Cruickshank v. Commissioner

FLORENCE V. CRUICKSHANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. F. G. CRUICKSHANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Cruickshank v. Commissioner Docket Nos. 16449, 21790. United States Board of Tax Appeals 13 B.T.A. 508; 1928 BTA LEXIS 3241; September 24, 1928, Promulgated *3241 The income of a husband and of a wife, both residents of California, derived from separate estates and individual earnings is taxable to the spouse owning the estate or earning the income, irrespective of an antenuptial agreement to the effect that such income should be used for the common benefit of both and any surplus invested in property the joint property of both. Ralph W. Smith, Esq., and Claude I. Parker, Esq., for the petitioners. Clark T. Brown, Esq., for the respondent. MILLIKEN *509 These proceedings were by motion made and granted consolidated for hearing and final decision and involve deficiencies in income tax. In the appeal of Florence V. Cruickshank the deficiencies are for the calendar years 1920 and 1921 in the respective amounts of $3,550.02 and $2,207.75, and in the appeal of F. G. Cruickshank the deficiencies are for the calendar years 1922 and 1923, in the respective amounts of $3,149.63 and $2,393.38. The only error assigned in each case is that the respondent in computing the income of petitioners, who are husband and wife, erred in refusing to compute such income in accordance with an antenuptial agreement entered*3242 into between them. FINDINGS OF FACT. Petitioners were married in 1909 and have been since that date husband and wife and residents and citizens of the State of California. Prior to their marriage and on August 1, 1909, petitioners entered into the following agreement: This Ante-nuptial Agreement, made and entered into this first day of August, 1909, by and between F. G. Cruickshank, of Pasadena, California, party of the first part, and Florence Vandevort, of the same place, party of the second part, WITNESSETH THAT: Whereas, the parties hereto contemplate intermarrying and are desirous of adjusting all property rights and interests; and Whereas, the party of the first part is the owner of property of the value of $10,000.00, and the party of the second part is the owner of property of the value of $760,000.00 (household furniture and furnishings and jewelry excepted), and Whereas, the parties are desirous of keeping the above principals intact, free from any claim of the other, but are desirous of sharing in the income and accumulations therefrom; Now therefore, in consideration of the premises and of the marriage herein contemplated, the parties do agree, each with*3243 the other, as follows, to-wit: That the property which each of the parties now has shall be and remain the separate property of the party so owning the same and shall be free from any claim of the other, except as herein provided. That during the continuance of said marriage the income and accumulations derived from said properties and the earnings of the parties and all moneys received by them from any and all sources shall be used by the partis hereto for their mutual comfort and enjoyment and shall be under the joint control of the parties hereto and any unused portion of the income and accumulations, shall, from time to time, be invested for the joint benefit of the parties hereto and shall be under their joint control. The parties agree to keep accurate books of account showing the moneys received and disbursed on account of said properties, and the amounts received from other sources and all moneys advanced to the parties hereto, and at least once a year to balance said books and to appraise the property so as to show the actual amount of property on hand. Should any statement show the property on hand to be of greater value than $770,000.00 the excess shall be the*3244 property of the parties hereto, the same to be under their joint control during the continuance of said marriage, but should *510 any statement show that the value of said property is less than $770,000.00, then the parties hereto must make up such deficit in said principal sum to the party whose principal has been impaired. For the purposes of this agreement the payment of $200.00 per month upon the first day of each month to Charlotte E. Gleason for the term of her natural life, shall be considered a charge upon the property of the party of the second part and paid out of the income before any other payments or advancements are made. Upon the dissolution of said marriage by death or otherwise, each of the parties (or the estate of the deceased party) shall be entitled to the amount they have contributed, as above set forth, and one-half of all earnings, accumulations, income and other moneys received from whatever source. Provided, however, that the household furniture and furnishings and jewelry which the second party now has shall be the property of the second party in addition to the above, and provided further that either party shall have the right, at any time*3245 to impair their principal by gift, but if so impaired it shall be entered upon the books of the parties hereto and the amount so impaired shall not be replaced out of income. This agreement may be changed, cancelled or modified by an instrument in writing signed by the parties hereto. The parties agree to devote so much of their time, without compensation, to the care, management and conservation of said property as may be necessary. In Witness Whereof, the parties hereto have hereunto set their hands and seals the day and year first above written. F. G. CRUICKSHANK (SEAL.) FLORENCE VANDEVORT (SEAL.) The above agreement has been in full force and effect since its execution and has in all particulars been carried out and observed by the parties. F. G. Cruickshank was at all times a practicing attorney at law and was during the years 1921, 1922, and 1923 a member of a partnership. Petitioners made for each year a separate income-tax return and each returned one-half of the total income which both received from all sources. For the years 1920 and 1921, respondent restored to the gross income of F. G. Cruickshank all the income he derived from his profession and all*3246 his income from all other sources other than the property covered by the agreement, and apportioned the income from said property 1/77 to F. G. Cruickshank and 76/77 to Florence V. Cruickshank. For the years 1922 and 1923 he followed the same procedure except that he apportioned the income from the property covered by the agreement in equal parts between petitioners. OPINION. MILLIKEN: Petitioners contend that under the antenuptial agreement each was absolutely and without a qualification entitled to receive one-half of the total income of both; that since this agreement was entered into prior to the adoption of the Sixteenth Amendment to the Constitution it is