Court Opinion

ID: 4604832
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:03.386239+00
Date Added: 2024-06-11T07:53:04.513430
License: Public Domain

ESTATE OF EMMA FRYE, DON EGGERMAN, EXECUTOR, PETITIONER, v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Frye v. CommissionerDocket No. 101631.United States Board of Tax Appeals44 B.T.A. 835; 1941 BTA LEXIS 1267; June 27, 1941, Promulgated *1267  Decedent and her husband were residents of the State of Washingtonduring the existence of their marriage and inseparably commingled their separate and community income.  The husband, during the marriage, purchased land in Oregon with part of such intermingled fund and took title in his name alone.  Held, that the whole of such intermingled income was the community property of the spouses; held, further, that decedent's estate was the beneficial owner of such land to the extent that her one-half interest in the community funds was used in its purchase and that gain realized on the sale of such interest is taxable to her estate.  W. S. Greathouse, Esq., for the petitioner. B. H. Neblett, Esq., for the respondent.  HILL *836  Respondent determined a deficiency in petitioner's income tax for the taxable period beginning November 1, 1937, and ended February28, 1938, in the sum of $9,016.95. The questions presented are (1)(a) whether petitioner owned an interest in certain real property, and (b), if so, whether a taxable gain was realized on the sale thereof; (2) whether petitioner was estopped from denying such ownership. FINDINGS OF FACT. *1268  Emma Frye, hereinafter referred to as the decedent, died testate February 26, 1934.  In her will she named her husband, Charles H.Frye, executor.  Frye became such executor and continued in that capacity until his death in 1940.  He was succeeded in that capacity by Don Eggerman, to whom letters testamentary were issued May 2,1940.  the books of petitioner were kept and its income tax returns were made on a cash and fiscal year basis.  Previous to the taxable period here involved, its fiscal year ended October 31.  By permission of respondent the ending of its fiscal year was changed to February 28. Petitioner's income tax return for the taxable period involved was filed with the collector of internal revenue for the district of Washington. Decedent and Charles H. Frye were married about 1885 and throughout the period of their marriage they were residents of the State of Washington.  During her lifetime decedent received an inheritance of about $200,000 from her father and long prior to the death of decedent Charles H. Frye inherited from his father $18approximately,000.  Other than his interest in the Oregon property, hereinafter referred to, such inheritance was his only separate*1269  property during the married relation. Frye & Co. is a corporation which operates a packing house in Seattle, Washington.  It issued 27,500 shares of stock and at decedent's death all but the qualifying shares were in the name of Charles H. Frye.  These shares were the community property of decedent and Charles H. Frye.  Decedent loaned about $200,000, the amount of her inheritance, to Frye & Co. on interest-bearing notes. During the period from 1909 to 1926, the decedent's husband purchased24 tracts of timber land located in Lincoln County, Oregon,at a total cost of $245,050.18.  Title thereto was taken in the name of Charles H. Frye.  This land will hereinafter be referred to as the Oregon property. Prior to the death of decedent all income of decedent and her husband was reported in joint income tax returns.  Frye always paid the tax reported on the joint returns.  During the entire period of the married life of decedent and her husband all income derived from *837  both the separate and community property of the spouses was in separably commingled in one joint bank account of decedent and her husband.  The greater part of such income came from Frye's salaries and the*1270  community business enterprises, and was community property. It was conceded on behalf of petitioner that the sources of the funds with which the Oregon property was purchased could not be traced. The Oregon property was referred to as Frye's separate property. In the probate proceedings and in the Federal estate tax return it was not listed in the inventories of decedent's estate, which included a list of community property of decedent as well as her separate property. On the first income tax return of Charles H. Frye filed after decedent's death he treated the Oregon property as his separate property. Upon checking this return an internal revenue agent informed his bookkeeper that the items of income and expense of the Oregonproperty should be divided equally between Frye and decedent's estate and the return was adjusted accordingly.  The bookkeeper informed the revenue agent that the Oregon property was considered Frye'sseparate property, but in compliance with such agent's advice the items of income and expense of this property were thereafter divided equally between petitioner and Charles H. Frye for income tax purposes for the taxable years ending October 31, 1937. In the*1271  income tax return filed for decedent's estate for the fiscal year ended October 31, 1936, the sum of $140.17, representing one-half of a loss sustained on the Oregon property, was deducted from gross community income of decedent.  