Court Opinion

ID: 4618251
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:38:13.555914+00
Date Added: 2024-06-11T07:55:26.787127
License: Public Domain

Dorothy G. McKay, Petitioner, v. Commissioner of Internal Revenue, RespondentMcKay v. CommissionerDocket No. 35195United States Tax Court24 T.C. 86; 1955 U.S. Tax Ct. LEXIS 201; April 28, 1955, Filed *201 Decision will be entered for the respondent.  Held, that, under section 12391.04 of the Revised Statutes of Hawaii, which were effective for the year 1947, the income from the separate property of petitioner's then husband was community income, with existing and equal interests in the petitioner and the said husband.  Arthur H. Diebert, Esq., and A. L. Burford, Jr., Esq., for the petitioner.George E. Constable, Esq., for the respondent.  Turner, Judge.  TURNER *86  Respondent determined a deficiency in income tax against petitioner in the amount of $ 3,816.76 for the calendar year 1947.The questions presented are (1) whether for 1947, either by operation of the community property law of the Territory of Hawaii then *87  in effect, or by reason of an agreement with her husband, the income from the separate property of the husband was community income, and (2) whether after filing a 1947 return on the community property basis, petitioner is estopped to deny that the income in question was taxable to her on that basis.FINDINGS OF FACT.Some of the facts have been stipulated and are found as stipulated.Petitioner is an individual and resides in Van Nuys, *202 California.  During the taxable year petitioner and Pink Lavary Murphey were husband and wife and were domiciled in Honolulu, Hawaii.  They filed separate returns for 1947 with the collector of internal revenue for the district of Hawaii.Petitioner and Murphey were married May 12, 1928, in Dallas, Texas, where petitioner was then living.  Murphey had lived in Honolulu since 1920, with the exception of the years 1926 and 1927, when he was away in the Navy.On January 1, 1940, petitioner and Murphey formed a partnership and engaged in the businesses of laundry and dry cleaning and naval tailoring, which were conducted under the name of Spud's.  In 1946 there was also a men's furnishing business.Petitioner and Murphey were divorced on June 4, 1946.  Prior to the divorce and incident thereto, they entered into a property settlement agreement, dated May 31, 1946, wherein petitioner, in consideration of the payment to her of $ 128,230.15, "accepts the terms of this agreement in full and complete settlement and release of all claims and demands of every kind or nature against said Husband * * * and from all claims or interest whatsoever in any property, real, personal or mixed, community*203  or separate, standing in the name of both parties, or property which the Husband may now own or may at any time hereafter hold or acquire any interest whatsoever in, either by devise, bequest, purchase or otherwise."On July 1, 1946, petitioner, pursuant to the terms of the agreement, executed a bill of sale wherein she transferred to Murphey all of her right, title, and interest in the partnership known as Spud's.Petitioner and Murphey had one child, a daughter, Patricia, who was of teen age in 1946 and 1947.  Shortly after the divorce in June 1946, petitioner purchased a residence at 409-A Portlock Road in Honolulu, where she and Patricia lived until July 1946.  Murphey's residence was at 2003 Keeaumoku Street.  In July 1946, petitioner and her daughter came to the mainland; the daughter visited with school friends and petitioner visited or lived with a family named Trento, in North Hollywood.*88  On October 9, 1946, petitioner remarried Murphey at Las Vegas, Nevada.  He returned to Honolulu about October 20, 1946, and petitioner and Patricia joined him on January 2, 1947.  They lived at the Keeaumoku Street residence during January, February, and possibly until the middle*204  of March, when petitioner and Patricia moved back to petitioner's house on Portlock Road.  In July or August, petitioner returned to the mainland and, except for a short trip to Honolulu in October, where during her stay she was in the hospital, she resided with the Trentos the remainder of 1947.During the period petitioner lived with Murphey, and not later than June 1947, Murphey supported petitioner, including the payment of some hospital bills and some store accounts.  Murphey came to the mainland frequently, and on October 21, 1947, while in Los Angeles, he had petitioner execute a "Release of Community Interest and Dower," explaining to her that he could not interest anybody in the purchase of any of his properties, even though he had a clearance on all of it, because they still wanted petitioner to sign again that she had no interest in such properties whatsoever.Petitioner, pursuant to the property settlement agreement, signed papers for Murphey at various times, one being a power of attorney signed about October 21, 1947, to enable him to cash some checks covering refunds for taxes for 1945 and 1946.  Under the settlement agreement Murphey was entitled to these refunds. *205  During November 1947 Murphey was in Los Angeles, and wished to drive to Texas to visit his mother.  He arranged with petitioner to trade in her 1941 Cadillac automobile on a 1947 model, to drive the new car to Texas, and upon his return to turn it over to her.  He paid an additional cost of $ 3,217.81 on the transaction and, after making the trip to Texas, turned the new car over to petitioner.The October 1946 marriage was terminated on April 13, 1948, when Murphey secured a divorce from petitioner on grounds of desertion.  Petitioner received no money or other property from him by reason of that divorce.At the time petitioner and Murphey remarried in October 1946, and until they were divorced in 1948, no agreement was entered into between them with respect to their properties.  