U.S. v. Elam

• Decision Date: 02 May 1997
• Docket Number: No. 95-56073,95-56073
• Parties: -2391, 65 USLW 2742, 97-1 USTC P 50,399, 97 Cal. Daily Op. Serv. 3257, 97 Daily Journal D.A.R. 5640 UNITED STATES of America, Plaintiff-Appellant, v. Nancy A. ELAM, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1036

112 F.3d 1036

79 A.F.T.R.2d 97-2391, 65 USLW 2742,

97-1 USTC P 50,399,

97 Cal. Daily Op. Serv. 3257,

97 Daily Journal D.A.R. 5640

UNITED STATES of America, Plaintiff-Appellant, v. Nancy A. ELAM, Defendant-Appellee.

No. 95-56073.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 4, 1996.

Decided May 2, 1997.

Annette M. Wietecha, Tax Division, United States Department of Justice, Washington, DC, for plaintiff-appellant.

Donald Lavi, Agoura Hills, CA, for defendant-appellee.

Appeal from the United States District Court for the Central District of California, James M. Ideman, District Judge, Presiding. D.C. No. CV-93-01744-JMI.

Before: GOODWIN, WIGGINS, and JOHN T. NOONAN, Circuit Judges.

WIGGINS, Circuit Judge:

The Government appeals from a judgment in favor of a taxpayer. Nancy Elam claimed a refund on her 1989 separate tax return, based on half of the overpayment credit she and her ex-husband had from their 1988 joint return. The district court ruled on summary judgment that the Government could not use the couple's prenuptial agreement to show that the overpayment arose from her husband's separate property because the agreement could not bind the Government. Thus, the court found that the Government failed to rebut California's presumption that the overpayment was community property in which the taxpayer had a one-half interest. We have jurisdiction for the appeal under 28 U.S.C. § 1291. We REVERSE and REMAND for trial.

Background

The day before their marriage, Nancy and Dr. Michael Elam signed a prenuptial agreement. The agreement provided that all income from Dr. Elam's personal services would be his separate property "as though the [ ] marriage had never been entered into" and also that all property he owned before the marriage (and any property into which it was converted) would remain his separate property.

The Elams filed a joint tax return for 1988 as a married couple. They claimed an overpayment of $176,988. The couple requested the overpayment be applied to their 1989 tax payment. During 1989, the couple separated, with the divorce becoming final on February 4, 1990. Following the couple's separation, Dr. Elam filed a separate tax return for 1989, claiming the entire $176,988 credit carried over from 1988. He eventually received credit for this amount.

In 1991, Nancy filed a delinquent 1989 tax return, claiming a credit for half the overpayment from the 1988 joint return ($88,494). As a result, she ultimately received a refund for $71,537, after offsetting her tax liability for 1989 and correcting for a $1500 miscalculation.

The Government sought to recover the $71,537 refund in district court, claiming the 1988 overpayment was Dr. Elam's separate property to which Nancy was not entitled. The district court granted summary judgment in favor of Nancy. The district court ruled that the Government had failed to show the overpayment was Dr. Elam's separate property because the couple's prenuptial agreement was irrelevant as a matter of law to the property status of the overpayment. The court reasoned that the prenuptial agreement was irrelevant because it was not binding on the Government. Thus, the court held that the Government failed to rebut California's community property presumption which entitled each spouse to claim half the overpayment credit. The Government appeals.

Discussion

We review de novo the district court's summary judgment based on its conclusion The Internal Revenue Code states that overpayment in one year may be credited against any tax liability "on the part of the person who made the overpayment...." 26 U.S.C. § 6402(a). Simply put, the person who overpaid is entitled to claim the overpayment credit. This case turns on whether the Government may rely on the Elams' prenuptial agreement to determine that the 1988 overpayment arose from Dr. Elam's separate property and not from the couple's community property. Nancy is not entitled to the overpayment if the Government can rely on the prenuptial agreement to show that the 1988 overpayment was generated by Dr. Elam's separate property.

that the prenuptial agreement was not relevant as a matter of law. Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir.1994).

A joint return does not itself create equal property interests for each party in a refund. Spouses who file a joint return have separate interests in any overpayment, the interest of each depending upon his or her relative contribution to the overpaid tax. Gordon v. United States, 757 F.2d 1157, 1160 (11th Cir.1985) (finding the bulk of tax withholding claimed on a joint return was from husband, so bulk of refund should be apportioned to husband); Rosen v. United States, 397 F.Supp. 342, 343 (E.D.Pa.1975); Rev.Rul. 74-611, 1974-2 C.B. 399 ("Thus, a joint income tax return does not create new property interests for the husband or the wife in each other's income tax overpayment."); see also Conklin v. Commissioner, 897 F.2d 1027, 1031 (10th Cir.1990) (citing Rev.Rul. 74-611, 1974-2 C.B. 399). Thus, the Elams' decision to file a joint tax return in 1988 does not change the underlying property interests at stake.

Because the couple's actual property interests are determinative even where a joint return is filed, we turn to analyzing those interests. ¹

All property acquired during marriage in California is presumptively community property. Cal.Fam.Code § 760. Further, property inextricably commingled with community property becomes community property. Austin v. Austin, 190 Cal.App.2d 45, 11 Cal.Rptr. 593, 595 (1961). If the Government fails to rebut the presumption the Elams' property is community property, then the district court is correct that each spouse is entitled to claim one-half of the 1988 overpayment credit.

California permits agreements between the spouses, including prenuptial agreements, to transmute community property into separate property. Cal.Fam.Code § 850(a). In their prenuptial agreement, the couple agreed that Dr. Elam's earnings and other property were his separate property. The Government contends that the prenuptial agreement is therefore relevant to rebut the community-property presumption because it shows the overpayment was Dr. Elam's separate property.

Transmutation agreements that are valid under state law are also binding on the Government for federal tax purposes. Helvering v. Hickman, 70 F.2d 985, 987 (9th Cir.1934) (finding wife's income was not taxable on the husband because transmutation agreement kept her earnings as separate property); see also United States v. Brodie, 858 F.2d 492, 499 (9th Cir.1988) ("To be effective for...