Republic Nat'l Bank of Dallas v. Comm'r of Internal Revenue (In re Estate of Castleberry)

• Decision Date: 08 August 1977
• Docket Number: Docket No. 8811—75.
• Citation: 68 T.C. 682
• Parties: ESTATE OF WINSTON C. CASTLEBERRY, DECEASED; REPUBLIC NATIONAL BANK OF DALLAS, INDEPENDENT EXECUTOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

68 T.C. 682

ESTATE OF WINSTON C. CASTLEBERRY, DECEASED; REPUBLIC NATIONAL BANK OF DALLAS, INDEPENDENT EXECUTOR, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 8811—75.

United States Tax Court

Filed August 8, 1977.

Decedent gave to his wife his community one-half share of certain property, so that it became her separate property. Under Texas law, the income from the transferred property was community property so that decedent owned a half share in such income. Held, decedent's gross estate includes (as a transfer with reserved life estate under sec. 2036(a)(1)) one-half of the transferred share (one-quarter of the whole). Estate of Hinds v. Commissioner, 11 T.C. 314 (1948), affd. on other grounds180 F.2d 930 (5th Cir. 1950), followed. Robert F. Ritchie and William B. Adams, for the petitioner.

David, L. Jordan, for the respondent.

HALL, Judge:

Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $148,406.72. Other issues having been disposed of by agreement of the parties, the sole issue remaining for decision is whether the value of gifts from decedent to his wife of his community interest in various bonds is includable in his gross estate, in whole or in part, under section 2036(a)(1) ¹ by reason of the post-transfer community property interest which under Texas law he had with regard to income from the transferred property.

FINDINGS OF FACT

The parties submitted this case under Rule 122, Tax Court Rules of Practice and Procedure. All of the facts have been stipulated and are so found. Those necessary to an understanding of the case are as follows:

Winston C. Castleberry (decedent) resided in Dallas, Tex., prior to his death on September 4, 1971. On September 20, 1971, the Republic National Bank of Dallas, a corporation with its principal office located in Dallas, Tex., was appointed executor of decedent's estate.

At the time of his death, decedent was married to Lucinda R. Castleberry. During their marriage, decedent made gifts to Lucinda of his one-half community interest in several municipal bonds. The fair market value of decedent-transferor's one-half interest in these bonds at decedent's death was $477,155.12. On the Federal estate tax return, petitioner did not include any portion of the value of these bonds in decedent's gross estate. Respondent in his statutory notice determined that the fair market value of decedent's one-half interest in these bonds was includable in decedent's gross estate under section 2036(a)(1).

OPINION

The sole issue for decision is whether within the meaning of section 2036(a) (1) decedent retained for his life the right to the income from certain bonds held as community property upon the transfer of his one-half community interest in the bonds to his wife. We are presented with this question because, under Texas law, while the transferred property becomes the separate property of the donee-spouse, the post-transfer income from the transferred property is community property. Moss v. Gibbs, 370 S.W.2d 452 (Tex. 1963); Arnold v. Leonard, 273 S.W. 799 (Tex. 1925). Thus, after the transfer, decedent in the present case held a community property interest in the income from the bonds, even though he had not explicitly or implicitly retained such an interest under the transfer instrument. The interest arose by operation of State law.

The identical issue was before this Court on one prior occasion. In Estate of Hinds v. Commissioner, 11 T.C. 314 (1948), affd. on other grounds 180 F.2d 930 (5th Cir. 1950), we held that such a transfer fell within the scope of the predecessor of section 2036(a)(1)² and that one-half of the value of the decedent's community interest in the transferred property was includable in his gross estate. Respondent appealed our decision, contending that the entire value of the decedent's community interest in the transferred property was includable in his gross estate. The taxpayer in Estate of Hinds did not appeal our decision, but, upon respondent's appeal, urged that the decision should be affirmed, not because it was right, but because it gave respondent more than he was entitled to and he could not therefore complain of it. The Court of Appeals for the Fifth Circuit agreed with the taxpayer, affirmed our decision without approving it, and denied the petition for review, stating ( 180 F.2d at 932):

We are compelled to disagree with respondent's position taken in reliance on Estate of Bomash.¹³ First, such a position ignores section 20.2036—1(a), Estate Tax Regs., which provides:

We do this upon the authority of the settled law of Texas, that whether the income be regarded as separate property of the wife or as community income from the wife's separate property, the taxpayer retained neither ‘the possession or enjoyment of, or the right to the income from,‘ the property so as to make applicable Sec. (2036(a)(1)), invoked by the commissioner and in part applied by the Tax Court. (Fn. ref. omitted.)

