Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Apr 16, 1956
26 T.C. 77 (U.S.T.C. 1956)

Docket No. 29571.



James McCollister, Esq., for the petitioner. J. Marvin Kelley, Esq., for the respondent.

James McCollister, Esq., for the petitioner. J. Marvin Kelley, Esq., for the respondent.

1. Petitioner, with her husband, Leo, and their children, was domiciled in St. Paul, Minnesota, prior to 1939. Leo had been a newspaper publisher and after his employment had been terminated, petitioner and Leo, about the middle of 1939, stored their furniture, rented their home, and moved to Carmel, California, where they, with the children, resided in rented furnished homes at various periods. In 1941 Leo acquired newspapers in Harlingen, Brownsville, and McAllen, Texas. He took up residence in Harlingen, and in 1943 brought three of the four children to live with him. Petitioner remained in Carmel, and during part or all of the time, including the taxable years 1944 and 1945, her health was impaired. Leo regularly prepared separate income tax returns for himself and petitioner, usually signing petitioner's name to the returns prepared for her. The returns for 1939 and 1940 were filed with the collector of internal revenue at Baltimore, Maryland. The returns for 1941 through 1945 were made out on community property basis and were filed in Texas. Petitioner sent Leo information with respect to her income and expenses which he used in preparing her returns. Leo, possibly in October 1945, instituted a divorce action against petitioner in Brownsville. Petitioner filed a cross-complaint, and in November 1974, after a bitterly contested trial of the matters at issue, was granted a divorce. After determining the items of separate property, the court found that there was a substantial amount of community property and made a division thereof. Held, on the facts, that Leo's domicile during 1944 and 1945 was in Texas, that petitioner and Leo properly reported their income for those years on a community property basis, and that respondent did not err in not determining otherwise.

2. Petitioner and Leo had acquired an interest, by joint investment, in the Dispatch-Pioneer Press Company and other enterprises, including the newspaper at Grand Forks, North Dakota. In December 1935, they each created a trust for the benefit of the other for life, with remainder interests to their children. Both were named as trustees for each trust. The corpus of each trust consisted of the same number of shares of stock of the publications corporation, but petitioner gave 100 shares of stock of the Grand Forks newspaper company to the trust created by her, while Leo gave only 50 shares of such stock to the trust created by him. In the trust created by petitioner, it was specifically provided that the income could be accumulated or distributed at the sole discretion of the trustees. The income of the trust created by Leo was to be paid to petitioner for life, at least quarterly, subject only to spendthrift provisions giving to the trustees the power to withhold income where in their discretion the circumstances were such as to fall within the said provisions. The court in the divorce proceeding construed the trust instruments, held as to each trust that the income was distributable solely in the discretion of the trustees, and required petitioner to pay over to a substituted trustee trust income which had come into her possession other than by action of the trustees. Held, that respondent was in error in including in the income of petitioner trust income which had not been distributed.

The respondent determined deficiencies in income tax against the petitioner for the years 1944 and 1945 in the amounts of $2,028 and $3,017.48. The petitioner now claims overpayments for the said years of $10,500 and $8,500.

The questions for determination are whether the income of the petitioner and her husband was properly reported on a community property basis, and whether the income of two trusts was taxable to them, whether or not such income was distributed.


The petitioner is now a resident of St. Paul, Minnesota. Her income tax returns for 1944 and 1945 were filed with the collector of internal revenue for the first district of Texas.

The petitioner and Leo E. Owens were married in New York, in October 1923. At the time of their marriage, the petitioner was a free-lance journalist, and Leo was employed by a newspaper, the New York World. Prior to 1927, they resided in White Plains, New York, where they owned their own home.

In 1927, they moved to St. Paul, where Leo became an official or employee of the Dispatch-Pioneer Press Company, later Northwest Publications, Inc., which published a newspaper or newspapers of wide circulation. Petitioner and Leo acquired 700 shares of stock in the corporation at a cost of $100,000, and on some undisclosed date Leo became its president. Later the corporation acquired a newspaper published in Duluth, Minnesota, and a one-half interest in radio station WCTN, now known as WCCO, which operates in the Minneapolis-St. Paul area.

Originally the 700 shares of stock were held in Leo's name, but on April 11, 1932, Leo had 299 shares transferred to petitioner's name. Previously, in 1931, Leo had transferred 101 shares to Ridder Brothers, identified of record as dominant in the affairs of the company. From August 1935 to March 1937, 38 additional shares were acquired and placed in petitioner's name, after which, 300 shares stood in Leo's name and 337 shares in petitioner's name.

On some date not shown, presumably through the purchase of the stock of Grand Forks Herald, Inc., Leo or Leo and petitioner acquired a newspaper at Grand Forks, North Dakota.

