Hay v. Comm'r of Internal Revenue

• Decision Date: 30 November 1949
• Docket Number: Docket No. 19918.
• Citation: 13 T.C. 840
• Parties: GILBERT B. HAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

13 T.C. 840

GILBERT B. HAY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 19918.

Tax Court of the United States.

Promulgated November 30, 1949.

The property rights of petitioner and his wife held finally determined under the laws of the State of Washington by an interlocutory decree of divorce issued by a court of that State, incorporating a property settlement agreement previously entered into by the parties, and the entire income of a business separately owned by the petitioner from the date of the interlocutory decree to the date of the final decree of divorce held taxable to petitioner. Clifford Hoof, Esq., for the petitioner.

William E. Koken, Esq., for the respondent.

OPINION.

LE MIRE, Judge:

This proceeding involves a deficiency in income tax for the year 1945 in the amount of $5,812.53. The sole question in issue is whether petitioner's business income for the period between the date of an interlocutory decree of divorce and the date of a final decree of divorce is taxable to him as separate income, or whether it was community income.

The facts are set out in a written stipulation which, together with the documents attached thereto, we adopt as our findings. The material facts are as follows:

The petitioner is an individual, residing in Seattle, Washington. His income tax return for the year 1945 was filed with the collector for the district of Washington. During 1945 the petitioner operated a chain of meat markets in Seattle, known as Hay's Markets.

The petitioner and Mary Margaret Hay were married in Seattle on July 19, 1937, and thereafter lived continuously in Seattle throughout the period here involved.

Subsequent to the institution of a divorce action by the petitioner's wife, she and petitioner entered into a ‘Property Settlement Agreement,‘ which provided in part as follows:

WHEREAS they desire to make a property settlement in the event an interlocutory decree of divorce is granted to either of the parties in the above-entitled case;

NOW, THEREFORE, it is mutually agreed by and between the parties that, in the event an interlocutory decree of divorce is entered herein, the said decree shall provide as follows:

1. That the plaintiff shall have as her sole and separate property the following:

(a) The home located at 6543— 49th Avenue, Southwest, Seattle, Washington.

(b) All the furniture, furnishings, fixtures and personal effects located in said home;

(c) One Buick automobile, Motor No. 53958293;

(d) Any personal bank accounts, cash and bonds in her possession;

(e) The sum of Twenty-five Thousand Dollars ($25,000.00).

2. That the defendant shall have as his sole and separate property all the remaining cash, bonds and personal property owned by the community composed of plaintiff and defendant.

6. No alimony or support money shall be awarded to the plaintiff.

7. Each party shall pay his or her own costs and attorney's fees.

8. Each of the parties agrees to execute whatever instruments or documents may be necessary to effectuate the aforesaid provisions.

9. This agreement shall be filed in the above-entitled case and approved by the court.

The agreement also provided for the custody of the three children, for monthly payments for the maintenance of the children, and for the maintenance by petitioner of a specified amount of life insurance in favor of the children.

On April 30, 1945, an interlocutory decree of divorce was granted to the petitioner's wife by the Superior Court of the State of Washington for King County. The court found in paragraph V of the findings of fact and conclusions of law as follows:

That during the married life of the parties hereto, they have accumulated community property of the approximate value of $57,000.00. That the parties have entered into a property settlement agreement with the advice and assistance of their respective counsel. That said property settlement agreement is a fair, just and equitable one, and should be approved by this court and incorporated as a part of the interlocutory decree.

The interlocutory decree of divorce in similar language declared the property settlement agreement to be fair, just, and equitable; approved and confirmed it; and incorporated it as a part of the decree.

In compliance with the provisions of the interlocutory decree of divorce the petitioner, during the months of May and June 1945, executed and delivered the necessary documents of title and transferred possession of the money and property described in paragraph 1 of the property settlement agreement to his wife.

A final decree of divorce was granted to the petitioner's wife on December 7, 1945, by the Superior Court of the State of Washington for King County. The decree found that the petitioner and his wife had lived apart since the date of the interlocutory decree, approved and confirmed the interlocutory decree in all respects, and formally terminated the marriage of petitioner and his wife.

During their married life the petitioner and his wife accumulated community property of the total approximate value of $57,000. The property settlement agreement which they entered into was in contemplation of divorce and was intended to make a complete and final settlement of all their community property in the event an interlocutory decree of divorce was granted to either party. The agreement was incorporated as a part of the interlocutory decree, which expressly disposed of all the community property of the petitioner and his wife. There was no appeal from the interlocutory decree, and it was never set aside or modified.

In their separate income tax returns for 1945 the petitioner and his wife reported as community income the income from the business of Hay's Markets for the year 1945 earned up to December 7, 1945, the date of the final decree of divorce. The respondent determined that only that portion of the business income for 1945 earned prior to April 30, 1945, the date of the interlocutory decree of divorce, was community income and that the portion earned thereafter was petitioner's separate income. Neither the petitioner nor his wife reported as community income the compensation for personal services earned by the petitioner's wife subsequent to the date of the interlocutory decree.

The petitioner contends that, since the State of Washington is a community property state and the wages and earnings of the husband during the existence of the marital community constitute community property, all of his earnings up to the date of final dissolution of his marriage are community property. Respondent contends that the interlocutory decree of divorce granted to petitioner's wife on April 30, 1945, was intended to, and did, dispose completely and finally of all the community property of the petitioner and his wife, and that after that date all of petitioner's business income was his separate property.

The status of property, whether separate or community, is determined in Washington as of the date of its acquisition. Rogers v. Joughin, 277 Pac. 988. Ordinarily, all property not acquired prior to marriage by gift, devise, or descent but acquired after marriage by either the husband or the wife, or both, is community property. Remington's Revised Statutes of Washington, Secs. 6890, 6891, 6892. However, where the...