Docket No. 99559.
05-07-1940
HERBERT MARSHALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John B. Milliken, Esq., for the petitioner. Byron M. Coon, Esq., and Alva C. Baird, Esq., for the respondent.
John B. Milliken, Esq., for the petitioner.
Byron M. Coon, Esq., and Alva C. Baird, Esq., for the respondent.
This case involves income tax deficiencies for 1933, 1934, and 1935, as follows:
1933 __________________________________ $3,899.26 1934 __________________________________ 55,238.46 1935 __________________________________ 27,800.50 __________ Total _________________________ 86,938.22
In addition, there is a delinquency penalty of $974.82 proposed pursuant to section 291 of the Revenue Act of 1932 for the calendar year 1933, due to alleged delinquency in filing an income tax return for that year, the return not having been filed until October 8, 1936.
The petitioner alleges that the respondent erred in the determination of the deficiencies in holding him liable to income tax upon the entire amount of his earnings for the years 1933, 1934, and 1935, instead of upon only one-half thereof, and also in the determination of a delinquency penalty for 1933.
FINDINGS OF FACT.
The petitioner was born in London, England, on May 23, 1890. He is and always has been a subject of Great Britain. He has never taken any step toward becoming an American citizen. He is in the United States on a quota number which he obtained in 1932.
The petitioner enlisted in the British army in 1916. He was wounded in 1917 and lost a limb. He was mustered out of the army in May 1918. Following a period of convalescence he engaged in theatrical roles in London and elsewhere with touring theatrical companies. In 1925 he visited the United States with such a company. He later returned to London for further theatrical engagements.
In 1928 the petitioner married Edna Clara Best Baird, a member of the theatrical company in which he was playing, in Jersey City, New Jersey. His wife was and is a prominent English stage actress. Petitioner and his wife returned to London in the spring of 1929. During the period from 1929 to 1932 the petitioner filled many theatrical roles in London and New York City and other key cities in the United States. In 1929 he rented an apartment in London, where he lived with his wife for some time.
Petitioner first visited the State of California in the month of May 1932, accompanied by his wife, where he was engaged in making three motion pictures. In the fall of 1932 the petitioner returned to London to fulfill further stage commitments. In March 1933 he returned to New York City to look at some theatrical plays running in that city. After a stay of about two weeks he returned to London to await the birth of an heir. A daughter was born to his wife on May 25, 1933.
Petitioner, accompanied by his wife, went to California in July 1933, for the purpose of making motion pictures. They lived in a rented house on Mound Street, Hollywood. In November 1933 his wife returned to England and in February 1934 rejoined her husband in Los Angeles, accompanied by their daughter. They lived in a rented house on Hollywood Boulevard. She engaged in making a motion picture in March 1934, for which she received $4,800. She disliked motion pictures and was anxious to return to the legitimate stage. By reason of the diverse interests of husband and wife, an estrangement sprang up between them. In April 1934, without protest from the petitioner, she returned to London, England, where she remained until the summer of 1939. At the time his wife separated from him in April 1934, the petitioner entertained the hope that she would soon return and live with him as his wife in California.
The petitioner, recognizing his obligation to his wife and child, wrote to her in May 1934 relative to an allowance. He was receiving a large income at the time. He wished to know if £125 a week would be a satisfactory allowance and she replied that she thought that was a very generous allowance and was ample for her needs. The petitioner thereupon made an arrangement with the Westminister Bank in London for the payment to her of £125 per week. The petitioner made remittances to the Westminister Bank to enable it to make the payments. The petitioner's wife was paid £125 a week from the time the agreement was entered into to the end of 1936. The actual amount paid her in 1933 was £1,865 plus $1,959.50; in 1934, £4,775 plus $10,000; in 1935, £6,550; and in 1936, £6,250.
Although at the time the petitioner went to California in July 1933 he was uncertain as to how long he would remain in California, he definitely decided in October or November of that year to make California his permanent place of abode. He has resided in California ever since.
In 1936 the petitioner revisited England for the purpose of having some adjustments made to his artificial limb and also for the purpose of seeing his daughter and friends. He also entertained the hope that his wife would return with him to California. She was unwilling, however, to do so.
The petitioner has never owned any real estate in California or elsewhere. He has contemplated buying a residence in California at different times, but in each instance his business counsel advised against making the contemplated purchase. During the years 1933, 1934, and 1935 he owned no personal property in England except a small account at the Westminister Bank, which was only a clearing account for payments to be made to his wife and for the payment of premiums on certain endowment insurance policies issued by English companies.
