Langston v. Commissioner

MRS. LEN LANGSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Langston v. Commissioner

Docket No. 30073.

United States Board of Tax Appeals

23 B.T.A. 991; 1931 BTA LEXIS 1794;

June 30, 1931, Promulgated

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A husband and wife, residents of Louisiana, held record title in community to an interest in certain realty. On a certain date an action, which had been brought by third persons to recover a part of this interest was compromised, the community being represented by an attorney in fact. In the compromise agreement it was stated that the title to the part interest was vested in said third persons who agreed and did on said date pay to the attorney the sum of $100,000 and agreed to pay the husband the further sum of $100,000 out of oil to be produce dfrom the property, but not until the third persons had received $225,000 out of oil. On the next succeeding day the husband attempted to make a donation of a part of the controverted interest in the realty to his children. The initial payment of $100,000 was paid to the husband. The whole of the deferred payment of $100,000 constituted income. The husband died and his spouse survived. Held, that one-half of the unpaid $100,000 was, when collected by the children, taxable to the surviving spouse.

Robert A. Littleton, Esq., for the petitioner.

Brooks Fullerton, Esq., for the respondent.

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MURDOCK

The Commissioner determined deficiencies in the petitioner's income-tax liability as follows:

Year	Amount
1921	$179.36
1922	1,272.62

The petitioner made the following assignment of error:

The Commissioner has erred in adding to the appellant's income her pro rata share of the proceeds from the collections on a debt originally due to the deceased husband of the appellant and one-fifth of which account receivable was inherited by her upon his death, said share of collections for the year 1921 amounting to Seven Thousand Two Hundred Seventy-eight and 63/100 Dollars ($7,278.63), and for the year 1922 Thirteen Thousand Five Hundred Forty-six and 97/100 ($13,546.97) Dollars, and which results in the Commissioner taxing the return of capital as income.

The respondent alleged in an amended answer that the correct deficiency for 1921 was $3,784.05 instead of $179.36.

All of the evidence was presented by a stipulation as follows:

STIPULATION OF FACTS

Petitioner is a resident of Homer, Caddo Parish, Louisiana and is the widow of Len Langston. Petitioner and Len Langston were married on February 15, 1887, and from that date until December 16, 1920, they lived together as husband and wife.

In the year 1913, and subsequent to March 1st of that year, the said Len Langston for consideration received from George Shaw a conveyance of and thereafter claimed title to certain real property in the Parish of Claiborne, State of Louisiana, generally described as follows:

W 1/2 and W 1/2 of E 1/2 less E 1/2 of NW 1/4 of NE 1/4 and W 1/2 of NE 1/4 of SE 1/4 Sec. 19, T. 21 N R 7 W. and SE 1/4 and S 1/2 of NE 1/4 and E 1/2 of SW 1/4 Sec. 24, T. 21 N R 8 W containing 800 acres, more or less.

On January 27, 1919 Len Langston, husband of Annie E. Knighton (petitioner) conveyed to Henry C. Walker, Jr., an undivided one-half interest of the oil, gas and other minerals in and under said above described tract or tracts of land. A certified copy of said conveyance is attached hereto, made a part hereof, and marked "Exhibit A."

Subsequent to the time that Len Langston made the foregoing conveyance of an undivided one-half interest in the oil, gas and other minerals in and under said land to Henry C. Walker, Jr., there arose a controversy between the said Len Langston and Ruby Inez Moody et al. , as to who was the rightful owner, or owners, of an undivided one-half interest in said tract or tracts of land and entitled to the oil, gas and other minerals thereunder and therein. Said Ruby Inez Moody, et al., claimed title to an undivided one-half interest in said lands as heirs of their mother's interest in community property. Len Langston claimed as grantee of George Shaw, the father of Ruby Inez Moody, et al. Said controversy finally developed into a law suit under the style of Ruby Inez Moody, et al., vs. Len Langston, et al., Docket No. 4580, in the Third Judicial District Court of Louisiana.

