Winchester v. Commissioner

HELEN N. WINCHESTER, FORMERLY HELEN N. HOLDAWAY, ADMINISTRATRIX OF THE ESTATE OF H. H. HOLDAWAY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Winchester v. Commissioner Docket No. 55561. United States Board of Tax Appeals 27 B.T.A. 798; 1933 BTA LEXIS 1299; February 27, 1933, Promulgated *1299 1. Where decedent, prior to the amendment on July 29, 1927, of the California Civil Code, made applications for two patents, and the patents were granted after the amendment, the entire profit from the sale of such patents in 1928 was taxable to the decedent. 2. Upon the record, held, that an assignment of a third patent to the decedent from his father on January 16, 1928, was a gift to decedent from his father, and as such was decedent's separate property; and that the entire profit from the sale thereof in 1928 was taxable to the decedent. 3. Respondent's determination of the amount of the profit from the sale of the three patents approved. Martin T. Nachtmann, Esq., for the petitioner. John D. Kiley, Esq., for the respondent. LOVE *798 This proceeding is for the redetermination of a deficiency in income tax for the period January 1, 1928, to October 15, 1928, in the amount of $6,349.41. Two questions are presented: (1) Whether the estate of decedent, who died a resident of California, is taxable on the entire profit from the sale of three patents, or on only one-half thereof; and (2) whether the respondent erred in determining*1300 the amount of the profit. FINDINGS OF FACT. Petitioner was the duly appointed administratrix of the estate of her deceased husband. They were married on April 2, 1925, and *799 during their marriage were domiciled in the State of California. The decedent died intestate on October 15, 1928, leaving as survivors petitioner and their child, and a child of decedent by another marriage. On January 12, 1926, Letters Patent No. 1569280 were granted to William S. Holdaway, the father of the decedent. For several years prior to decedent's death, the latter contributed to his father's support. Petitioner continued such contributions after the death of her husband, and on the date of the hearing herein (October 10, 1932) was still contributing thereto. On January 16, 1928, William S. Holdaway executed a written assignment of Letters Patent No. 1569280 in favor of his son, which assignment recited in part as follows: NOW, THEREFORE, for a good and valuable consideration, receipt of which is hereby acknowledged, I, WILLIAM, S. HOLDAWAY, by these presents do sell, assign and transfer unto the said HALL H. HOLDAWAY, the whole right, title and interest in and to said Letters*1301 Patent aforesaid * * *. The above assignment was recorded in the United States Patent Office on April 11, 1928. On April 3, 1928, Letters Patent No. 1664883 were granted to Hall H. Holdaway, the decedent herein. Application for this patent was filed by the decedent on June 22, 1926. On April 10, 1928, Letters Patent No. 1665457 were granted to Hall H. Holdaway, the decedent herein. Application for this patent was filed by the decedent on August 26, 1925. Both of the patents granted to decedent were subsidiary to the one granted the decedent's father. They would have had no value without the basic patent No. 1569280. On September 12, 1928, decedent sold the three above-mentioned patents for a consideration of $60,000. On March 15, 1929, petitioner, as administratrix, filed an income tax return for the estate of her deceased husband and reported therein, as profit from the sale of the patents, an amount of $14,245.97, computed as follows: Selling price $60,000.00 Actual cost of development $6,508.06 Services of decedent 25,000.00 31,508.06 Community gain 28,491.94 One-half taxable to decedent 14,245.97 The respondent in his*1302 deficiency notice, disallowed the above deduction of $25,000 and determined that the decedent was taxable on the difference between $60,000 and $6,508.06, or $53,491.94. On November 25, 1929, the Superior Court of the State of California, in and for the County of Los Angeles, in the matter of the Estate of Hall H. Holdaway, deceased, issued an "Order Settling *800 Final Account and For Distribution," which recited in part, as follows: The final account and petition for distribution herein of Helen N. Winchester, formerly Helen N. Holdaway, administratrix of said estate * * * are now presented to the Court for hearing and settlement * * * the Court, after hearing the evidence, finding said estate is community property, settles the account and orders distribution of said estate as follows: It is Ordered, Adjudged and Decreed by the Court that due notice to the creditors of the deceased has been given; that the said administratrix has in her possession, belonging to the estate, after deducting the credits to which she is entitled, a balance of $46,011.43 * * *; that said deceased left surviving as his only heir at law: Helen N. Noldaway, now Helen N. Winchester, widow, *1303 and that the said cash and the property * * * be distributed to Helen N. Winchester * * *. [Italics ours.] On July 29, 1927, the following amendment of the Civil Code of California became effective: 161a. Interests in community property. The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband as is provided in sections 172 and 172a of the Civil Code. This section shall be construed as defining the respective interests and rights of husband and wife in community property. OPINION. LOVE: The evidence fails to prove that the respondent committed any error in determining that the profit from the sale of the three patents amounted to $53,491.94 instead of $28,491.94, as reported by petitioner. This leaves only the question of whether the decedent is taxable on the entire profit of $53,491.94, or on only one-half of that amount. Prior to July 29, 1927, the husband in California was taxable on the entire community income subject to the Federal income tax. *1304 United States v. Robbins,269 U.S. 315. On July 29, 1927, the Civil Code of California was amended as set out in our findings. In speaking of this amendment the Supreme Court of California, in Stewart v. Stewart,269 Pac. 439, said: This section of the Code, whatever effect it may have upon community property