Sampson v. Welch

• Decision Date: 30 April 1938
• Docket Number: No. 7317-S.,7317-S.
• Citation: 23 F. Supp. 271
• Court: U.S. District Court — Southern District of California
• Parties: SAMPSON v. WELCH, Formerly Collector of Internal Revenue.

23 F. Supp. 271

SAMPSON v. WELCH, Formerly Collector of Internal Revenue.

No. 7317-S.

District Court, S. D. California, Central Division.

April 30, 1938.

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Frank Mergenthaler, of Los Angeles, Cal., for plaintiff.

Ben Harrison, U. S. Atty., and E. H. Mitchell, Sp. Asst. U. S. Atty., and Alva C. Baird and Eugene Harpole, Sp. Attys. for the Treasury Department, all of Los Angeles, Cal., for defendant.

JENNEY, District Judge (after stating the facts and summarizing the arguments as above).

This case raises a number of questions which have been perplexing the federal courts, the California courts, and legal commentators for years.¹ The issue at bar necessitates first a general determination as to the nature of the change which the adoption of section 161a effected in the wife's interest in community property in California. This court must next decide whether the wife's rights over such property are sufficient to prevent the inclusion of her share as a part of her deceased husband's gross estate, under the provisions of either section 302(a) or 302(b) of the applicable federal estate tax statute, the Revenue Act of 1926, 44 Stat. 70, 26 U.S.C.A. § 411(a, b). Finally, the court must determine whether a written though informal conveyance — from a husband to a wife of such property rights as are necessary to make her the owner of a present, existing and equal interest in all their property — is a taxable transfer within the provisions of section 302(c) or 302(d) of the same Revenue Act, 44 Stat. 70, 71, 26 U.S.C.A. § 411(c, d).

The difficulties incident to such problems are not altogether new. Some of the obstacles presented are those which have confronted all common-law judges who have attempted to analyze civil law concepts with common-law methods of thought. See opinion of Attorney General Harlan F. Stone, C.B. IV-1, at p. 25; 35 Harv. L.Rev. 47 at 66. Then, too, the attitude of the federal court that it should accept the state courts' definitions on such matters (U. S. v. Robbins, 269 U.S. 315, at page 326, 46 S.Ct. 148, 70 L.Ed. 285; Warburton v. White, 176 U.S. 484, at page 496, 20 S.Ct. 404, 44 L.Ed. 555) may handicap it because of conflicting or vague decisions, or because there are almost no state decisions to follow. This is precisely the situation we encounter when we try to interpret section 161a. In such a case the federal court can only decide the matter on the basis of what it believes the state court will ultimately and authoritatively declare. But the perils of such a course are obvious and painfully real, as witness the fate of the decision in Wardell v. Blum, 9 Cir., 276 F. 226, where the circuit court's conception of the California law was declined by the California Supreme Court in Stewart v. Stewart, 199 Cal. 318, at page 342, 249 P. 197. That situation does not, however, relieve this court of its immediate responsibility.

The problems presented here have likewise taxed the ingenuity and patience of the Attorney General and the Treasury Department, as may be seen from a brief review of the efforts of those governmental agencies to draft consistent tax policies as to California community property. On February 14, 1917, T.D. 2450 recognized that in Texas, one-half of the common estate belonged to each spouse, and indicated that if a wife could establish by evidence the community character of the property, it was includible only to the extent of one-half thereof in a deceased husband's gross estate. This ruling was based upon state authorities holding that the interests of spouses in community gains were equal, even though the husband retained management and control. Thereafter, on August 24, 1920, Attorney General Palmer, in an opinion addressed to Secretary of the Treasury Houston, ruled that community income was divisible between the spouses of Texas, and, as such, was reportable one-half by the wife and one-half by the husband (3 C.B. 221). On March 3, 1921, T.D. 3138 (4 C.B. 238), based on a detailed examination of state statutes and decisions in another opinion by the Attorney General, declared that in all community property states except California, not only could income be reported one-half by each spouse, but that the half interest of the wife, being vested, was not properly includible for estate tax purposes in the deceased husband's gross estate. By T. D. 3569, dated March 27, 1924 (C.B.III-1, 92) this rule was extended to include California, as to both income and estate taxes. This latter ruling, resting on the decision in Wardell v. Blum, 9 Cir., supra, was shortly thereafter withdrawn for further consideration (T.D. 3596; C.B. III-1, 101). Then T.D. 3670 issued on February 7, 1925 (C.B. IV-1, 19), restored the former holding of T.D. 3569 in so far as it related to estate tax, but declined to reinstate it as to income tax; the government apparently intending to secure an answer to the latter question by prosecuting litigation through to the United States Supreme Court. This was actually done, and the decision in United States v. Robbins, 269 U.S. 315, 46 S.Ct. 148, 70 L.Ed. 285 determined the matter against the taxpayer, holding that husbands and wives in California could not divide community income for federal income tax purposes. Following this case and taking into consideration the decision of the California Supreme Court in Stewart v. Stewart, supra, the Treasury Department by T.D. 3891 (C. B. V-2, p. 232) withdrew its former expressions of policy and declared that in computing a California decedent's gross estate for tax purposes, there should be included all of the community property. This view was indorsed in Talcott v. United States, 9 Cir., 23 F.2d 897. Thus the problem was apparently settled, although in so doing a rule was adopted with regard to California which conflicted with that approved for other community property states.

