Sweeney v. Commissioner

JESSIE GAIR SWEENEY, EXECUTRIX, ESTATE OF EDWARD F. SWEENEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sweeney v. Commissioner Docket No. 6322. United States Board of Tax Appeals 15 B.T.A. 1287; 1929 BTA LEXIS 2685; April 9, 1929, Promulgated *2685 Held that certain personal property held in name of decedent, a resident of the State of Washington, was community property and returnable as such for taxation. E. S. McCord, Esq., for the petitioner. L. S. Pendleton, Esq., for the respondent. VAN FOSSAN *1287 This proceeding is brought to redetermine a deficiency in the estate tax for the year 1923 in the sum of $5,186.99. The petitioner alleges that the respondent erred in the following determinations: (1) That the 4,998 shares of the capital stock of the Edward F. Sweeney Investment Co., valued at $213,456.68, were the separate property of Edward F. Sweeney and not the community property of the said Sweeney and the petitioner. (2) That 2,498 shares of the capital stock of the Gair Realty Co. were the separate property of Edward F. Sweeney and not the community property of the said Sweeney and the petitioner. The respondent also erred in fixing the value of that property at $99,162.46 instead of $53,894.35. (3) That a certain account receivable from the Edward F. Sweeney Investment Co., valued at $17,269.52, was the separate property of Edward F. Sweeney and not the community*2686 property of the said Sweeney and the petitioner. (4) That the note of Edward F. Sweeney in the sum of $400.87 payable to Hotel Butler Co. was not properly deductible as his debt. (5) That the note of Edward F. Sweeney in the sum of $17,850 payable to Seattle National Bank was not deductible as his debt. (6) That the note of Edward F. Sweeney in the sum of $4,500 payable to Union National Bank was not deductible as his debt. (7) That an executor's commission in the sum of $3,750 was not deductible as an administration expense. Throughout the case the terms "petitioner" and "taxpayer" have been erroneously used by counsel as referring to Jessie Gair Sweeney in her capacity as wife of the decedent, whereas the party petitioner here involved is Jessie Gair Sweeney, Executrix. FINDINGS OF FACT. Edward F. Sweeney, the decedent, and Jessie Gair Sweeney, were married on June 3, 1903. The marriage relation continued until its termination on January 31, 1923, by the death of Edward F. Sweeney, *1288 who was survived by his widow and four children. At the time of his marriage the decedent owned certain real estate, largely unimproved, situated in the City of Seattle, *2687 Wash., and valued at approximately $60,000. He possessed, also, 1,223 shares of the capital stock of the Seattle Brewing & Malting Co., which were sold in 1905 or 1906 for approximately $125,000. In March, 1905, the decedent organized a corporation known as the Edward F. Sweeney Investment Co., with capital stock of $500,000, consisting of 5,000 shares of the par value of $100 each, of which 4,998 shares were issued to decedent Edward F. Sweeney. The decedent and his wife transferred to the Investment Co. lot 4 in block 5 in A. A. Denny's Addition to the City of Seattle, unimproved land owned by the decedent prior to his marriage and purchased in 1897 for $12,000. In 1907 and 1908 there was constructed on the lot a building known as the Hotel Savoy at a cost of about $350,000, secured partly through a mortgage loan of $170,000. The note secured by the mortgage was executed by the Edward F. Sweeney Investment Co. and the decedent and Jessie Gair Sweeney individually. All renewals were executed by the three joint makers. The amount of the mortgage is now reduced to $145,000. Subsequent to the erection of the hotel building, the decedent organized a corporation, known as Hotel*2688 Savoy Co., for the purpose of operating the hotel, and received substantially all its stock. The venture was unsuccessful and resulted in a loss of about $100,000. Shortly after the sale of his stock in the Seattle Brewing & Malting Co. in 1906, the decedent purchased an office building, known as the Boyle Building, for $500,000, of which $100,000 was paid in cash and the remainder secured by mortgage executed by the decedent and his wife. In 1916 the mortgage was foreclosed and a loss of $100,000 was sustained. On May 20, 1916, the Gair Realty Co. was incorporated with the capital stock of $250,000, consisting of 2,500 shares of the par value of $100 each, of which 2,498 shares were issued to Edward F. Sweeney. To this corporation the decedent and his wife on May 23, 1916, conveyed all real estate, largely unimproved, including all the lots acquired by the decedent prior to his marriage, excepting only the Hotel Savoy property conveyed to the Edward F. Sweeney Investment Co. as aforementioned. The value of the lots owned by the decedent prior to his marriage and so conveyed to the Gair Realty Co. was less than $25,000 at the time of the conveyance. Subsequent to the incorporation*2689 of the Gair Realty Co. the decedent began to develop the real estate held by the company by the erection of buildings thereon, in order to accomplish which it was necessary to secure loans from mortgage companies and banks. Jessie Gair Sweeney was the daughter of