Court Opinion

ID: 4624941
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:56:11.921267+00
Date Added: 2024-06-11T07:56:37.106471
License: Public Domain

FRANCES C. BROOKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brooks v. CommissionerDocket No. 99708.United States Board of Tax Appeals43 B.T.A. 860; 1941 BTA LEXIS 1439; March 11, 1941, Promulgated *1439  Petitioner in 1936 and 1937 failed to report one-half of the income of her husband derived from personal services, alleging that by virtue of a contract entered into with her husband she had agreed that his entire income should be his separate property.  Held, the evidence is insufficient to disclose a contract of the nature contended for by petitioner, and accordingly she must report one-half of her husband's income from personal services.  Lester Whitmore, Esq., for the petitioner.  Edward C. Adams, Esq., for the respondent.  HILL*861  The respondent has determined deficiencies in income tax for the calendar years 1936 and 1937 in the respective amounts of $240.83 and $247.97, which arise from his determination that salary and director's fees received by petitioner's husband during these years constitute community property and are thus taxable in one-half part to the petitioner.  Petitioner's contentions in answer to this position raise two issues: (1) Whether there existed during the taxable years a valid agreement between petitioner and her husband by which the latter's earnings from personal services were declared to be his separate*1440  income, and (2) whether, if no such agreement existed, the petitioner is entitled to credits not already allowed for personal and dependent exemptions against the community income which she must then report.  FINDINGS OF FACT.  Petitioner is an individual, residing in Bellingham, Whatcom County, Washington, where she moved with her husband, Frank N. Brooks, in the year 1919.  After moving to Washington both the petitioner and her husband inherited properties which each retained and managed as his or her separate property.  During the year 1923 Frank N. Brooks engaged in the lumber business, investing his separate funds in corporations engaged in the manufacture and sale of lumber.  Brooks became the president of one of these corporations, the Warnick Lumber Co.  The petitioner did not regard these enterprises as financially sound and as early as 1923 expressed to her husband her desire to keep her property entirely free from involvement in any liability growing out of them.  The lumber companies owned by Brooks were operated at a loss during a part of the period following 1923, continuing down to the year 1935.  In the latter year their financial condition became increasingly*1441  grave.  Near the end of that year, in view of these circumstances, petitioner and her husband consulted and agreed that "each would keep his own income and each file their own separate returns." On this occasion Brooks stated to petitioner that they "did not have to file community property returns." It was agreed in addition at that time that petitioner would manage her separate property, although she had assumed its sole management prior to *862  that year, with the exception of infrequent advice from her husband and from her bankers.  During all of the years from 1936 through 1939 the petitioner and her husband filed separate income tax returns.  In the taxable years Brooks reported as his separate income the entire amounts which he received as salary and director's fees.  The Commissioner thereafter eliminated from his returns one-half of these sums and, determining that the salaries and fees were community property, taxed one-half of them to the petitioner.  On December 28, 1938, Brooks filed with the internal revenue agent an affidavit requesting a hearing on the 1936 deficiency involved herein and stating that there was no obligation either under state or Federal law*1442  requiring a husband and wife in Washington to divide equally the salary of the husband.  Petitioner, on January 5, 1939, filed a similar affidavit contesting the 1937 deficiency in question here.  Frank N. Brooks died in the month of September 1939 and petitioner was appointed administratrix of his estate.  In an inventory filed with the Probate Court by petitioner on April 1, 1940, there was included in his estate as his separate property bank deposits, stocks and bonds, and as his share of community property one-half of the realty used by petitioner and Brooks as a home.  OPINION.  HILL: We are called on here to say, viewing the evidence which has been presented to us, whether petitioner must report as her income one-half of the fees and salaries received by her husband during the taxable years.  The answer to this question depends on whether we are able to make out a definite, binding agreement between petitioner and Brooks which set apart as the latter's separate property his director's fees and salaries.  The effect of such an agreement, if proof of it is made, is to make separate income of what is otherwise community property. *1443 ; ; ; so much is agreed.  Without such a contract earnings from personal services are community property and must be reported one-half by each spouse for income taxation.  Sec. 6892, Washington Revised Statutes (Remington, 1932); ; ; . The evidence before us we deem insufficient to show a definite agreement between petitioner and her husband affecting the earnings of Brooks arising from personal services.  Proof is made only that petitioner's husband, at the time of the agreement, stated that they "did *863  not have to file community property returns" and it was thereupon agreed that "each would keep his own income and each file their own separate returns." The meaning of these statements, taking all of the testimony into account, is not plain.  It appears that Brooks had largely in mind the mere mechanics of reporting the income, whether by joint or separate*1444  return, which does not affect the character of the income.  Prior thereto it is stated and emphasized that petitioner and Brooks made joint returns and, thereafter, utilized separate returns.  If it be assumed, however, that in the statements of the parties may be found contemplation that the character of the income was altered, we are yet unable to make out an agreement which reaches the conclusion argued by the petitioner.  The contract so far as disclosed does not in itself purport to alter the nature of the income.  This was thought by Brooks to be done by operation of law, both of Washington and of the Federal Government.  Evidence of this is found in the affidavits filed with reference to these deficiencies in which it was stated by petitioner that it was her contention that under , the taxpayer has a right to either divide his earned income with his wife or report it entirely in his own return, with or without an agreement to that effect.  This position is reiterated in the petition in this proceeding.  The agreement here involved, therefore, appears to be no more than an understanding of the parties that, in view of their conception*1445  of the law giving a freely exercisable option, each should report his or her income separately.  The contract thus can not stand alone when deprived of the support of the law and can have no effect on the nature of the income here in question.  Petitioner's efforts to make clearer the meaning of the contract here involved through proof of petitioner's method of listing Brooks' estate on inventory can not, we think, avail her here.  No question is made that Brooks' securities were his separate property.  The bank deposits alone appear significant and even these lose their significance when no proof is made of their source, whether or not arising from personal services.  The whole evidence adduced is insufficient to justify our sustaining petitioner's contentions for an agreement altering the community nature of Brooks' earnings during the taxable years.  Accordingly, respondent's position must be sustained.  Petitioner's requests for credits for personal exemption and for dependents appear from the deficiency notice here involved to have been taken into account by respondent in computing the additional tax due.  In the absence of more specific criticism or facts on which to base*1446  such a criticism of respondent's computations, these contentions of petitioner must also be passed over.  Decision will be entered for respondent.