Court Opinion

ID: 4601921
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:28:38.151201+00
Date Added: 2024-06-11T07:52:34.717763
License: Public Domain

W. T. CARTER, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Carter v. CommissionerDocket No. 86558.United States Board of Tax Appeals36 B.T.A. 853; 1937 BTA LEXIS 647; November 11, 1937, Promulgated *647  COMMUNITY PROPERTY - TEXAS. - Petitioner and his wife are residents of the State of Texas, and have been since their marriage in 1910.  Prior to marriage petitioner acquired by gift from his father 650 shares of stock in a texas corporation, and subsequently acquired additional shares (1) by purchase with community funds, (2) by way of stock dividends, and (3) by gift from his mother.  He sold 500 shares at a profit in the taxable year 1931.  Held, the profit so derived was, under Texas law, community funds of petitioner and his wife, whether the stock sold was all petitioner's separate property, or part separate and part community, and only one-half of such profit is taxable to petitioner.  G. K. Munson, Esq., and Palmer Hutcheson, Esq., for the petitioner.  James H. Yeatman, Esq., for the respondent.  HILL*853  This is a proceeding for the redetermination of a deficiency in income tax for the year 1931 in the amount of $3,554.61.  The sole issue submitted for decision is whether or not respondent erred in holding that profits realized from the sale in the taxable year of certain stock, and stock issued thereon as stock dividends, standing*648  in the name of petitioner, constituted separate property of petitioner instead of community property of petitioner and his wife.  *854  FINDINGS OF FACT.  Petitioner is a citizen of the State of Texas.  He was married to Lillie N. Carter in Houston on November 29, 1910, and the marital status has continued since that time in Texas.  Petitioner's income tax return for the year 1931 was filed with the collector of internal revenue for the first district of Texas, at Austin.  The W. T. Carter Lumber & Building Co. was incorporated in 1910 with an authorized capital stock of $250,000.  Of this stock petitioner acquired 694 shares as follows: DateHow acquiredCertificate No.SharesMay 5, 1910By gift from father9100May 5, 1910do10100May 5, 1910do11100May 5, 1910do12100Nov. 6, 1918do33250Dec. 31, 1918By purchase4544Total694On January 11, 1921, the capital of the company was increased to $1,000,000 and a stock dividend of 160 percent (1.6 shares for each old share) was declared on the basis of earned surplus and undivided profits.  This entitled petitioner to receive 1110.4 shares as a stock dividend. *649  At the same time he purchased 639 6/10 shares.  He then turned into the corporation the certificates, Nos. 9, 10, 11, 12, 33, and 45, covering the 694 shares previously acquired and received the following new certificates: January 14, 1921, certificate No. 3, for 2,000 shares; January 14, 1921, certificate No. 4, for 444 shares; made up as follows: Old shares694Dividend shares1,110.4New shares purchased639.6Total2,444.0On April 22, 1924, petitioner purchased three shares of the company's stock from T. H. Ball and acquired 28 shares by gift from his mother, and as of January 13, 1925, a total of 2,475 shares had been issued to petitioner and stood in his name.  On January 13, 1925, the capital of the company was increased to $2,000,000, and a stock dividend of 80 percent was declared, on the basis of earned surplus and undivided profits.  This entitled petitioner to receive 1,980 shares as a stock dividend on the 2,475 shares held by him at the time.  He also at the same time purchased 25 additional shares.  He then turned in to the corporation the certificates *855  covering the 2,475 shares and received the following new certificates: DateCertificate No.SharesJan. 13, 192531,000Do41,000Do51,000Do61,000Do7480Total4,480*650  made up as follows: Shares owned (1/13/25)2,475Stock dividend1,980Stock purchased25Total4,480At no time has the corporation had any paid-in surplus.  Subsequent to January 13, 1925, petitioner acquired the following additional shares of the company's stock: DateHow acquiredCertificate No.SharesOct. 10, 1927By purchase2727Jan. 1, 1928do2970Aug. 15, 1929do3150All stock of the company acquired by petitioner by purchase or otherwise was issued and held in his name until sold.  In 1930 petitioner sold 500 shares of the company's stock, and in 1931 sold 500 additional shares thereof, these sales being made out of certificates 7, 31, and 6.  In 1926 petitioner opened a set of books for the purpose of establishing a record of his separate property and the community property of himself and wife.  This record showed 678 shares of the stock involved herein listed as petitioner's separate property, and the remainder of 3,802 shares as community property, the latter including all shares of stock bought after marriage and the shares received as stock dividends during marriage.  Petitioner never considered*651  or treated the stock dividends as other than community property, as reflected by his records.  He classified alike the purchases after marriage and the stock dividends issued after marriage.  All stock purchased after marriage was purchased with community funds.  It was petitioner's intention, regardless of the legal effect of the stock dividends, that the stock so issued should be owned by himself and his wife as community property.  Profits *856  derived from prior sales of such stock were reported for tax purposes as community income.  Petitioner devoted the major portion of his time to the conduct of the operations of the corporation referred to above.  OPINION.  HILL: Petitioner and his wife since the date of their marriage in 1910 and at all times have been residents of the State of Texas.  Prior to his marriage petitioner acquired by gift from his father 650 shares of stock of the W. T. Carter Lumber & Building Co., a Texas corporation.  Subsequently (but prior to 1930) petitioner acquired additional shares of stock of the same company (1) by purchase with community funds, (2) by way of stock dividends, and (3) by gift from his mother.  In 1930 petitioner sold 500*652  shares of the stock, and in the taxable year 1931 sold at a profit 500 additional shares.  The separate acquisitions of stock by petitioner having been merged and commingled in the certificates later issued for larger numbers of shares, including the stock dividends, apparently respondent, applying the first in, first out rule, treated the sale of 500 shares in 1930 as having been made out of the 650 shares first acquired by petitioner by gifts from his father, and the 500 shares sold in the taxable year as consisting of the remaining 150 shares of the original gifts, and 350 shares issued as stock dividends.  