The property settlement agreement dated May 31, 1946, was never revoked.On August 3, 1948, Garrett R. McKay, petitioner's present husband, was shot and severely wounded by Murphey, in the living room of petitioner's home on Portlock Road, in the presence of petitioner and two other witnesses, one of whom was the daughter, Patricia.  A fourth person, a young girl friend of Patricia, was in an adjoining room. *206  McKay was taken to the hospital and while there was visited by Murphey's brother, who wanted McKay to leave town.  McKay *89  had a jewelry store in Honolulu and felt he could not lose the money and work he had put in the store.  After some visits by Murphey with McKay, it was arranged through their respective attorneys for McKay's business assets to be purchased in the name of Elmer C. Durbin, at a price of $ 10,000.On August 13, 1948, Murphey took $ 10,000 in currency in an envelope to petitioner, who was in the hospital, to be delivered to McKay, who was in another wing of the same hospital.  She was asked to obtain a receipt from McKay for the money.  She delivered the money to McKay, in the presence of McKay's lawyer and another friend, but on advice of his attorney, McKay refused to give a receipt.  Later petitioner informed Murphey of that fact.After the transaction had been effected, someone had an airplane ticket for flight to San Francisco delivered to McKay, who left Honolulu on August 14, arriving in San Francisco on the next day.Petitioner and her daughter returned to California about the same time.About a week later, petitioner and Murphey were remarried in *207  Los Angeles.  Petitioner remarried Murphey so that she would not have to testify against him and to save her daughter from the publicity of a trial.On February 17, 1949, the Circuit Court of the First Judicial Circuit, Territory of Hawaii, because of the absence from the jurisdiction of petitioner, her daughter Patricia, and complainant Garrett Ronald McKay, entered a nolle prosequi in a charge against Pink Lavary Murphey of "Assault Being Armed with a Dangerous Weapon with Intent to Commit Murder and Assault with a Weapon Obviously and Imminently Dangerous to Life."On December 7, 1949, petitioner obtained an annulment of the 1948 marriage in Los Angeles, on the ground that she and Murphey had not lived together as husband and wife. The proceeding was uncontested, although Murphey's attorney was present.  He had informed petitioner that Murphey had obtained a divorce, and had been married, in Mexico.  Petitioner nevertheless wanted the annulment.On December 8, 1949, petitioner married McKay, and they are still husband and wife.During 1947 the business conducted as Spud's was operated at a loss.  Charles A. Miyata, the bookkeeper for Spud's, prepared 1947 income tax returns for*208  both Murphey and petitioner.  Petitioner was living in California when she received the return prepared for her, for signature.  She signed the return without questioning it and returned it to Spud's prior to March 15, 1948.  The bookkeeper had always made out her returns and she thought they had been "right." Her address was given on the return as "Bishop & Hotel Sts., Honolulu 9, T. H.," *90  which was the address of Spud's main store, and was the address also given on Murphey's return.  The returns so prepared were thereafter filed, possibly by Murphey or the bookkeeper, with the collector in Honolulu.  Murphey paid the tax shown on each return.Each return showed total income of $ 22,181.60, that the entire amount was community income, and that one-half thereof, or $ 11,090.80, was the adjusted gross income of each spouse. On each return the $ 11,090.80 was described as "1/2 of $ 22,181.60 community property."Petitioner's return showed two claimed exemptions, one for herself and one for her daughter, and that her husband "Pink L. Murphey" was filing a separate return.  The items of income and deduction were not listed on petitioner's return in the schedules provided therefor. *209  On page 2 of the return was the statement "Refer to Pink L. Murphey's (Husband) Return." Each return showed the signature date as "3/15/48," which is also the date on which they were shown to have been received by the collector in Honolulu.  Murphey claimed exemptions for himself and his mother.The total income of $ 22,181.60, except for Murphey's navy retirement payments covering the years 1941, 1942, and 1947, the amount of $ 36 paid to Murphey by the "First Circuit Court, Honolulu, T. H.," and the sum of $ 336 received as rent on petitioner's property at 409-A Portlock Road, was produced by the property which had become Murphey's separate property under the settlement agreement of May 31, 1946.In his determination of deficiency herein, the respondent increased net income from $ 10,590.80 as shown on the return to $ 19,600.99.  Of that increase, $ 6,335.32 was the result of disallowance of a net operating loss carryover from 1946 and of a part of business expense deductions claimed.  The remaining $ 2,674.87 by which net income was increased resulted from the partial disallowance of a claimed capital loss.  After the above disallowance of deductions claimed, there were still *210  a business net loss for the year of $ 11,817.62 and an allowed capital loss of $ 1,000.The only amount shown under "Wages, salaries, bonuses, commissions, and other compensation" determined by respondent to be income of petitioner was in the amount of $ 18.  1 Also included was $ 2,189.51, being one-half of the navy retirement payments received by Murphey in 1947.By a statement mailed to her from Honolulu by a representative of the respondent, petitioner was advised that the findings had been discussed with Murphey and that he concurred therein.  