Wells Fargo Bank & Union Trust Co. v. United States

• Decision Date: 04 June 1957
• Docket Number: No. 15046.,15046.
• Parties: WELLS FARGO BANK & UNION TRUST CO., Executor of the Will of Walter D. K. Gibson, Deceased, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

245 F.2d 524 (1957)

WELLS FARGO BANK & UNION TRUST CO., Executor of the Will of Walter D. K. Gibson, Deceased, Appellant, v. UNITED STATES of America, Appellee.

No. 15046.

United States Court of Appeals Ninth Circuit.

May 6, 1957.

Rehearing Denied June 4, 1957.

COPYRIGHT MATERIAL OMITTED

Morrison, Foerster, Holloway, Shuman & Clark, Franklin C. Latcham, W. T. Fitzgerald, Clarence E. Musto, San Francisco, Cal., for appellant.

Charles K. Rice, Asst. Atty. Gen., George Lynch, Lee A. Jackson, I. Henry Kutz, Davis W. Morton, Jr., Attys., Dept. of Justice, Washington, D. C., Lloyd H. Burke, U. S. Atty., San Francisco, Cal., for appellee.

Before POPE and FEE, Circuit Judges, and EAST, District Judge.

EAST, District Judge.

This action was brought in the District Court for the Northern District of California, Southern Division, under Section 1346(a) (1), Title 28, U.S.C.A., for the refund of certain income taxes alleged to have been erroneously assessed and collected.

The main facts are not in dispute and were the subject of stipulation in the District Court.

The Appellant is the Executor of the last Will and Testament of Walter D. K. Gibson, deceased, who died on December 21, 1938 (Decedent). The estate of Decedent (Walter's Estate) was in the course of administration from January 11, 1939 to August 26, 1941, when it was distributed under decree of final distribution. However, Appellant was not discharged as Executor.

Decedent's will was executed on August 31, 1937.¹ Contemporaneously with the execution of Decedent's will, Emily A. Gibson, wife of Decedent (Emily), executed a waiver of her right to claim one-half of any part of the community property of the spouses involved and agreed to accept the terms of Decedent's will.²

Statement of Facts

The Decedent's ultimate estate under the will was composed entirely of community property of himself and Emily and his estate was ultimately distributed in accordance with the provisions of his will and the election of Emily to withdraw fifty per cent of Decedent's estate, which power to withdraw she exercised during the course of administration of Decedent's estate and on May 8, 1941, and assigned the property to the Crocker First National Bank of San Francisco to hold as Trustee, under a trust agreement.

For the period, January, 1941, through August 26, 1941, one-half of the income attributable to the property subject to administration in the Decedent's estate, was returned by the taxpayer for purposes of federal income taxes. The other one-half was reported on a return filed by the executor of the estate of the wife, Emily, she having died on November 24, 1941.

A deficiency was proposed by the Appellee against Decedent's estate on the ground that the entire income of the property subject to administration for the period was taxable to him. Concurrently an over-assessment was proposed with respect to the tax paid by the estate of the wife, Emily. Some readjustments were made by the parties amicably and the balance was paid by the Decedent's estate in cash.

The Appellant, taxpayer, filed a claim for refund of this payment on the ground that for the period in question only one-half of the income was chargeable to the Decedent's estate and the other half being chargeable to the estate of Emily.

The Appellee allowed this claim in the amount of $9,362.58. However, such refundable sum was reduced by the amount which thereby became due from the estate of Emily and the difference was paid by the Defendant to the taxpayer. It follows that in this suit the Appellant sought to recover that amount of his claim for refund which was not refunded in cash, being stipulated sum of $7,100.35. Parenthetically, it must be noted that the only reason that the Appellee claims that this amount should be withheld was on account of claimed taxes due from the estate of Emily and in line with its hereinafter referred to claim of recoupment.

Questions Presented

1. Whether the income received by the estate of a deceased husband during administration is wholly taxable to the estate, or taxable half to the estate and half to the surviving wife where the estate was comprised entirely of community property in which the husband and wife had present and equal interests at the time of the husband's death.

2. Whether in such a case the income received by the estate is wholly taxable to the estate, or half to the estate and half to the surviving wife where the wife consented to take under the husband's will, but retained the right to withdraw half of the estate.