apparent it was not made to evade income tax; and that this right is a property right which can not be disregarded for the purpose of taxation or any other purpose. *511 Since the antenuptial agreement is valid and binding, it is immaterial for income-tax purposes whether it was executed before or after the adoption of the Sixteenth Amendment. We have not before us a question of tax evasion. Cf. *3247 United States v. Isham,17 Wall. 496. The issue presented is not whether that agreement did in fact result in an enforcible right to an equal division of the income between the parties, but is, What is the effect of the agreement upon the taxable income of each? The agreement was carefully drawn and meticulously sets out the rights and liabilities of the parties. It clearly appears that the property mentioned in the agreement remained the absolute separate property of each party free from any claim of the other but under joint control; that the income and accumulations from such properties and all other income received by either party from any source whatever should be used by the parties for their mutual comfort and enjoyment; that any unused portion of such income and accumulations should be invested for the joint benefit of the parties, such investments to be under joint control; and that upon the dissolution of the marriage the parties (or the estate of the deceased party) should be entitled to the amounts each contributed and one-half of all the earnings, accumulations, income or other moneys from whatever source. *3248 We will first discuss the effect of the antenuptial agreement on the taxable income of the husband other than that derived from the property covered by the agreement. The case of Blair v. Roth, 22 Fed.(2d) 932 (certiorari denied, 277 U.S. 588), is in point. In that case the court said: * * * 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. By the appellant it is not contended that, under the California statutes (sections 159, 160, Civ. Code; Wren v. Wren,100 Cal. 276, 34 P. 775, 38 Am. St. Rep. 287; Kaltschmidt v. Weber,145 Cal. 596, 179 P. 272; Smith v. Smith,47 Cal.App. 650, 191 P. 60; Perkins v. Sunset T. & T. Co.,155 Cal. 712, 103 P. 190), a husband and wife domiciled in that state may not make valid agreements relating to either their separate or*3249 their community property, or that it would be incompetent, by appropriate agreement between them, to constitute the earnings of the wife her separate estate. In essence his contention is that, at most, the agreement here was for an assignment by each of the parties of one-half of his or her earnings to the other; that, 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; and that the obligation to pay the tax so computed could not be escaped by contributing such incomes to the so-called partnership between the two members of the community, any more effectually than by contributing it to a like enterprise as between one member of the community and a third person. In this view we concur. *512 The above is decisive of this particular issue. Besides, it appears that during three of the years involved, the husband was a member of a partnership. This feature brings this proceeding in so far as said years are concerned, within the decision of *3250 Mitchel v. Bowers, 15 Fed.(2d) 287. The reasoning in the opinion in Blair v. Roth, supra, is equally applicable to the taxability of income derived from the properties covered by the antenuptial agreement. That instrument provides that the property of each of the parties shall, subject to the right to the joint use of the income and the right of joint control, remain the separate property of the party owning it at that time and should be free from any claim of the other. Income from such property is under the law of California separate property. As such it is first the income of the owner of the property and the obligation to pay tax thereon can not be escaped by contributing such income to the common use of both. Such also has been the consistent holdings of the Board. See Samuel V. Woods,5 B.T.A. 413; Fred W. Warner,5 B.T.A. 963; Guy C. Earl,10 B.T.A. 723; and H. A. Belcher,11 B.T.A. 1294. Cf. C. R. Thomas,8 B.T.A. 118. We are of opinion that each party is taxable on the income drerived from the property owned by him or her at the date of the agreement*3251 and from any other property representing property then owned. Counsel for petitioner calls to our attention the provisions of section 161(a) of the Civil Code of California enacted as a law July 28, 1927, and contends that "such section, while not a law during the years in question, was a declaration by the Legislature as to what it has always intended to mean in reference to the respective rights or interests of a husband or wife in California community property." It seems sufficient to observe that, whatever may be the import of the section of the California statute in question, that it was not a law during the years here before us can have no bearing on the taxable status of the income theretofore earned. The treatment that should be accorded such income is controlled by the decision of the United States Supreme Court in United States v. Robbins,269 U.S. 315. Counsel also contends that the antenuptial agreement presents a joint venture. It seems sufficient to point out that there was no combination of property, money, efforts, skill or knowledge in some specific venture or common undertaking. Since it does not appear from the record whether there*3252 is any income from property purchased with surplus income, we refrain from discussing that phase of the case. It appears that for the years 1920 and 1921, respondent allocated the income from the property covered by the agreement 1/77 to the husband and 76/77 to the wife and that for the years 1922 and 1923 *513 he allocated such income to each in equal shares. This appears to be quite inconsistent, but we have not sufficient facts before us to make findings on this point. It is true that in the wife's case, involving the years 1920 and 1921, an accountant was introduced to testify as to what he discovered on certain books of account. Whether such books were properly kept does not appear. The pleadings do not contest the determinations of respondent, except to the extent of alleging that he did not allocate the income in accord with the terms of the agreement. It appears from the deficiency letter that respondent made certain changes in petitioner's income as reported. The figures given by the witness are not in all respects in harmony with those in the deficiency letter. Besides, on cross-examination this witness testified: Q. You don't know, you can't tell, from*3253 your examination, can you, how much income can be attributed to the increase over the $10,000 or over the $760,000 or how much can be attributed to those particular items? A. No. Judgment will be entered for the respondent.