Taxes paid on the Oregon property in the sum of $15,064.52, representing one-half of total taxes on that property, were deducted from gross income of the estate. In the income tax return filed for decedent's estate for the fiscal year ended October 31, 1937, expense connected with the Oregonproperty in the sum of $141.67 was deducted from the estate's gross income.  The sum of $65.86, representing one-half of the taxes paid on the Oregon property in the taxable year, was also deducted in that return. Prior to final determination of the amount of estate tax due from decedent's estate, attorneys for the estate wrote a letter to the internal revenue agent in charge at Seattle, Washington, concerning a contention by the executor that Frye's separate funds had been invested in the Oregon property.  The letter contained the following statement: Relative to the $18,000 invested in the timberlands, we have reviewed the Will of Hermann H. Frye, father of Charles*1272  H. Frye, and find that the bequest was of $18,000 as Mr. Frye indicated at our recent conference.  However, upon checking this matter, Mr. Frye finds that there were some deductions made from that sum and the amounts of these deductions are indefinite, without reference to the original probate proceedings in Iowa.  Mr. Frye has decided that *838  rather than to take the time of having the records in the probate proceedings checked and in order to facilitate the closing of this matter, you may disregard the investment of separate funds in the timber. The Oregon property produced no net income between the date of decedent's death and the taxable period involved in this proceedingThe estate tax return was adjusted by respondent by adding to decedent's gross estate one-half of the Oregon property at the value of $75,000.  The value of one-half of the Oregon property at the time of the death of decedent was $75,000.  Petitioner acquiesced in this adjustment and valuation. In 1935 Frye & Co. was indebted to certain banks.  On November4, 1935, Charles H. Frye, by warranty deed, conveyed the Oregonproperty to the Bank of California, N.A., of Seattle, Washington,hereinafter referred*1273  to as the bank, as trustee for the creditor banks. The conveyance was supplemented by a trust agreement between Frye and the bank dated December 6, 1935.  The property was conveyed to the bank as trustee in order that the bank might sell the property for the benefit of Frye & Co.'s creditors.  Legal title to the Oregon property remained in the bank as trustee until the property was sold on January 13, 1938, to the Oregon-Mesabi Corporation. The bank transmitted to the Title & Trust Co. of Portland, Oregon,documents of title to the property, to be placed in escrow and then released to the purchaser upon completion of the transaction.  Thetransfer to the Oregon-Mesabi Corporation was effected by special warranty deed from the bank, by quitclaim deed from the creditor banks, and warranty deed from Charles H. Frye, individually. These documents were supplemented by an affidavit of Charles H.Frye, dated December 2, 1937, containing the following statement: * * * That on February 26, 1934, Emma Frye, the wife of affiant died in Seattle, King County, Washington; that affiant qualified as an executor of the estate of Emma Frye, deceased, and is now acting as such executor. That the estate*1274  of Emma Frye, deceased, inclusive of the marital community estate of Charles H. and Emma Frye, has claimed no interest, title, or right in or to any property in the State of Oregon, but on the contrary has disclaimed any right, title, or interest in and to real property in the State of Oregon and has asserted that any real property in the State of Oregon in the name of Charles H. Frye was his individual property in which the estate of EmmaFrye has no interest. Title insurance was issued on the conveyances.  The gross sale price of the Oregon property was $200,000.  The net sale price after deduction of expenses and unpaid taxes was $191,588.32. On May 14, 1938, an income tax return for the taxable period beginning November 1, 1937, and ending February 28, 1938, was filed for decedent's estate, in which gain to petitioner from the sale of the Oregon property in the sum of $41,210.13 was reported.  Thisitem of gain was reported on the theory that petitioner owned one-half *839  of this property.  On May 16, 1938, an amended return for the period beginning November 1, 1937, and ending February 28, 1938, was filed, in which the gain from the sale of Oregon property which had*1275  been reported on the original return was eliminated from gross income.  The amended return was accompanied by a letter of transmittal, in which the following statement appeared: We are now sending an amended return covering the separate Estate of Emma Frye, as upon checking the return with our counsel we have been advised by him that we were in error in reporting the gain from sale of property covered in schedule "F".  The Lincoln County properties are Mr. Frye's separate property and should be treated as such.  