Commissioner of Internal Revenue v. Skaggs
| Decision Date | 22 September 1941 |
| Docket Number | No. 9174.,9174. |
| Citation | 122 F.2d 721 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. SKAGGS. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Helen R. Carloss and Sewall Key, Sp. Assts. to the Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and John M. Morawski, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for petitioner.
Robert Ash, of Washington, D. C., for respondent.
Before FOSTER, SIBLEY, and McCORD, Circuit Judges.
The taxpayer, L. L. Skaggs, was married in January, 1929, and has since been domiciled in Texas. In 1926 he had acquired a building in California, which yielded in the tax year 1934 net rents upon a lease in the amount of $11,468. In 1926 he had acquired also stock in a corporation, Safeway Stores, in lieu of an interest he formerly had in the business. This stock he sold in the tax year 1934, and realized a capital gain of $16,863. In his income tax return he treated both these items as community income and returned only half. The Commissioner held both to be his separate income and assessed an additional tax. The Board of Tax Appeals, 38 B.T.A. 921, held with the taxpayer, and the Commissioner petitions for review.
We assume that the Safeway Stores is a Texas corporation and that its stock is personalty under the Texas law. Both parties concede that the law of Texas fixes the ownership of it and its proceeds, the question being whether under that law the gain realized by its sale is the separate property of Skaggs, or falls into the marital community. The provisions of the Texas Constitution and statutes are quoted and discussed in Commissioner v. Wilson, 5 Cir., 76 F.2d 766, 768. In defining the separate property of husband and wife as that owned or claimed before marriage and that acquired afterwards by gift devise or descent, the statutes add "as also the increase of all lands thus acquired." Vernon's Ann.Civ.St. arts. 4613, 4614. The Board following its decision in the case of W. T. Carter, Jr., v. Commissioner, 36 B.T.A. 853, held the statutory meaning to be that while any increase in value of separate land realized by a sale would be separate property, it would be otherwise as to personal property, because the mention of increase of land excludes increase of personalty, and the statutes expressly make to be community property all acquisitions during marriage which are not separate property. The argument is plausible, but we do not think the construction is in accord with the Texas decisions. These recognize the identifiable proceeds of sale of separate property to be separate property, whether the property sold be real or personal. In O'Connor v. Commissioner, 5 Cir., 110 F.2d 652, we held the gain on a sale of separate personal property to be taxable to the separate owner, and cited the Texas decisions from the beginning, affirming the Board's decision in that case. There are cases in Texas in which it was shown that the gain realized came largely from the expenditure of the time and efforts of the spouse during the marriage, in which the claims of the community were recognized, but in such instances the proceeds of sale were not identified as arising wholly from the separate property.1 The Board's case of W. T. Carter, Jr., supra, was of that kind and was correctly distinguished on that ground in deciding the O'Connor case, supra, 40 B.T.A. 489. We think the O'Connor case is controlling here. 11 Am.Jur., Community Property, § 26. 23 Texas Jur., p. 142, § 114; 126 Am.St. Rep. p. 114, and cases cited.
As to the rents from the California realty, the question is whether their ownership is to be determined by the law of California or that of Texas. Both States have the law of the marital community derived from the old Spanish law. By the Spanish law the rents of separate property fell into the community. 11 Am.Jur., Community Property, § 32. This is the law in Texas, so far recognized by the State Constitution that the effort to enlarge by statute the wife's separate estate by adding the rents to it was held unconstitutional. Arnold v. Leonard, 114 Tex. 535, 273 S. W. 799. We held in Commissioner v. Wilson, 5 Cir., 76 F.2d 766, that the part of the same statute which also added to the husband's separate estate the rents thereof was so intimately connected with the unconstitutional provision as to fall with it. The Court of Claims, Hurd v. United States, 22 F.Supp. 421, reached a different conclusion, but the Texas legislature itself, Texas Laws 1929, C. 32, § 3, p. 66, declared: "The Legislature never would have provided, or attempted to provide, that the rents and revenue derived from the husband's separate property should be his separate estate if it had known that the correlative portion of the Statute, which provided that the rents and revenues derived from the wife's separate property should be her separate estate, was in conflict with the Constitution, as heretofore held by the Supreme Court of Texas; and the fact that both of said correlative provisions, though unconstitutional, remain on the Statute Books and are, therefore, confusing and misleading," was made the ground for eliminating both provisions as an emergency measure. We are satisfied that the conclusion we reached in the Wilson case was correct and that rents of separate property in Texas of both spouses have always been community property. Certainly the Act of 1929 removed any doubt, and the rent here in controversy accrued in 1934.
In California the Spanish law has been by valid statute modified so that the separate property of each spouse includes "the rents, issues, and profits thereof." California Civil Code, §§ 162, 163. 11 Am.Jur., Community Property, § 32. The question therefore is whether the federal income tax laws should regard the rents arising from realty in California separately owned by Skaggs as his income according to the law of California, or as falling into the marital community according to the law of Texas.
Marriage is a very personal matter, and its incidents are in general regulated by the law of the matrimonial domicile. But the Spanish and French laws touching community property, and those of California and Texas and other States derived from them, are held to be, in the...
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