Michna v. Commissioner

E. MICHNA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Michna v. Commissioner Docket No. 20820. United States Board of Tax Appeals 24 B.T.A. 715; 1931 BTA LEXIS 1602; November 11, 1931, Promulgated *1602 1. HUSBAND AND WIFE - SEPARATE PROPERTY - TEXAS. Where the husband acquired title to property in Texas and paid part of the purchase price prior to his marriage, the fact that some of the purchase price was paid from community property or separate estate of the wife after marriage does not convert the property into community property, but it remains the separate estate of the husband. 2. Id. Oil royalties received by the petitioner in the taxable year from such property constitute his separate income and the Commissioner did not err in taxing the whole of such income to the husband instead of dividing such income on the community property basis and taxing one-half thereof to the husband and one-half to the wife. John O'Neil,16 B.T.A. 614; W. P. Fergusoon,20 B.T.A. 130, affirmed on this point 45 Fed.(2d) 573, followed. Harry C. Weeks, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. BLACK *715 Petitioner complains of the action of respondent in determining a deficiency of $2,000.09 in income tax for the year 1920, and alleges that the respondent erred in holding that*1603 certain oil-producing property and oil royalties were the separate property of the petitioner, and not community property of petitioner and his wife. FINDINGS OF FACT. The petitioner is an individual and resides at 1700 Monroe Street, Wichita Falls, Tex. At all of the times hereinafter mentioned he was a citizen and resident of the State of Texas, except for a few months in 1920, when he resided in Oklahoma. In 1910 petitioner was twenty-two years of age, unmarried, and was living with his father on a farm in Runnells County, Texas. In that year petitioner's father purchased from W. J. Sides 298 acres of land in Wichita County, Texas, and had the record title thereto conveyed to the petitioner. This was done to avoid possible loss of the land by the father resulting from his liability as an accommodation endorser of certain commercial paper. In 1912 petitioner purchased from his father 80 acres of the Wichita County land and agreed to pay therefor $3,680, of which $900 was paid at that time. In 1914, in performance of the agreement, petitioner conveyed 218 acres of the land to his father, leaving the title to the remaining 80 acres vested in him, where it had been since*1604 1910. Petitioner was married in 1915, and he had paid approximately one-third of the purchase price of *716 the 80 acres before he was married. After his marriage, petitioner rented his 80-acre tract to his father for farming purposes and he and his wife rented and moved to several other locations in Texas and Oklahoma, where he engaged in farming. In 1920 oil was discovered on petitioner's 80 acres and on the 218 acres of the father. Both parties had previously leased their property for oil-producing purposes on the customary royalty basis. On June 22, 1920, petitioner's parents, in consideration of love and affection for their children, made a gift to them by deed, by which the petitioner received an undivided 3/44 interest in the land, rents, royalties, and revenues from the 218 acres above mentioned. On March 22, 1920, petitioner and his wife sold and conveyed a one-half interest in the royalties on the 80-acre tract. All the oil royalties and proceeds from the sale of oil royalties received by petitioner during the taxable year, the amounts of which are not in dispute, were received from the royalty interest conveyed to him by his parents and from the 80 acres*1605 of land to which reference has hereinbefore been made. At the time of the marriage, petitioner's wife had $400 as her separate estate and afterwards received $500 more. Both of these sums were used in payment on petitioner's 80 acres and the remainder of the purchase price was paid from farming operations, rent of the 80 acres and from oil royalties received after oil was discovered. In making his return for 1920, petitioner treated the oil royalties and the proceeds which he had received from oil royalties as community property taxable one-half to petitioner and one-half to his wife. His wife made a separate return of the one-half of such income which she claimed belonged to her. Respondent, in the statement which accompanied the deficiency letter, made the following statement explaining the action which he had taken: The adjustments as recommended disclose a taxable income of $25,041.56. The computation of the tax on this amount discloses a tax liability of $2,871.89. Inasmuch as you have been assessed $87.80, there is disclosed a deficiency in tax of $2,000.09 on your return and an overassessment of $871.80 on the return of your wife. OPINION. BLACK: It is the contention*1606 of the respondent that the entire amount of the oil royalties and the proceeds of the sale of a one-half interest in the royalties on the 80-acre tract are the separate property of the petitioner and taxable to him. He contends that the character of the 80-acre tract was fixed as the separate property of petitioner prior to his marriage and that it remained the separate property of petitioner, notwithstanding it may have been partially paid for with *717 the proceeds of community property, or separate property of the wife. Relative to the gift of the undivided 3/44 interest in the 218-acre tract by petitioner's parents to him, the respondent's position is that as this was a gift to petitioner, it constituted petitioner's separate property under the Texas statutes, although it was acquired during the marriage. The applicable Texas statutes to the questions here involved, are given in the footnotes. 