Bishop v. Comm'r of Internal Revenue

• Decision Date: 16 January 1945
• Docket Number: Docket No. 4594.
• Citation: 4 T.C. 588
• Parties: STELLA WHEELER BISHOP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

4 T.C. 588

STELLA WHEELER BISHOP, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4594.

Tax Court of the United States.

Promulgated January 16, 1945.

Held, that one-half of the loss sustained upon the sale, in the course of administration, of securities acquired since 1927 and owned as community property in California is not deductible in the return of the surviving spouse. Commissioner v. Larson, 131 Fed.(2d) 85; Estate of James F. Waters, 3 T.C. 407, followed. Robert H. Walker, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

The respondent determined a deficiency of $1,070.23 in the petitioner's income tax for the year 1940. The petitioner cites as error respondent's action in denying as a deduction one-half of a loss sustained upon the sale by her husband's executor of securities acquired since 1927 and owned as community property and one-half of the taxes and expenses paid by the executors of her husband's estate, and in refusing to allow the elimination from the petitioner's income of one-half of the executrix's fee received by her. Consistent with these claims, petitioner's position is that one-half of the income from taxable dividends and interest received by the estate during the administration is taxable to her.

FINDINGS OF FACT.

The facts were stipulated and as so stipulated they are adopted as findings of fact. In so far as they are material to the issue, they are as follows:

The petitioner is an individual, residing in San Francisco, California. She filed her income tax return for the year 1940 with the collector of internal revenue for the first district of California.

The petitioner and Roy N. Bishop were married on the 9th day of May, 1907, and they remained married continuously thereafter until the 20th day of December 1938, when Roy N. Bishop died. Roy N. Bishop and the petitioner, Stella Wheeler Bishop, were residents of, and domiciled in, the State of California continuously from the year 1909 to the 20th day of December 1938. The petitioner has continued that status to the present time.

Between April 20, 1931, and October 29, 1937, the petitioner and Roy N. Bishop acquired certain securities at an aggregate cost of $65,672.52. Such securities were not disposed of until they were sold by the petitioner and Crocker First National Bank of San Francisco, hereinafter called the bank, as executrix and executor, respectively, of the will and estate of Roy N. Bishop.

Thereafter, on December 20, 1938, Roy N. Bishop died and on January 9, 1939, his will was admitted to probate by the Superior Court of the State of California, in and for the City and County of San Francisco. The will named the petitioner and the bank as executrix and executor, respectively, of the will and estate of said Roy N. Bishop, deceased.

Thereafter, the petitioner and the bank, as executrix and executor, respectively, of the said estate, sold the securities heretofore mentioned at an aggregate loss of $33,686.77.

At the time Roy N. Bishop died, and at all times herein mentioned prior thereto, the securities above referred to, an automobile on which the estate paid a tax of $34, and certain other securities and bank deposits, on which dividends and interest were received by the estate in 1940, constituted community property of Roy N. Bishop and the petitioner acquired subsequent to July 29, 1927, and no part thereof was acquired as or from the proceeds of any property owned by Roy N. Bishop and the petitioner, or either of them, on or before July 29, 1927. During 1940 the estate paid transfer taxes of $461.48 on such property and an automobile tax of $34, and it received dividends of $4,299.11 from securities and interest amounting to $132.15 on bonds and bank deposits belonging to the estate. It was agreed that the dividends from Pacific Lumber Co. were not nontaxable to the amount of 28.495 percent. During that year the petitioner received a fee of $1,928.09 as executrix of the estate.

The transfer taxes and automobile tax, the executrix fee, and the funds used to pay the expenses of sale of the securities were all paid either out of funds on hand at the time Roy N. Bishop died, which funds at such time and at all times prior thereto constituted community property of the petitioner and Roy N. Bishop acquired subsequent to July 29, 1927, or were paid out of funds representing the proceeds of or income from such property. No part of such funds was acquired prior to July 29, 1927, or as proceeds of or income from any property owned by Roy N. Bishop and the petitioner, or either of them, on or before July 29, 1927.

