Court Opinion

ID: 4612318
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:50:53.801443+00
Date Added: 2024-06-11T07:54:25.129733
License: Public Domain

W. A. ROTH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Roth v. CommissionerDocket No. 26563.United States Board of Tax Appeals17 B.T.A. 1330; 1929 BTA LEXIS 2138; November 8, 1929, Promulgated *2138  1.  Agreements were made between husband and wife, residents of California, that the earnings of both should be contributed to a common fund and out of its their personal and community expenses should be paid, and they should be the owners of any surplus.  Held that the earnings of the wife are community income and taxable to the husband.  2.  Where husband and wife made an oral agreement in 1919 relative to their property rights and on December 31, 1923, entered into a written agreement relative thereto, the written agreement can not be considered as being in effect during 1922.  Shirley E. Merserve, Esq., and W. H. Teasley, C.P.A., for the petitioner.  C. H. Cual, Esq., for the respondent.  LITTLETON*1330  The Commissioner determined a deficiency of $982.15 for 1922.  Petitioner alleges that the Commissioner erred in his determination, (a) by adding to his income $5,655.18 salary earned by his wife, (b) by arbitrary valuation of buildings for depreciation purposes, and (c) failure to give proper effect and consideration to an agreement between petitioner and his wife, Edith M. Roth, fixing their property rights.  At the hearing petitioner*2139  abandoned the claim for improper depreciation, which leaves for consideration the question whether or not the inclusion of the wife's earnings in the income of the petitioner constituted error.  FINDINGS OF FACT.  The petitioner is a resident of Los Angeles, Calif.  In October 1919, he was married to Edith M. Roth and at the time of or shortly after the marriage they entered into an oral agreement relative to their property and future earnings.  The Commissioner determined a deficiency in income taxes against the petitioner for 1921 by including in his income salary earned by his wife.  The petitioner appealed to this Board, Docket No. 6012, relying upon the oral agreement above mentioned to relieve him of the deficiency.  The Board decided in his favor, but, on appeal the Circuit Court of Appeals for the Ninth Circuit, reversed the decision of this Board and decided against the taxpayer.  . In his petition in this proceeding the petitioner makes the following allegation: *1331  (5) The facts upon which the petitioner relies as the basis of this proceeding are as follows: (a) The facts applicable to this case are the*2140  same facts presented to the Board in the case of this petitioner, Docket No. 6012.  Petitioner relies upon the evidence adduced in said case, supplemented by a written agreement between petitioner and his wife, copy of which is attached hereto and marked "Exhibit B" and are summarized as follows: * * *.  Petitioner then summarizes his theory as to the effect of the written agreement, which was not introduced in evidence in Docket No. 6012.  The facts as disclosed by the evidence and found by this Board and the Circuit Court of Appeals in Docket No. 6012, involving deficiency in income taxes for 1921, were as follows: That during the taxable year 1921, the petitioner and his wife, Edith M. Roth, were residents of and domiciled in the State of California; that at or about the time of their marriage in October, 1919, the petitioner and his wife agreed orally that they would share equally all their income and their expenses; that prior to her marriage, the said wife of the petitioner was employed by the Los Angeles Lime Company; that after her marriage and throughout the taxable year 1921 she remained in the employ of the said company and that her salary was increased from time to*2141  time as the duties of her position increased; that for the taxable year 1921 her salary was $5,309.90, which she reported in her individual income tax return as her separate income.  That the petitioner was also employed by the Los Angeles Lime Company during the taxable year 1921 and in his individual income tax return for the said year he reported among other items salary which he received from the said company.  That the petitioner and his wife deposited their earnings in a joint bank account which was subject to check by either of them; that the household expenses were paid from this account; that from time to time they invested their savings from the said joint account and of such investments some stand in the names of the individuals and some are held jointly; that before making investments the petitioner and his wife consulted with each other concerning them.  That in auditing the returns filed, the respondent added to the income reported by the petitioner for the taxable year 1921 the salary of $5,309.90 reported separately by the wife.  At the hearing of this proceeding, petitioner introduced oral testimony relative to the original oral agreement respecting property*2142  rights and the actions of the parties through the taxable year 1922, which was substantially the same as that introduced in Docket No. 6012, and we find and adopt the findings of fact above set forth for 1921 as our findings of fact in this proceeding for 1922, with the exception of the amount of salary earned by the wife included in petitioner's income, which is $5,655.18 for 1922.  Both parties were employed during 1922 as they were in 1921.  *1332  In addition to the oral evidence, petitioner introduced in this proceeding the following written agreement between himself and wife, dated December 31, 1923: THIS AGREEMENT, entered into the 31st day of December, 1923, between the undersigned, WALTER A. ROTH and EDITH M. ROTH, husband and wife, WITNESSETH: For Five (5) years last past, the parties hereto have been husband and wife and each of the parties has been employed and engaged in business.  Each of the parties has been receiving compensation for personal services in the business and each of the parties has had invested in the business in which he or she was employed and in outside investments various sums of money constituting the personal property of said parties; *2143  that it has been impossible to ascertain what proportion or amount of the salaries paid to each has been the result of the personal services and efforts of each and what proportion of said salaries has been due to an indirect compensation for investment in business; that it has been and is impossible to ascertain what proportion of the investment holdings of each is due to the individual personal services and efforts of each and what proportion is due to the increase and rents, issues and profits of the personal property of each.  As far as an accounting is concerned, the parties have commingled their various funds and have held titles to real estate in one or another's name irrespective of any claim to or recognition of full legal interest in the title so held.  The parties realize that their present method of holding said properties is confusing, and, in the event of the death of either of the parties, may result ultimately in controversy and other difficulties.  Therefore, the parties do agree as follows: They agree that this memorandum shall constitute an evidence of the understanding between them to change the character and status of all of their property holdings and property*2144  rights as herein set forth.  