Gump v. Commissioner of Internal Revenue

• Decision Date: 03 February 1942
• Docket Number: No. 9825.,9825.
• Citation: 124 F.2d 540
• Parties: GUMP et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

124 F.2d 540 (1941)

GUMP et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 9825.

Circuit Court of Appeals, Ninth Circuit.

December 31, 1941.

Rehearing Denied February 3, 1942.

Charles A. Christin and Walter Christie, both of San Francisco, Cal., for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, and Joseph A. Jones, Sp. Assts. to the Atty. Gen., for respondent.

Before GARRECHT, HANEY, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

This is a proceeding to review a decision of the Board of Tax Appeals. It involves estate taxes assessed against the estate of Alfred S. Gump, of which petitioners are the executors.

Alfred S. Gump died testate January 23, 1934. In 1905 he had married petitioner Camille R. Gump. At that time he owned 25 shares of the capital stock of the S. & G. Gump Company, a San Francisco concern which had been organized about six years previously. During the period from 1905 to February 9, 1929, the decedent and his two brothers, Abraham L. and William E. Gump, devoted their entire time and efforts to the developing and building up of the business of the Gump Company, and the success of the concern was largely due, and in equal measure, to the ability and energy of the three brothers. From March, 1921, to February, 1929, the decedent held 2,664 shares of common stock of the Gump Company, all of which were concededly community property. In the latter year his wife owned 46 shares.

On February 9 and December 23, 1929, decedent and his wife entered into agreements under the terms of which they sold their shares to Abraham L. Gump for the book value thereof — $1,100,976.25 — together with 15 shares of the capital stock of an affiliated realty company. Of the purchase price $500,000 was payable in cash, the down payment including the sum $84,018.20 representative of the entire agreed price of the realty company shares. The remainder was payable in seven annual installments evidenced by as many promissory notes, the last of which matured February 1, 1936. All notes were made payable to decedent. The agreements recited that the decedent was the owner of 2,664 shares of the Gump Company and the 15 shares of the realty company, and that his wife was the owner of 46 shares of the Gump Company. At death four of these notes remained unpaid in the principal amount of $384,994.45.

In auditing the estate tax return of Gump's executors the Commissioner determined that the gross estate of the decedent consisted of the entire community estate. He included therein the four unpaid notes at their face value.

The executors filed an income tax return for the decedent covering the period from January 1, 1934, to the date of his death — January 23. Not desiring to include in that return the gain realized by the transmission of the unpaid installment obligations of Abraham L. Gump by reason of the death of the decedent, as provided for in § 44(d) of the Revenue Act of 1934,¹ the executors furnished a bond conditioned upon the ultimate return as income of these installment obligations. The Commissioner determined that 74.045% of each dollar collected on such installment obligations represented taxable income, that is, realized gain, to be accounted for when collected. He further determined that the estate or the beneficiaries should return as taxable income the amount of such gain paid by Abraham L. Gump subsequent to January 23, 1934. It may be added here that the amount of federal income tax payable on the income of decedent for the period of January 1 to January 23, 1934, would have been greater by $25,877.59 had there been reported as taxable income for that period the amount of gain included in the principal of the unpaid installment obligations in question.

On the showing before it the Board of Tax Appeals concluded that the entire estate was community property acquired prior to July 29, 1927, in which the rights of the wife were so restricted as to subject the whole of the community estate to the federal estate tax. Further, that the full value, as of the date of death, of the unpaid installment notes represented capital or corpus includible in the gross estate.

1. Petitioners contend that, by virtue of the contract disposing of the Gump Company stock, the restricted community estate theretofore existing was transmuted into a tenancy in common in the proceeds of the sale. The point merits little attention. The agreement specifically recites that the husband is the owner of 2,664 shares and that the wife owns 46 shares. The purchaser undertook to pay to the husband the agreed price of the whole number of shares. The extent of the wife's interest is limited to so much of the sale price as was applicable to her individual shares, and to this extent it is to be supposed that her husband was accountable to her.² There is nothing in the instruments suggestive of an intent to convert the community estate in the stock into a tenancy in common in the proceeds. Doubtless the husband and wife joined in the agreement as a matter of convenience, since each held shares and all were being sold. Perhaps, as the Commissioner suggests, there may have been the further purpose to join the two in a single instrument to avoid possible controversy. See Riley v. Gordon, 137 Cal.App. 311, 30 P.2d 617.

For authority petitioners rely on Oakland Bank, Executor, v. Commissioner, 23 B.T.A. 256. That case deals, not with the sale of property, but with its acquisition through the medium of a deed in which the husband and wife were named as grantees. The situations are clearly distinguishable. Moreover, in the proceedings for the probate of Mr. Gump's will the California court determined that the whole of the estate was community property.

2. It was stipulated that at December 31, 1928 (the date as of which the contract of sale became effective) the earned surplus of the Gump Company attributable to the 2,664 shares held by Alfred S. Gump had increased by the amount of $198,028.44 over the earned surplus attributable to such shares at July 29, 1927. In other words, there was an increase in the book value of the Alfred S. Gump shares by that amount.

Petitioners contend that a definite part of this increment must be excluded from the gross estate of the husband. The reasoning is predicated on the amendment of July 29, 1927, to the community property law of California, after which date the wife's interest ceased to be a mere expectancy and became a "present, existing and equal" interest. Section 161a Civil Code of California. Concretely, on the authority of Pereira v. Pereira, 156 Cal. 1, 103 P. 488, 23 L.R.A.,N.S., 880, 134 Am.St.Rep. 107, and kindred cases,³ it is argued that the increment of invested capital, over and above a fair return on the investment, is attributable to the personal efforts of the husband, hence belongs to the...