Johnson v. Comm'r of Internal Revenue

• Citation: 72 T.C. 340
• Decision Date: 14 May 1979
• Docket Number: Docket No. 10423-76.
• Parties: MARY HELEN JOHNSON, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

72 T.C. 340

MARY HELEN JOHNSON, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 10423-76.

United States Tax Court

Filed May 14, 1979.

During 1973, petitioner's husband along with two other individuals was involved in a scheme to defraud the Federal Government by filing false income tax refund claims with the Internal Revenue Service. Held, under Texas law a portion of the income petitioner's husband derived from this illegal scheme is community property and, therefore, petitioner is taxable on one-half of such portion. Held, further, petitioner is entitled to deduct under sec. 212(1), I.R.C. 1954, a portion of the legal fees paid in connection with her husband's unsuccessful defense of the criminal charges brought against him as a result of his participation in the fraudulent refund scheme. Towner Leeper, for the petitioner.

James N. Mullen, for the respondent.

FAY, Judge:

Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1973 in the amount of $11,643. Concessions having been made, the only remaining issues for decision are:

(1) Whether illegal income obtained by petitioner's husband in a false Federal income tax refund scheme constitutes community property and, hence, income to the petitioner.

(2) Whether petitioner is entitled to deduct under section 162¹ or section 212 a portion of the legal fees paid to defend her husband against criminal charges brought as a result of his participation in the false refund scheme.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

At the time of filing her petition herein, Mary Helen Johnson resided in El Paso, Tex. Throughout 1973, petitioner was married to Jerry E. Johnson (Johnson). For the taxable year 1973, petitioner filed a separate Federal income tax return.

During 1973, petitioner's husband was involved with two other individuals in a scheme to defraud the Federal Government by filing false income tax refund claims with the Internal Revenue Service. Petitioner did not participate in or know of this scheme. The two other individuals involved in the scheme were an Internal Revenue Service employee, Cora Fraley Baggett (Baggett), and her brother John T. Fraley (Fraley).

The scheme began when Fraley learned that his sister, Baggett, who worked at the Internal Revenue Center in Austin, Tex., had generated false refund checks for several other members of their family. Thereafter, Fraley persuaded her to do the same for him and Johnson. The refund checks were generated as follows: Baggett researched the microfilms at the Service Center and located taxpayers with names similar to Fraley and Johnson. She then made a master file change, altering the addresses of the real taxpayers to addresses supplied to her by Fraley. She would then prepare false claims on a refund claim form, Form 843, or file a false amended return, Form 1040X. These false claims usually reflected a casualty loss. Baggett would approve the false claims, and refund checks in the amounts claimed would be made out by the Government in the name of the real taxpayers and mailed to the addressed provided by Fraley.

To enable them to negotiate the checks, Fraley and Johnson opened numerous bank accounts in Texas, New Mexico, and Indiana. Most of these accounts were joint accounts in which fictitious women's names were used as their wives. When necessary, the women's names would be signed by Fraley or Johnson. When a refund check was received in the mail, it would be deposited by Fraley or Johnson in one of these bank accounts. After a short period of time, the balance in an account would be withdrawn and Fraley and Johnson would divide the proceeds.

In addition to the false claims Baggett prepared using other taxpayers' names, she also prepared four false refund claims using petitioner's and her husband's actual names. These four claims covered the years 1966, 1968, 1969, and 1970. Four refund checks dated August 31, 1973, and made payable to petitioner and her husband were mailed to them. These four checks totaled $6,180.51. Petitioner's husband signed both his and petitioner's name to these checks and cashed them at a bank in El Paso, Tex.

Johnson's share of the total proceeds from this scheme during 1973 was $59,595.77.

Sometime during 1973, the fraudulent scheme was discovered and a criminal information was subsequently filed against Baggett charging her with conspiracy to commit an offense, 18 U.S.C. sec. 371, and making a false claim upon an agency of the United States, 18 U.S.C. sec. 287. She pleaded guilty to both counts. In addition, Fraley and Johnson were charged with conspiracy to defraud the Government, 18 U.S.C. sec. 286, and they too pleaded guilty.

In connection with his defense to the charge of conspiracy, petitioner's husband incurred $7,001 in legal fees. To pay this amount, petitioner and her husband on November 22, 1973, transferred a 1974 Cadillac convertible to the attorney who represented him.²

Prior to the time petitioner filed her Federal income tax return for 1973, she learned of her husband's involvement in the fraudulent refund scheme. Thus, on her separate return for 1973, petitioner stated that her husband had $9,419 in illegal income for the year and she included one-half, $4,709, as her community income. In addition, petitioner claimed one-half of the legal fees as a deduction.