When the petitioner and Leo moved to St. Paul, they had one child, Leo E. Owens, Jr., hereafter referred to as Lee. Within a few months after they arrived in St. Paul, their daughter, Ellen, was born. Two other sons, Owen and Peter, were born of the marriage. Peter, the younger of the two, was born January 10, 1936.

After moving to St. Paul, Leo, petitioner, and their family lived in rented furnished residences until September of 1928, when they purchased a home of their own. They lived in that house until June of 1936, when it was sold and a larger residence was acquired. Both residences were on a large scale, and the petitioner was accustomed to having the services of several servants.

Leo's services with Northwest Publications, Inc., were terminated in 1938 or 1939, and in June of 1939, he went to Pebble Beach, California, which is near Carmel. His family joined him there in July. He had rented a ‘luxurious Spanish type of home,‘ which the family occupied until October, when they moved to Carmel. There they rented and resided in several furnished homes. The first place was located on the beach. In September of 1940, Lee and Ellen were placed in boarding schools and a smaller house was rented. Lee went to Villanova, in Santa Barbara, and Ellen to Dominican Academy, in San Rafael.

Beginning about the middle of 1941, Leo was employed for a short time by the St. Louis Post Dispatch, in St. Louis, Missouri, and while so employed he was furnished hotel accommodations by his employer. Petitioner's health was not good and at some time prior to June 1941, Leo had taken Owen and Peter to his sister in Minneapolis, in order to relieve petitioner of the responsibility of caring for them. About the same time petitioner moved to a small house in Carmel, sometimes referred to by her as a ‘shack,‘ which had been rented for her by Leo. He also employed the owner of the house, who was a nurse, to look after petitioner. The services rendered by the owner consisted of nursing petitioner, taking care of the house, and preparing meals— ‘she did everything.’ The petitioner at that time was under a doctor's care. She had never fully regained her health after the birth of her fourth child.

The state of petitioner's health was possibly worsened by the illness of Lee. Lee had had a serious illness in St. Paul, and had been in a hospital there from December 30, 1938, until March 1939. He had suffered a relapse just prior to or upon his arrival in California. Because of this condition, he had to quit the public school in Carmel, and a private tutor was employed for the remainder of the school year. In November 1940, he suffered a fractured skull in a fall, while attending Villanova, and was in a Santa Barbara hospital until Christmas, when he was brought home. He was cared for by petitioner, and again had a private tutor.

After leaving St. Paul, Leo had been on a lookout for another newspaper, and at some time during 1941, he purchased three newspapers in Texas, one at Brownsville, one at Harlingen, and one at McAllen.

During the Christmas holidays of 1941, Leo returned to Carmel, as did Lee, who was again attending school at Santa Barbara, and Ellen, who brought a girl friend with her. Because of the lack of room where petitioner resided, rooms were obtained for the others at Pine Inn. While in Carmel Leo rented a larger house for petitioner in order that there might be room for Lee and Ellen when they were not in school. The petitioner resided there until November 1942, when she became dissatisfied and on her own initiative rented and moved into another house.

At the time the newspapers were acquired in Texas the petitioner had understood that she was helping her husband buy them. In making the purchase, he was to use certain of his money and petitioner was to put up substantial collateral, including the assignment of certain insurance, and further, she was to use her money in the support of herself and the children.

When Leo took up his residence in Harlingen, he first stayed at a hotel. Later he resided in rented furnished houses. The address used by him was P.O. Box 511, Harlingen, Texas.

In the summer of 1943, Leo brought Ellen from California and Owen and Peter from St. Paul, to live with him in Harlingen. At some undisclosed date after June 1941, when he had taken Owen and Peter to his sister in Minneapolis, the sister had married and the boys had been placed in a boarding school in St. Paul. Lee had attended Judson School in Phoenix, Arizona, during the school year of 1942-1943, because it was thought the climate there would be beneficial to his health. At the close of school in June, he was hospitalized at the Mayo Clinic in Rochester, Minnesota.

Ellen, Owen, and Peter attended the public schools in Harlingen during the school year 1943-1944. Thereafter Leo placed Ellen in the Hockaday School, and Peter in the Texas Country Day School, both in Dallas. After finishing at Hockaday, Ellen attended Southern Methodist University for a short time. Owen remained in Harlingen until the fall of 1945, when he was entered in Phillips Academy in Andover, Massachusetts, where he continued until June of 1949. Lee was in Rochester, Minnesota, all or part of the time until August 1947, and during some of the time at least, attended a college there. He entered Loyola College in Los Angeles, in the fall of 1947.