The respondent's *91  determination of deficiency against petitioner was based on the findings so reported to have been discussed with Murphey.OPINION.There is no apparent disagreement between the parties as to the amount or sources of the income involved.  Further, the facts show that all of the income, except for $ 336 *211  rental received on petitioner's Portlock Road property, the $ 36 received by Murphey, presumably as fees of some sort from the circuit court in Honolulu, and the retirement pay received by him from the Navy, was from property which had become Murphey's separate property under the settlement agreement of May 31, 1946.  That Spud's was operated at a loss during 1947 is an accepted fact, and the respondent has made no determination or claim that Murphey was engaged in any other business or occupation.  In short, the facts show that if the income from the property which became Murphey's separate property under the settlement agreement of May 31, 1946, be eliminated, there can be no deficiency in this case.It is the position of the respondent that, by operation of the community property laws of Hawaii in effect in 1947, the income from the separate properties of a husband and wife was community income. He also contends that petitioner and Murphey, when they were remarried in October of 1946, made an agreement whereby the income herein was to be community income; and by affirmative plea in an amendment to his answer, he also claims that petitioner, by filing an income tax return which *212  was designed to report the income on Murphey's separate property as community income, is now estopped from contending otherwise.  The petitioner takes the contrary position on all three points.While we think the evidence plainly and clearly refutes the respondent's claim that petitioner and Murphey at the time of their remarriage in October of 1946 entered into an agreement that the income from Murphey's separate property would thereafter be community income, we are satisfied that the respondent is correct in his interpretation of the community property law, and that by operation of that law, the income from Murphey's separate property during the period the marriage continued was community income.The community property law was enacted by the Legislature of Hawaii at its Regular Session of 1945, by adding new sections 12391.01 to 12391.18, inclusive, as Chapter 301A of the Revised Statutes of Hawaii.  By section 12391.01, it was provided that all property, both real and personal, of the husband before marriage and all property thereafter acquired by him by gift, devise, bequest, or descent, and all substitutions therefor, should continue to be his separate property. *92  Section*213  12391.02 of the act contained identical provisions as to the separate property of the wife.  The property which under the statute would be community property was covered in section 12391.04 as follows:Sec. 12391.04.  Community property.  Except as otherwise provided in this chapter, all property, both real and personal, including earnings of the husband and earnings of the wife and including rents, issues, income and other profits of the separate property of the husband and rents, issues, income and other profits of the separate property of the wife, acquired by the husband or by the wife after marriage or on or after the effective date of this chapter, whichever is the later, shall be community property of the husband and wife, and each shall be vested with an undivided one-half interest therein.  The respective interests of the husband and the wife in such community property shall be present, existing and equal interests.  The respective interests of the husband and the wife in such community property shall arise as an incident of marriage.It is the claim of the respondent that under the provision quoted the income from the separate property of Murphey was community income, *214  one-half of which is taxable to petitioner, in keeping with the reporting by her and by Murphey, and in keeping with his determination.  Petitioner, on the other hand, argues that the provision quoted is applicable to the income from separate property of the spouses only if the separate property producing the income was itself acquired after marriage.So far as we have been able to determine, there have been no court decisions construing the section in question and if there is anything to be had in the nature of a legislative history, it has not been called to our attention, and we have not found it.  We are accordingly left to the language itself and to our best judgment of its meaning and intent.It is to be remembered that while sections 12391.01 and 12391.02 provide that the separate property of the spouses at the time of marriage and all property thereafter acquired separately by gift, devise, bequest, or descent, and all substitutions therefor, shall be and continue to be the separate property of the respective spouses, they contain no provision with respect to the income from such separate property, regardless of whether such separate property was acquired before or after marriage. *215  Furthermore, the only section of the act specifying the character of income from property, whether separate or community, is section 12391.04, and if it be said, as petitioner contends, that that section has to do only with the income of separate property, where the separate property itself was acquired after marriage, then there is an absence in the statute of any provision dealing with the income from the separate property of the spouses, which separate property was owned by them at the time of their marriage.From an examination of the language of section 12391.04, in connection with the statute as a whole, it is our view and we hold that *93  the provision was not intended to be limited in its application in the manner contended for by the petitioner, but rather, it was intended that the income received after marriage from all of the separate property of the spouses was to be community income, regardless of whether the separate property itself was acquired before or after marriage.In so concluding, we have not overlooked the opening words of section 12391.04, which makes the provisions of that section applicable to all property, including income, of the husband and of the*216  wife "Except as otherwise provided in this chapter." The "Except as otherwise provided in this chapter" provisions in the act, other than sections 12391.01 and 12391.02, previously referred to, appear to be sections 12391.03, 12391.05, 12391.06, and 12391.07.  