We have therefore amended all the income and expenses derived from Lincoln County property sale and operation. The schedules have been corrected and are attached to Form 1040 and 1040duplicate. Respondent, in determining the deficiency in income tax for decedent's estate for the taxable period beginning November 1, 1937, and ending February 28, 1938, among other adjustments made, included as taxable gain the sum of $24,726.08, representing 60 percent of the difference between one-half of the net sale price and the adjusted basis of the property to petitioner.  In addition respondent included in gross income of the estate the sum of $2.58 representing net income derived*1276  from the Oregon property in the taxable period. OPINION. HILL: The decisive questions before us are (a) what, if any, interest in the Oregon property was owned by petitioner and (b) whether petitioner is estopped from denying ownership in part of that property. Only that part of the deficiency determined which respondent attributes to income of petitioner as owner of an interest in the Oregon property is in dispute.  Other adjustments are not in controversy. Petitioner contends that title to the Oregon property was in CharlesH. Frye and that no gain from the sale thereof or other income therefrom is taxable to petitioner.  Petitioner further contends that, in any event, the estate of decedent realized no gain from the sale, since the trustee sold the property for the benefit of creditors.  This latter contention is without merit.  The property was sold to pay debts of Frye & Co., one-half of whose stock petitioner owned. Respondent argues that the Oregon property was purchased with community funds, that decedent owned a one-half interest therein at the time of her death, and that such interest passed at her death to petitioner. Respondent also pleaded estoppel, alleging in*1277  substance that for estate tax purposes petitioner included as an asset of decedent's estate a one-half interest in the Oregon property; that Charles H.Frye as executor of the estate, in negotiating the estate tax liability, *840  averred that the Oregon property was purchased with community funds; that the executor filed an income tax return for the taxable period in which was reported profit of $41,210.13 upon the sale of the Oregon property, taxable to the extent of $24,726.08; that the income tax returns of petitioner for the fiscal years 1935, 1936, and1937 claimed deductions for one-half of the taxes on, and one-half of the operating expense of, this property; that a sale of a portion of the property was reported in petitioner's income tax return for the fiscal year 1936 as having been made by petitioner; that the statute of limitations now bars the assessment or collection of income taxes against petitioner for the years in which deductions were taken for such taxes and expenses; that such acts and averments amount to representations or concealment of material facts unknown to respondent and relied upon by him to his detriment; and that petitioner is therefore estopped*1278  to deny ownership of an interest in the Oregonproperty. On the question of estoppel we think respondent can not be sustained. On reference to our findings of fact it will appear that petitioner did not represent to respondent that it owned an interest in the Oregon property.  On the contrary, petitioner represented and contended, both in the matter of the estate tax of decedent's estate and in the first income tax returns of petitioner and of Charles H. Frye after decedent's death, that the Oregon property was the separate property of Charles H. Frye.  it was upon the insistence of respondent that an undivided one-half of this property should be included in decedent's estate for estate tax purposes and that it should be treated as owned in equal shares by petitioner and Charles H. Frye in their returns for income tax purposes, that petitioner and Frye so treated such property.  Under such facts it can not be said that respondent was misled by or that he relied on representations of petitioner or of Charles H. Frye, or anyone on their behalf, that the property in question was so owned in equal shares.  Respondent made his own investigation of facts and reached a conclusion as to the*1279  ownership of the property contrary to that represented by petitioner.  The acquiescence therein of petitioner and Charles H. Frye for the purposes of estate and income taxes prior to the taxable period here involved was not such representation of facts as would constitute an element of estoppel.  The plea of estoppel is not sustained. The facts which petitioner contends demonstrate that the Oregonproperty was Frye's separate property are that the property was referred to as his separate property, that it was not included in the inventory of the probate proceedings of decedent's estate, that the property was treated as Frye's separate property in his first income *841  tax return filed after decedent's death, that title insurance was issued upon conveyance of the property to the Oregon-Mesabi Corporation,and that Frye individually executed a warranty deed to the purchaser and made an affidavit to the effect that decedent's estate disclaimed any interest in the property. On the other hand, while the bookkeeper of petitioner, of Charles H.Frye, and of Frye & Co. testified that the property was referred to as Frye's separate property, she also testified that there was no indication*1280  on his books that the property was his separate property.  