Commissioner of Internal Revenue v. Cadwallader

• Decision Date: 30 April 1942
• Docket Number: No. 9863.,9863.
• Citation: 127 F.2d 547
• Parties: COMMISSIONER OF INTERNAL REVENUE v. CADWALLADER.
• Court: U.S. Court of Appeals — Ninth Circuit

127 F.2d 547 (1942)

COMMISSIONER OF INTERNAL REVENUE v. CADWALLADER.

No. 9863.

Circuit Court of Appeals, Ninth Circuit.

April 30, 1942.

Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch, Helen R. Carloss, Carlton Fox, and Hubert L. Will, Sp. Assts. to the Atty. Gen., for petitioner.

Clark J. Milliron, of Los Angeles, Cal., for respondent.

Before WILBUR, HANEY, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

While domiciled in the Philippine Islands, Brooke W. Cadwallader and his wife acquired certain personal property. The husband and wife were citizens of the United States. Cadwallader died in the Philippines in 1936; and the question presented is whether, for federal estate tax purposes, his gross estate includes the whole or only one-half of the property so acquired. The Commissioner assessed the entire value, but on petition for redetermination the Board of Tax Appeals held that only one-half the value was taxable.

So far as pertinent, Section 302(a) of the Revenue Act of 1926, as amended, provides that the gross estate of a decedent shall include the value at the time of his death of all property "to the extent of the interest therein of the decedent at the time of his death," 26 U.S.C.A. Int.Rev. Acts, page 227. The law of the Philippines is concededly determinative of the extent of this decedent's interest. Lang v. Commissioner, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331, 118 A.L.R. 319. Cf. Poe v. Seaborn, 282 U.S. 101, 111, 51 S.Ct. 58, 75 L.Ed. 239; Black v. Commissioner, 9 Cir., 114 F.2d 355.

In the Philippines the marital community is called the "conjugal partnership." The code provisions defining the status of the spouses and their rights in property acquired during coverture are similar to those of the community property states. Some of these provisions are quoted on the margin.¹ The Supreme Court of the Islands has characterized the wife's interest in the conjugal property as "vested" and "equal to" that of the husband, Gibbs v. Government (1933), 59 Phil. 293. It was there held that the wife's interest, passing upon her death to her husband, was subject to an inheritance tax. The court said (59 Phil. at pages 301, 302) that "under the provisions of the Civil Code and the jurisprudence prevailing here, the wife, upon the acquisition of any conjugal property, becomes immediately vested with an interest and title therein equal to that of her husband, subject to the power of management and disposition which the law vests in the husband. Immediately upon her death, if there are no obligations of the decedent, as is true in the present case, her share in the conjugal property is transmitted to her heirs by succession." In the course of the opinion the court quoted Articles 1407, 1414, and 1426, shown in the above note, and referred to Article 657, which we have also set out there.

It is urged by the Commissioner that this decision is not presently the law of the Philippine Islands. He claims that the holding is inconsistent with previous expressions of the court in several cases, and with a subsequent expression in the case of Oñas v. Javillo, 59 Phil. 733. We are not able to agree with the Commissioner, as we think the Gibbs case must be taken as controlling.

One of the previous cases is Nable Jose v. Nable Jose, 41 Phil. 713. There the court held that upon the death of the wife the husband, by virtue of his power to liquidate (settle the affairs of) the conjugal estate, could sell or mortgage the property without authority of court. In the course of the opinion it was observed that "prior to the liquidation, the interest of the wife, and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title until it appears that there are assets in the community as a result of the liquidation and settlement." In the similar situation involved in Manuel and Laxamana v. Losano, 41 Phil. 855, similar language is used; but in both of those cases the court was dealing with the rights of the wife or her heirs in respect of specific conjugal property, it being thought that they had an interest only in the net remainder of the property after liquidation and payment of the debts of the marital community. It is plain from these decisions that, regardless of the language used in characterizing the wife's interest, the husband was not thought to have any interest whatever in her share of the property acquired by the community. He has only the power of management and disposition; and this power extends beyond the wife's death for the purpose of winding up the affairs of the conjugal partnership. In this respect the powers of the husband seem comparable with those of a surviving partner at the common law.