On or about May 6, 1920, the said Ruby Inez Moody, et al., and Len Langston, et al., reached an agreement in compromise. A copy of said agreement in compromise is attached hereto and marked "Exhibit B." A certified copy of conveyance of May 6, 1920, from Ruby Inez Moody, et al., to A. R. Heinz, in consummation of said agreement in compromise, is attached hereto, made a part hereof and marked "Exhibit C."

The cash payment of $100,000 referred to in Exhibits B and C was paid to the said Len Langston in 1920. The $225,000, referred to in said Exhibit B, was to be paid to Ruby Inez Moody, et al., out of the first monies received from oil runs from the properties described therein after May 4, 1920, until the full amount was paid, and the subsequent $100,000, received from said oil runs, was to be paid to Len Langston until he had received and had been paid $100,000. No part of the said $100,000 to be paid Len Langston out of oil runs was paid or received by the said Len Langston or his agent or attorney during the year 1920. The first payment thereof was received during the year 1921 in the amount of $58,229.06.

On or about May 7, 1920, the said Len Langston made and executed an act of donation to his four children. A certified copy of said act of donation, dated May 7, 1920, is attached hereto, made a part hereof, and marked "Exhibit D."

On June 7, 1920, Len Langston executed a correction of said donation to his children of May 7th, 1920. A certified copy of said instrument of correction is filed herewith as "Exhibit E," and made a part hereof.

The payment of the $100,000 to be made to Len Langston from the oil runs was made during the following years in the following amounts:

Year	Amount
1921	$58,229.06
1922	27,093.89
1923	4,677.05
1924	10,000.00
Total	$100,000.00

Said payments were made to J. A. Thigpen, Trustee, as provided in said agreement of May 6, 1920, "Exhibits B and C," and by him distributed, one-fifth to each of the four children of Len Langston, and one-fifth to petitioner, Mrs. Len Langston.

Len Langston died on December 16, 1920, and there was no administration of his estate; his four children waiving all rights therein to his wife, petitioner herein.

The act of donation by Len Langston as set forth in Exhibits D and E has been regarded by petitioner and parties named therein as being a valid donation or gift under the laws of the State of Louisiana, and pursuant thereto the $100,000 received from oil runs, provided in Exhibits B and C to be paid to Len Langston, was actually distributed by J. A. Thigpen, Trustee, one-fifth to each of the four children of petitioner and Len Langston, deceased, and one-fifth to petitioner. Of the $58,229.06 paid in 1921, from said oil runs, petitioner received only $11,645.81. Petitioner did not report as income any part of said $11,645.81 as taxable income. The respondent confused petitioner with Mrs. Len T. Langston, petitioner's daughter-in-law, and in the deficiency notice included $5,216.87 as petitioner's income, that figure being the sum which on respondent's theory was the correct income of Mrs. Len T. Langston, petitioner's daughter-in-law. It is now conceded by petitioner that one-half of the one-fifth part of $58,229.06 and $27,093.89 paid from oil runs during 1921 and 1922 is taxable income to her, but that the other one-half of said one-fifth part thereof, being her husband's community, was inherited by petitioner at his death, and paid to her under waiver of administration by children.

For the year 1922 respondent included one-half of $27,093.89 as taxable income of petitioner, and proposed a deficiency in tax of $1,272.62. Respondent now contends that for the year 1921 petitioner is taxable on one-half of $58,229.06, or $29,114.53 and claims that deficiency proposed for 1921 be increased to $3,784.05.

