United States v. Merrill

• Decision Date: 02 March 1954
• Docket Number: No. 13390.,13390.
• Citation: 211 F.2d 297
• Parties: UNITED STATES v. MERRILL.
• Court: U.S. Court of Appeals — Ninth Circuit

211 F.2d 297 (1954)

UNITED STATES v. MERRILL.

No. 13390.

United States Court of Appeals Ninth Circuit.

March 2, 1954.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Thomas R. Winter, Fred Youngman, Helen Goodner, Audley J. Godfrey, Jr., Sp. Assts. to Atty. Gen., Charles P. Moriarty, U. S. Atty., Seattle, Wash., for appellant.

Wright, Innis, Simon & Todd, Seattle, Wash., for appellee.

Before HEALY, BONE and POPE, Circuit Judges.

BONE, Circuit Judge.

Appellee brought this action for refunds of income taxes paid by him for the taxable years 1939 and 1940. The facts are undisputed. Appellee's wife died testate in the State of Washington on April 9, 1939. In her will, which was of the non-intervention type, she named appellee as executor and bequeathed her one-half interest in the community property, after payment of certain minor bequests to appellee in trust to pay the income to himself for life.

After the will was admitted to probate on April 21, 1938, appellee immediately separated the community property into two equal parts and carried only his deceased wife's one-half share of this property in his books of account as executor. He carried the other one-half of the community property in a separate set of books as his individual property.

On November 22, 1939 the probate court entered a decree of distribution directing that the estate be distributed one-half to appellee as "his community interest" and the other one-half, after payment of the minor bequests, to himself as trustee in accordance with his wife's will. The decree further authorized a payment of $20,000 to appellee as executor's fees.

Thereafter and on December 23, 1939 appellee paid himself $12,500 as part of his executor's fee from his wife's segregated one-half share of the community property. He reported this amount as income in his individual income tax return for 1939 and paid the tax thereon.

On December 10, 1940 appellee received the remaining $7500 due him as executor's fee, again out of his wife's segregated one-half share of the community property. Subsequently an Internal Revenue Agent who was investigating the estate tax return filed by appellee as executor informed appellee that only one-half of the executor's fee could properly be deducted from the wife's estate for federal estate tax purposes. Appellee paid the estate tax in accordance with this advice. After consulting with an accountant, appellee on December 31, 1940 made entries in his personal books of account and the books of the estate so as to show an indebtedness by him to the wife's estate of $10,000 — the amount which had been erroneously paid him as executor's fees out of his wife's share of the community property. These accounts were thereafter balanced by a cash payment by appellee to the trust estate in August of 1943.

Appellee did not report the $7500 received by him as executor's fee in 1940 in his income tax return for that year. Subsequently an Internal Revenue Agent recommended a deficiency assessment based upon appellee's failure to report this amount as income, and appellee thereupon paid the tax alleged to be due. He filed timely claims for refund of the income taxes paid by him on $2500 of the $12,500 he received as executor's fees in 1939, and all of the income taxes paid on the $7500 he received in 1940. This suit followed, and the court below awarded the refunds claimed.

In Washington the entire community property is subject to administration on the death of one of the spouses, and to the community debts and expenses of administration. See Commissioner of Internal Revenue v. Larson, 9 Cir., 131 F.2d 85, and cases cited in footnote 2 thereof; Thatcher v. Capeca, 75 Wash. 249, 253-254, 134 P. 923. In the instant case the entire $20,000 executor's fee was originally paid out of the deceased wife's segregated one-half share of the community property. As both parties concede, this was a mistake, since only one-half ($10,000) of the fee was properly chargeable against the deceased wife's share of the community property. The court below apparently took the view that, by virtue of the above noted 1940 bookkeeping entries adjusting the mistaken overpayment of $10,000 from the wife's estate, and the subsequent payment of that amount by appellee to the trust set up pursuant to the wife's will, the $20,000 executor's fee was, in effect, charged one-half against the deceased wife's one-half share of the community property and one-half against appellee's share as surviving spouse. This would seem to be a correct interpretation of what was accomplished by the transaction.

