Court Opinion

ID: 4605251
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:58.433653+00
Date Added: 2024-06-11T07:53:09.635828
License: Public Domain

LOTTIE ZUKOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Zukor v. CommissionerDocket No. 99901.United States Board of Tax Appeals43 B.T.A. 825; 1941 BTA LEXIS 1441; March 6, 1941, Promulgated *1441  In 1934 petitioner and her husband were residents of and domiciled in New York.  In that year two suits were brought against petitioner's husband based upon alleged misfeasance on his part as an officer and director of a corporation then in bankruptcy.  In 1937, the taxable year, petitioner and her husband were residents of and domiciled in California.  In that year an offer in settlement of the suits was made and approved by the Bankruptcy Court, and pursuant thereto petitioner's husband paid in that year the sum of $45,000.  Held, petitioner is not entitled to deduct one-half of that amount from the half of the income of the marital community reported by her in the taxable year.  Marshall D. Hall, Esq., and F. A. Pike, C.P.A., for the petitioner.  Samuel Taylor, Esq., for the respondent.  KERN *825  This case involves a deficiency of $29,881.64 for the calendar year 1937, and the sole issue still in dispute is whether petitioner is entitled to deduct from gross income $22,500 representing one-half of the amount paid by her husband, Adolph Zukor, in the taxable year in compromise of certain lawsuits brought against him.  Petitioner claims*1442  this right as a resident during the taxable year of California, a community property state.  Respondent denies it on the ground *826  that the actions were begun in 1934 when petitioner and her husband were residents of New York.  The case was submitted on a stipulation of facts, which embodied the returns of the two spouses and all relevant pleadings and settlements of the suits in question, and our findings state merely the substance of this stipulation.  FINDINGS OF FACT.  Petitioner and her husband, Adolph Zukor, each filed an individual income tax return for the year 1937 on the cash basis, in which each reported one-half of the income derived from personal services and each claimed one-half of the deductions, including the deduction here in question.  Before May 1936 petitioner and her husband, Zukor, were domiciled in and residents of New York, but since then have been domiciled in and residents of California.  Before May 1936 Adolph Zukor was an officer and director of the ParamountPublix Corporation, now known as Paramount Pictures, Inc., and performed all his duties in New York.  At all times in 1937 Zukor was in charge of operations in California for Paramount*1443  Pictures, Inc.  In May 1934 there was filed in the Supreme Court of New York a complaint in a suit by Charles D. Hilles, Eugene W. Leake, and Charles E. Richardson, as trustees in bankruptcy of the ParamountPublix Corporation, against Frank A. Bailey and a large number of others, including Adolph Zukor as a director of Paramount, in which it was stated that the defendants caused Paramount to purchase certain of its own outstanding stock in excess of its market value and when the corporation's capital was impaired; and set out other causes of action which it is unnecessary to detail here.  In December 1934 a complaint in another suit was filed by Hilles, Leake, and Richardson as trustees of the ParamountPublix Corporation against Jules E. Brulatour and others, including petitioner's husband, as directors, in proceedings under section 77B of the Bankruptcy Act of the United States in the Supreme Court of New York.  Zukor had been president of the corporation in 1927, 1928, 1929, and 1930.  The bill alleged that salaries paid to Zukor as director and officer, and to others, were excessive in various respects, and made other allegations which it is not necessary to mention here.  *1444  In the course of these suits Hilles, Leake, and Richardson, trustees of Paramount, filed a petition with the United States District Court for the Southern District of New York for approval of settlement of the suits of Hilles v. Bailey et al., and Hilles v. Brulatour et al. (treated as "Reserved Actions" by the court in its reorganization of the corporation) by the payment by defendants, including Zukor, to the petitioners of $2,150,000.  Bailey's case had been set for trial *827  on October 29, 1937, pending disposition of the matter by the court, and Brulatour's case, by agreement of counsel, was not to be tried until after the trial of Bailey's case and had been adjourned to the December 1937 calendar.  Under the terms of settlement Adolph Zukor and Eugene F. Zukor were to pay to the petitioners $45,000 in cash and $405,000 in nine notes of $45,000 each, maturing on January 2, 1939, and yearly thereafter until paid.  A hearing was held on November 3, 1937, and an order was issued by the court on that day approving the settlement.  On petition of Hilles, trustee, the court modified its order on November 24, 1937, nunc pro tunc in respect of the Zukor notes*1445  in a manner not material here, the cash payment remaining as before, which was duly discharged by a check drawn on November 20, 1937, to Hilles, as trustee, by Adolph Zukor for $45,000 and paid in due course.  OPINION.  KERN: The sole question is whether one-half of the sum of $45,000 paid by petitioner's husband, Adolph Zukor, in the taxable year 1937 in compromise of two suits begun in 1934 against him and others in New York is deductible from petitioner's gross income for that year under section 23(a) of the Revenue Act of 1936.  The two spouses, as they might properly do, each reported one-half of the earned income.  United States v. Malcolm,282 U.S. 792">282 U.S. 792. Each claimed also one-half of the deductions related to that income, including the expense in question.  