Exhibit B, the agreement of compromise, was executed on May 6, 1920 by the attorneys for the parties to the suit. It provided:

Now, THEREFORE, the said Len Langston, by said attorneys, relinquishes any and all claim of title whatsoever to the interest claimed by the aforesaid plaintiffs in the land hereinafter described, being the undivided one-half interest in controversy in the suit of Mrs. Ruby Inez Moore, et al., versus Len Langston, et al., acknowledging the title of the aforesaid plaintiffs to such undivided one-half interest in said lands, and also relinquishes all claims to the money already accrued from the royalties held in suspense awaiting the termination of said suit and agrees that all companies holding said money shall immediately pay said amounts over to Mrs. Ruby Inez Moore Moody, Mrs. Lessie Vada Gandy and Mrs. Lena Brown and their vendees or to any person or attorney designated by them, and the aforesaid plaintiffs, viz., Mrs. Ruby Inez Moore Moody, Mrs. Lessie Vada Gandy and Mrs. Lena Brown, agree and bind themselves to pay in compromise and settlement to said defendant, Len Langston, his said attorneys, or to any person or persons designated by him, the sum of One Hundred Thousand Dollars ($100,000.00) cash, and the further sum of One Hundred Thousand Dollars ($100,000.00) payable only from the oil produced and saved on the land hereinafter described and accruing to three-one hundred and twenty-eighths (3/128) royalty, except as hereinafter stated, after the sum of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) shall first have accrued and been paid out of such oil to said Mrs. Ruby Inez Moore Moody, Mrs. Lessie Vada Gandy and Mrs. Lena Brown, their agent or attorney, transferees or assigns, and all of said parties constitute J. A. Thigpen, a resident of Caddo Parish, Louisiana, trustee, to whom the proceeds of the sale of the oil accruing to the aforesaid interest shall be paid and who shall pay the said sum of One Hundred Thousand Dollars ($100,000.00) to the said Len Langston, his agents or attorneys or parties designated by him, after the said sum of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) shall have accrued to said interest and been paid to him, said trustee, the said sums of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) and One Hundred Thousand Dollars ($100,000.00) to be paid as above provided from the oil produced from the lands hereinafter described from and including May 4, 1920.

The property which the said Len Langston relinquishes in favor of the said Mrs. Ruby Inez Moore Moody, Mrs. Lessie Vada Gandy and Mrs. Lena Brown is described as an undivided one-half interest in and to [here follows a description of the property and a description of the property affected by the royalty].

By Exhibit C, executed on May 6, 1920, Mrs. Ruby Inez Moore Moody, Mrs. Lessie Vada Gandy and Mrs. Lena Brown conveyed to A. R. Heinz "an undivided three-one hundred and twenty-eighths (3/128) of all the oil saved from that produced from the hereinafter described land * * *." The land described was that referred to in Exhibit B. This instrument further provided:

This sale is made for the consideration of the sum of One Hundred Thousand Dollars ($100,000.00), cash in hand paid, the receipt of which is hereby acknowledged, and the payment to the vendors herein of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) out of the first oil accruing to the interest above conveyed and the payment to Len Langston, his heirs or assigns, of One Hundred Thousand Dollars ($100,000.00) out of the first oil run after the payment to the vendors herein of the sum of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) and accruing to said interest.

The obligation to pay the aforesaid sums of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) and One Hundred Thousand Dollars ($100,000.00) are not personal obligations of this vendee, but are to be paid only in the event that the property produces sufficient oil to pay the same, and such payments are to be made only from the oil accruing to the royalty interest above conveyed from and including May 4, 1920.

And the parties hereto constitute J. A. Thigpen, a resident of Caddo Parish, Louisiana, trustee, to whom the proceeds of the sale of the oil accruing to the aforesaid interest from and including May 4, 1920, shall be paid and who shall pay the said sum of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) to these vendors, and thereafter shall pay the said sum of One Hundred Thousand Dollars ($100,000.00) to the said Len Langston, his agents or attorneys or parties designated by him, and when said sums shall have been so paid, said trust shall be at an end and the moneys accruing from the sale of the oil belonging to the in erest above conveyed shall be payable to the vendee herein.