Also petitioner, acting through Charles H. Frye as executor, acquiesced in the inclusion of half of the value of the Oregon property in decedent's estate for estate tax purposes and in treating the property as owned in like manner in petitioner's and Charles H. Frye's income tax returns for the three taxable years next prior to the taxable period here involved. The facts upon which petitioner relies are not sufficient to overcome the presumption that the property was purchased in large part with community funds.  We have found upon the evidence that the community and separate income of decedent and her husband, CharlesH. Frye, were inseparably commingled during the existence of their marriage and that the greater part of such income was their community property.  Under the laws of Washington, when such indistinguishable intermingling of property occurs the whole mass of such property is presumed prima facie to be community property.  ; *1281 ; . There being no evidence to rebut the presumption as above stated, we hold that all of the income received by decedent and her husband, Charles H. Frye, during their marriage was community property.  The record shows that, aside from his interest in the Oregon property, the only separate property which Charles H. Frye had during such marriage was approximately, but not more than, $18,000.  Whether such separate property was commingled with the community property of the spouses the evidence does not disclose.  The inventory and appraisement of the estate owned by decedent at her death shows separate property of her estate of the net appraised value of $156,000.56 and a community estate of herself and Charles H. Frye of the net appraised value of more than $600,000. The evidence does not disclose the character of ownership of the funds used to purchase the Oregon property.  Petitioner's counsel conceded at the hearing "that we don't profess to be able to trace them." Since the purchase of the property was made by Charles H.Frye and since under Washington laws he had the control and management of*1282  community personal property, sec. 6892, Rem. Comp. Stat.  *842  of Wash., 1 but not of decedent's separate property, we assume that none of the latter was used in such purchase.  It follows that, since the separate property of Charles H. Frye did not exceed $18,000, the purchase price of the Oregon property came from community funds to the extent of at least $227,050.18, one-half of which was the measure of the community interest of decedent in the funds used to purchase such property.  Also, it is apparent from the excerpt of the letter of petitioner's attorneys, set forth in our findings of fact, relative to the investment of separate funds of Charles H. Frye in the Oregon property, that he did not claim that more than $18,000 of his separate property was so invested. *1283  No evidence was offered of any agreement or other arrangement between decedent and her husband or of any act by her alone whereby she relinquished her interest in the community funds used in the purchase of the Oregon property or whereby she relinquished her interest in the latter property.  Moreover, no contention is advanced herein that decedent made a gift to her husband of any property or otherwise relinquished to him her interest in any property.  Wehold, therefore, that decedent had a beneficial interest in the Oregonproperty at her death and thereupon such interest passed to petitioner. While the legal title to the Oregon property rested in Charles H. Frye, he held such title in trust for the benefit of the decedent to the extent of the proportion which her one-half interest in the community funds used in the purchase of the property bore to the total cost of the property.  ; . Cf. . Petitioner, therefore, had a beneficial interest in the Oregon property.  The per centum of such beneficial*1284  ownership was the quotient of 113,525.09divided by 245,050.18, or 46.327 per centum. It follows that, since the value of the Oregon property at the death of decedent was $150,000, petitioner's interest therein was 46.327percent of that amount.  Petitioner realized gain on the sale of the Oregon property in the taxable period measured by the difference between 46.327 percent of the net sale price of the property and the adjusted basis to petitioner of its interest in such property.  Sixtypercent of such gain is includable in petitioner's income in computing its tax liability.  Other income from such property within the taxable period is likewise so includable to the extent of 46.327 percent thereof. Decision will be entered under Rule 50.Footnotes1. SEC. 6892.  Community property defined - Husband's control of personalty. Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property.  Thehusband shall have the management and control of community personal property, with alike power of disposition as he has of his separate personal property, except he shall not devise by will more than one-half thereof. ↩