Robert Gair, a man over *1289 80 years of age, who lived in Brooklyn, N.Y., and was possessed of a fortune of over $6,000,000. He had six children. It was impossible to secure the loans required in the building operations carried on by the decedent without the endorsement of Jessie Gair Sweeney, whose prospective inheritance from her father gave her the credit standing demanded by the mortgage companies and banks. Mrs. Sweeney objected to giving such endorsements and executed the same solely by reason of an oral agreement with decedent that all of the property of whatever kind or description standing in the name of the decedent or that might be acquired by him was community. property and was owned equally by the decedent and Mrs. Sweeney. This agreement was referred to and reaffirmed on many occasions when financial aid was sought and was disclosed to representatives of the lenders and to others. By virtue of*2690 such endorsements Mrs. Sweeney became personally liable upon mortgage notes aggregating over $800,000 and also became joint maker on notes in the Seattle National Bank and the Union National Bank aggregating about $35,000. The mortgage obligations and other notes were renewed and reduced during the various stages of the real estate operations of the decedent and his wife, and, with the exceptions hereinafter noted, she signed all renewals and substitutions for the original indebtedness. The real estate operations of the decedent and Mrs. Sweeney were carried on through both the Edward F. Sweeney Investment Co. and the Gair Realty Co. The amounts of the loans granted to these corporations were in excess of the sums warranted by the real estate security offered and were obtained only by means of the credit and endorsements of Jessie Gair Sweeney. Continuously during her marriage Mrs. Sweeney received an income or allowance from her father ranging from $300 to $1,100 per month. The total amount received by her during this period was approximately $125,000. During the same period the decedent received approximately the same amount through salaries and other forms of earnings. Both*2691 Mrs. Sweeney and the decedent contributed all of their respective incomes toward the living expenses of the family and all purposes relating to their community business. No segregations were made of any such expenditures with reference to the legal ownership of the properties to which they were applied. During the entire operations carried on by the decedent and his wife no distinction was made between the real estate owned by the decedent prior to his marriage and that acquired by him and his wife subsequent thereto. For several years prior to his death the decedent utilized the Edward F. Sweeney Investment Co. as a means by which the personal community business of himself and Mrs. Sweeney might be carried on. From time to time he advanced money to it and at the time of *1290 his death there remained in his account on the corporation's books a credit of $17,269.52. On April 30, 1918, the Edward F. Sweeney Investment Co., Edward F. Sweeney, and Jessie Gair Sweeney borrowed the sum of $25,000 from the Seattle National Bank for use in community enterprises. This loan was continued for some time, reduced in amount and divided into three notes of smaller amounts, so that*2692 at the decedent's death the indebtedness consisted of one note of $10,000 on which the decedent and Jessie Gair Sweeney remained as joint makers, the remainder of the loan being represented by two smaller notes aggregating $7,850, on which Mrs. Sweeney's signature did not appear as a joint maker. Some time prior to the decedent's death he had secured a loan of $5,000 from the Union National Bank of Seattle in the name of the Edward F. Sweeney Investment Co., but the proceeds of the note were used for the needs of the Gair Realty Co. The note was renewed and reduced so that at the time of the decedent's death the indebtedness was $4,350 and was still carried in the name of the Edward F. Sweeney Investment Co. This note was executed by the decedent as joint maker, but not by Mrs. Sweeney. Subsequent to the decedent's death, Mrs. Sweeney secured funds from outside sources and paid the loans due to the Seattle National Bank, amounting to $17,850, and to the Union National Bank, amounting to $4,350. Mrs. Sweeney claimed the sum of $3,750 as a commission due to her as executrix of the estate of the decedent. The respondent disallowed the executrix's commission as a deduction "since*2693 no commission was claimed or paid." No evidence was introduced relating to the deduction of $480.87 alleged to be due to the Hotel Butler Co. OPINION. VAN FOSSAN: In Remington's Compiled Statutes of Washington, 1922, we find the following provisions as to the status of property of a marital community in that State: SEC. 6890. Property and pecuniary rights owned by the husband before marriage, and that acquired by him afterward by gift, bequest, devise or descent, with the rents, issues and profits thereof, shall not be subject to the debts or contracts of his wife, and he may manage, lease, sell, convey, encumber or devise by will, such property without the wife joining in such management, alienation, or encumbrance, as fully and to the same effect as though he were unmarried. SEC. 6891. The property and pecuniary rights of every married woman at the time of her marriage, or afterward acquired by gift, devise, or inheritance, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of her husband, and she may manage, lease, sell, convey, encumber or devise by will such property, to the same extent and in the same manner that her husband*2694 can, property belonging to him. *1291 SEC. 6892. Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition as he has of his separate personal property, except he shall not devise by will more than one half thereof. In the case of ; , the Supreme Court of the State of Washington enunciated the following cardinal principles governing the status of community and separate property in that State: 1. The presumption is that property acquired during coverture is community property, and the burden is upon the person claiming it to be separate property to establish that as its character. 2. The status of property is to be determined as of the date of acquisition. This rule is equally true with regard to personal property as with real property. 3. If property is once shown to have been separate property, the presumption continues that it is separate until overcome by evidence. Separate*2695 property continues to be separate through all its changes and transitions, so long as it can be clearly traced and identified. 4. The rents, issues, and profits of separate property remain separate property and profits resulting from money borrowed on separate credit are separate property. 5. Separate property may lose its identity as such by being consolidated with community property. The decisions by the Supreme Court of Washington have established that there are at least two situations in which the above provisions of the law are circumvented or superseded. These are where there is an agreement between the parties abrogating the property status established by statute (; ; ; ; ; ; ; ) or where there is such a commingling of separate and community property as to make it impossible to trace or distinguish the separate elements. *2696 ; ; ; . The evidence clearly establishes that by reason of her impending inheritance from her father Jessie Gair Sweeney's financial standing was much superior to that of her husband. It is also established that when her financial aid was sought by her husband she objected to lending her name to the projects until he assured her and agreed that all of the property then in his name or to be acquired by him was to be considered as community property. The acknowledgment by decedent of this changed status was often made to Mrs. Sweeney and to those associated with them in business transactions. Solely by reason of this agreement, Mrs. Sweeney lent her name and financial standing to decedent's business activities and signed as maker or *1292 endorser notes aggregating hundreds of thousands of dollars. Under the decisions cited, such an agreement in respect to personal property made after marriage and mutually observed and acted on is valid. The only property here involved was personal property. Our decision might well*2697 rest on this agreement, but there is a further basis in the treatment and commingling by the parties of the property and funds. At the time of his marriage the decedent's property consisted of stock in the Seattle Brewing & Malting Co., which he sold in 1905 for $125,000, and certain unimproved lots in the City of Seattle. One of these lots, No. 4 in block 5 in A. A. Denny's Addition had been purchased by the decedent in 1897 for $12,000 and was conveyed by him and Jessie Gair Sweeney to the Edward F. Sweeney Investment Co. for the purpose of erecting a hotel building thereon. Such a building, known as the Hotel Savoy, was constructed at a cost of $350,000. In all of the transactions connected with this building operation, including the acquisition of the additional necessary funds by loan and otherwise, Mrs. Sweeney fully participated. The value of the lots owned by the decedent prior to his marriage and conveyed to the Gair Realty Co. in 1916 was less than $25,000. On these lots there were erected buildings costing many times the value of the land. The funds obtained for that purpose came from the contributions of Jessie Gair Sweeney, loans negotiated by utilizing her*2698 credit, the individual earnings of the decedent, and the profits arising from the community business. There was no segregation of the funds on the basis of their origin. No specific contribution was devoted to any particular purpose, but the entire revenues of the community wee combined and merged into a common fund and were used indiscriminately for the common object. Thus, in both instances the property which originally was the separate property of the decedent lost its identity in the later developments. The bare title to the real estate can be traced but we can not determine what portion of the present value of the properties is allocable to the land and what portion to the improvements thereon. The two elements are so interwoven as to defy separation. The improvements were made largely from community funds; they are the result of the activities of both the husband and the wife, and in their production