Section 12391.03 provides that all property or moneys received as compensation for personal injuries shall be the separate property of the spouse sustaining the injuries.  By section 12391.05, it is provided that there shall be a rebuttable presumption that all property acquired by either spouse after marriage shall be community property. In section 12391.06, it is provided that a husband and wife may hold property as joint tenants, tenants in common, tenants by the entirety, or as community property, but that there is a rebuttable presumption that all property acquired after marriage is community property, unless the contrary intention is expressed in the instrument by which the property is acquired.Section 12391.07 provides that either the husband or the wife may contract with the other so as to convey his or her interest in the community property and vest his or her right, title, interest, or estate in the transferee, as*217  the separate property of the transferee.  Petitioner, on brief, seemingly argues that the property settlement contract of May 31, 1946, is, under section 12391.07, controlling as to the 1947 income from the separate properties of Murphey and petitioner.  Rather obviously, we think, there is no merit in such a contention.  That contract was designed to divide all of their property, community or otherwise, looking to the termination of the husband and wife relationship, which relationship was in fact terminated 4 days later by the decree of divorce on June 4, 1946.  The contract was incident to the divorce and became effective on the date thereof.  Certainly at that time there was no thought of remarriage, and we find no reasonable basis for saying that a subsequent division under section 12391.07 of community property acquired after remarriage and which was community property only because of the remarriage was even remotely within the contemplation of the parties in reaching their property settlement agreement of May 31, 1946.  On the facts, it is our opinion that petitioner and Murphey made no contract under section 12391.07 *94  covering the 1947 income from their separate properties, *218  and we so conclude.It is thus apparent, we think, that none of the above sections which are exceptions to the general rule prescribed by section 12391.04 lend any support to the petitioner's claim that only in the case of separate property acquired after marriage is the income therefrom to be regarded as community property.On the other hand, section 12391.10 of the act, in our opinion, gives support to the conclusion above reached as to the scope of section 12391.04.  By section 12391.10, it is provided that the wife, as agent for the community shall have the right to receive, manage, etc., "that portion of the community property which consists of her earnings, the rents, issues, income and other profits of her separate property," and that the husband, as agent for the community, shall similarly have the right to receive, manage, etc., all other community property, including "that portion of the community property which consists of his earnings, the rents, issues, income and other profits of his separate property and all other community property which shall stand in his name." It is thus to be noted that the income from the separate property of the spouses is referred to as community*219  property without any qualification as to whether such separate property itself was acquired before or after marriage, which is in harmony with our interpretation of section 12391.04, to the effect that after marriage the income received from all of the separate property of the spouses was community income, regardless of whether the separate property itself was acquired before or after marriage. 2*220  In the light of the above, it is accordingly our conclusion that the income from the separate property of Murphey was, under section 12391.04, the income of both petitioner and Murphey in equal interests, and that the respondent did not err with respect thereto in his determination of the deficiency herein.  In the circumstances, we do not reach the question of estoppel, affirmatively pleaded by him.Decision will be entered for the respondent.  Footnotes1. Presumably this amount represented one-half of the $ 36 shown on Murphey's return, under the description "First Circuit Court, Honolulu, T. H."↩2. The Legislature of Hawaii, at its Regular Session in 1949, repealed the community property law which it had enacted in 1945, insofar as prospective effect thereof was concerned.  It amended certain sections of the prior community property statute to deal with the problems relating to property which had become community property during the period it was in force, stating specifically, however, that "Such repeal shall not operate to divest any interest in property which was acquired, established, accrued or vested prior to the effective date" of the repealing act.  The amendment to the Federal Internal Revenue Code permitting a husband and wife, on a joint return, to arrive at their income by the so-called split-income computation method was made by the Revenue Act of 1948, which, by its terms, became effective May 1, 1948, and so far as we are advised, the 1949 Regular Session of the Legislature of Hawaii was its first session after May 1, 1948.↩