Obviously, in California, as in Texas, if the debt was incurred by the husband in that state during coverture and was, therefore, a community debt, one-half would be deductible by each spouse.  Alice G. K. Kleberg,43 B.T.A. 277">43 B.T.A. 277. The character of the expense is not in controversy.  The question is, therefore, narrowed to whether petitioner, who was residing in the community property*1446  State of California in the taxable year, is entitled to such a deduction arising out of litigation instituted in and growing out of acts performed in the noncommunity property State of New York.  The nature of the two suits has been sufficiently set out to make recapitulation here unnecessary beyond saying that they both grew out of alleged improper acts of petitioner's husband and others while he was an officer and/or director of the ParamountPublix Corporation in the State of New York.  Respondent confesses that he has been able to find no cases precisely in point here, but contends that the obligation, having arisen while petitioner and her spouse were not residing in California, was his alone, and cites various cases holding that the property of the husband acquired in a noncommunity property state remained his separate property after his removal to California; Charles A. Shea,30 B.T.A. 1265">30 B.T.A. 1265; affd., 81 Fed.(2d) 937; W. L. Honnold,36 B.T.A. 1190">36 B.T.A.  1190; *828 Ruth B. Rains,38 B.T.A. 1189">38 B.T.A. 1189. He does not trace, however, the progress of California legislation on this subject to show what rule is now applicable.  *1447  We must here look to the law of California first.  The Civil Code of California, by sections 162 and 163, defines the separate property of spouses, and by section 164 defines community property as follows: All other property acquired after marriage by either husband or wife, or both, including real property situated in this State and personal property wherever situated, heretofore or hereafter acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this State, is community property; * * * This provision is the result of an amendment on July 27, 1917, and another in 1923, for the provision as it stood previously was held by the State Supreme Court in In re Arms' Estate,186 Calif. 554; 199 Pac. 1050, to mean much less: It has long been the established law of this state that where a husband brings into this state money or property acquired by him during coverture in another state, by whose laws it was his separate property, it remains his separate property after it reaches this state, and that any property acquired therewith in this state, either by purchase or exchange, is also*1448  the separate property of the husband.  Since the year here involved is 1937, the section as amended in 1917 and 1923 would be applicable.  It is significant, therefore, that the new provision, after first having been upheld by the State Supreme Court, was, in In re Thornton's Estate (Cal., 1934), 33 Pac. (2) 1, held unconstitutional, as infringing the due process and privileges and immunities clauses of the Fourteenth Amendment of the Federal Constitution.  As we said in Shea's case, supra, at page 1269, commenting on this decision, "The result is that the rule in California is now the same as it was prior to the amendments to section 164, and property acquired in another state by whose laws it was the separate property of the husband remains his separate property when taken into California, In re Arms' Estate, supra, and under section 163 the 'rents, issues, and profits thereof' are his separate property." This is the rule in respect of separate personal property acquired in a noncommunity property state and thereafter brought into California.  Neither party has cited any California law in respect of obligations incurred in a noncommunity*1449  property state.  Respondent points out what is obvious, that the liability in these New York suits was single and that of the husband, when the suits were instituted and, under New York law, when that liability was discharged by payment.  He argues, therefore, that the obligation remained the separate obligation of the husband after his removal with his wife to California, when California law would apply; and in support of his contention he ventures upon the doubtful argument, drawn from Helvering v. Fitch,309 U.S. 149">309 U.S. 149; and Helvering v. Leonard,310 U.S. 80">310 U.S. 80, that the law of *829  a state must be proved as a fact by the taxpayer at his peril in courts and administrative tribunals of the United States. We think it unnecessary to examine this argument more carefully, for a more obvious answer lies in the very nature of deductions allowed in the Federal revenue acts.  Had the California courts upheld the constitutionality of section 164 of the Civil Code, as amended, a question of more difficulty would have been presented; for where the law of the state of the new domicile has impressed hitherto separately acquired personalty of the husband*1450  with the interests of the marital community, it would not be unreasonable to assume in petitioner's favor that separate obligations of the husband would likewise become joint obligations of husband and wife.  In such a posture of affairs the very nature of allowed deductions in the Federal revenue acts, which are correlative to interests owned, would, in justice, require their allowance here.  See Kleberg, supra. But this is not the case.  Property of the husband separately acquired in a noncommunity property state remains his property in California as if section 164 had not been amended, and we think that deductions for liabilities arising against him in a noncommunity property state should be treated in the same way and are allowable only to the husband, even though satisfied after the husband and wife have become domiciled in a community property state.  Judgment will be entered for the respondent.