3. Whether the defense of equitable recoupment applies to prevent a recovery by appellant in this case.

The legal question involved in Question 1 is answered by the doctrine of Bishop v. Commissioner of Internal Revenue, 9 Cir., 1945, 152 F.2d 389. As the District Court said in its opinion, reported in 134 F.Supp. 340, at page 341:

"In the Bishop case the taxpayer and his wife, California residents throughout their married life, had present, existing and equal rights in the community property. During the administration of the estate of the husband half of the income was reported by the estate and half by the widow. The Commissioner sought to tax all the income as that of the estate. The Court of Appeals held that the widow, being the owner of a one-half interest in the community property, owned one-half of the income therefrom. Therefore the estate, it was held, could not be taxed on more than one-half."

It is noted that the theory of the Bishop case is that tax liability shall be upon the owner of the property creating the income. Quoting from the Bishop case, 152 F.2d at page 391, we find:

"The Tax Court appears to have assumed that, upon decedent\'s husband death, petitioner\'s surviving widow half of the community property ceased to be hers and became a part of decedent\'s estate. The assumption is incorrect. Sections 201 and 202 of the California Probate Code Petitioner\'s half, like decedent\'s half, was subject to administration, but, unlike his half, her half never became part of his estate." (Emphasis supplied.)

Question No. 2.

The answer to question 2 is found in the determination of the true ownership of the corpus involved by the provisions of the last will and testament of Decedent in light of the community property relationship of the properties of Walter and Emily immediately prior to his death and Emily's power or right to defeat the legal effect of her waiver by a withdrawal as her own property of up to fifty per cent of the corpus handled by the Executor.

The trial Court found a primary distinction between the Bishop case and the case at bar and held that Emily's waiver of her community property right and her agreement to take according to the will was an election by Emily that was binding and enforceable under California law, citing as authority, Flanagan v. Capital National Bank, 213 Cal. 664, 3 P.2d 307; Security-First National Bank of Los Angeles v. Stack, 32 Cal.App.2d 586, 90 P. 2d 337. See also, In re Estate of Watkins, 16 Cal.2d 793, 108 P.2d 417, 109 P.2d 1, and concluded that "upon the husband's death, in view of this election the entire community property became the estate of the husband," and "the widow's relationship to the estate was that of a beneficiary."

It has long been settled in California that the spouses may agree with respect to the character of the property which they hold to transmute such property from community to the separate estates of both or either by an agreement which ordinarily need not be executed with any particular formality. This Court feels that the last Will and testament of Decedent and the contemporaneously executed waiver of Emily were each dependent upon the other but did not in and of themselves ipso facto resolve themselves into a binding contract between the spouses so that neither one could change the relationship without the consent of the other. In fact the Decedent so acknowledged in his last Will and Testament which became effective as of the instant of his death, that "all my properties and estate * * * are the community property of myself and my wife, Emily * * * and that it is my understanding that under the law of the State of California my said wife may elect to take one-half of all my property and estate absolutely as her own * *."

There was no contractual stipulation between the spouses that Walter could not at any time revoke the will and make any distribution he saw fit of his one-half. At best any contractual obligation of the spouses could only have been created upon and subsequent to the death of Walter by reason of his lifetime belief that Emily would abide by her waiver which at best would be through the adoption of the equitable theory of estoppel.

Reviewing the cases relied upon by the District Court we find that Estate of Watkins, supra 16 Cal.2d 793, 108 P.2d 419, involves joint and mutual wills of husband and wife declaring that all the property therein disposed of was "their community property." That case does not deal with the legal problem presented in the case at bar.

Flanagan, supra, (Supreme Court of California) cited by the trial judge, revealed a situation of a husband's will leaving considerable real and personal property to the plaintiff, wife, the remainder of the estate being left to a brother, sister and niece. At the time of the execution of the will plaintiff, wife, signed an instrument reciting that she was the wife of the decedent, that she had read the will and that "in consideration of the provisions made in and by said will" she elected to accept the provision and conditions including the disposition of the "community property" and that she waived all claim to said community property. After death of the decedent the plaintiff commenced action against the executor claiming her share in the community. The court did say, 3 P.2d at page 308:

"Such an agreement is clearly supported by consideration and is binding upon the

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