They agree that in the event that any of their property they now own is community property, that that property shall be transferred and changed from community property into separate property as herein set forth.  They agree that all of their property of whatever kind or character and all of their income from whatever source derived (whether derived as the rents, issues and profits of property now existing or whether derived as compensation in payment for personal services) shall be and become separate property and not community property and that each of the parties hereto shall be deemed to own an undivided one-half personal and separate interest in all the properties now owned by the parties hereto in all of the rents, issues and profits of said properties and in and to the moneys received by way of compensation for the services of each.  It is understood, however, that for the purpose of carrying this agreement into immediate effect it shall not be necessary to change the record titles of any properties whether the same consist of real estate, stocks, bonds, notes, or anything else.  Signed, executed and acknowledged, this 31st day of December, 1923. *2145  (Signed) WALTER A. ROTH.  EDITH M. ROTH, There was no other change, alteration or correction made to the original oral agreement.  In making her return for 1922, petitioner's wife included in her income $5,655.18 salary earned by her during that year and paid the tax thereon.  The Commissioner has taken this salary out of the *1333  wife's income and added it to the petitioner's income and issued to the wife a refund or overassessment.  This caused the deficiency.  OPINION.  LITTLETON: As we view this case the ultimate facts in it and the former case, Docket No. 6012, are practically the same and their legal effect is the same.  Stripped of all surplusage and opinion evidence, petitioner and his wife made an oral agreement in 1919, which was in effect during 1921 and 1922, and as to which the court in , stated: There was no writing, and the testimony of appellee and his wife, much of which was elicited by highly leading questions, was to the effect that shortly after their marriage, they had an understanding, not that the earnings of each should constitute the separate property of the earner, but that the earnings*2146  of both should be contributed to a common fund, of which they were to be the owners, share and share alike.  They referred to themselves as equal partners is all they had or should acquire, jointly or severally.  and again: As exemplified in actual practice, the agreement of the appellee and his wife amounted to substantially this: They would contribute their earnings to a common fund, out of which their personal and community expenses would be paid; and of the savings, if any, and the property in which such savings were invested, they were to be the owners upon an equal footing.  The court then held that the salary earned by the wife was community property and properly taxable to the petitioner.  In this proceeding, the evidence as to this oral agreement and bank account is practically the same, except that petitioner claimed that his wife was entitled to one-half of his earnings as he earned it, instead of after he received it.  We are not impressed by this claim as it is merely his construction of the oral agreement, plainly an afterthough and contrary to the facts and the opinion in *2147 On the hearing of the present proceeding the written agreement of December 31, 1923, was introduced in evidence and petitioner stated that it represented the original oral agreement.  This writing was not introduced as evidence in Docket No. 6012, but the reason this was omitted does not appear.  Clearly this writing does not apply to the year 1922, as it was not executed until one year thereafter, and whatever its terms may be their effect was limited to the time of execution and the future.  It has no retroactive effect.  It is not our purpose to construe this contract for the years to which it might apply, but merely to show that it does not apply to 1922.  The preamble to the agreement recites that the parties during their married life have each earned money from personal services *1334  and from investments, and have confused and mingled the proceeds thereof so that it is impossible to determine the rights of each and in order to prevent controversy they made the agreement.  Under the contract two things are agreed upon: first, "They agree that in the event that any of their property they now own is community property, that*2148  that property shall be transferred and changed from community property into separate property," and, second, "They agree that all of their property of whatever kind or character and all of their income from whatever source derived shall be and become separate property and not community property." It will be observed that the word "shall" is used throughout.  This imports futurity and has no retroactive effect.  The agreement was made for the purpose of settling property rights of the parties as of December 31, 1923, and thereafter.  It affected their property on hand at that date, and income and property to be acquired in the future, but does not apply to income for 1922 and does not purport to.  Petitioner cites , as overruling and establishing a contrary doctrine to that announced in  But the court in the Earl case expressly distinguished it from the Roth case and it does not apply.  In the Earl case the court said: The remaining question is its proper construction.  The petitioner claims that by its terms his personal earnings become the joint property*2149  of himself and wife immediately upon being earned, while the position of the government is that, notwithstanding the language of the contract, there was an interval of time during which his earnings belonged to the community and were taxable as such.  We are unable to agree with this latter view.  The language of the contract is that the earnings, including salaries, fees, etc., of either spouse shall be treated and considered and "is hereby declared to be received, held, taken and owned" by them as joint tenants and not otherwise.  This clearly indicates an intention that the earnings of either spouse shall not be received and held by the community but by them us joint tenants.  The Board of Tax Appeals and the government seem to rely principally on the decision of this court in ). In that case, the contract as construed by the court, amounted to nothing more than an agreement between a husband and wife that they would contribute their earnings to a common fund out of which their personal and community expenses would be paid andthe savings if any would be owned by them jointly.  There was no agreement, as here, that the earnings*2150  of either spouse should be received, and held and owned as the joint property of both, but merely that each would contribute his or her earnings to a common fund.  It is evident that the parties here did not have in mind that the future earnings of either should first be received by him or her and then turned over to a joint tenancy but the intention clearly expressed is that the earnings should be received, taken and held from the very beginning as the joint property of both.  The case presented by petitioner is practically the same as that presented in , and is governed by . The action of the Commissioner was correct.  Judgment will be entered for the respondent.