under the agreement of February 28, 1929, and under a judgment against petitioner obtained by her in action No. 249156 in the San Francisco Superior Court.  She further released petitioner from the obligation to pay any greater sum per month than $250.  The agreement of modification provided that the parties file separate income tax returns and that each should include one-half of the community income in his or her individual return.  Petitioner agreed to reimburse the wife for the difference between the amount of the tax paid by her and the amount of tax she would have paid if she had not included one-half of the community income in her gross income.  Finally, the agreement provided that in the event that separate returns of community income should not be allowable by court decision or administrative ruling in cases such as these, the provision for inclusion of one-half the community income in the wife's gross income and payment of her additional tax by petitioner should be inoperative.  The petitioner made all the payments required under the agreements during the taxable years.  No other agreements were entered into1940 BTA LEXIS 1120">*1127  between petitioner and his wife respecting community property or community rights.  During the years 1934, 1935, and 1936 petitioner was employed in the capacity of attorney by the firm of Knight, Boland & Riordan.  His earnings for personal services from that firm amounted to $6,507.20 in 1934, $12,011.04 in 1935, and $17,967.83 in 1936.  During the taxable years the only check drawn by the firm of Knight, Boland & Riordan to the order of petitioner's wife was one in the sum of $5,750 in the year 1936.  The amount was charged to petitioner's account with the firm.  No payments other than those specified in the agreements were made by petitioner to his wife during the taxable years.  No demand was made upon petitioner during the taxable years by his wife for sums other than those paid under the agreements.  For the years 1934, 1935, and 1936 the petitioner reported in his income tax returns one-half of his share of the income derived from personal services as an attorney at law.  Respondent, in arriving at the deficiencies for the taxable years, included the entire amount of petitioner's earnings in his taxable income.  OPINION.  VAN FOSSAN: The sole question for consideration1940 BTA LEXIS 1120">*1128  is whether or not the agreement of February 28, 1929, converted petitioner's earnings for personal services from community property to his own separate property.  Petitioner contends that the wife reserved a right in the community property and that the community was not 41 B.T.A. 930">*934  destroyed by the agreement.  He maintains that the wife retained her community interest in a portion of his earnings and, hence, that interest is not taxable to petitioner.  Respondent, on the other hand, argues that the agreement substituted a new right in petitioner's wife in lieu of her community rights and, therefore, petitioner should be taxed upon his entire earnings during the taxable years.  In the absence of agreement to the contrary, petitioner's earnings during the taxable years would have been community property. California Civil Code, sec. 161a, 162-164.  Nor is the fact that petitioner and his wife were separated material.  Brown v. Brown,170 Cal. 1">170 Cal. 1; 147 P. 1168. Community income earned and received after 1927 must be returned one-half by the husband and one-half by the wife.  1940 BTA LEXIS 1120">*1129 United States v. Malcolm,282 U.S. 792">282 U.S. 792. Under California law, a husband and wife may enter into a contract with each other respecting property. California Civil Code, sec. 158.  Such a contract may apply to community property.  Cheney v. City & County of San Francisco,7 Cal.(2d) 565; 61 Pac.(2d) 754. Thus, under local law, petitioner's wife might enter into a contract changing her rights in the community.  For purposes of income tax, effect will be given to contracts abrogating community rights.  Helvering v. Hickman, 70 Fed.(2d) 985. Having determined that petitioner and his wife might, by contract, convert petitioner's earnings from community property to his own separate property, we now inquire as to the effect of the agreement of February 28, 1929. The petitioner and respondent base their respective arguments mainly on divergent interpretations of paragraph 6 of the agreement, which is set forth in our findings of fact.  Petitioner contends that the wife reserved a portion of her community rights by virtue of this paragraph.  Upon examination of the agreement as a whole, we conclude that respondent1940 BTA LEXIS 1120">*1130  correctly determined that the parties intended to, and did in fact, terminate the community status.  The wife excepted from her release only her right to receive 25 percent of petitioner's earnings and the community property consisting of the shares of stock, real estate, and insurance policies which petitioner agreed should become the separate property of the wife.  Here there is no reservation of a community interest by the wife.  She released all her rights except a stipulated portion of petitioner's salary and her ownership of specifically described property turned over to her by this very agreement.  She accepted, in lieu of her community interests, an assignment of 25 percent of petitioner's earnings, not to fall below a specified minimum.  In the year 1934 the practical effect of the agreement was to give the wife all but $507.20 of petitioner's earnings.  This was far in excess of 41 B.T.A. 930">*935  any community interest which petitioner's wife might have under the California law.  In our opinion the agreement converted petitioner's earnings during the taxable years from community property to his own separate property.  1940 BTA LEXIS 1120">*1131  Assignment of earnings does not preclude taxation of those earnings to the assignor.  Lucas v. Earl,281 U.S. 111">281 U.S. 111. Accordingly, we hold that all of petitioner's earnings are includible in his gross income for the taxable years. Decision will be entered under Rule 50.