On December 30, 1935, 12 days before Peter was born, the petitioner and Leo, at their home in St. Paul, executed two trust instruments. Each created a trust for the benefit of the other, for life, and both were named trustees in each trust. The corpus of each trust, in the main, was shown to consist of 120 shares of the capital stock of Northwest Publications, Inc. In addition, the petitioner transferred to the trust created by her for the benefit of Leo 100 shares, and Leo transferred to the trust created by him for the benefit of the petitioner 50 shares of the capital stock of Grand Forks Herald, Inc.

By identical provisions, remainders over were provided in each trust for the benefit of the children of the grantors. In the trust created by Leo for the benefit of the petitioner, it was provided that ‘the net income of the trust estate shall be payable: (a) To the Settlor's wife during her lifetime.’ And in a later paragraph, it was provided that ‘all income shall be distributed to the beneficiary or beneficiaries entitled thereto at least quarterly and at least annually a statement showing the condition of the trust funds and receipts and disbursements of principal and income thereof, shall be furnished to each beneficiary over the age of eighteen years.’

In the trust created by petitioner for the benefit of Leo, it was provided that ‘The net income of the trust estate may be accumulated in trust or distributed in whole or in part at the sole discretion of the Trustees. All income distributed by the Trustees to beneficiaries of the trust shall be payable as follows: (a) To the Settlor's husband during his lifetime.’ As in the trust above, all income was to be distributed to the beneficiary or beneficiaries ‘entitled thereto’ at least quarterly.

Except for the provision above, the trust instruments were in all material respects identical. Two provisions common to both trust instruments were as follows:

3. As to any trust created under this instrument the following provisions shall apply:

(f) The interest of any beneficiary in the principal and income of any trust herein created shall not be assignable. Should any beneficiary or beneficiaries hereunder alienate or dispose of the principal or income to which they are entitled under this trust, or if by reason of bankruptcy, insolvency or any other means whatsoever, said principal or income can no longer be personally enjoyed by them respectively, but because of such fact or facts the same should become vested in or payable to some other person, then the trust as to such proportion of the trust funds herein as would belong to or be enjoyed by the said beneficiary or beneficiaries shall immediately cease and determine and the principal and income thereof shall go in augmentation of the principal of the other trust funds herein created, provided, however, in case at any future period thereafter circumstances should exist which in the opinion of the trustees should justify or render expedient the placing at the disposal of said beneficiary or beneficiaries or those who would otherwise be entitled to receive the benefits of said trust by, through or under the said beneficiary or beneficiaries, respectively, and portion of the trust estate, then it shall be lawful for the said trustees in their discretion but without it being in any manner obligatory upon them, to transfer absolutely to the said beneficiary or beneficiaries or those who would otherwise have claimed by, through or under the terms of this trust, any portion not exceeding the portion he or she would otherwise have been entitled to hereunder of the trust funds and immediately upon such transfer being made the trust hereinbefore declared shall absolutely cease and determine, or in the discretion of the said trustees, but without it being obligatory upon them the trustees may pay to or apply for the use of the said beneficiary or beneficiaries or the use of his or her family, so much and such part of the income to which such beneficiary or beneficiaries would have been entitled to under this trust in case the forfeiture hereinbefore provided for has not happened, or in the discretion of the said trustees and without it being obligatory upon them, the trustees may restore to the trust so created for such beneficiary or beneficiaries such part of the principal of the trust estate to which said beneficiary or beneficiaries would have been entitled to in case the forfeiture hereinbefore provided for had not happened to the trust herein created for said beneficiary or beneficiaries.

(h) Should the Settlor's husband (wife), or after his (her) death any of the Settlor's children, having reached the age of twenty-five (25) years permanently reside outside the State of Minnesota, they shall have the right to have the Trust Company herein named as a successor trustee, or its successor in office, removed by a court of competent jurisdiction and have substituted therefore a Trust Company, if practical, affiliated with a National Bank or trust department of a National Bank, located in a city of over 200,000 inhabitants, according to the last federal census, near the place of residence of the Settlor's said husband (wife) or child of either of them, to the end that they may have personal contact with the affairs of this trust.


TURNER, Judge:

Our first question is whether the income of petitioner and Leo, particularly the fees received by Leo for his services in managing the three Texas newspapers, was properly reported on a community basis. It is fairly well settled, we think, that the ownership of income received from personal services is determined by the laws of the domicile of the earner of such income at the time the income is earned. Herbert Marshall, 41 B.T.A. 1064; Nathaniel Shilkret, 46 B.T.A. 1163, affd. 138 F.2d 925; Benjamin H. McElhinney, Jr., 17 T.C. 7; and Marjorie Hunt, 22 T.C. 228. And we do not understand that either party contends otherwise, it being the claim of the petitioner that neither she and Leo, nor she or Leo, were ever domiciled in the State of Texas, or any other community property State and there was and could be no community property and therefore no community income by reason of Leo's sojourn or residence in Texas.

