DocketNumber： Docket Nos. 3567, 3568
Citation Numbers： 1945 U.S. Tax Ct. LEXIS 177, 4 T.C. 1260
Judges： Opper, Habron, Arundell, Leech, Agree
Filed Date： 4/30/1945
Status： Precedential
Modified Date： 1/13/2023
*177
1. On October 25, 1937, H. C. Frick Coke Co. conveyed to petitioner and his wife coal underlying two tracts of land covering approximately 50 acres. Thereafter, and during the taxable years, the coal was mined. Part of the coal was sold as raw coal, but the slack was processed and sold as coke. The cost of mining the coal, processing the coke, and the sale of both came from a joint bank account of petitioner and his wife, and all of the proceeds from such operation were deposited in such joint account. In the respective taxable years, petitioner and his wife each claimed ownership of one-half the net proceeds of such mining and coking operations and each reported one-half thereof on their respective separate income tax returns.
2. (a) In the taxable years, petitioner and his wife held in their joint names shares of the capital stock of certain corporations which had been purchased *178 from funds held in a joint account in the names of petitioner and his wife.
(b) In 1933, petitioner and his wife rented a safe deposit box to which either had access. On October 16, 1944, certain bearer bonds and certain certificates of shares of corporate stock, issued in the name of petitioner and endorsed by him in blank, were in that safe deposit box.
*1260 These consolidated proceedings involve income tax deficiencies for the years 1940 and 1941 in the respective amounts of $ 2,255.70 and $ 14,788.60. The issues are (1) whether respondent erred in treating all gain from the sale of coal and coke as income of the petitioner, rather than one-half as his and one-half that of his wife on a *179 theory of ownership by the entirety; and (2) whether respondent erred in treating all interest from certain bonds and all dividends from certain stocks as the income of the petitioner, rather than one-half as his and one-half that of his wife on the theory of ownership by the entirety. Certain facts were stipulated. We find the facts as stipulated. Other facts not stipulated are found from the evidence.
FINDINGS OF FACT.
Petitioner is an individual, residing in the Borough of Scottdale, Westmoreland County, Pennsylvania. His income tax returns for *1261 the years 1940 and 1941 were filed with the collector of internal revenue for the twenty-third district of Pennsylvania. Petitioner and Gayle Pritts were married on August 23, 1929, and have since continued to live as husband and wife. The latter filed individual income tax returns for the years 1940 and 1941. Her first separate return was filed for the year 1940. On June 21, 1928, petitioner, with his own funds, acquired a bond and mortgage constituting a lien on all the Pittsburgh, 9-foot or Monongahela River vein or seam of coal in and underlying 3 tracts of land located in Fayette County, Pennsylvania. By sheriff's*180 deed dated June 21, 1932, executed as a result of a foreclosure judgment previously entered, petitioner became the sole owner of two of the aforesaid tracts of coal land and, individually, the owner of an undivided one-sixth interest in a third tract containing 96 1/2 acres.
By deed dated May 28, 1934, National Deposit Bank of Brownsville conveyed its undivided five-sixths interest in the third tract to the petitioner individually.
On May 29, 1934, petitioner and his wife entered into an agreement of lease with H. C. Frick Coke Co. covering these coal lands. The lease was to continue for a term of six years, and provided for the payment of certain fixed royalties in equal quarterly installments throughout the term.
On June 1, 1934, petitioner and his wife assigned to the National Deposit Bank of Brownsville the first 7 quarterly installments of royalty reserved under the lease as security for the entire purchase money due the National Deposit Bank of Brownsville, amounting to $ 42,305.69 for its undivided five-sixths interest in the tract of coal land containing the 96 1/2 acres.
On June 12, 1934, with the exception of the first installment which had been paid to the National Deposit*181 Bank of Brownsville, petitioner and Gayle P. Brennen, his wife, assigned all the payments of royalty to be received under the lease with H. C. Frick Coke Co. to the Farmers Deposit National Bank of Pittsburgh as collateral security for their joint note, the proceeds of which were used to pay the balance of purchase money due the National Deposit Bank of Brownsville. The quarterly installments of royalty were received by the Farmers Deposit National Bank of Pittsburgh and applied to the reduction of the aforesaid joint note and renewals thereof until December 18, 1935, when the original note was substantially paid. At that time a joint collateral note was given to the Farmers Deposit National Bank of Pittsburgh in the amount of $ 55,874.80, payable March 2, 1936. The proceeds of this note were used to purchase 1,000 shares of Pennsylvania Railroad Co. stock, 500 shares of Standard Oil Co. of Indiana stock, 500 shares of Imperial Oil Co. of Canada stock, and 300 shares of *1262 Swift & Co. stock. These shares were issued in the joint names of petitioner and Gayle P. Brennen and deposited with the note as additional collateral. These shares of stock, with the exception of the*182 shares of Imperial Oil Co. of Canada which had been sold, were owned by them during the years 1940 and 1941.