During the years 1932 and 1933 the petitioner was under contract with Gilbert Miller, of New York City, for appearances on the legitimate stage. Gilbert Miller acted as his business manager during those years. The petitioner supposed that Miller would file any required income tax returns for him for 1933. He knew that Miller was holding back a certain portion of his income to pay his income tax. It was not until late in 1935 that the petitioner learned that Miller had filed no income tax return for him. This discovery was made as a result of a revenue agent's examination of community property income tax returns filed by petitioner and his wife for 1934. The revenue agent prepared income tax returns for the petitioner and his wife for 1933 on a community property basis. The petitioner's return for that year was executed by the petitioner on January 31, 1936. The wife's return was executed by the wife in London on April 16, 1936. Due to some delays in getting required information from Gilbert Miller, the returns were not filed with the collector at Los Angeles until October 8, 1936. The additional taxes shown to be due by the returns were duly paid to the collector at the time of filing.
Income tax returns for 1934 and 1935 were filed by the petitioner on a community property basis for himself and wife within the time required for filing such returns. The petitioner had a power of attorney from his wife for the execution of her return.
In the determination of the deficiencies the respondent has denied the right of the petitioner to make income tax returns on the community property basis for all of the years 1933, 1934, and 1935, and has held the petitioner liable to income tax upon his entire net incomes.
The petitioner was not domiciled in nor a resident of California during the year 1933. The petitioner was domiciled in Los Angeles, California, during the years 1934 and 1935 and his earnings for those years constituted community property.
The delinquency in filing an income tax return for 1933 was due to a reasonable cause and not to willful neglect.
OPINION.
SMITH:
Although the petition filed in this proceeding alleges numerous minor errors made by the respondent in the determination of the net income of the petitioner for the years 1933, 1934, and 1935, all of which have been denied by the respondent in his answer, the only real question in issue is whether the petitioner's earnings for the three years in question constituted community property under the California statutes and whether the petitioner is liable to income tax on the entire amount of his earnings.
In his deficiency notice the respondent states with respect to the deficiency determined for 1933:
(a) The division of income on a community property basis has been denied and salary has been increased by $25,392.93, the amount included in the return of your wife. Under the provisions of Mimeograph 3859, Cumulative Bulletin X-1, page 140, husband and wife domiciled in the State of California may each report in separate returns one half of the community income received by them. The above is in accordance with the decision of the Supreme Court in the case of United States v. Malcolm, rendered January 19, 1931, which made effective the division under the amendment on July 29, 1927 to the Civil Code of California, designated section 161 (a). In view of your wife's status as a nonresident alien, it is held that there was no domicile of husband and wife in California which carried with it community property rights.
For 1934 and 1935 the respondent simply states:
(a) The division of income on a community property basis has been denied and salary received has been increased by the amount included in the return of your wife.
The petitioner contends that he was a resident of and domiciled in California during the years in controversy in this proceeding, and that, since he was a married man, his entire net income was community property. He further submits that:
Independent of any evidence on the matter of domicile, * * * by the terms of the statute defining community property, the California legislature has included in the definition of community property, property acquired in California through personal services without regard to the domicile of the owner at the time it was acquired.
We do not think that there is any merit in the last stated contention. It seems to us clear that, if a married person domiciled in a noncommunity property state performs a contract in California from which he derives income, the income is not to be regarded as community property simply because it was earned in California. It appears to us plain that the law of the state of the domicile must control as to whether earnings are community property or noncommunity property.
Furthermore, it is noted that section 946 of the California Civil Code provides:
§ 946. By what law governed. If there is no law to the contrary, in the place where personal property is situated, it is deemed to follow the person of its owner, and is governed by the law of his domicile.
The petitioner refers us to sections 162 and 163 of the Civil Code, which provide as follows:
§ 162. Separate property of the wife. All property of the wife, owned by her before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with the rents, issues, and profits thereof, is her separate property. The wife may, without the consent of her husband, convey her separate property.
§ 163. Separate property of the husband. All property owned by the husband before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with the rents, issues, and profits thereof, is his separate property.
Until 1917 section 164 of the California Civil Code was worded in this manner: "All other property acquired after marriage, by either husband or wife, or both, is community property. * * *" Cases construing the California law under this section of the code appeared to concede that the common law rule of comity — to the effect that the character of personal property is to be determined by the law of domicile of its owner at the time such property was acquired — prevailed. In re Frees Estate, 187 Cal. 150; 201 Pac. 112; In re Nickson's Estate, 187 Cal. 603; 203 Pac. 106.
