Lord v. Commissioner

ROBERT H. LORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Lord v. Commissioner Docket No. 59385. United States Board of Tax Appeals 30 B.T.A. 425; 1934 BTA LEXIS 1329; April 18, 1934, Promulgated *1329 Petitioner's right to receive corporate stock was initiated while he was domiciled in the State of Oregon. His removal to the State of Washington before receipt of the stock did not change the character of it from separate to community property, and the income represented by the proceeds of the sale of the stock was taxable to petitioner as his separate income. Ralph H. Cake, Esq., for the petitioner. Warren F. Wattles, Esq., for the respondent. ARUNDELL *425 The respondent has determined a deficiency in petitioner's income tax for the year 1928 in the amount of $3,996.68. The only matter in controversy is whether a certain sum received by petitioner in 1928, representing the proceeds of the sale of corporate stock, was separate or community income. FINDINGS OF FACT. Petitioner entered the employ of Deere & Co., a corporation, in 1911 or earlier, and was thereafter continuously employed by that company, or its subsidiaries, until on or about January 10, 1925. For some years prior to January 10, 1925, he was manager of the company's branch at Portland, Oregon. On November 1, 1911, and on June 26, 1914, petitioner entered into contracts*1330 with Deere & Co. setting forth the compensation he was to receive for his services. Both contracts provided that: "In further consideration of the services so to be rendered" by petitioner, Deere & Co. "agrees to sell" and petitioner "agrees to buy" common stock (50 shares under the first contract and 250 shares under the second) of Deere & Co. at $50 per share. The contract price of the stock was payable in installments. On April 8, 1918, petitioner and Deere & Co. entered into a contract reciting that all agreements in the contract of June 26, 1914, or any modification thereof "respecting the purchase to be made by the second party [petitioner] of the first party's common stock * * * are hereby canceled." The contract then provided as follows: The first party now agrees to sell and the second party to buy 250 shares of said Deere & Company's Common Stock of the par value of $100.00 per share, at $50.00 per share, upon the following terms and conditions: (a) Said stock shall be paid for (except as hereinafter provided) by first party crediting upon the purchase price thereof, a sum equivalent to the dividends which may be declared upon a like number of shares of Deere & *1331 company's outstanding Common Stock. *426 Other provisions were that when the credits to be made amounted to $12,500 the stock was to be delivered to petitioner, but if they did not amount to that sum by June 1, 1925, the petitioner nevertheless would receive 100 shares of the stock on that date, and if by June 1, 1928, the credits did not equal the contract price for the remaining 150 shares, those shares would be delivered to him at that time and no further payments would be required. Under the contract petitioner had the option of paying for the stock at any time. It was further provided that in the event of the discontinuance of petitioner's services with the company prior to the time the stock was paid for, he would have the option of either paying the balance due on the stock and receiving it, or receiving from the company the amount credited on the contract price, plus interest. By letter of November 20, 1924, Deere & Co. notified petitioner that after January 10, 1925, his services would no longer be required. The letter contained the following paragraph: In view of the fact that you have been with this organization many years and in case, in our opinion, your*1332 attitude toward this organization and the members thereof continues to be above board and fair in the future the same as in the past, it is our idea to continue your common stock contract in force, and to give you and your family the benefits which accrue thereunder just the same as if you continued indefinitely in the employ of the company. On or about January 10, 1925, petitioner and his wife left Portland, Oregon, and established their domicile at Mt. Vernon, Washington, where they resided until some time in 1930. In 1928 petitioner received from Deere & Co. $50,259, representing the proceeds of 150 shares of the common stock of the company. In their returns for 1928 petitioner and his wife treated the amount so received as community income, each reporting one half. In determining the deficiency the respondent treated the entire sum as petitioner's separate income. OPINION. ARUNDELL: We have no question here as to whether or not the amount received by petitioner from Deere & Co. constituted income. The question presented is whether such income was the separate income of petitioner or community income divisible between petitioner and his wife, they being residents*1333 of the State of Washington at the time of receipt. Petitioner's view is that the contract of April 8, 1918, and all his rights under it, expired when he left the service of Deere & Co.; that there was no consideration on his part for the offer contained in the letter of November 20, 1924, hence it was a mere offer and not a contract; and that such offer did not ripen into a contract until he performed the conditions thereof by maintaining the prescribed attitude *427 towards Deere & Co. In other words, there was no contract until 1928, when he was a resident of Washington, and the income under such contract was then community income. The respondent urges that the substantial consideration furnished by petitioner for the sum he received was the services he had previously rendered; that his receipt of the proceeds of the stock relates back to his contract of employment, which, being entered into in Oregon, makes the proceeds his separate income, under the rule that in determining the property rights of spouses the property is deemed to be acquired as of the time of acquisition of the initial right of which it is the development. We are unable to accept petitioner's theory*1334 that the contract of April 8, 1918, and all his rights under it completely expired when he left the service of his employer, and that a new contract - completed by performance in 1928 - was substituted for it. We recognize