The sole question on which this case was decided in the court below was whether, when a wife dies in the State of Washington and the surviving husband serves as executor of her estate, an executor's fee paid to the husband from community funds is taxable in its entirety to him. Appellee contended, and the trial court agreed, that since one-half of the executor's fee paid appellee was chargeable against his own share of the community property, to that extent the fee did not constitute income to him.

The court below relied upon Bishop v. Commissioner, 9 Cir., 152 F.2d 389. In that case we held that upon the death of a husband domiciled in California, (1) only one-half of the income from community property during the period of administration was taxable to the deceased husband's estate, the other one-half being taxable to the surviving wife; and (2) the wife, who received a fee as executrix from community funds, was taxable only upon one-half thereof, the other half having been paid from the wife's own share of the community property (the precise problem involved here). The decision was grounded on the proposition that under California community property law a surviving wife is the owner of a one-half share of the community property during the period of administration of her husband's estate. We referred to California statutes providing that husband and wife have "present, existing and equal interests" in the community property, and that upon the death of either spouse, one-half of the community property "belongs" to the survivor. 152 F.2d at page 390, quoting section 161a, Cal.Civ.Code, and section 201, Cal. Probate Code.

Appellant relies upon Commissioner v. Larson, 9 Cir., 131 F.2d 85. In that case we held that income from Washington community property in the hands of the executor of a deceased husband's estate was taxable in its entirety to the estate, and that no part thereof was taxable to the surviving wife. Appellant correctly argues that the theory adopted by us in the Larson case, if followed here, would require a reversal. For if, as that case holds, the deceased wife's estate — a separate taxable entity¹ — embraces the whole of the community property for income tax purposes, it follows that expenditures, including executor's fees, made to the surviving spouse from community funds must be allowed the estate in full as deductions,² and must be held taxable in full as income to the surviving spouse. Appellee suggests distinctions between the facts of the instant case and those of the Larson case, but none, we think, are significant.³

In the Bishop case we distinguished the Larson case on the ground that the law of Washington, as interpreted by us in the Larson case, made the executor of the estate of a deceased spouse the "owner" of income from all of the community property during the period of administration. The Larson case, having been decided on the basis of Washington law, would appear to be controlling in favor of appellant. Appellee, however, argues that, despite what is said in the Bishop and Larson cases, there is actually no difference in the pertinent laws of Washington and California, that the Larson and Bishop cases are therefore in conflict, and that the latter case should be followed.

We are forced to agree with appellee that there is no real difference between the law of California and that of Washington for purposes of the present problem. As has been observed by the Supreme Court of the United States, a husband and wife in Washington (as in California) have vested, equal, undivided interests in the community property. Poe v. Seaborn, 282 U.S. 101, 111, 51 S.Ct. 58, 75 L.Ed. 239; see In re Coffey's Estate, 195 Wash. 379, 382, 81 P.2d 283; Commissioner of Internal Revenue v. Larson, supra, 131 F.2d at page 87. The Washington statute dealing with the disposition of community property on the death of one of the spouses reads as follows:

"Upon the death of either husband or wife, one-half of the community property shall go to the survivor, subject to the community debts, and the other half shall be subject to the testamentary disposition of the deceased husband or wife, subject also to the community debts. * * *" (Emphasis ours.) Remington's Revised Statutes of Washington, Sec. 1342.

Under the decisions of the Supreme Court of Washington the words "shall go" in the quoted statute mean simply that a spouse's share of the community property shall continue to belong to such spouse on the death of the other member of the marital community, as is the case in California. In the case of In re Coffey's Estate, 195 Wash. 379, 382, 81 P.2d 283, 284, the Court said: "The interest of the wife in the community estate in this state is not a contingent or expectant interest, but a present, undivided, one-half interest. Omitting citations. No new right or interest is generated in the wife by the death of her husband; his death merely affords the occasion for the termination of the husband's interest in the community estate." See also Wittwer v. Pemberton, 188 Wash. 72, 76, 61 F.2d 993, 65 F.2d 218; Redelsheimer v. Zepin, 105 Wash. 199, 177 P. 736.

That the surviving spouse's share of the community property is not a part of the estate of the deceased spouse under Washington law — that it simply "continues to belong" to the survivor — has been recognized by this court for...