The language of the Nable Jose case was again quoted in Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, where it was held that the husband must pay the federal income tax on all the income of the conjugal partnership. That case, however, was decided in advance of the holding of the United States Supreme Court in Poe v. Seaborn, supra, and upon the ground that since the wife "has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax", 38 Phil. at page 420. The court remarked that the wife "has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital."

The subsequent case relied upon by the Commissioner, Oñas v. Javillo, supra, was decided about three months after Gibbs v. Government, supra. The latter decision was not mentioned. In the opinion the court quoted the above excerpt from the Nable Jose case to the effect that the wife has a "mere expectancy" prior to liquidation, but the court decided that the heirs of the wife could maintain an action for partition of community real estate after the death of the wife, notwithstanding there had been no liquidation. This decision, instead of supporting the view of the Commissioner, is direct authority for the proposition that the wife has an interest in the conjugal property which upon her death passes to her heirs subject to administration.

We are in accord with the view of the Board of Tax Appeals, namely, that the clear-cut holding of the Gibbs case should be followed. In the light of that decision and the quoted statutory provisions, we think the interest of the wife in community property in the Philippine Islands does not differ substantially from the present interest a wife has under the laws of the community property states generally; and that for the purpose of the federal estate tax the husband must be held to have no interest in the wife's share of the conjugal estate.

Affirmed.

HANEY, Circuit Judge (dissenting).

The fact that the residents of 39 states, amounting to 83.8% of the population of the United States, must bear a substantial part of the just tax burden of the residents of 9 states amounting to only 16.2% of such population, because of a special privilege enjoyed by the residents of such 9 states, is sufficient to warrant close scrutiny of any request for extension and perpetuation of such special privilege. The cost to the many of the special privilege for the few is between $200,000,000 and over a billion — a stupendous gift. Black v. Commissioner, 9 Cir., 114 F.2d 355, 360. Another reason why this court should be especially searching in its decision is that 5 of the 9 favored states are included in this circuit which includes only two other states, exclusive of the territories of Alaska and Hawaii.

The special privilege arises from the fact that even though a husband earns and is paid a salary, the wife may return one-half of such salary as her income. By this device, the tax is lessened because on a lesser amount of income the tax rate is smaller. The division of the income between the spouses is said to be proper because under the community property law of the favored states, one spouse is considered as owning one-half the earnings of the other spouse.

McKay explains "community" by stating that the word implies an association of persons. He also states that the "marital community is a group of persons consisting of husband and wife" and that "community property is simply the property that belongs to this group". McKay, Community Property, 2nd Ed., 3, § 4.

There are a number of theories as to the origin of the system of community property. McKay, supra, 4, § 7. So far as Spain is concerned, it is thought that the community property system was established there between A.D. 653 to A.D. 672 by the conquering Goths. McKay, supra, 7, § 9. The relation between husband and wife created under the law of community is sometimes spoken of as a conjugal partnership. McKay, supra, 121, § 160.

The Philippine Islands, discovered by Magellan in 1521, thereafter, by subjugation, were ruled by Spain until the purchase thereof by the United States for $20,000,000, pursuant to the treaty with Spain signed at Paris on December 10, 1898. 21 The Americana, 752, 753. The Act of March 2, 1901, Ch. 803, 31 Stat. 910 provided that all military, civil and judicial powers, necessary to govern the islands, were vested in such person and persons, and were to be exercised in such manner as the President should direct, until Congress should otherwise provide. Apparently, an executive order established by implication the community property law, if not the treaty or international law (Vilas v. Manila, 220 U.S. 345, 357, 359, 31 S.Ct. 416, 55 L.Ed. 491) and that law was continued in force by the Act of August 29, 1916, Ch. 416, § 6, 39 Stat. 547.

The Revenue Act of 1918, 40 Stat. 1062, § 211(a), levied an income tax "upon the net income of every individual". The Revenue Act of 1916,...