In 1917 section 164 of the Civil Code was amended to read as follows:
* * * All other property acquired after marriage by either husband or wife, or both, including real property situated in this state, and personal property wherever situated, acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this state is community property; * * *
The petitioner submits:
It is apparent from the language of Section 164 after its amendment in 1917 that it was the intent of the Legislature to define as community property all property not included under Sections 162 and 163, the definition of separate property.
The petitioner submits that this proposition is supported by In re Thornton's Estate, 1 Cal. (2d) 1; 33 Pac. (2d) 1. In that case the court held that section 164 of the California Civil Code, as amended in 1917, is unconstitutional in so far as it provides that personal property acquired after marriage by husband and wife while domiciled elsewhere than in California, which would not have been the separate property of either if acquired while domiciled in California, becomes community property when the parties become domiciled therein. The petitioner's contention is that, in holding this provision to be unconstitutional the court by inference held that income earned in this state by a person domiciled elsewhere is community property. We can not agree that this was the holding of the court. Cf. Charles A. Shea, 30 B. T. A. 1265. The well established rule in California, as well as elsewhere, is that stated in California Jurisprudence Ten-Year Supplement, vol. III, p. 499: "The character of personal property is to be determined by the law of the domicile of its owner at the time of acquisition, irrespective of the law of any subsequent domicile which may be acquired."
It follows that if the petitioner was not domiciled in California during the years 1933, 1934, and 1935 his income earned during those years does not constitute community property under the California laws.
It is the petitioner's contention that he went to California in July 1933, and that he has been domiciled in that state ever since. If he went to California in July 1933, with the intention of making California his permanent home we think there can be no question but that he was domiciled in that state from July 1933. The fact that the petitioner is a British subject would have no bearing upon the question as to whether his earnings while domiciled in California constituted community property. Thus, in Joe May, 39 B. T. A. 946, we said: "The community property laws of California do not specifically exclude a resident or nonresident alien from its benefits." See also J. P. Schumacher, 32 B. T. A. 1242.
In his brief the petitioner states:
The definitions of domicile are all in agreement in making the test of domicile depend upon two requirements (1) Residence (2) The intent to remain. In order therefore to establish a domicile the two prime factors are the taking up of a residence in a particular place with the intent to make it a permanent abode and in California it is declared in the Political Code that a residence or domicile can be changed or acquired only by "the union of act and intent." Pol. Code § 52, Subd. 7, Chambers v. Hathaway, 187 Cal. 104, 200 Pac. 931.
The respondent argues that even though the petitioner may be held to have been domiciled in California during the years 1934 and 1935, he may not be held to be domiciled in that state during the year 1933. He points to the testimony of the petitioner bearing upon this point to the effect that when the petitioner went to California in July 1933, he had no intention of making that state his permanent place of abode. On direct examination the petitioner was asked:
Q. And when would you say, Mr. Marshall, if you could designate a time, when you decided that you would remain in California indefinitely and reside here indefinitely?
A. It was positively in that same year of 1933, Judge.
Q. What time would you say, if you can fix a time, in 1933, when you think that that conviction became certain on your part?
A. It is rather difficult, but my impression is that it occurred in October, I think, or very early in November, after I had gone on a trip to Hawaii, which, by the way, I omitted as it was part and parcel in making of a picture. Then, on my way back from there, with every increasing assurance that I was going to work here for quite a few years, obviously I was influenced by that as well. That is when I really began to think about it, I think, on that return; it seems familiar to me then.
There is much in the record to indicate that the petitioner during the first part of his stay in California in 1933 had no definite intention to make California his permanent place of abode. In 1932 and 1933 and for some years prior thereto he was under contract to Gilbert Miller for bookings for theatrical appearances on the legitimate stage. Miller's place of business was in New York City. In past years Miller had made arrangements for the petitioner to appear in theatricals in different places in the United States and in England. The petitioner was asked the question relative to the contract which brought him back to this country in July of 1933 for the purpose of making motion pictures:
Q. What were the terms of that contract, if you recall? Was it for a number of pictures or a number of years, or what?
A. Its original form took the shape of my signing with Paramount to do five years of pictures, options, of course, two pictures a year to be tied in with my theatrical commitments with Miller. It was a conditional thing which later did not iron out.
