Shoenhair v. Commissioner

MARTHA LOCKE SHOENHAIR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Shoenhair v. Commissioner Docket No. 102675. United States Board of Tax Appeals 45 B.T.A. 576; 1941 BTA LEXIS 1102; November 5, 1941, Promulgated *1102 Held, that under the laws of Arizona an agreement between husband and wife that the husband's income from his earnings and investments would be and remain his separate property, was valid and that, therefore, under authority of Helvering v. Hickman, 70 Fed.(2d) 985, the husband's earnings from the practice of law constituted his separate income taxable solety to him. John W. Townsend, Esq., and Lloyd Fletcher, Jr., Esq., for the petitioner. R. H. Transue, Esq., for the respondent. TYSON *576 This proceeding seeks redetermination of income tax deficiencies, in the amounts of $608.60 and $704.69, for the calendar years 1936 and 1937, respectively. Petitioner alleges that the respondent erred in including in her gross income the amounts of $2,763.85 for 1936 and $4,403.71 for *577 1937, representing one-half of the law partnership earnings received by her husband during those years, respectively, based upon respondent's determination that the husband's earnings constituted community income and that one-half thereof is taxable to petitioner. FINDINGS OF FACT. Since 1930, and including the taxable years, *1103 the petitioner and her husband, T. K. Shoenhair, have continuously resided at El Encanto Estates, Tucson, Arizona. They were married on March 27, 1929. The petitioner's individual income tax returns for the years here in question were filed with the collector of internal revenue for the district of Arizona. The petitioner's principal sources of income during the years in question were the distributions of income to her as the beneficiary of certain trusts administered by the Bankers' Trust Co. of New York and the rentals from certain real estate located in Toledo, Ohio. Prior to and during the years in question, the petitioner's husband was engaged in the practice of law and his principal source of income was the earnings of his law partnership of Mathews, Bilby & Shoenhair. His distributive share of such earnings amounted to $5,527.61 for 1936 and $8,807.43 for 1937. On January 1, 1936, the petitioner and her husband, T. K. Shoenhair, entered into an oral agreement whereby they mutually agreed that T. K. Shoenhair's earnings from his law partnership and his income from any investments he might make were to be his sole and separate property, entirely free from any community*1104 interest or claim of petitioner. It was further agreed that the petitioner's income derived from the trusts of which she was a beneficiary, from any real estate she owned, and from any investments she might make, was to be her sole and separate property entirely free from any community interest or claim of T. K. Shoenhair. The above mentioned agreement was strictly adhered to and carried out by petitioner and her husband throughout the years 1936 and 1937. Each of them maintained a separate bank account and neither of them exercised any right, dominion, or control over the income, bank account, or financial affairs of the other, but, instead, treated their respective income and property as their separate property, respectively. In determining the deficiencies here in question, the respondent included in petitioner's gross income the amounts of $2,763.85 for 1936 and $4,403.71 for 1937 as representing a community interest in one-half of the income earned by her husband during those years. *578 OPINION. TYSON: The petitioner contends that her agreement with her husband was valid under the laws of Arizona; that such agreement abrogated the community interest she would*1105 otherwise have had under those laws in her husband's earnings; and that his earnings therefore constituted his separate income, taxable solely to him under section 22(a) of the Revenue Act of 1936, citing, among numerous other cases, ; ; certiorari denied, ; and . The respondent admits that if the petitioner and her husband had been residents of California, instead of Arizona, then , would be controlling here. The respondent contends, however, that the cited case has no application here because the community property laws of Arizona differ from those of California. He contends, therefore, that the earnings of petitioner's husband constituted community income taxable one-half to the husband and one-half to petitioner, under authority of . In *1106 , the husband and wife, residents of Arizona, each filed separate returns reporting one-half of the community income, and the question before the Supreme Court was whether such income could be so returned or whether it was all taxable to the husband, as determined by the Commissioner. The Supreme Court held that under the laws of Arizona the wife's interest in the community property was not a mere expectancy, but a present vested interest equal to that of the husband and that one-half of the community income was taxable to her and one-half thereof to the husband. In that case the Court did not have before it the question here involved, i.e., whether the husband and wife could enter into an agreement whereby the husband's earnings were to be and remain his separate property; it consequently affords no support to respondent's contention. In , the question presented was whether or not the husband was taxable on the income of his wife derived by her through a salary, or any portion thereof. The material facts shown were that the husband and his wife were professional actors earning their livelihood*1107 as such, and that prior to the taxable year in which the salary in question of the wife was earned the husband and wife orally agreed that "the earnings of each were to be and remain the sole and separate property of the spouse earning the same, free of any community right, claim, or interest of the other * * *." Upon consideration of the laws of California as reflected in the decisions of the Supreme Court of that state construing the meaning *579 and effect of the state's community property statutes, the Court held (a) that the earnings of the wife under the antecedent oral agreement between her and her husband became her separate property and (b) that by reason of such agreement, and its effect, under authority of , no part of the salary of the wife ever became community property and that consequently no part thereof was taxable as income to the husband. In view of this holding it is pertinent to first consider whether or not the laws of Arizona are the same in effect as those of California with reference to the validity and effect of a conveyance of community property by a husband to his wife, or vice versa, as his or her*1108 separate property. If they are the same, , controls the holding here, as conceded by respondent. In construing the meaning and effect of the community statutes of Arizona the Supreme Court of that state has consistently held that the husband or wife can validly and effectively convey to the other as that other's separate property any or all of his or her interest in the community property owned by both, provided the agreement of both spouses thereto is clearly shown. ; ; ; ; ; ; Baldwin v. Baldwin, 71 Pac.(2d) 791; and . The substance of the holdings in the cited Arizona cases was succinctly stated in Baldwin v.*1109 Baldwin (1937), 71 Pac.(2d) 791, 795, as follows: Property acquired by both spouses during marriage likewise belongs to the community, but whether acquired by one or both, either may convey his interest to the other and thus dissolve the community. In ; ; ; , and other cases, it has been decided by this court that a husband may convey his interest in the community to his wife, and in , that a wife may convey hers to her husband. * * * We conclude that under the cited Arizona authorities the laws of that state are the same as those of California with reference to the effect of a conveyance of community property by a husband to his wife, or vice versa, as his or her separate property. In the instant proceeding it is clearly shown that the petitioner and her husband entered into a mutual agreement on January 1, 1936, that the husband's income from*1110 his earnings and investments would be his sole and separate property and that such agreement was strictly adhered to and carried out during 1936 and 1937. The respondent raises no objection to the fact that the contract was oral, nor do we think that fact is material. ;*580 ; and . We conclude that, under the laws of Arizona, the earnings of the petitioner's husband during 1936 and 1937 were his separate property, and upon authority of ;; and , we hold that such earnings were taxable entirely to him and that no part of such earnings was taxable to petitioner. The respondent erred in including in petitioner's gross income the amounts of $2,763.85 for 1936 and $4,403.71 for 1937. Decision will be entered under Rule 50.