Exhibit D is dated May 7, 1920. It provided:

Before me, the undersigned notary public in and for Claiborne Parish, Louisiana, duly commissioned and qualified, came and appeared Len Langston, who declared that he is desirous of making a division and donation of a portion of his property to his four children, and because of the love and affection he bears for his said children he does by this act and these presents give and grant unto Len T. Langston, Annie Belle Langston, wife of D. J. Missimer, Ida Langston, here present accepting and acknowledging delivery thereof, and Joseph K. Langston, all residents of Claiborne Parish, Louisiana, the following described property, to-wit:

To each of said four named children an undivided one-fifth interest each in the following described property, situated in Claiborne Parish, Louisiana, to-wit: [here follows a description of the property including the same property referred to in Exhibit B]. Said one-half interest in said property now being in litigation between Ruby Inez Moore et al., and the donor, as shown by suit No. 4580 on the docket of the Third Judicial District Court of Louisiana in and for Claiborne Parish, and No. 23537 on the docket of the Supreme Court of the State of Louisiana; and the said donor having authorized the firm of Blanchard, Goldstein & Walker, his attorneys, to settle and compromise said suit on such terms and conditions as may to them seem fit, this donation shall in no wise affect the procuration and authority of said attorneys to settle and compromise said suit, the donees confirming and ratifying the action taken or which shall be taken by said attorneys pursuant to said authority.

Exhibit E was to eliminate from the provisions of Exhibit D a piece of land erroneously included therein.

OPINION.

MURDOCK: It appears from the stipulation that in 1913, but subsequent to March 1 of that year, George Shaw executed an instrument purporting to convey about 800 acres of land in fee to Len Langston. It does not appear what consideration Langston gave for this conveyance. Thereafter, Langston claimed title to this property in fee. On January 27, 1919, Langston conveyed one-half of the oil, gas and other minerals in and under and that might be produced from this property to Walker for $15,000. Langston acknowledged receipt of the $15,000. Subsequent to this conveyance to Walker, three children of Shaw sued Langston for an undivided one-half interest in the 800 acres of land to which they claimed title through inheritance of their mother's interest in community property. Apparently the case was tried and an appeal was taken. At any rate, while the proceeding was pending on appeal it was compromised on May 6, 1920. By the agreement of compromise Langston relinquished any and all claim of title whatsoever to the interest claimed by the plaintiffs in the land, being the undivided one-half interest, and acknowledged the title of the plaintiffs. By the terms of the agreement of compromise Langston was to receive $100,000 in cash and the further sum of $100,000 payable only from the oil produced and saved on the land and accruing to certain royalties after $225,000 was first paid from this oil to the plaintiffs in the suit. On the same day, May 6, 1920, the plaintiffs conveyed to Heinz an undivided 3/128 of all the oil saved from certain parts of the land and also an undivided 9/512 of the oil saved from certain other parts of the land upon consideration of the payment of $100,000 in cash and the payment to the vendor of $225,000 out of the first oil and the payment to Langston of $100,000 out of the next oil. Langston received the cash payment of $100,000 provided for in the compromise agreement and that is not in controversy. The controversy relates only to the second $100,000 which he was to receive only in the event that the property produce sufficient oil to pay the same.

At the end of the day, May 6, 1920, Langston was still the owner of the undivided one-half interest in this land which was not in controversy in the suit, subject to the conveyance which he had made to Walker of one-half of the oil, gas and other minerals under the 800-acre tract. On the next day, May 7, 1920, he executed an instrument purporting to give to each of his four children, because of love and affection, an undivided one-fifth interest in an undivided one-half interest in the 800 acres of land. After describing the land this instrument recited:

* * * said one-half interest in said property now being in litigation between Ruby Inez Moore, et al., and * * * the said donor having authorized * * * his attorneys, to settle and compromise said suit * * * this donation shall in no wise affect the procuration and authority of said attorneys to settle and compromise said suit, the donees confirming and ratifying the action taken or which shall be taken by said attorneys pursuant to said authority. This instrument was apparently executed under a misapprehension of the facts, for the suit had been compromised and settled the previous day and, if the donor had ever been the owner of this particular one-half interest, nevertheless he was thereafter not the owner. On May 7, 1920, the only right which he had in relation to this one-half interest was the right given him under the compromise agreement to receive $100,000 from the oil produced and saved and accruing to the royalties after the payment of $225,000 to the three Shaw children.

