Wiener v. Fernandez

• Citation: 60 F. Supp. 169
• Decision Date: 31 March 1945
• Docket Number: No. 936.,936.
• Parties: WIENER et al. v. FERNANDEZ, Collector of Internal Revenue.
• Court: U.S. District Court — Eastern District of Louisiana

60 F. Supp. 169

WIENER et al. v. FERNANDEZ, Collector of Internal Revenue.

No. 936.

District Court, E. D. Louisiana, New Orleans Division.

March 31, 1945.

Herold, Cousin & Herold and Sidney L. Herold, all of Shreveport, La., and Phelps, Dunbar, Marks & Claverie and Charles E. Dunbar, all of New Orleans, La., for plaintiffs.

Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe, Helen R. Carloss, and James P. Garland, Sp. Assts. to the Atty. Gen., and Herbert W. Christenberry, U. S. Atty., and A. P. Schiro, III, Asst. U. S. Atty., both of New Orleans, La., for defendant.

R. N. Gresham, of San Antonio, Tex., Palmer Hutcheson, of Houston, Tex., J. P. Jackson, of Dallas, Tex., and Harry C. Weeks, of Fort Worth, Tex., amici curiae.

BORAH, District Judge.

This action was filed by the universal legatees and heirs of Sam Wiener, Jr., deceased, to recover an alleged overpayment of federal estate taxes in the amount of $162.329.59, with interest. The case was tried by the court without a jury on an agreed statement of facts. The stipulated facts, incorporated herein by reference, reveal the following:

Plaintiffs are the sons of Sam Wiener, Jr., who died on December 10, 1942, in Shreveport, Louisiana, leaving a last will and testament in which he constituted the present plaintiffs his sole heirs. Decedent was married in Shreveport, Louisiana, in the year 1907 to Florence Loeb with whom he lived from that time until his death.

"During the marriage, Sam Wiener, Jr., was engaged in many different kinds of business, such as the grocery business, lumber business, real estate and later, in investments of various character. All assets of every character, movable and immovable, which stood of record or in the possession of the decedent at the time of his death (with the exception of certain realty in Mississippi) was acquired by, and fell into the ownership of the marital community which had existed between him and his surviving wife. At no time during the existence of the community was Mrs. Wiener ever employed in a gainful occupation outside the household, nor did she receive from any one salary or other compensation for such personal services, nor was any part of the community property derived originally from any separate property owned by Mrs. Wiener."

In the federal estate tax return filed on behalf of the estate of Sam Wiener, Jr., deceased, plaintiffs reported the entire value of all of the separate property owned by decedent, plus the one-half of the net value of the community which had existed between decedent and his surviving wife. Included in said community, and therefore reported only to the extent of one-half thereof, were fifteen policies of life insurance contracted for by decedent during the said marriage, all naming the wife as beneficiary, and each and all of the premiums on which had been paid with community funds. Each of said policies reserved the right to the insured of changing the beneficiary.

Under the return as filed there was an estate tax liability of $107,078.47 and this sum was paid.

In the audit of the federal estate tax return the Commissioner of Internal Revenue assessed a deficiency of federal estate taxes of $165,821.57, which together with interest in the amount of $3,807.08 was paid by plaintiffs to defendant herein on August 10, 1944. The additional assessment resulted in part from the inclusion by the Commissioner of Internal Revenue in decedent's taxable estate of the entire value of all of the community property of every character and the inclusion in the taxable estate of the total proceeds of the life insurance above referred to.

Claim for refund of the amount sued for herein was filed by plaintiffs on August 12, 1944, and said claim was rejected in its entirety by the Commissioner of Internal Revenue on October 31, 1944.

"There exists no controversy between the parties respecting valuations. The amount claimed by the plaintiffs in their claim for refund, and which forms the subject matter of this suit, represents that part of the deficiency assessment resulting entirely from the application by the Bureau of Internal Revenue of the provisions of Section 402(b) (2) and of Section 404(a) of the Federal Revenue Act of 1942, 26 U. S.C.A. Int.Rev.Acts; that is to say, in the inclusion by the Bureau of Internal Revenue in the taxable estate of the decedent the entire community property (rather than only one-half thereof as returned), including the entire proceeds of the life insurance above referred to."