The petitioner had made a success on the legitimate stage. His wife was devoted to the legitimate stage. Moving pictures had no appeal for her. She was an English woman who could not see her way clear to give up the English stage and abandon that career merely because her husband was making a success in moving pictures.
It is also quite clear from the testimony of the petitioner that he was not certain as to whether his initial success in moving pictures would offer a permanent career for him. He stated: "I would like to add to that, if I may, in 1932 it looked far less of a permanent career than it was revealed to me later, and I didn't even think I was going to succeed."
It is furthermore to be noted that if the petitioner was a resident of California in 1933 he was required to file an income tax return in California for 1933. He supposed that the matter of filing a return was being taken care of by Gilbert Miller in New York. This indicates that until the end of 1933 the petitioner looked upon his residence in California as temporary.
All of the gross income earned by the petitioner for 1933 was earned prior to the time that the petitioner had definitely determined to make California his permanent place of abode. His total gross income for 1933 was $59,250. His business manager, Rex Cole, testified:
* * * there was salary of $15,750 received from Metro-Goldwyn-Mayer Studios between August 1 and August 24, 1933, and there was received from Paramount Studios a total of $43,500 which was received from Paramount between August 28th and November 3, 1933, which makes a total of $59,250.
Upon the evidence of record, we sustain the respondent's contention that the petitioner was not domiciled in California at the time he earned his compensation for 1933. The petitioner is therefore liable to income tax upon his total net income for 1933.
There can be no question but that by the end of 1933 the petitioner had definitely formed the intention of making California his permanent place of abode. He was living with his wife in California at the time he formed such intention. The evidence indicates that up until April 1934 the petitioner was domiciled with his wife in Los Angeles. At the time his wife left him, in April 1934, he had no intention of abandoning his residence in California. He hoped that his wife would rejoin him. If she had rejoined him within a reasonable time we do not think that the respondent would or could have raised any question that the petitioner was domiciled in California during the years 1934 and 1935 and entitled to claim the benefits of the statutes of California relating to community property.
The respondent requests that the Board examine the realities of the instant case. He states:
* * * In the instant case, two persons domiciled in England came to California for the first time in 1932. They stayed four months. In 1933 they came again. The husband decided to stay because his career was here but the wife, after staying for a short time in 1933 and again for a few months in 1934, returned to England, for the reason that her career was there. Since that time they have been separated. It is submitted that such a situation does not come within the reasoning of the community property laws which is to give the wife living in the jurisdiction a share in the husband's earnings in order to protect her and protect the marriage status. Where the wife has a separate domicile of her own outside of the jurisdiction, the reason for these laws disappears. What petitioner is seeking to do in this case is to apply a rule to a situation not within the reason for the rule. He seeks to apply the rule by invoking a fiction of the conflict of laws, namely, that the domicile of the wife follows that of the husband. This section does not apply in a case such as the instant case where two professional people pursue their own respective careers thousands of miles apart. * * *
We do not think that the argument made meets the issue which is presented. It is rather in the nature of a protest against the provisions of the income tax law which permit a person in a community property state to exclude from his income one-half thereof upon the ground that the wife has a vested right therein. Our only query here is whether under the law of the State of California the earnings of the petitioner constitute community property. If they do the petitioner is taxable upon one-half of them. United States v. Malcolm, 282 U. S. 792. We are of the opinion that the earnings of the petitioner during the taxable years 1934 and 1935 constituted community property, upon the ground that he was a married man and domiciled in the State of California. His wife had not technically deserted him during these years. Section 52 of the California Political Code provides: "5. The residence of the husband is the residence of the wife." It must be held that the petitioner and his wife were legally domiciled in California during 1934 and 1935, and that the earnings of the petitioner constituted community property. The petitioner is taxable upon only one-half of the net income of the community for the years 1934 and 1935.
The respondent contends that the petitioner is liable to the 25 percent delinquency penalty under section 291 of the Revenue Act of 1932 in respect of the returns filed for 1933. The penalty is not, however, incurred where the delinquency in the filing of a return was due to a reasonable cause and not due to willful neglect. There was clearly no willful neglect on the part of the petitioner. He knew that Gilbert Miller had withheld $4,600 of his income for 1933 and he supposed that he was making the required income tax return. When he found out that the required return had not been filed, his business agent in Los Angeles filed the return. In these circumstances we think that the penalty was not incurred.
Decision will be entered under Rule 50.