As a result of the language used by the Fifth Circuit in Estate of Hinds, respondent prior to 1975 did not attempt to include in the gross estate of a decedent-transferor under section 2036(a)(1) of its predecessor any part of the value of the decedent's interest in Texas community property transferred to a spouse. See, e.g., Estate of Wier v. Commissioner, 17 T.C. 409, 420—422 (1951). In 1975 respondent issued Rev. Rul. 75—504, 1975—2 C.B. 363, wherein he stated he would not follow the dictum of the Fifth Circuit Court of Appeals in Estate of Hinds.

Respondent here contends that the entire one-half community interest in the bonds transferred by decedent to his wife is includable in decedent's gross estate under section 2036(a)(1). On the other hand, petitioner contends that none of the transferred property is includable in decedent's gross estate. We disagree with both parties and instead reaffirm the position taken by this Court in Estate of Hinds that one-half of decedent's one-half community interest (or one-quarter of the whole value of the bonds) is includable in decedent's gross estate under section 2306(a)(1).

Petitioner raises three arguments in support of its contention that our decision in Estate of Hinds is incorrect and that section 2036(a)(1) is inapplicable to transfers of a Texas community property interest by one spouse to the other, where the donor-spouse continues to hold a community property right to the income by operation of State law. Petitioner first maintains that the decedent ‘retained’ no interest in the income from the bonds within the meaning of section 2036(a)(1), since there was no agreement, prearrangement, or understanding, either express or implied, between the donor and donee providing for such retention.

In Estate of Hinds we were confronted with the identical contention, and we rejected petitioner's assertion, stating (11 T.C. at 324):

As we have already pointed out, the decedent did not specifically retain or reserve any income from his part of the community property which was transferred to the trust; yet, under the laws of Texas, he was clearly the owner of one-half of the income from the property which he conveyed to the trust so long as he should live. This being the case, we think decedent ‘retained’ the right to one-half of the income from the property which he conveyed to the trust within the meaning of the language used in * * * (section 2306(a)(1)).

We find the reasoning no less valid today and are of the opinion that petitioner has misconstrued the thrust of our decisions wherein we did or did not find an agreement, prearrangement, or understanding that decedent has retained a life interest in the transferred property.³ Those decisions did not hold that a finding of an implicit or explicit agreement was a precondition to the legal conclusion that a decedent had retained an interest in the transferred property under section 2036(a)(1). Petitioner is correct in noting that in each of those cases the decedent would have had no interest in the transferred property absent an agreement. However, in the instant case such an agreement was unnecessary. By operation of State law decedent held an interest in the transferred property after the transfer. We therefore conclude that section 2036(a)(1) applies where the donor holds an income interest in transferred property by operation of State law as well as where he expressly or impliedly retains the interest under the transfer instrument.

Petitioner's second argument is that even if the decedent ‘retained’ an interest, it was not retained ‘under’ the transfer as required by section 2036(a)(1). This argument is in substance identical to petitioner's first argument that, since the right to the income arose by operation of State law, nothing was retained by decedent. In addressing this identical argument raised under the predecessor of section 2036(a)(1), the Court of Appeals for the Third Circuit stated in Estate of McNichol v. Commissioner, 265 F.2d 667, 670 (3d Cir. 1959), cert. denied 361 U.S. 829 (1959):

This is too constricted an interpretation to place on the statute. The statute means only that the life interest must be retained in connection with or as an incident to the transfer.

We are in agreement with this interpretation of the statute, and, for the reasons previously stated, we conclude that the right to the income was retained under the transfer. Moreover, we are of the opinion that petitioner's reliance on Estate of Gutchess v. Commissioner, 46 T.C. 554 (1966), in support of this assertion is misplaced. In that case we were faced with determining whether a decedent-husband had retained a life estate in the family residence incident to its transfer to his wife. We found no agreement, prearrangement, or understanding that the decedent would retain a life interest in the family residence.

We further noted (46 T.C. at 557):

Respondent also makes some argument that under Ohio law (Ohio Rev....