Horst v. Commissioner , 3 T.C. 417 ( 1944 )

Estate of E. Clemens Horst, Deceased, Daisy B. Horst, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. Daisy B. Horst, as Transferee of E. Clemens Horst, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent

Horst v. Commissioner

Docket Nos. 686, 687

United States Tax Court

3 T.C. 417; 1944 U.S. Tax Ct. LEXIS 176;

March 6, 1944, Promulgated

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In Docket No. 686 decision will be entered under Rule 50, and in Docket No. 687 decision will be entered of no transferee liability.

In 1925 the decedent and his wife, domiciled in California, entered into an agreement providing for the transfer of 2,026 shares of stock, owned by them as community property, to the wife, as her separate property, in consideration for the release of her community interest in a like number of shares of the same stock. Held, the transfer to the wife was a gift, and not a sale or exchange for a "fair consideration in money or money's worth" within the provisions of section 320 of the Revenue Act of 1924.

M. E. Harrison, Esq., and Theodore R. Meyer, Esq., for the petitioners.

H. D. Thomas, Esq., for the respondent.

Arundell, Judge.

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ARUNDELL

These consolidated proceedings involve a proposed deficiency in Federal gift tax for the year 1925 in the amount of $ 32,348.80, and transferee liability for the same tax. The respondent, upon brief, has conceded that there is no liability on the part of Daisy B. Horst as transferee. The sole question then, is whether the transfer by a husband to his wife of a certain number of shares of stock held as community property, in consideration of a release by her of her community interest in an equal number of shares in the same company, constitutes a gift under section 319 of the Revenue Act of 1924, as amended by section 324 of the Revenue Act of 1926, ¹ or, as the petitioner contends, was a sale or exchange of property for a "fair consideration in money or money's worth" within the provisions of section 320 of the Revenue Act of 1924.

FINDINGS OF FACT.

The petitioner in Docket No. 686 is the duly appointed executrix of the estate of her deceased husband, E. Clemens Horst, who died on May 24, 1940. The gift tax return for the year 1925 was filed on or about May 23, 1942, with the collector of internal revenue for the first district of California.

Daisy B. Horst and E. Clemens Horst were married February 14, 1893. From that time until the death of the husband they have been residents of and domiciled in California.

On April 11, 1925, they entered into an agreement with each other providing for the disposition of certain shares of stock of the E. Clemens Horst Co., owned by them as community property. The agreement follows:

This Agreement, made this 11th day of April, 1925, by and between E. Clemens Horst and Daisy B. Horst, his wife, both of the City and County of San Francisco, State of California,

WITNESSETH:

That Whereas there now stands in the name of the undersigned, E. Clemens Horst, four thousand fifty-two (4052) shares of the capital stock of E. Clemens Horst Company, a New Jersey corporation, evidenced by certificates of stock Numbers 238 and 258 of said corporation; and

Whereas, said corporate stock is the community property of the parties hereto and it is the desire of the parties hereto that said corporate stock should be equally divided between them so that each one shall hold one-half thereof as his or her separate property;

Now, Therefore, It Is Hereby Agreed between the said parties as follows:

First: Said E. Clemens Horst hereby assigns, transfers and conveys unto said Daisy B. Horst, two thousand twenty-six (2026) shares of said capital stock to be held by her as her separate property;

Second: The said Daisy B. Horst hereby assigns, transfers and conveys to said E. Clemens Horst the remaining two thousand twenty-six (2026) shares of said capital stock to be held by him as his separate property with full and unrestricted ownership of the same, including full testamentary power over the same.

In Witness Whereof the parties hereto have hereunto set their hands the day and year first herein written.

E. Clemens Horst

Daisy B. Horst

OPINION.

We think the case of , decided by the Ninth Circuit Court of Appeals, is indistinguishable in principle from the present case and requires that the respondent be sustained. The court in that case, after reviewing the California authorities as to the nature of the wife's estate in community property prior to the amendment of the Civil Code in 1927, concluded "that the wife having no proprietary interest or estate in the community property beyond a mere expectancy before the gift by the husband, and thereafter having the entire interest in the property as a part of her separate estate, the gift tax was properly assessed upon the whole value of the property under the act."

The petitioner seeks to distinguish , on the ground that the court in that case considered a transfer running solely from the husband to the wife, while in the instant case the wife transferred her community interest to the husband as a part of the same transaction. But, this overlooks the fundamental basis of the court's decision, which was that the wife's interest prior to 1927 was a mere expectancy which did not materialize into a property interest until the dissolution of the marriage relationship either by death or divorce, ; , and, consequently, before the gift she had no estate of value.

Petitioner also seeks to bolster her position by arguing the analogy between a wife's dower interest and the interest of a wife in community property in California prior to 1927. We think no useful purpose would be served by pointing out the difference between the two interests. It might be noted, however, that the interest considered in Ferguson v. Dickson, 300 Fed. (2) 961, the case chiefly relied upon by petitioner, arose in New Jersey, where it has been held that "the inchoate right of dower, though not an estate in land, is a present, fixed, and vested valuable interest of a wife in her husband's estate of inheritance, in land of which he is seized, defeasible upon predeceasing him." ; ; ; .

In view of the foregoing, we hold that the release of the wife's interest in 2,026 shares of stock did not constitute a "fair consideration in money or money's worth" for the transfer of a like number to her as separate property, and that such transfer was a gift, taxable under sections 319 and 320 of the Revenue Act of 1924, as amended by section 324 of the Revenue Act of 1926.

In Docket No. 686 decision will be entered under Rule 50, and in Docket No. 687 decision will be entered of no transferee liability.

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Footnotes

• 1. Sec. 319. For the calendar year 1924 and the calendar year 1925, a tax equal to the sum of the following is hereby imposed upon the transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly, and upon the transfer by a nonresident by gift during such calendar year of any property situated within the United States, whether made directly or indirectly; * * *

  Sec. 320. If the gift is made in property, the fair market value thereof at the date of the gift shall be considered the amount of the gift. Where property is sold or exchanged for less than a fair consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the consideration received shall, for the purpose of the tax imposed by section 319, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.↩