Wood v. CIR

• Decision Date: 23 February 1960
• Docket Number: No. 17892.,17892.
• Citation: 274 F.2d 268
• Parties: Myrtle J. WOOD, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

274 F.2d 268 (1960)

Myrtle J. WOOD, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17892.

United States Court of Appeals Fifth Circuit.

January 15, 1960.

Rehearing Denied February 23, 1960.

Robert J. Hobby, Wentworth T. Durant, Dallas, Tex., for petitioner.

Carolyn R. Just, Joseph Kovner, Marvin W. Weinstein, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Arch M. Cantrall, Chief Counsel, Internal Revenue Service, Claude R. Marshall, Sp. Atty., I. R. S., Washington, D. C., for respondent.

Before RIVES, Chief Judge, and HUTCHESON and TUTTLE, Circuit Judges.

TUTTLE, Circuit Judge.

This is a petition to review the decision of the Tax Court reported in 31 T.C. 528.

Petitioner is the divorced wife of Fred M. Wood. Before the divorce the community owned a 45% interest in certain oil and gas production. At the time of divorce the community was indebted to others in the amount of $25,510.25. The divorce decree awarded Mrs. Wood:

"(3) A one-half interest in that 45% interest owned by the community in connection with the Pierce Withers estate at Houston, Texas, or a total to the Plaintiff of 22½% of said interest after the payment of community debts with a provision that Fred M. Wood will assume Ten Thousand ($10,000.00) Dollars of the existing community debt of the approximate total of Twenty-five Thousand Five Hundred Ten ($25,510.25) and 25/100 Dollars;" (Emphasis added).

Mrs. Wood assigned one-third of her 22½% interest to her attorney, Sam Pittman, for services rendered her in her divorce proceedings.

The income from the interest was impounded by a state court order during the tax years in question (1951 and 1952) and for subsequent years at the instance of creditors of the community who sought to reach it to satisfy the community debts. Mrs. Wood received none of the payments until after a decree entered by the Texas state court in the creditors' suit in 1957.

Mrs. Wood reported no income from this source for the tax years, although the share actually produced $4478.05 in 1951, and $2751.04 in 1952. These funds were ultimately paid out to creditors of the community as decreed by the Texas court.

The Commissioner contends that the divorce decree awarded petitioner a present interest in the mineral interest subject only to payment of the community debts; that payments to the community creditors were for Mrs. Wood's benefit and the sums were therefore taxable to her.

Taxpayer contends that the later Texas court decree expressly held that the divorce decree conveyed no title to Mrs. Wood in praesenti, but conveyed her only a remainder interest in the minerals after the community debts were paid; that since, after the divorce, the community debts were not chargeable to her (even though collectible out of her "share" of the community property) discharge of the debts was not for her benefit and thus did not thereby become income to her.

We agree with the taxpayer. Several of the legal propositions asserted by the parties are not in conflict. The first is: Community income is taxable one-half to each member of the community; the second is: After divorce the wife is not personally liable for the payment of community debts; the third is that: As stated by the Tax Court in this case, "we agree that we are bound by the determination of the state court as to the rights of the parties in the state court proceedings," 31 T.C. 528. See, as to this point, Freuler v. Helvering, Commissioner, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634; Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465.

There is no doubt that as long as the community continued each spouse was taxable on one-half the income. This was so even though the entire income might be consumed in discharging community debts. The divorce decree, however, terminated the community. The property set aside for the wife in the divorce decree became the separate property of the wife. It is contended by petitioner that the property set aside for her was a reversionary interest in the one-half interest in the 45% production and that no payments made to discharge the community debts before the reversion vested in her could be charged to her as income.

The government says the Tax Court correctly stated:

"We do not understand the district court for the County of Nueces, Texas, decided the question of title to the property."

The government, in its brief says:

"But, on analysis, it is immediately seen that the * * * court did no more than decide that taxpayer had no rights to the funds in the court\'s custody, as her separate property, against the creditors of the community." (Emphasis added.)

The basic fallacy with the conclusion of the Tax Court and the Commissioner is that they appear not to have critically read the state court's decree. It unquestionably, and in precise terms, found as to title to the property, i. e., the oil and mineral interests. No one can now contend that this is not title to property. Ferguson v. Commissioner, 5 Cir., 45 F.2d 573. The state court was called upon to construe the decree of divorce.¹ It held:

"It Further Appears to the Court from the evidence adduced at the trial of this cause, and the Court finds as a matter of fact and of law, that the divorce decree hereinabove described which was rendered in the case of Myrtle Wood, vested in the said Myrtle Wood, as a femme sole, only a reversionary interest in and to the mineral interests and estates hereinabove described, and that the said Myrtle Wood, as a femme sole, owned and held no rights, titles, or interests in praesenti thereto until such time as the claims of the creditors of the former community estate of Fred M. Wood and Myrtle Wood were fully satisfied and discharged, and that, therefore, the said Myrtle Wood is not the owner of any rights, titles, or interests in and to any of the moneys or funds impounded in the registry of this Court:

"It Is, Therefore, Ordered, Adjudged, and Decreed by the Court that Myrtle Wood, a femme sole, had no rights, titles, or interests in the mineral interests and estates involved in this proceeding prior to the entry of this Order, and that she recover none of the moneys or funds impounded in the Registry of this Court.

"However, It Further Appearing to the Court, and the Court finding as a matter of fact and of law, that the satisfaction and discharge of the claims of those creditors of the former community estate of Fred M. Wood and Myrtle Wood hereinabove described, all as has been hereinabove provided, thereby renders the rights, titles, and interest of the said Myrtle Wood, a femme sole, in and to the mineral interests and estates hereinabove described as rights, titles, and interests in praesenti, and as and from the date of this judgment, the said Myrtle Wood is the owner of an undivided Four-Eighteenths (4/18ths) interest in and to the mineral interests and estates hereinabove described.

"It Is, Therefore, Ordered, Adjudged and Decreed by the Court that Myrtle Wood, a femme sole, do have and recover the title to and possession of an undivided Four-Eighteenths (4/18ths) interest in and to the mineral estates and interests hereinabove described as constituting the subject matter of this suit, and that the said Myrtle Wood, a femme sole, do have and recover the title and possession of said undivided Four-Eighteenths (4/18ths) interest in and to said mineral estates free and clear of any and all assignments, liens (legal or equitable), claims, demands, and encumbrances which are, or could be, asserted, claimed, owned, or held by any of the other parties to this suit, it being further ordered, adjudged and decreed by the Court that the title and possession of the said Myrtle Wood to said Four-Eighteenths (4/18ths) interest in said mineral estates be, and the same is hereby, quieted." (Emphasis added.)

The Commissioner does not here challenge the right of the court to pass specifically on the question of title in the state of the pleadings before it. Taxpayer, on the other hand makes a convincing argument to the effect that such issue was necessarily passed on. In such circumstances, we must take the state court decree at its face value. So doing, we conclude that Mrs. Wood had no title to the estate until all community debts were paid; that the debts were not her personal debts; and were not paid for her benefit; thus she had no income from the property during the tax years.

The fact that the income was Mrs. Wood's before divorce and later became hers after all debts were paid is in no way inconsistent with the holding of the state court that she had no title or interest during the time that the community debts (no longer chargeable to her individually) were being paid...