In the statutory notice, respondent determined that petitioner's husband's illegal income for 1973 amounted to $59,595.77 and that petitioner was taxable on one-half of this amount or $29,797.89 less the $4,709 already included. Respondent also disallowed the deduction for legal expenses.

OPINION

The first issue we must decide is whether the illegal income obtained by petitioner's husband in a false income tax refund scheme constitutes community property and, hence, income to the petitioner.

Texas is a community property state. Tex. Const. art. 16, sec. 15; Tex. Fam. Code Ann. sec. 5.01 et seq. (Vernon 1974). Under Texas law, community property is defined as all property acquired by either spouse during marriage except for property acquired by gift, devise, descent, or in recovery for personal injuries sustained by a spouse during marriage. Tex. Fam. Code Ann. sec. 5.01 (Vernon 1974). These latter categories constitute a spouse's separate property. Tex. Fam. Code Ann. sec. 5.01 (Vernon 1974).

With respect to community property, each spouse has a vested interest in and is owner of one-half of all such property. Hopkins v. Bacon, 282 U.S. 122, 126 (1930); Lange v. Phinney, 507 F.2d 1000, 1005 (5th Cir. 1975); Dillard v. Dillard, 341 S.W.2d 668, 670 (Tex. Civ. App. 1961). As a result of her ownership of one-half of all community property, a wife is liable for the Federal income taxes on such share. United States v. Mitchell, 403 U.S. 190, 196 (1971); Hopkins v. Bacon, supra at 127; Poe v. Seaborn, 282 U.S. 101, 118 (1930); Lange v. Phinney, supra. Therefore, in the present case, if the illegal income earned by her husband is community property, petitioner is taxable on one-half of such amount even though she had no part in its acquisition.³ Conversely, if the illegal income is her husband's separate property, petitioner is not liable for any tax on such amounts because she has no ownership interest in his separate property. Tex. Fam. Code Ann. sec. 5.21 (Vernon 1974). See Blake v. Commissioner, 20 T.C. 721, 731 (1953); O'Connor v. Commissioner, 40 B.T.A. 489, 490 (1939), affd. 110 F.2d 652 (5th Cir. 1940).

As provided in sec. 5.01 of the Texas Family Code, property must be “acquired” during marriage to constitute community property. It is a well-established rule in Texas that the word “acquired” as it is used in this statute refers to the origin or inception of title. Wrightsman v. Commissioner, 111 F.2d 227, 228 (5th Cir. 1940); Lee v. Lee, 247 S.W. 828, 832 (1923). See also Speer, Texas Family Law, sec. 15:7 (5th ed. 1976). Consequently, a spouse who acquires property during marriage must acquire some legal title to the property before such property will be characterized as community property. Wrightsman v. Commissioner, supra. Hence, if a spouse acquires possession of property without title, the property remains the separate property of such spouse. Wrightsman v. Commissioner, supra.

With these principles in mind, the resolution of the first issue in this case depends on whether petitioner's husband acquired title to his share of the proceeds derived from the false refund scheme. Since the nature of an individual's legal interest in property is a matter of State law, we must look to Texas law to determine whether petitioner's husband acquired title to these proceeds. United States v. Mitchell, supra at 197 (1971); Aquilino v. United States, 363 U.S. 509, 513 (1960); Estate of Williams v. Commissioner, 62 T.C. 400, 407 (1974).

Under Texas law, where property is acquired illegally, whether title to such property passes to the illegal taker depends on whether the owner intended to pass both possession and title to the illegal taker. De Blanc v. State, 118 Tex. Crim. 628, 37 S.W.2d 1024, 1027 (1931). See also Roe v. State, 140 Tex. Crim. 299, 144 S.W.2d 1104, 1107 (1940); Lovine v. State, 136 Tex. Crim. 32, 122 S.W.2d 1069, 1070 (1939); Baldwin v. State, 132 Tex. Crim. 427, 104 S.W.2d 872, 873 (1937); Hoovel v. State, 125 Tex. Crim. 545, 69 S.W.2d 104, 109 (1934); Shelton v. Thomas, 11 S.W.2d 254, 257 (Tex. Civ. App. 1928).

In De Blanc v. State, supra, the appellant was employed as a bank messenger by the Texas Bank & Trust Co. (Texas) in Austin, Tex. His duty was to carry money transfers between Texas and other local banks. On one occasion, while acting without authority, the appellant presented a transfer request for $5,000 to the Austin National Bank (Austin). Upon obtaining the money, he converted it to his own use. The appellant was subsequently convicted of theft. On appeal, the...