the rule that where there are two contracts complete in themselves relating to the same subject matter, but of different dates, the later one supersedes the earlier. But that is not the situation here. The later one does not say what constituted "the common stock contract" therein mentioned, from which it is obvious that any attempt on the part of petitioner to enforce any rights under the later one would have necessitated his establishment of the prior agreement. Clearly it was not intended that the offer in the letter was to stand as complete in itself. The language used demonstrates the intent not to be a complete abrogation of the prior contract, but a modification. Note the wording: "* * * it is our idea to continue your common stock contract in force * * *." But even if the letter be considered a new contract superseding the old, there was no lack of consideration, as contended by petitioner, which would make it ineffective until performance. Where*1335 there is a modification of a contract "the original consideration attaches to and supports the modified contract." ; . "The substitution of a new contract for an old one in itself constitutes a sufficient consideration." ; . Moreover, looking at the matter from a practical point of view, it is inconceivable that a negative or passive attitude on the part of petitioner, simply refraining from doing or saying anything that might be inimical to the welfare of Deere & Co., constituted the entire consideration for the substantial sum he received in 1928. It is a far more reasonable view that petitioner's receipt of the proceeds of the stock had its inception or source principally in the services rendered prior to the discontinuance of service with the company. This, as we read it, was the intent of the company in its letter of November 20, 1924, expressed in the works: "In view of the fact that you have been *428 with this organization many years * * * it is our idea to continue your common stock contract in force." Thus*1336 the services rendered in the past were regarded by the company as at least a part of the consideration for the sum paid petitioner after he left the employ of the company. Cf. ; affd., . Thus the income received by petitioner in 1928 had its source in Oregon, a noncommunity state, while he and his wife were domiciled there. Separate property of the husband acquired in a foreign jurisdiction and taken into the State of Washington remains his separate property in that state. ; . And, under the doctrine of relation, the time and place of the initiation of the right to acquire property is determinative of its character when reduced to possession. McKay, in his work on Community Property (§ 517), states the rule as follows: The controlling principle stated. - As between husband and wife, when a right, legal or equitable, is acquired whether before or during marriage, all things of value into which the initial right develops by the performance of conditions, the running of time or the like, or into which it is converted by an*1337 assignment, or, if the initial right rests in obligation, all that which is obtained through the performance, discharge, satisfaction, enforcement or assignment of the obligation, are deemed in law to have been acquired as of the date of the acquisition of the initial right, and take the character, as separate or common, of that right. An inchoate title is regarded as a right within the scope of the above rule and "its development from an inchoate to the absolute or complete form does not shift it from one fund to another; * * * it may pass from a conditional to an unconditional form, without change or [of] legal character * * *." McKay § 520. Under these rules the character of the proceeds from the sale of stock, as separate or community, is determined by and is the same as that of the initial right, even if that was but an inchoate right, of which the proceeds are the fruit. Under these rules, applied to a case where a resident of a community property state marries between the time of inception of a right and its fruition, the property acquired is regarded as separate property. In *1338 , a case arising in Washington, it is said: If one marries after initiating a title, it is his separate property in all cases wherein, by the doctrine of relation, the title takes effect as of the time of the first act initiating it, as in the case of a settlement under the homestead or pre-emption laws of the United States. ; ; . Property purchased by a contract before marriage but not paid for until after marriage, is also separate property. ; ; . *429 In ; , the husband had contracted to purchase land when he was single, but did not receive a deed until after his marriage. The property was held to be his separate property. Similarly, in *1339 ; , homestead property upon which entry was made by a single man who received a patent to the land after his marriage was held to be separate property. The above authorities were cited and applied in . In that case the taxpayer, who was a single man on January 1, 1924, and a resident of the State of Washington, had on that date a right to purchase stock of his corporate employer, the contract containing a provision for crediting dividends to the purchase price. He was married on March 1, 1924. On November 8, 1924, a dividend was declared by the corporation, a proportionate part was credited to the taxpayer's account, and a stock certificate delivered to him. We held that the stock so acquired was his separate property by reason of the initiation of his right to it prior to his marriage, and the dividends therefrom were his income. In this case petitioner's services, which constituted at least a part of the consideration for the stock, were performed while he was domiciled in Oregon, pursuant to an agreement executed while he was in that jurisdiction; the continuation*1340 of services as a condition precedent to delivery of the stock was waived while he was domiciled in that state. Accordingly, under the authorities above set out, his right to the stock, or its proceeds, originated while he was domiciled in Oregon, under the laws of which it was his separate property, and the proceeds of the stock when received retained that character, notwithstanding his then residence in a community property state. Decision will be entered for the respondent.