Section 811, subsections (e) and (g) of the Internal Revenue Code, the applicable statute, was amended by Sections 402(b) (2) and 404(a), respectively, of the Revenue Act of 1942. This case presents the question of the constitutional validity of Sections 402(b) (2) and 404(a). For convenience of discussion I shall hereinafter refer only to Section 402(b) (2) as the constitutional questions raised by plaintiffs in respect to this amending section apply with equal force to Section 404(a).

Section 402(b)(2) of the Revenue Act of 1942 provides that there shall be included in a decedent's gross estate the full value of all property "to the exent of the interest therein held as community property by the decedent and surviving spouse under the law of any State, Territory, or possession of the United States, or any foreign country, except such part thereof as may be shown to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse. In no case shall such interest included in the gross estate of the decedent be less than the value of such part of the community property as was subject to the decedent's power of testamentary disposition."

By its express terms this statute provides that all property held by a decedent and spouse in community shall be included in the gross estate of the decedent, except that portion shown to have been received as compensation for personal services actually rendered by the survivor, or derived from such compensation, or from the separate property of the survivor, but in no case shall such interest included in the gross estate be less than the share over which the decedent had a testamentary power of disposition.

The community property with which we are concerned in the instant case is of the type which does not fall within either exception in the statute. We have therefore a type of community property in which the first spouse to die is taxed on the whole, including the survivor's share.

The fact that section 402(b) (2) allows all property which can be shown to have been received for personal services actually rendered or derived originally from such compensation or from separate property of the surviving spouse does not operate in aid of its validity in Louisiana. All income of the husband is presumed under the law of this state to be community property. Civil Code Art. 2405. Furthermore, "compensation for personal services actually rendered" falls into the community (Article 2402) regardless of whether such service be rendered by the husband or by the wife living together as such. To charge the heirs with the burden of showing what part of the community consisted of the survivor's separate earnings or separate property would not only be impracticable but would have the effect of denying one of the most important principles of the community property system, the theory that the gains of the community automatically vest in the husband and wife equally, each having full ownership of one-half of such gains. Arts. 2402, 2406. Moreover, section 402(b) (2) itself denies this allowance by providing that in no case may the gross estate be less than the value of such part of the community property as was subject to the decedent's power of testamentary disposition. Thus the statute first states, in effect, that community property, for taxation purposes, will be regarded as the separate property of each spouse to the extent that it was earned by that spouse, then suddenly announces a recognition of the surviving spouse's half interest in the community, regardless of its source by providing that the estate of the spouse dying first is taxable to the extent of at least one-half the community in all instances.

The federal estate tax is not a tax on property, but on the transmission of property from the dead to the living. United States v. Perkins, 163 U.S. 625, 16 S.Ct. 1073, 41 L.Ed. 287; Plummer v. Coler, 178 U.S. 115, 20 S.Ct. 829, 44 L.Ed. 998. This statute abolishes completely as to community partnership property only the test of ownership at death as being the controlling factor in measuring the tax, and substitutes therefor, as to the bulk of such property, the conception of dual, but complete, ownership by both spouses, so that this bulk is taxed as a part of the gross estate on the first to die, depending not on source, actual ownership or management, but upon the accidental circumstance of which spouse predeceases the other. As to that property received or derived from compensation for personal services actually rendered or traceable to income from separate property, the source controls only in the event the first to die received the compensation or owned the separate property, and all such property must be included in such recipient's gross estate. If the first to die did not receive the compensation or the derivatives from separate property, source is completely disregarded, and one-half is included in the gross estate of such decedent. Power of testamentary disposition limits the amount to be included in the gross estate, so it can not in any case be less than the amount over which the decedent had power of testamentary disposition and thus in certain events a third and different rule of taxation is applied.

"The nature and character of the right of the wife in the community for the purpose of taxation (is)...