Court Opinion

ID: 4627118
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:00:40.008718+00
Date Added: 2024-06-11T07:57:00.190674
License: Public Domain

H. A. BELCHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Belcher v. CommissionerDocket Nos. 5501, 21194.United States Board of Tax Appeals11 B.T.A. 1294; 1928 BTA LEXIS 3637; May 11, 1928, Promulgated *3637  1.  In the absence of an agreement to the contrary the earnings of both husband and wife in California are community property and are taxable to the husband.  2.  Where, prior to the marriage, husband and wife agreed that they would pool all earnings, income and property and share equally all income and expenses, and after marriage all earnings and income of both were deposited in a joint bank account and all expenses were paid from the common fund and investments were made in the individual names of husband and wife in equal amounts, it is held that the earnings of the wife are community property immediately upon receipt and are taxable to the husband, and that the agreement was not one making the wife's earnings her separate property.  Ralph W. Smith, Esq., for the petitioner.  Le Roy L. Hight, Esq., for the respondent.  VAN FOSSAN *1294  This is a proceeding for the redetermination of income taxes for the calendar years 1922 and 1923, for which the Commissioner has determined deficiencies of $2,496.82 and $2,148.75, respectively.  It *1295  is alleged that the Commissioner erred in refusing to permit the petitioner's wife to report*3638  on her separate return income earned and received by her as her separate property, which income the Commissioner included in petitioner's gross income for the taxable years on the ground that it was community property.  FINDINGS OF FACT.  Petitioner and his wife, Lucille B. Belcher, were married December 5, 1903, at Los Angeles, Calif., and are citizens and residents thereof.  At the time of their marriage the petitioner was employed by the Southern Pacific Railroad Co. and his wife was an officer and employee of R. A. Rowan & Co., in which employment she continued after her marriage.  On August 13, 1909, petitioner entered the employ of R. A. Rowan & Co. and has been continuously so employed since that time.  In planning their marriage they discussed the advisability of Mrs. Belcher retiring from business and it was decided that she should continue her employment.  It was orally agreed and understood between them that both would continue in business, that all earnings, income and properties acquired by both during their married life would be pooled or combined in a common fund, from which all expenses of both would be paid, and that each would own a one-half interest in all*3639  earnings, income and properties acquired by either or both.  It was agreed that they would share equally all earnings, income and properties acquired and all expenses incurred by both during their married life.  Shortly after the marriage a joint account was opened with one bank, upon which each of the parties was authorized to draw.  All earnings and income of both parties, as received, were deposited in this account by Mrs. Belcher or at her direction.  The petitioner would endorse the checks for his earnings and turn them over to Mrs. Belcher for deposit or she would endorse them for him and deposit the same with her own.  Funds were withdrawn from this account and deposited in a joint account with another bank, from which all expenses were paid.  Mrs. Belcher kept all records of their receipts and expenditures, made or directed all deposits and paid all expenses out of the joint account.  Surplus funds were invested in stocks and other properties, an equal amount being invested in the individual name of each party.  Savings accounts, in equal amounts standing in their individual names, were carried with the Citizens Savings & Loan Co. of Mansfield, Ohio, of which Mrs. Belcher's*3640  brother was the head.  An equal amount was always invested in the name of each party, except where *1296  it was deemed advisable for one or the other to invest in some venture of his or her business associates.  All investments, however, were considered the joint property of both, in which each owned an equal share.  All donations and contributions to charities and religious organizations were made in the name of each party in equal amounts.  For the taxable years the petitioner and his wife made separate income-tax returns and reported upon their respective returns the actual amount of salaries, commissions, etc., received by each.  Mrs. Belcher reported upon her separate return income received from salaries, commissions, etc., for the year 1922 the sum of $11,869.48 and for the year 1923 the sum of $11,478.48.  The respondent determined that the salary, commissions, etc., received by Mrs. Belcher during the taxable years was community income and included the same in petitioner's gross income for those years.  OPINION.  VAN FOSSAN: The petitioner has cited numerous statutes and cases to show that husband and wife in California may contract freely with each other relative*3641  to their properties, and by express agreement may render the wife's earnings her separate property.  The respondent does not dispute these contentions, but points out that in this case there is no evidence of an agreement that Mrs. Belcher's earnings should be her separate property.  With this we agree.  The agreement entered into was that the earnings of both parties should be pooled and be the joint property of both.  In the language of the parties "everything was to be fifty-fifty." This is not an agreement that the property should be the separate property of each and does not create an exception to the general rule that, Community property is property acquired by husband or wife, or either, during marriage, when not acquired as the separate property of either.  Section 687, Civil Code of California.  In the absence of an agreement that their earnings should be separate property it can not be questioned that the earnings of either spouse are community property.  (See ; *3642 .) As said by the Circuit Court of Appeals recently in a case strikingly similar to this - At the instant they were received, the salaries were, by the law, impressed with the status of community property and were taxable with reference to that status.  . In that case the court reversed the decision of the Board and stated that the reasoning used in the , on which case our decision in the Roth case was based, was unsound.  See also . As community *1297  property, Mrs. Belcher's earnings are taxable to the petitioner when received. United Statesv. Robbins, 269, U.S. 315.  There was no error in respondent's determination of the deficiencies.  Reviewed by the Board.  