Respondent further held that the stock dividends constituted separate property of petitioner, and so taxed the profit derived from the sale in 1931 as separate income of petitioner.  Petitioner contends that the entire profit should be treated as community income of himself and wife.  There is no controversy as to cost bases or amount of gain realized.  Petitioner's position, we think, must be sustained.  Whether the profit in question was the separate property of petitioner, or constituted community property of himself and wife, must be determined according to the laws of*653 Texas.  "What are the property rights of husband and wife arising from their marital relationship is peculiarly a state question and we are bound on such question by the decisions of the state courts." . Cf. , and . Vernon's Annotated Taxas Statutes (Civil), vol. 13, provide in part material here as follows: ART. 4613.  Husband's Separate Property. All property of the husband, both real and personal, owned or claimed by him before marriage, and that acquired afterwards by gift, devise or descent, as also the increase of all lands thus acquired, and the rents and revenues derived therefrom, shall be his separate property.  * * * [Article 4614 similarly defines the wife's separate property.] *857  ART. 4619.  Community Property. All property acquired by either the husband or wife during marriage, except that which is the separate property of either, shall be deemed the common property of the husband and wife, and during coverture may be disposed of by the husband only.  * * * *654  Prior to 1917 only the "increase" of the spouses' separate lands in Texas constituted separate property, but in that year an act was adopted making the "rents and revenues" from the separate lands of each spouse his or her separate property.  However, this enactment, as amended in 1921, was held invalid on account of the insufficiency of the caption to the bill; and it was also held unconstitutional as to the wife's separate estate for the reason that her separate property rights, having been defined by the state constitution, could neither be increased nor diminished by legislative act.  ; . The statutes cited above, which were adopted by the Texas Legislature in 1925, reenacted the provisions making the rents and revenues from the husband's separate lands the separate property of the husband, and cured the defective caption to the bill theretofore held invalid on that account.  . It will be observed that these statutes relate only to the separate lands of the husband and not to the "increase" of or "rents and revenues" derived from his separate*655  personalty.  Under the community property system, in the absence of a contrary statutory provision, it is the general rule that the increase, rents, and profits of the separate property of the spouses fall into the community, 31 C.J. 29, and this was the early rule in Texas prior to 1917, ; ; ; . And statutes expressly giving to the separate estate the increase or fruits of particular kinds of separate property impliedly exclude other exceptions to the general rule previously established that all issues and profits of the separate property fall into the community.  31 C.J. 31, citing ; . Thus, the statutes above referred to did not abrogate or in any way affect the long established general rule recognized by the courts of Texas that the increase, rents, revenues, and profits of the separate personalty of either spouse belonged to the community. Following that rule, it was said by the Supreme Court of Texas in *656 ; , that "It seems to be settled by the previous decisions of this court that profits on investments of the wife's separate estate are community property, and liable for the husband's debts." In , the same court held that money received as a prize on a lottery ticket purchased with the separate *858  money of the wife was community property.  In ; , a stock of goods, the separate property of the husband at the date of his marriage, was from time to time replenished and increased until the wife's death.  It was held that the goods only to the extent of their value at the date of their marriage was the husband's separate property.  The same rule was applied in ; , where the wife originally owned the stock of goods as her separate property. It has also been held that rents of the wife's separate property belonged to the community, *657 ; , and interest accruing on the separate funds of the wife is community property, ; . "All moneys and property made in commercial transactions, by either husband or wife, is community property", even though the capital employed is the separate property of one of the spouses.  Mitchell v. Mitchell, supra, at page 709. This doctrine in Texas has been modified in some cases to the extent of holding that where the increase in separate property was spontaneous and independent of assistance from the community, it was separate property, ; , but where it involves care, labor, or attention from the members of the community, it is community property, . In the case at bar, petitioner devoted the major portion of his time to the management and operation of the corporation which issued the stock in controversy.  *658  In , it was held that the husband's profits from the sale in Texas during marriage of corporation stock were community funds.  At the date of marriage the husband had 40 shares of Gulf Oil Co. stock.  This was all paid except the sum of $120, which was afterwards paid.  During marriage the husband sold at a profit 20 of his 40 shares of stock.  The court held that the $120 was community property, and that the entire profit derived from the sale was also community funds.  Under the rule established by the foregoing decisions of the Texas courts, we can reach no other conclusion than that the profit derived from the sale of the stock here in controversy was community property of petitioner and his wife, and not his separate property, and this is true whether the stock sold was all his separate property, or part separate and part community.  It follows that only one-half of such profit may be included in petitioner's gross income and taxed to him.   Respondent's action is reversed. Reviewed by the Board.  Judgment will be entered under Rule 50.