Meanwhile the Legislature of California had made certain changes in the community property laws by the amendments of 1923 and 1927. These changes induced new efforts by taxpayers to bring California into line with the rule of other community property states. As a result the Supreme Court of the United States in United States v. Malcolm, 282 U.S. 792, 51 S.Ct. 184, 75 L.Ed. 714, answering certain questions certified to it by the Circuit Court of Appeals for the Ninth Circuit, 47 F.2d 1087, declared that a wife has, under section 161a of the Civil Code of California, such an interest in the community income that she should separately report the same and pay tax on one-half thereof. Although the question was asked and answered as above, the court without comment referred to the cases of Poe v. Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239; Goodell v. Koch, 282 U.S. 118, 51 S.Ct. 62, 75 L.Ed. 247, and Hopkins v. Bacon, 282 U.S. 122, 51 S.Ct. 62, 75 L.Ed. 249, dealing with a similar problem in other community property states. In these cases, there was a strong intimation that the interest of the wife was reportable separately because it was vested, as determined by the prevailing decisions of the respective state courts. No such pronouncement has as yet issued from the Supreme Court of California.

Thus while California spouses are permitted to divide their income from community property under the prevailing rule, the related question as to what may be done in computing estate taxes is still open. The current practice of the Treasury Department, as admitted by the government — though not supported by any official ruling — is to consider that the wife's interest in community property acquired after July 29, 1927, is not includible in the deceased husband's estate. But there is no authoritative decision to which this court can refer summarily. Accordingly, a full consideration of all the problems seems to be required.

Fully conscious of these difficulties, the court in the case at bar turns first to the problem of the precise effect of this concededly valid agreement of May 23, 1929, in an effort to ascertain the definite characteristics of the property interest, if any, which passed as a result of it. Once we have defined the quantity and quality of that interest, we may then properly consider whether it falls within the provisions of the federal estate tax statute.

It will be noted that this agreement closely follows the wording of section 161a. It was the apparent intention of the parties by that instrument — and the court finds that it was the actual effect thereof — that Mr. Sampson transferred to Mrs. Sampson such an interest in all their property, previously acquired, as would have accrued to her under section 161a had such property been community property acquired after the passage of that statute. If this section made no substantial change in the rights which a wife might legally enjoy over community property, obviously the agreement made no substantial alteration in the rights which Mrs. Sampson was to enjoy. If, on the other hand, section 161a did make material changes in the rights of the wife, then the agreement effectively executed a similar rearrangement of the Sampsons' marital property rights. The basic question therefore is: What was the effect of section 161a?

It should be noted that both section 161a and the agreement incorporate by reference the provisions of sections 172 and 172a of the California Civil Code which deal with the management and control of community property. These sections are as follows:

"§ 172. Management of community personal property. The husband has the management and control of community personal property, with like absolute power of disposition, other than testamentary, as he has of his separate estate; provided, however, that he cannot make a gift of such community personal property, or dispose of the same without a valuable consideration, or sell, convey, or encumber the furniture,...