Judgment will be entered for the respondent.PHILLIPS PHILLIPS, dissenting: I can not agree with the conclusion that the wages of the wife, at the instant of receipt, were impressed with the status of community property for I am convinced that under the prenuptial agreement of the parties her earnings never*3643  became community property.  The community system of property in California was derived in part from Spain through Mexico, and in part from France through the influence which the Code of Louisiana played in shaping the California statutes.  In both Spain and France, in the absence of any agreement, property was held in community but it was valid for the parties, prior to their marriage, to fix their property rights by contract.  Although the community was a consequence of marriage, the future spouses were not bound to adopt it, but could by a prenuptial contract exclude it wholly or in part.  Burge's Commentaries on Colonial and Foreign Laws, vol. 3, pp. 396, 444.  The Legislature of California in 1850 passed in "An Act defining the rights of Husband and Wife." (Stats. 1850, p. 254.) This act provided: SEC. 14.  In every marriage hereafter contracted in this State, the right of husband and wife shall be governed by this Act, Unless there is a marriage contract containing stipulations contrary thereto. (Italics supplied.) SEC. 15.  The rights of husband and wife married in this State, prior to the passage of this Act, or married out of this State, who shall reside or acquire*3644  property herein, shall be determined by the provisions of this Act, with respect to such property as shall be hereafter acquired, unless so far as such provisions may be in conflict with the stipulations of any marriage contract. (Italics supplied.) This act was modeled upon the Code of Louisiana, which in turn followed the Code of Napoleon.  The present Civil Code of California provides: SEC. 159.  A husband and wife cannot, by any contract with each other, alter their legal relations, except as to property, and except that they may agree, in writing, to an immediate separation, and may make provision for the support of either of them and of their children during such separation.  SEC. 161.  A husband and wife may hold property as joint tenants, tenants in common, or as community property.  SEC. 177.  The property rights of husband and wife are governed by this chapter, unless there is a marriage settlement containing stipulations contrary thereto.  *1298  Parties contemplating marriage may contract freely concerning their property under the law of California, and such prenuptial contracts have been upheld by the courts of that State; *3645 ; . It thus appears that community of property only arises in the absence of a prenuptial contract to the contrary.  It follows, therefore, that where there is a prenuptial contract, which by its terms excludes community ownership of property, then community ownership never arises, and all property relations of the spouses are governed, not by the law of the community, but by the terms of their contract. The evidence in the case before us fairly establishes that prior to the marriage of petitioner in 1903 the parties to the marriage were cognizant of the effect of marriage on their property relations.  The evidence further establishes that prior to the marriage the parties entered into an oral agreement that both would continue in business, on an equal basis; that their earnings would be pooled or combined in a fund in which they would have an equal interest, from which all expenses of both would be paid; and that each would own a one-half interest in all earnings, income and properties acquired by either or both during their married life.  This agreement was carried out during*3646  all the subsequent years of their married life, including the taxable year in question.  It established a property relationship which was entirely different from community ownership.  When property is held in community in California, the husband alone has the power of disposition.  He may spend it substantially as he chooses, and if he wastes it in debauchery the wife has no redress.  See , and cases there cited.  The wife has no present ownership in the property, her interest being a mere expectancy, ; . Under the terms of the prenuptial agreement petitioner and his wife were each to own a one-half interest in all earnings, income, and properties acquired by either or both during their married life.  This agreement was intended to include and it did include all property which would otherwise have been community.  Its effect was to exclude the community entirely and to establish between the spouses an equality in ownership and control; something which does not exist where the husband has the entire disposition and control of the property.  I come*3647  next to consider whether this agreement, not being in writing, was valid.  It was entered into by the parties in 1903 and the evidence discloses that the spouses have ever since treated it as a continuing obligation and that during the taxable year in question their property relations were regulated by its terms.  It was, therefore, completely executed as to all property held by the spouses and *1299  income received by them during the taxable year.  No rights of creditors or third parties are here involved.  In this situation I conceive the law of California to be that the contract is valid and binding between the parties, and can not be assailed by third parties on the ground that it was not in writing, ; ;See ; ; ; ; *3648 . In , the court quoting from , said: As the ante-nuptial contract is alleged to have been completely executed the same is not assailable by the parties thereto, or by third parties, on the ground that it was not in writing, as prescribed by the statute.  I conclude, therefore, that the prenuptial contract of petitioner and his wife was a valid, subsisting agreement, executed as to the taxable year in question, and had the force and effect of excluding the community system of ownership and substituting in its stead a property relationship between the parties according to its terms.  It follows that the income of the wife was at no time during the taxable year community property, that the husband had none of the powers of management and control of the property in question which would be incident to community property, and that the wife's income is not taxable to the husband as community property.  This conclusion would make it necessary to determine whether each spouse should report as income his or her earnings, or one half of the earnings of both; a very interesting*3649  question which it seems unnecessary to discuss in a dissenting opinion.  STERNHAGEN and MURDOCK agree with the dissent.