The petitioner, in her brief, takes a position somewhat different from that indicated in the assignment of error in the petition. She now concedes that in each year she received one-fifth of the total amount received and distributed by the trustee and one-half of the amount which she received is taxable income to her since it came to her as community property. But she contends that the other one-half of the amount which she received in each year related to that half of the community property which her husband owned and which she inherited from him at his death. The respondent does not seek to tax the petitioner with any amount which she might have received as an heir of her husband. He contends that one-half of the money coming from the royalties is taxable income to her because she had been a member of the community which had originally acquired the right to receive this money under the agreement of compromise, and she either never parted with this right, or, if she did part with the right, such parting did not relieve her from the payment of income tax upon her share of the money when it became due and was paid.

At the outset we are met with the contention of the respondent that the donation made by Len Langston was void in so far as it attempted to donate the $100,000 which was to be paid out of oil, if such in fact was the result of the donation. He refers to article 1528 of Merrick's Revised Civil Code of Louisiana, which provides:

A donation inter vivos can comprehend only the present property of the donor. If it comprehend property to come, it shall be null with regard to that.

The respondent insists that since Len Langston could not enforce the payment of the unpaid portion of the compromise settlement until oil sufficient to pay the Shaw children the sum of $225,000 had been captured, and then not until further oil sufficient to pay the $100,000 or at least a part thereof coming to him had been recovered, and since all this depended on the uncertainty of the amount of oil under the land, his right to this $100,000 was future property. He cites . Counsel for the petitioner has made no reply to this contention. If, as the respondent contends, the donation was an attempt to convey future property, the attempted conveyance would not relieve the petitioner from tax. Parker v. Routzahn, Dist. Ct., N. Dist. Ohio, 10/28/30. Cf. ; ; affd., ; . But in any event, the Commissioner's determination need not rest on this contention alone.

While Langston attempted on May 7 to donate undivided interests in that part of the land which was in suit, it is obvious that on that date he did not own the land, a part of which he attempted to donate. On the previous day, May 6, he, through his attorneys, had renounced all title thereto. Further, the Shaw children had on the same day conveyed the oil interests to Heinz, who in turn had made the cash payment of $100,000, all of which on that date belonged to Langston. Here we are concerned not with the intentions of Langston, whatever they may have been, but with what he actually did. ; . It is clear that on May 7 Langston had no land to donate. But it is contended by the petitioner that the act of donation attaches to Langston's right to receive the amounts payable to him under the compromise. There are words in the act of donation which indicate that this may have been his intention. On the other hand, it is stipulated that the cash payment of $100,000 was paid to Len Langston. If the act of donation carried with it all rights under the compromise agreement, four-fifths of this cash payment was as much the property of the children as was their right to four-fifths of the deferred unpaid amount of $100,000. The matter is clouded with doubt, which should have been removed by the petitioner.

Giving to the act of donation the construction most favorable to the petitioner, it amounted only to an assignment of a right to receive future income. We say this for the following reasons: Since no contention to the contrary is made, we must assume that in the absence of the donation, the whole of the unpaid $100,000 when received would have constituted taxable income to the Langston community, one-half of which would have been taxable to the petitioner and the other half to her husband. After the execution of the compromise agreement the Langston community had nothing more to do to earn this income, and a gift of such income does not relieve the donor from income tax thereon. ; Parker v. Routzahn, supra; ; ; ; ; .

While the donation was made by the husband, he made it "not as the exclusive owner, but because by law he was created the agent of the community." ; . Cf. Art. 2404 Merrick's Revised Civil Code of Louisiana. The donation was as much the act of the petitioner as of her husband. Her husband is dead and we are not concerned with his half of the income, but the petitioner remains taxable on her half irrespective of the act of donation, if in fact such donation transferred to the children a part of this earned but unpaid income. The petitioner should be taxed upon one-half of the payments made in the years before us and further adjustment should be made in compliance with the stipulation.

Judgment will be entered under Rule 50.