Opinion
Docket No. 27624.
1951-07-11
BENJAMIN H. McELHINNEY, Jr., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert Mueller, Esq., for the petitioner. John P. Higgins, Esq., for the respondent.
During the taxable years 1944, 1945, and 1946, petitioner was married and was domiciled in Virginia, a non-community property state. Petitioner received taxable income from his capital investment in a partnership doing business in Texas, a community property state. The partnership was engaged in rice farming, in the grocery business, in an automobile sales agency, and had a small amount of net income from rentals of real estate which the partnership owned. Petitioner's interest in the partnership was his separate property. Petitioner and his wife each reported one-half of the income distributable to petitioner on the partnership return as community income. Held, the income, except that which was from rentals of real estate, was taxable in its entirety to the husband, he being domiciled in Virginia. Robert Mueller, Esq., for the petitioner. John P. Higgins, Esq., for the respondent.
The Commissioner has determined deficiencies in petitioner's income taxes and an addition to tax for the calendar years and in the amounts as follows:
+---------------------------------+ ¦Year ¦Deficiency ¦10% penalty ¦ +------+------------+-------------¦ ¦1944 ¦$545.86 ¦ ¦ +------+------------+-------------¦ ¦1945 ¦1,181.26 ¦$116.48 ¦ +------+------------+-------------¦ ¦1946 ¦1,504.26 ¦ ¦ +------+------------+-------------¦ ¦Total ¦$3,231.38 ¦$116.48 ¦ +---------------------------------+
Petitioner has not contested the 10 per cent addition to tax for the year 1945 as determined by respondent under the provisions of section 291(a) of the Internal Revenue Code.
During each of the taxable years petitioner and his wife reported their income on a community property basis with each reporting one-half of their combined net incomes. In his determination of the deficiency for the year 1944, the Commissioner added to the net income as disclosed on petitioner's return, $3,048.17, which he explained in the deficiency notice as follows:
(a) It has been determined that the income realized from the separate interests of the husband, located in Eagle Lake, Texas, for the year 1944 is the separate income of the husband. The income erroneously reported by the wife from these interests as her community one-half has been added to the husband's separate income and taxed accordingly.
Similar adjustments differing only in amounts were made by the Commissioner in his determination of the deficiencies for the years 1945 and 1946.
The sole issue raised by the petition is as follows:
* * * that the Commissioner of Internal Revenue erred in determining the taxable net income of the petitioner for the calendar years 1944, 1945, and 1946, by not permitting petitioner to divide (with his wife) certain income which was received from sources within the state of Texas and under Texas law are (sic) (was) community income.
FINDINGS OF FACT.
Petitioner filed his income tax returns for the taxable years 1944, 1945, and 1946, with the collector of internal revenue for the district of Virginia. Petitioner stated on his tax return for the year 1944 that his address was Vienna, Virginia, and on his tax returns for the years 1945 and 1946 that his address was Alexandria, Virginia. It was stipulated that during the taxable years petitioner was domiciled in the State of Virginia, and we so find.
Upon the death of his mother who resided in Texas, petitioner inherited a one-half interest in her estate. This gave him a one-fourth interest in all the community property owned by his father and mother at the time of his mother's death. Petitioner's interest in the estate was used as his capital contribution in the formation of a partnership which, during the taxable years, was engaged in various businesses located in Eagle Lake, Texas. Petitioner's father, B. H. McElhinney, managed the partnership which was named ‘B. H. McElhinney, Son and Daughter.‘ No formal partnership agreement was ever executed. It was stipulated that petitioner's interest in the partnership was his separate property, and not community property as defined by the law of the State of Texas. Apparently petitioner rendered no services to the partnership, and none of the petitioner's share of income, therefore, is to be considered as wages or salary for services rendered.
The income of the partnership for the taxable years was derived principally from a grocery store, a retail automotive agency, raising of rice crops, and commissions on buying rice. Petitioner's distributive share of partnership profits was shown on the partnership returns, Form 1065, as follows:
+-----------------------------------+ ¦ ¦Ordinary ¦ ¦ +------+------------+---------------¦ ¦Year ¦net income ¦Contributions ¦ +------+------------+---------------¦ ¦1944 ¦$4,008.54 ¦$30.19 ¦ +------+------------+---------------¦ ¦1945 ¦4,729.27 ¦26.75 ¦ +------+------------+---------------¦ ¦1946 ¦10,141.80 ¦113.08 ¦ +-----------------------------------+
In filing their separate tax returns for the years involved, petitioner and his wife each reported thereon one-half of their combined net incomes, including the net income from the partnership. Each reported net income on a community property basis as follows:
+------------------------------+ ¦Year ¦Amount of net income ¦ +------+-----------------------¦ ¦ ¦reported by each ¦ +------+-----------------------¦ ¦1944 ¦$3,398.52 ¦ +------+-----------------------¦ ¦1945 ¦5,127.99 ¦ +------+-----------------------¦ ¦1946 ¦8,445.90 ¦ +------------------------------+
In the partnership return of income for the year 1944, the source of net income was described as follows:
+------------------------------------------+ ¦Wilcox Grocery, Eagle Lake ¦$6,799.70 ¦ +-------------------------------+----------¦ ¦Universal Motor Co., Eagle Lake¦7,108.98 ¦ +-------------------------------+----------¦ ¦Rice farming ¦1,760.00 ¦ +-------------------------------+----------¦ ¦Rental income ¦365.49 ¦ +-------------------------------+----------¦ ¦Total ¦$16,034.17¦ +------------------------------------------+
One-fourth of the foregoing amount, $4,008.54, was shown as being distributable to B. H. McElhinney, Jr., Alexandria, Virginia.
In the partnership return of income for the year 1945, the source of net income was described as follows:
+-----------------------------------------------------+ ¦Wilcox Grocery Company, Eagle Lake, Texas ¦$4,309.16 ¦ +------------------------------------------+----------¦ ¦Universal Motor Company, Eagle Lake, Texas¦11,701.67 ¦ +------------------------------------------+----------¦ ¦Rice farming ¦4,791.23 ¦ +------------------------------------------+----------¦ ¦Net loss on rentals ¦(188.59) ¦ +------------------------------------------+----------¦ ¦Commissions on rice purchases ¦1,800.00 ¦ +------------------------------------------+----------¦ ¦Total income ¦$22,413.47¦ +-----------------------------------------------------+
One-fourth of the foregoing amount after deduction of salary of $3,496.41 to B. H. McElhinney, Eagle Lake, Texas, $4,729.27, was shown as being distributable to B. H. McElhinney, Jr.
In the partnership return of income for the year 1946, the source of net income was described as follows:
+-------------------------------------------------------------+ ¦Wilcox Grocery, Eagle Lake ¦$7,552.83 ¦ +--------------------------------------------------+----------¦ ¦Universal Motor Co., Eagle Lake ¦19,051.36 ¦ +--------------------------------------------------+----------¦ ¦Interest on Government Bonds ¦97.75 ¦ +--------------------------------------------------+----------¦ ¦Commissions on buying rice ¦9,195.25 ¦ +--------------------------------------------------+----------¦ ¦Sale of clean rice ¦700.00 ¦ +--------------------------------------------------+----------¦ ¦Rice joint venture ¦8,019.48 ¦ +--------------------------------------------------+----------¦ ¦Rental income ¦325.55 ¦ +--------------------------------------------------+----------¦ ¦Gross income ¦$44,942.22¦ +--------------------------------------------------+----------¦ ¦ ¦ ¦ +--------------------------------------------------+----------¦ ¦Less: Expense of earning commission on buying rice¦1,375.00 ¦ +--------------------------------------------------+----------¦ ¦Net income ¦$43,567.22¦ +-------------------------------------------------------------+
One-fourth of the foregoing amount after deduction of $3,000 salary to B. H. McElhinney, $10,141.80, was shown as being distributable to B. H. McElhinney, Jr.
OPINION.
BLACK, Judge:
During the taxable years petitioner was domiciled in Virginia and received income from a partnership which was organized in Texas and engaged in business in Texas. Petitioner's income from the partnership consisted solely of earnings on his capital investment which was petitioner's separate property. There is no dispute between the parties as to the net income of the partnership in any of the taxable years; the only issue is whether the petitioner's distributive share of income from the Texas partnership is the separate income of petitioner or the community income of petitioner and his wife.
Virginia is a non-community property state and under the laws of that state the consort's income from his wages and separate property is the separate income of the consort and taxable to him. Under the law of Virginia petitioner's wife had no vested interest in the income from the property of petitioner and the income at issue here is community income only if the instant case is controlled by the property laws of the State of Texas.
There could be no question but that if petitioner and his wife had been domiciled in Texas during the taxable years the income from the partnership would have been community income, even though petitioner's interest in the partnership was his separate property. See W. D. Johnson, 1 T.C. 1041. But petitioner and his wife were not domiciled in Texas; they were domiciled in Virginia. The question then is whether the law of the situs controls or whether the law of the domicile controls. If all the income had been rents from lands which petitioner owned in Texas, the law of the situs of the land would control and the income from rents would be community property even though petitioner was domiciled in Virginia. W. D. Johnson, supra. In that case Johnson and his wife domiciled in Kansas and we held that rents, issues, and profits from lands in Texas, whether the separate property of the taxpayer Johnson or community property of himself and wife, fell into the community. In so holding we said:
* * * as to the rents, issues, and profits received from the lands located in Texas, our holding must be that petitioner is entitled to report such income on the community basis. Even if the lands should be held to be the separate property of petitioner, all income therefrom during coverture falls into the community under the law of Texas. (Citing authorities.) The law of situs of land controls as to the determination of whether or not the income from such land is separate or community income. Commissioner v. Skaggs, 122 Fed.2d 721. Cf. Hammonds v. Commissioner, 106 Fed.(2d) 420.
But in the instant case by far the greater portion of the taxable income which is involved was not from rents, issues, and profits from lands which petitioner owned in Texas. In 1944, net income of the partnership from rents on real estate owned by the partnership was $365.44; in 1945, there was no net income of the partnership from land rents; and in 1946, the net income of the partnership from rents of real estate was $334.45. We hold that petitioner's partnership share of these rents was community income and one-half of it is taxable to him and one-half is taxable to his wife.
It is clear that by far the greater portion of the net income involved here was from three sources, namely: (1) rice farming by the partnership, (2) income from an interest which the partnership owned in Universal Motor Company, and (3) income from an interest which the partnership owned in Wilcox Grocery. The rice farming was done on lands in which the partnership owned an interest and on lands in which the partnership owned no interest but which were rented by the partnership for rice farming. This is shown by the following testimony of Benjamin H. McElhinney, Sr., which is in the record:
Q. The next item on the return is gross sales of rice showing an income there and there are expenses of the rice crop, cost of the rice crop, and it results in a net income to the partnership. Were these in the nature of crops raised on lands owned by the partnership of B. H. McElhinney, Son and Daughter?
A. Either owned by or rented. I rented some land as well as owned some land. So I couldn't tell you without going back to my books which year is which.
From the evidence which is in the record we would be unable to make any finding of facts as to what part of the profits from rice farming was due to rice raised by the partnership on lands owned by the partnership and what part was due to rice raised by the partnership on rented lands. The substance of petitioner's contention is that regardless of the source of his income from the partnership, whether it was profits from rice farming, profits from the grocery business, or profits from the automobile sales agency, it was all community income and that this was true notwithstanding petitioner's domicile was in Virginia.
Petitioner concedes since he was domiciled in Virginia that any income received from his personal services rendered in Texas would have been his separate income under such cases as Herbert Marshall, 41 B.T.A. 1064, and Nathaniel Shilkret, 46 B.T.A. 1163, affd. 138 F.2d 925. But petitioner contends that because the income in question was from a partnership business which had its location in Texas the law of the situs and not the law of the domicile controls in just the same way as if all the income in question was from rents, issues, and profits from real estate separately owned by petitioner and located in Texas. We are unable to agree with this view. Petitioner cites no case which supports such a view. In affirming Nathaniel Shilkret, supra, the United States Court of Appeals for the District of Columbia held that the California community property law did not apply to the personal service earnings of a taxpayer in that state whose domicile was in a non-community property state. In the course of its opinion the court said:
In most of the cases we have examined the place in which the money is earned and the place of domicile are the same, ir. consequence of which no question of the law of domicile was involved; but where the place of acquisition and the domicile are different, certainly the majority of cases apply the common-law rule of domicile. The question is not new and was much debated especially in the preparation of the Restatement. In the early stages of the Institute discussion of the situs view was recommended, doubtless under the influence of some State statutes on the subject but ultimately the domiciliary rule was substituted and appears now as Section 290 of the Restatement (Conflict of Laws), as follows: ‘Interests of one spouse is movables acquired by the other during the marriage are determined by the law of the domicile of the parties when the movables are acquired.‘
* * * This conclusion, supported as we think it is by the weight of authority, seems to us to be manifestly the logical result. For as was said by Chancellor Kent: ‘It is a settled principle of international jurisprudence and one founded on a comprehensive and enlightened sense of public policy and convenience, that the disposition, succession to, and distribution of personal property, whereever situated, is governed by the law of the country of the owner's * * * domicile * * * and not by the conflicting laws of the various places where the goods happened to be situated.
It is true, of course, that the income involved in the Shilkret case, supra, was from the personal services of the taxpayer, whereas the income involved here is from partnership interests located in Texas where the partnership, as we have already explained, was interested in the operation of a grocery store, an automobile selling agency, and a rice-growing business. Petitioner argues that these latter facts make the instant case distinguishable from the rule of the Herbert Marshall case, supra, and the Nathaniel Shilkret case, supra. We are not convinced that this is true.
Petitioner relies largely upon Hammonds v. Commissioner, 106 F.2d 420, and Skaggs v. Commissioner, 122 F.2d 721, to support his view. We do not think these cases are controlling. The issue presented by the facts in the instant proceeding, we think, is somewhat similar to the issue involved in Estate of E. T. Noble, 1 T.C. 310, affd. (C.A. 10, 1943), 138 F.2d 444. In that case the taxpayer Noble and his wife were domiciled in Oklahoma, a non-community property state. Income was received from Noble's separate property which was an interest in a partnership or joint venture located in texas. Noble and his partner were leasing Texas land for development as gas and oil producing land and petitioner's share of income from the leases was held to be income taxable entirely to the husband, Noble. In the Noble case this Court explained that neither the Hammonds case nor the Skaggs case was controlling. In the Hammond case it was held that ‘The leases being community property, petitioner and O. O. Hammons (petitioner's husband) were entitled to file separate returns, each reporting one-half of the income derived from the sale thereof.‘ The Hammonds case involved the nature of the gain derived from the sale of community property. The petitioner herein has conceded that his interest in the Texas partnership was his separate property and not community property. In that portion of the Noble case wherein we discussed the Skaggs case we said:
* * * it was held that Skaggs, then domiciled in Texas but owning separate real estate in California from which he received rentals, was not entitled to report that income as community income. It was held that, since under the laws of the State of California income from separately owned property is taxable to the owner and not to the marital community, the law of the state in which the real property was located must control, and that, even though the rentals from separately owned real estate in the State of Texas constitute community income, a different rule must obtain where the real estate is located in the State of California. The Supreme Court denied certiorari, 315 U.S. 811. We do not think that the decision of the court in that case has a material bearing upon the issue presented here.
As we have already stated the issue presented in the instant proceeding with the exception of the small amount of rental income of the partnership in the years 1944 and 1946 from real estate owned by it is similar to that presented in the Noble case, supra, and is similar to one of the issues in Trapp v. United States, 177 F.2d 1. In these cases, as in the instant proceeding, the taxpayer's interest in the Texas partnership was his separate property. Like the taxpayer Noble, Trapp and his wife were domiciled in Oklahoma and Trapp received net income as a member of a partnership leasing oil producing lands in Texas. Trapp's interest in the partnership was likewise his separate property and the court disposed of the issue by saying ‘the net gain (net income) from the leases was taxable to the taxpayer without division. Noble v. Commissioner, supra.‘
On the authority of the cases which we have cited and discussed above, we think the Commissioner did not err in taxing to petitioner his entire share of income distributable from the partnership, except his share of the net income from rental of real estate in 1944 and 1946 which was owned by the partnership. As we have already pointed out, income from rentals of real estate is controlled by the law of the situs and not by the law of the domicile. Therefore, in a recomputation under Rule 50, petitioner's partnership share of the income from rents from real estate owned by the partnership should be taxes as community income, one-half to petitioner and one-half to his wife.
Another think to which we think we should make some allusion is that petitioner's income tax returns which are in evidence and also his wife's income tax returns which are in evidence show that they each had certain income from their personal services rendered in the State of Virginia. Income from personal services in the State of their domicile was the separate income of the spouses and should be so treated in a recomputation under Rule 50.
Decision will be entered under Rule 50.