1 *1607 The courts of Texas have had these questions before them in a number of cases, and as to the first have laid down the rule that the status of title, as belonging to one estate or the other, is determined by the status of the original right, subsequently matured into full title. ; ; ; improvements made on the husband's separate property after marriage and paid for with community funds, or the wife's separate funds, do not change the character of the husband's separate estate, . In this case the court said: The fact that the 85 acre tract included in the lands sought to be partitioned was the separate property of J. L. McGee was a meritorious defense in part to the allegation in plaintiff's petition that all said land was community, and to the claim asserted by plaintiff in said petition that the children of Mrs. McGee by her first marriage were entitled to participate in the distribution of the proceeds of such tract. This fact was available to her in meeting the burden of showing such a defense as a requisite*1608 part of her motion for a new trial and it was so alleged in said motion. The allegation in plaintiff's petition was that the property sought to be partitioned was community. Plaintiffs could not by controverting affidavit enlarge the allegations in their petition on which the case was tried nor introduce new issues to defeat Mrs. Pellum's motion. They in said controverting affidavit admitted, in effect, that the 85 acre tract was the separate property of J. L. McGee, as alleged in said motion, but attempted to avoid the effect of such admitted fact and defeat a new trial on the ground that improvements were made on said separate property after the marriage of J. L. and Hannah McGee. If such improvements were in fact made as alleged, they would not change the character of said*718 property with reference to its being separate or community, regardless of whether they were paid for with community funds or with the proceeds of sale of Mrs. McGee's separate property. ; *1609 ; ; ; . Any sums so expended for improvements after said marriage may on another trial, under proper pleadings, be made a charge upon said 85-acre tract in favor of the community or of the separate estate of Mrs. McGee, as the facts proved at that time may justify under the rules of law applicable in such cases. * * * [Italics supplied.] Where in an exhibition of the whole title it appears its origin preceded the marriage, it is the separate property of the spouse in whom it originated, ; . One of the leading Texas cases on this subject is . There the Supreme Court of Texas considered the question and reached the conclusion that the separate estate of the husband was not changed by the use of community funds in payment for the property or to discharge encumbrances thereon and that the only right to which the community is entitled is a claim for reimbursement. *1610 In that case the Supreme Court of Texas, after reviewing the authorities of Louisiana and the Spanish law, states: The only right to which the community is entitled is that of claiming the reimbursements of the sum paid on account of the entry of the double concession, if such payment has been made out of the funds of the community. The principle was also embraced in the later case of In re Moseman's Estate, reported in , and the previous rulings of the court were followed. In that case the husband a short while before his marriage, had taken out a policy of insurance on his own life, payable "to his executors, administrators, or assigns". After his marriage the premiums were paid from community funds. After his death, upon settlement of his estate the question was agitated whether the money paid by the insurance company upon the policy belonged to the community; and it was held that it was property of his separate estate, but that it was chargeable, in favor of the community, with the premiums which had been paid with community funds. * * * The rule of the Spanish law as to improvements made with community funds upon the separate property*1611 belonging to one of the spouses belongs to the community, but gives the other no claim to the property itself. Schmidt, Spanish Law, Art. 48 * * *. It is clear from these cases that the 80-acre tract was the separate property of petitioner. For tax purposes we are not concerned with what claims the community or the wife may have against it for reimbursement. There is not dispute about the gift of the 3/44 interest in the 218-acre tract to the petitioner and under the terms of Article 4613, Texas Statutes, this must also be considered his separate property. *719 In several cases we have held that oil royalties and proceeds from the sale of oil royalties derived from separate property constitute separate income to the party owning the land. ; ; affirmed on this point, ; . See also , one of the leading Texas cases on this subject. We conclude that the action of respondent in determining the deficiency was correct. Decision will be entered for*1612 the respondent. Footnotes 1. The Revised Civil Statutes of Texas, in force during the taxable year, provide as follows: ART. 4613. - Husband's separate property. All property of the husband, both real and personal, owned or claimed by him before marriage, and that acquired by gift, devise, or descent, as also the increase of all lands thus derived therefrom, shall be his separate property. The separate property of the husband shall not be subject to the debts contracted by the wife, either before or after marriage, except for necessaries furnished herself and children after her marriage with him, nor for torts of the wife. During the marriage the husband shall have the sole management, control and disposition of his separate property, both real and personal. ART. 4619. - Community Property. All property acquired by either the husband or wife during marriage, except that which is the separate property of either, shall be deemed the common property of the husband and wife, and during coverture may be disposed of by the husband only. All the effects which the husband and wife possess at the time the marriage may be dissolved shall be regarded as common effects or gains, unless the contrary be satisfactorily proved. ↩