acquired subsequent to its effective date, cannot in any manner relate to or govern the ownership of property acquired prior thereto. [Italics supplied.] In United States v. Malcolm,282 U.S. 792, the Ninth Circuit, under section 239 of the Judicial Code, certified to the United States Supreme Court two questions of law, as follows: (1) Under the applicable provisions of the Revenue Act of 1928, must the entire community income of a husband and wife domiciled in California be returned and the income tax thereon be paid by the husband? *801 (2) Has the wife, under section 161a of the Civil Code of California, such an interest in the community income that she should separately report and pay tax on one-half of such income? In answering the questions, the Supreme Court, in a per curiam opinion, *1305 said: The first question certified is answered: No. The second question is answered: Yes. Poe v. Seaborn, ante, p. 101; Goodell v. Koch, ante, p. 118; Hopkins v. Becan, ante, p. 122. The facts in the Malcolm case involved only a salary of $3,600 earned by the husband during the year 1928, and did not involve any income from community property acquired prior to July 29, 1927. In commenting upon the Malcolm case, the respondent, in Mim. 3859 (X-1 C.B. 140), said in part: This decision is applicable to income from community property acquired on and after July 29, 1927, and to salaries, wages, and fees earned on and after that date which constitute community property. The decision is not applicable to income from property acquired prior to July 29, 1927, nor to salaries, wages, fees, and other compensation earned prior to that date. (See I.T. 2457, C.B. VIII-1, 89). [Italics supplied.] The respondent's holdings in I.T. 2457, supra, and Mim. 3859, supra, were based upon the holding of the Supreme Court of California in *1306 Stewart v. Stewart, supra. These holdings, in effect, have recently been upheld by the Ninth Circuit in a test case entitled Hirsch v. United States, 62 Fed.(2d) 128. The Hirsch case held that dividends received in 1928 on stock was community property under California law but which had been purchased with funds of the marital community acquired prior to the amendment of the California Civil Code on July 29, 1927, were wholly taxable to the husband. In so deciding, the court said in part: The interest of the husband in the community property is such that the legislature can not vest any part thereof in the wife by legislation enacted subsequent to the acquisition of the community property. * * * It seems too clear for discussion that if the legislature of California was powerless to shift the title to a portion of the community property from the husband to the wife, it is equally powerless to change their relationship to income derived from the community property vested in the husband. In the instant case two of the patents (Nos. 1664883 and 1665457) resulted from applications filed by the decedent prior to July 29, 1927. It is*1307 now well settled that patent applications are property. Commissioner v. Stephens-Adamson Mfg. Co., 51 Fed.(2d) 681; Joseph H. Adams,23 B.T.A. 71. Although the patents were not granted until after July 29, 1927, the interest of decedent therein remained the same as was his interest in the patent applications themselves. See quotations from McKay, a recognized authority on community property, in John M. King,26 B.T.A. 1158, 1163. See also Stewart v. Stewart, supra.It follows that the entire profit *802 from the sale of these two patents was wholly taxable to decedent. Hirsch v. United States, supra. With respect to Letters Patent No. 1569280, which decedent acquired from his father on January 16, 1928, respondent contends that the assignment was a gift from the father to the son; that under section 163 of the Civil Code of California "All property owned by the husband before marriage and that acquired afterwards by gift, bequest, devise, or descent, with the rents, issues, and profits thereof, is his separate property"; and that, being his separate property, the decedent was*1308 taxable on the entire profit from the sale. In Granniss' Estate,142 Cal. 1; 75 Pac. 324, the Supreme Court of California held that under section 163 (just quoted) the profits derived from the sale by the husband of his separate property remained his separate property. On the other hand, petitioner contends that the Superior Court of the State of California, in and for the County of Los Angeles, having determined in its order set out in our findings that decedent's estate was "community property," it follows that since Patent No. 1569280 was acquired after July 29, 1927, to wit, January 16, 1928, the profit therefrom was taxable, under United States v. Malcolm, supra, one-half to decedent and one-half to decedent's widow. In support of his contention that the assignment was a gift, respondent offered an affidavit by decedent's father, who testified in part as follows: That the consideration for the assignment aforesaid was his natural love and affection for his said son, the fact that deponent was of advancing years and unable to develop the said patent, that his said son had for some time contributed and was then contributing*1309 to deponent's maintenance and support; that his said son by reason of his large experience in inventions and his ability in that direction, was able to make experiments in connection therewith; and also that his said son was the owner of other patents for disk drills or drill bits, which made the disk bit aforesaid more available in his hands. On the basis of the record made in this proceeding, we are of the opinion and so find that the assignment of Letters Patent No. 1569280 was a gift of the patent to decedent from his father. The findings of the county court that "said estate is community property," is not res adjudicata in the instant proceeding. Guaranty State Bank of Greenville, Texas,12 B.T.A. 543. It follows that under section 163 of the Civil Code of California, supra, the last mentioned patent was decedent's separate property, and that the entire profit from the sale thereof was taxable to the decedent. The determination of the respondent is approved. Reviewed by the Board. Judgment will be entered for the respondent.