the wife's credit standing was a large, if not the principal, contributing factor. As above stated, where separate and community property have become so intermingled, commingled and merged as to make segregation difficult or impossible, the whole is treated as community*2699 property. ;; ; ; . *1293 In the case , the court said: It was the mixing of these funds, derived from different sources, and the payment out of those funds, together with any other funds he may have used for the purchase and improvement of property or making improvements on his separate property, that constituted such a commingling of funds as to defy segregation (with one exception to be mentioned on the appeal of the executors) and led the court to find and determine the certain of the property was community property. The principles set forth above have been applied by us in several cases relating to income from community and separate property. ; ; and . In the case under consideration the value of the unimproved real estate was not comparable to the value of the*2700 improvements and the increments attributable to the community property, neither is it possible to determine the proportionate value of these two elements. In consideration both of the commingling of the property and of the express agreement between the parties, we hold that the entire property formerly owned by the decedent and Jessie Gair Sweeney and represented by the capital stock of the Edward F. Sweeney Investment Co. and the Gair Realty Co., held in the name of the decedent at his death, was community property. The respondent determined the value of the stock of the Edward F. Sweeney Investment Co. to be $213,456.68. The petitioner has not shown this to be in error. The respondent has determined the value of the Gair Realty Company stock to be $99,162.46. Likewise, the petitioner has proven no error in this calculation. These figures should be used as the basis for computing petitioner's tax. At the time of his death the decedent had advanced to the Sweeney Investment Co. the sum of $17,269.52 in excess of the amounts received by him from that corporation. The moneys so advanced appear to have been derived solely from the decedent's earnings and receipts subsequent*2701 to his marriage. Therefore, they constituted community property. ; . The Edward F. Sweeney Investment Co., Edward F. Sweeney, and Jessie Gair Sweeney became joint makers of a note of $25,000 dated April 30, 1918, payable to the Seattle National Bank, and employed the proceeds in community ventures. The loan was continued, reduced and divided into separate obligations. At the time of the decedent's death Jessie Gair Sweeney remained as the joint maker of a renewal note of $10,000, given in lieu of the above obligation, but was not required to execute two smaller notes aggregating $7,850, evidencing the remainder of the debt to the bank. Neither the Edward F. Sweeney Investment Co. nor the estate of the decedent being in a position to pay the obligation, and the bank insisting upon payment, Mrs. Sweeney paid the note from her independent *1294 funds. A similar situation existed in relation to a loan of $5,000 secured by the Edward F. Sweeney Investment Co. from the Union National Bank, with the exceptions that the proceeds thereof were used by the Gair Realty Co. and Mrs. Sweeney was not a joint*2702 maker of the obligation. However, the amounts so borrowed from these two banks were used solely for community enterprises through the two corporations. In , the Supreme Court of the State of Washington held as follows: There is a suggestion in the brief of counsel for respondents - though seemingly not seriously argued - that in no event is the community consisting of Burwell and wife liable upon these notes. What we have already said seems to be sufficient to dispose of any such contention, against the community consisting of Burwell and wife. But, even should we regard Burwell as an accommodation maker of these notes, we still think viewing the whole history of the dealings of these parties from the time respondents Groll and Burwell, upon the original purchase of the stock by appellant, agreed to repurchase it from him, manifestly to promote the financial welfare of the San Juan Canning Company, and in turn their own welfare, that all acts done and obligations incurred by Burwell were so connected and intended to redound to the benefit of the business of the community that the signing of these notes became a community*2703 obligation. We feel constrained to so hold, especially in view of the presumption that the signing of these notes by Burwell, as maker, was for the benefit of the community. The decisions of this court in , and , lend support of this conclusion. In view of what we have said with reference to the complete merging of the interests and the resources of the decedent and his wife into a community relationship, either through corporate or individual channels, we are of the opinion that these two obligations also were community debts. The respondent's objection to allowing the deduction for the commission of the executrix, amounting to $3,750, was that the same had not yet been paid. In , we held such a deduction allowable. Judgment will be entered under Rule 50.