Giving due regard to the legal distinction between residence and domicile, we are satisfied, on the record before us, that no later than early 1942 Leo became domiciled in Texas and that Texas continued to be his domicile for and during all of the years material herein. See and compare Nathaniel Shilkret, supra; Herbert Marshall, supra; Pietro Crespi, 44 B.T.A. 670; Samuel B. Weiss, 30 B.T.A. 478; and L. B. Peeples, 27 B.T.A. 879. It would thus appear as to Leo, under Texas law, his earnings during the period of such domicile constituted community property, one-half belonging to him and one-half belonging to petitioner; that he and petitioner correctly and properly reported such income on a community property basis, and that the respondent did not err in not determining otherwise.

If we understand the petitioner aright, it is her further contention, however, that even though it is held that Leo did establish his domicile in Texas and was so domiciled in the taxable years herein, her domicile, in circumstances here and contrary to the general rule, did not follow that of Leo; that she was never domiciled in Texas, never was in Texas until she appeared there for the purposes of trial in the divorce proceeding in 1974, and as a consequence Leo's earnings were not community property, one-half of which was taxable to her.

The ownership of the earnings of a husband under California law, where the controlling facts were substantially the same as in this case, was tried and decided in Commissioner v. Cavanagh, 125 F.2d 366, affirming 42 B.T.A. 1037. In that case it was held that the income of the husband, who was domiciled in California, was community income, one-half of which belonged to his wife, even though the wife was a resident of Canada, had never been asked by the husband to come to California and live with him, nor had she ever indicated a willingness to do so, and not only that, but had never been in California. See also in that connection Marjorie Hunt, supra, where during the taxable year, a decree of separate maintenance having been entered in the Superior Court of California in the year proceeding, the wife moved from California and established her domicile in the State of Iowa. It was there pointed out that the ownership of and in the earnings of the husband was controlled and determined by California law and continued until death or a final decree of divorce terminated the marriage, and regardless of the fact that the wife, the taxpayer in that proceeding, had established her domicile in Iowa, a non-community property State, one-half of the husband's earnings was her income and she was taxable thereon.

Although we have found no case exactly on the point, we do not understand the law of Texas to be otherwise. Furthermore, it would appear that this specific point and as between petitioner and Leo has already been litigated and judicially determined by the Texas court in the divorce proceeding. In the judgment and decree therein, the court, after determining the items of separate property, found that there was a substantial amount of community property and made a division thereof. Certain properties found to be community property were alloted to petitioner in kind, the others being alloted to Leo, but in making the division in kind the court found, adjudged, and decreed that with respect to the community property which had been alloted to Leo in kind and for the ‘community charges against the separate property of Leo,‘ the petitioner should have and recover of Leo the sum of $100,000. And as more fully set forth in our Findings of Fact the court announced the terms of the settlement in the presence of both the petitioner and Leo and their counsel, all of whom announced to the court that the judgment and decree were in all things satisfactory to each of them, that they would abide thereby, that the judgment should become final with no right on the part of either party to file a motion for a new trial or to prosecute any character of appeal therefrom. In the face of that determination by the duly constituted court of the State of Texas having jurisdiction of both parties and the property therein, we regard that decision as controlling and binding upon this Court. Blair v. Commissioner, 300 U.S. 5. On the record as a whole, it is reasonable to conclude that the community property so found and divided by the court between petitioner and Leo included the very income in issue herein, and certain it is that the petitioner has offered no proof to show otherwise. On the community income issue the respondent is sustained.

It is our opinion also that the decree of the Texas court likewise disposes of the question relating to the taxability of the income of the two trusts. As to each trust, the court held that the income was distributable solely in the discretion of the trustees. The respondent concedes that under Blair v. Commissioner, supra, the judgment and decree of the Texas court is binding in this proceeding as to the validity of the trusts. In reaching its conclusions with respect to the trusts the court found it necessary to consider and resolve the rights, obligations, and duties of all persons affected thereunder, and in determining the rights of the parties it was essential and necessary to reach a conclusion as to the distributability and ownership of the income. It did so. We accordingly conclude and hold that since the income of both trusts was distributable to the beneficiary or beneficiaries thereunder solely in the discretion of the trustees, section 162(c) of the Internal Revenue Code of 1939 is applicable, and petitioner and Leo for the years herein were taxable only on the trust income which was distributed. Blair v. Commissioner, supra.

Decision will be entered under Rule 50.