In her income tax return for 1940 the petitioner claimed $8,421.69 as one-half of the recognizable loss from the sale of securities and a deduction of $247.74 representing one-half of the taxes so paid. She reported as income her one-half of the dividends and interest so received. She also reported her one-half of her fee as executrix.

The Commissioner disallowed the deductions claimed, excluded from her income the dividend and interest items, and included therein the entire sum received as her fee as executrix.

The petitioner claimed credit for income tax of $22 paid at the source, but the Commissioner reduced such sum to $20 on the ground that $2 applied to community property interest received by the estate.

OPINION.

ARUNDELL, Judge:

The basic issue in this case presents a clear-cut question whether one-half of the loss upon the sale of community property acquired since 1927 in California while the estate of the husband is in the process of administration can be taken as a deduction by the surviving spouse.

While the precise question presented for decision has not been directly decided by the Ninth Circuit Court of Appeals, we think that the court's decision in Commissioner v. Larson, 131 Fed.(2d) 85, would require an answer contrary to petitioner's contention. In that case the court had under consideration a Washington statute substantially similar to the California statute here involved and in its opinion reached the conclusion that, because the entire estate was subject to administration in the estate of the deceased husband, the income was ‘owned‘ by the executor or administrator and should be returned in its entirety by him. The same question was implicit in this Court's decision in the Estate of James F. Waters, 3 T.C. 407, though the question was not there directly decided.

We have always felt particularly impelled to strictly follow a Circuit Court's decision on questions of local law peculiarly within its knowledge and experience. Helvering v. Stuart, 317 U.S. 154. As we understand Commissioner v. Larson, supra, and Rosenberg v. Commissioner, 115 Fed. (2d) 910, which latter case was also decided by the Ninth Circuit, the income from community property during the period of administration is taxable in its entirety to the executor or administrator and one-half of it may not be returned by the surviving spouse.

It follows that the entire loss resulting from the sale of securities by the executor must be taken as a deduction by the latter and one-half of the loss may not be deducted by the surviving spouse in computing her tax. The same treatment must be accorded the expenses and taxes paid by the executor, which requires their deduction in full by the executor and no part of them may be deducted by the petitioner.

In another issue the petitioner asks to be relieved from including in her income one-half of the fee received by her as executrix of her husband's estate. We see no merit in her contention. The fee was paid to her for personal services rendered in her personal capacity as a fiduciary. We may assume that the amount of the fee was fixed by the probate court as proper compensation for such services performed in connection with the settlement of the Roy N. Bishop estate and that the action of the court was completely in accord with the significance and effect of the community property laws of California. Petitioner has not proved the fee to be in part excludible from her income. Therefore, the full amount of the fee must be included in her taxable income.

Reviewed by the Court.

Decision will be entered under Rule 50.

VAN FOSSAN, J., dissenting: The majority opinion concedes that the precise question here posed has not been decided by either the Circuit Court of Appeals for the Ninth Circuit or by the Tax Court, but nevertheless feels bound by the rationale of Commissioner v. Larson, 131 Fed(2d) 85, and Estate of James F. Waters, 3 T.C. 407. Feeling that these cases are not authority for the conclusion reached by the majority, I must dissent. I shall set out my views at some length.

It may be helpful to place the situation existing in California before 1927 and that obtaining after that date in juxtaposition. Prior to 1927, during the lifetime of the husband the wife had only an expectancy in community property. Thereafter, ‘the respective interests of 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. ‘ (Sec. 161a, Civil Code of California.¹ ) Prior to 1927 all income from community property was taxable to the husband. United States v. Robbins, 269 U.S. 315. Thereafter, the wife was entitled to return for taxation one-half of the income from the community property. United States v. Malcolm, 282 U.S. 792. Prior to 1923 section 1402, Civil Code of California, provided, ‘upon the death of the husband one-half of the community property goes to the surviving wife, and the other half is subject to the testamentary disposition of the husband, and in the absence of such disposition goes to his descendants * * * .‘ Since 1923 the statutes of California have provided, ‘upon the death of either husband or wife, one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary...