Opinion
Docket No. 11383.
Promulgated December 16, 1947.
1. Profits earned by a wife's operation of a boarding and rooming house in Texas, a community property state, held, derived from the wife's personal services within the meaning of section 811 (e), Internal Revenue Code.
2. The value of a farm purchased in Texas with community funds, comprising profits derived from the surviving wife's personal services, held, includible in the value of the deceased husband's gross estate, with the exception of the interest acquired with such profits.
Wesley E. Seale, Esq., for the petitioner.
John P. Higgins, Esq., for the respondent.
This case involves a deficiency in Federal estate tax determined by the respondent in the amount of $3,601.62. Petitioner assails respondent's inclusion of the entire community estate of Frank D. Neumann and his wife, Louise J. Neumann, in the estate of Frank D. Neumann, deceased, for tax liability under section 811 (e) (2), Internal Revenue Code, on the ground that only one-half of the community estate should be taxed for estate tax purposes, since the whole of such community estate was economically attributable to the surviving wife, having been derived originally from compensation for personal services actually rendered by her. The case was submitted on oral testimony and exhibits.
FINDINGS OF FACT.
Frank D. Neumann, a resident of Sinton, San Patricio County, Texas, died testate on July 28, 1944, and the return for the estate here involved was filed with the collector of internal revenue for the first district of Texas, at Austin, Texas, by Louise J. Neumann, independent executrix of the estate, she having been theretofore lawfully appointed such.
Frank D. Neumann and Louise J. Neumann were husband and wife, having married January 29, 1901, and they continued thereafter to live together as husband and wife until his death, both being resident citizens of the State of Texas during their entire married life.
Neither of them owned property at the time of their marriage, nor did either inherit or receive by gift property thereafter, and all property acquired by them or either of them during their marriage was community property under the laws of Texas.
The community property so owned by Frank D. Neumann and his surviving wife, Louise J. Neumann, at the time of his death was as follows:
Real Estate Personal Property
. A farm consisting of 500 acres of land in San Patricio County, Texas (240 acres of which was purchased in 1912, and 260 acres in 1920), of the value of .......................................... $50,000.00 All of lot 16 and one-half of lot 17, block 53, in the city of Sinton, San Patricio County, Texas, of the value of ................................... 5,000.00 . Bonds: U.S. Government bonds of the value of ....................... $19,000.00 Road bonds of the value of ........... 7,000.00 --------- 26,000.00 Cash on deposit in bank ..................................... 1,422.00 Three policies of life insurance on the life of Frank D. Neumann, of the value of ...................... 12,366.20 One automobile of the value of .............................. 500.00 Household goods of the value of ............................. 1,500.00 -------- Total value ............................................. 96,788.20 The Federal estate tax return filed herein by Louise J. Neumann, independent executrix of her husband's estate, listed all of the property above enumerated, with the values as stated, but claimed that only one half of same was subject to Federal estate tax, since she had personally earned and accumulated the $27,000 with which 240 acres of the farm had been purchased, and that it was from the earnings of this farm that she and her husband accumulated the balance of the estate owned by them at the time of his death.The estate tax return also listed items of deduction aggregating $3,050.27, which deduction apparently was not contested by the Commissioner.
The Commissioner determined that, since all property of the estate was community property, its entire value was taxable and includible in the gross estate of Frank D. Neumann, deceased, under the provisions of section 811 (e) (2), Internal Revenue Code, as amended by section 402 (b) of the Revenue Act of 1942.
Frank D. Neumann had no business, trade, or profession and was not regularly employed, but worked at various jobs, among them being: Worked in meat market, on the railroad, in the fields, in a garage, as a carpenter, hauled cordwood, etc., and his maximum earnings were on an average of $40 to $60 a month, and he was never able to earn a livelihood for his wife and two children. His wife was the money-maker, earned the living for the family, and made the important business decisions. The first 6 years of their married life were spent in Fayette County, Texas, then they moved to Corpus Christi, where he first had a job as a clerk in a hotel, but shortly thereafter the owner of the hotel died and he was out of employment, and they had only $35 and he wanted to write to their folks for money with which he and his family could move back to Fayette County. To this his wife objected, and she sought some way to make a living, and saw a "for sale" sign on a rooming and boarding house, and upon inquiry found that the owner, a woman, was in ill health and had to quit at once. Whereupon Mrs. Neumann bought the furniture for $450 on a credit secured by mortgage, to be paid in $25 monthly installments, and took over the lease on the 14-room building, entailing a monthly rental of $50. She made arrangements to buy the necessary groceries and opened a rooming, but principally a boarding, house where meals were served to the roomers and many others. She made herself known to the business people of the town and through them solicited table boarders and secured a large number. She personally managed and operated the boarding house, giving her personal services and devoting her entire time and attention thereto. By her labor, thrift, and good management, Mrs. Neumann was successful, and with the profits from the boarding house she was soon enabled to pay off the indebtedness she incurred in securing it and began a consistent saving and depositing in the bank of earnings and profits therefrom, and throughout the approximate 10-year period that she operated same at Corpus Christi she made and saved therefrom the total sum of $17,000.
Corpus Christi was on the Gulf coast, where a storm occurred, and Mrs. Neumann decided she did not care to live there longer. She had a brother living in Beaumont, Texas, which city was on a boom, due in part to the building of a big shipyard there, so she told her husband she was going to move to Beaumont and get a new location. She rented a building in Beaumont and operated a boarding and rooming house in the same manner as in Corpus Christi, except on a larger scale and for much higher prices. Her house was well located for this business, being near the shipyards, and was operated at full capacity, both as to roomers and table boarders, having at one time as many as 93 roomers and table boarders. In the 2 years that she operated the boarding house in Beaumont, she accumulated and saved profits therefrom in the sum of $10,000.
The success of Mrs. Neumann's boarding house operations at Corpus Christi and Beaumont and the compensation and profits she received therefrom were attributable entirely to the personal services actually rendered by her; the necessary costs in their maintenance and operation were all derived from profits therefrom, and her husband did not contribute thereto. When out of employment he gave some assistance at times, such as occasionally sweeping and washing dishes, etc., but his services did not constitute a material contribution to the operation or management of the business.
The $17,000 of profits Mrs. Neumann earned and saved from the operation of the boarding house in Corpus Christi and the $10,000 profits she accumulated from the boarding house in Beaumont were earned and received by her as compensation for personal services actually rendered by her, and this total sum of $27,000 so acquired by her was invested in the farm owned by Mrs. Neumann and decedent at the time of his death. While the title to the farm was in Neumann's name, the purchase price of $12,000 for the 240 acres first acquired was paid entirely from Mrs. Neumann's boarding house profits, and the remaining $15,000 accumulated from her boarding house operations was expended in making valuable and permanent improvements upon the farm which enhanced its value in an amount equal to at least the sums so expended.
The estate owned by Mrs. Neumann and decedent at the time of his death, to the extent of $27,000, was derived originally from compensation received by Mrs. Neumann for personal services actually rendered by her.
In 1918 Mrs. Neumann and decedent and their family moved onto the farm theretofore bought and upon which sums of money had been theretofore and were thereafter expended in making permanent improvements thereon. It was Mrs. Neumann's decision which prompted the buying of the farm. After moving onto the farm, both Mrs. Neumann and decedent did some work on the farm, but the eldest son had much to do with its operation, since he spoke Spanish and Mexican labor was employed exclusively. Neumann's health later failed and during the last 10 or 12 years of his life he was 100 per cent disabled.
OPINION.
Texas is a community property state and has been throughout its history, both as a state and a republic.
Prior to the enactment of the Revenue Act of 1942, in Texas, as in other community property states, upon the death of the husband or wife, where they owned community property, a Federal estate tax was levied only upon the one-half of such estate belonging to the deceased spouse. By section 402 (b) (2) of said act, now known as section 811 (e) (2) of the Internal Revenue Code, the law was changed so that all property held as community property by decedent and the surviving spouse under the law of any community property state is taxable in its entirety to the decedent. The Supreme Court upheld the constitutionality of that act. Fernandez v. Wiener, 326 U.S. 340; United States v. Henry Rompel, Jr., 326 U.S. 367. The only exception to this innovation in the law is contained in the act itself, in the following language:
SEC. 811. GROSS ESTATE.
The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States —
* * * * * * *
(e) JOINT AND COMMUNITY INTERESTS. —
(1) JOINT INTERESTS. — * * *
* * * * * * *
(2) COMMUNITY INTERESTS. — To the extent 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. [Italics ours.]
* * * 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. * * *
It is this exception contained in the statute that we are called upon to construe and apply to the facts of this case.
Respondent cites decisions by Texas Courts of Civil Appeals holding that the personal earnings of either the husband or wife are community and not separate property. Lilly v. Yeary, 152 S.W. 823; Barr v. Simpson, 117 S.W. 1041. Unquestionably such is the law in Texas, see opinions by Texas Supreme Court, Barr v. Barr, 120 Tex. 61; 36 S.W.2d 152; Arnold v. Leonard, 118 Tex. 535; 273 S.W. 799.
All of the estate here involved was the community property of Frank D. Neumann and his surviving wife. Petitioner's right, if any, to prevail herein is not based on the ground that part of the estate was her separate property, but whether under the Federal statute all or any part thereof has been "shown to have been received as compensation for personal services actually rendered" by her "or derived originally from such compensation."
We agree with petitioner that the language "compensation received for personal services actually rendered" need not result from an employer-employee relationship. The language of the act does not justify such a narrow interpretation. Furthermore, that such was not the intention of Congress is evidenced from the report of the Finance Committee of the Senate in reporting the bill to the Senate, wherein, in commenting upon the purpose of, and the effect upon those excepted from, the change in the law it said:
The amendments thus make due provision for the exclusion from the gross estate of that portion of the community property which is economically attributable to the survivor. * * *
In the light of this explanation it would appear that it was the intention of Congress to exempt from the estate tax that portion of the community property "economically attributable to the survivor."
"Personal services" means more than mere labor performed, and includes skill, science, and other work or management resulting from the service of a person. See Hoyt v. White, 46 N.H. 45; Yost v. Scott County Commissioners, 25 Minn. 366.
Under the law of Pennsylvania, where a married woman's earnings become her separate property, it was held that the wife's earnings need not be in the form of a salary, but could be a share of the profits from the business in which she was engaged. Berkowitz v. Commissioner, 108 F.2d 319.
In E. T. 20 (1947), Internal Revenue Bulletin No. 23, p. 15, the Commissioner, in interpreting section 811 (e) (2) of the Internal Revenue Code, ruled that, where the decedent and his surviving wife were engaged in a mercantile business in which the wife rendered regular, substantial, and gainful personal services, property of the marital community shown to have been economically attributable to her personal services in such business was "compensation for personal services actually rendered by the surviving spouse," and this would be so whether she was gainfully employed independently or in a joint enterprise. Furthermore, that the words "compensation" and "personal services" in the statute were used in a comprehensive sense and not restricted to salary or wages.
Was the money Mrs. Neumann accumulated from the operation of her boarding houses at Corpus Christi and Beaumont compensation for personal services actually rendered by her? We think so.
Running a boarding house is a well known American occupation. A vast majority of those so engaged are women, it being peculiarly a woman's work, since it is in a sense an enlargement of her household duties on a wholesale scale. The husband, if there be one, usually plays a minor role, as he did here. To be successful in the operation of a boarding house requires close application, hard and unremitting toil, a knowledge of the business, thrift, and good management. Mrs. Neumann apparently possessed and exercised all of these qualities in a marked degree. She necessarily had to actually render personal services, since she started from scratch without anything, and her phenomenal success could not have been attained without it. Furthermore, she was fortunate in the location for such a business, since Corpus Christi and Beaumont were two of the most rapidly growing towns in the country.
We know of no work in which a woman can engage requiring a greater degree of personal service actually rendered by her than in the successful operation of a boarding house, and the $27,000 Mrs. Neumann accumulated therefrom was "economically attributable" to her under the statute.
Since this entire amount was invested in the purchase price of part of the farm owned at the time of Neumann's death and for valuable and permanent improvements thereon, we hold that to the extent of $27,000 the estate here involved was derived originally from compensation received by Mrs. Neumann for personal services actually rendered by her and is, therefore, not includible in the gross value of the estate.
The evidence does not warrant a finding, as contended by petitioner, that the entire estate was derived originally from this $27,000 and the farm in which it was invested. Petitioner has failed to trace all of the property of the estate to such original investment. Two hundred and sixty acres of the farm were purchased after the boarding house operations ceased, and petitioner has not shown what price was paid for this part of the farm nor the source from whence it was derived, and the same can be said as to the purchase price of the personal property. Petitioner has failed to meet the burden of proof incumbent upon her, except as to the sum of $27,000, and, since this amount is less than one-half of the value of the entire community estate, it will not be included in the gross value of the estate for estate tax purposes.
Reviewed by the Court.
Decision will be entered under Rule 50.