Thereafter the royalties due from the Frick Coke Co. were received by the Farmers Deposit National Bank of Pittsburgh and applied to the reduction of the note of December 18, 1935, and renewals thereof until September 4, 1936, when the petitioner and his wife executed and delivered to the First National Bank of Scottdale their joint collateral note securing the payment of the residue of the indebtedness of $ 35,630.87. This note was secured only by the deposit of the shares of stock above described.
On October 25, 1937, H. C. Frick Coke Co. conveyed to petitioner and Gayle P. Brennen, his wife, approximately 50 acres of coal of the Connellsville vein or seam underlying two tracts of land in Mount Pleasant Township, Westmoreland County, Pennsylvania (hereinafter called "Mount Pleasant coal lands") in full payment of the remaining royalties due under the indenture dated May 29, 1934, and that indenture was canceled.
Commencing shortly after October 25, 1937, and continuing thereafter throughout the years 1940 and 1941, the coal in the Mount Pleasant coal lands was mined and *183 sold, in part, as raw coal and the slack was manufactured into coke and sold as coke.
Petitioner and Gayle P. Brennen have never entered into a partnership agreement in writing. The mining and coke operations were under the management of petitioner during the taxable years involved. Gayle P. Brennen at no time had record title to any coal lands or interest in coal lands other than the Mount Pleasant coal lands.
On September 13, 1933, upon the organization of the First National Bank of Scottdale, and continuing until the present, two joint accounts were opened and have been carried in that bank, each in the name of petitioner, George K. Brennen, and Gayle P. Brennen, his wife. One of the accounts was designated "Special."
Since 1933 petitioner and his wife have had a safe deposit box in the First National Bank of Scottdale, to which either had access. All the certificates for shares of stock issued in the name of petitioner, the dividends of which were divided equally between petitioner and Gayle P. Brennen on their respective income tax returns for the years 1940 and 1941, were on October 16, 1944, 1 lodged in such safe deposit box. The printed assignments on the back of all *184 such certificates for shares were signed by petitioner, in blank. All of the bonds, the interest on which was divided equally between petitioner and Gayle P. *1263 Brennen in their respective income tax returns for the years 1940 and 1941, were payable to bearer and were, on October 16, 1944,
During the year 1940, from the Mount Pleasant coal lands 20,562 tons of coal were mined and sold as coal for $ 51,370.45, and, in addition, 24,042 tons of coal mined from said lands were manufactured into coke, producing 16,029.07 tons of coke, which were sold for $ 83,441.13.
During the year 1941, from the same lands 19,932.2 tons of coal were mined and sold as coal for $ 61,646.91, and, in addition, 33,903 tons of coal mined from such lands were manufactured into coke producing 22,602.7 tons of coke, which were sold for $ 132,903.29.
Since mining operations began in the Mount Pleasant coal*185 lands, depreciation and depletion have been claimed and allowed as follows:
| Year | Depletion | Depreciation |
| 1938 | $ 1,894.40 | $ 1,894.40 |
| 1939 | 4,811.20 | 4,811.20 |
| 1940 | 7,888.32 | 7,888.32 |
| 1941 | 9,075.20 | 9,075.20 |
| Total | 23,669.12 | 23,669.12 |
After January 1, 1938, the only mining operations conducted by the petitioner were in the Mount Pleasant coal lands. The moneys derived from such mining operations were deposited in the aforementioned joint account designated "Special." The development expenses of such mining operations were paid from moneys withdrawn from the joint account designated "Special." No moneys were withdrawn from such account except to pay development expenses, all the expenditures incident to the mining, coking, and sale of coal and coke, and taxes, except when there was a surplus of such moneys withdrawals were made to purchase stocks and bonds. Gayle P. Brennen assisted in the office work in connection with the mining operations. She made up payrolls, signed checks, and took orders for the sale of coal and coke in the absence or disability of the petitioner or either of the clerks.
For the taxable years 1940 and 1941, petitioner and Gayle P. Brennen filed*186 partnership tax returns showing the annual gain from the mining and coke operations in the Mount Pleasant coal lands. In their individual income tax returns for those respective years each reported one-half of the gain from such operations as his and her individual income.
OPINION.
Petitioner contests respondent's action in including in his gross income for the respective taxable years 1940 and 1941, (a) all the gain derived from certain coal mining and coking operations on *1264 lands known as Mount Pleasant coal lands; (b) all the dividends from certain shares of stock; and (c) all the interest from certain bonds, payable to bearer. Petitioner and his wife, Gayle P. Brennen, each reported one-half of the gains, dividends, and interest in their individual income tax returns for the respective taxable years.
Petitioner contends that the coal lands from which the coal was mined and sold or converted into coke and then sold, the shares of stock, and the corporate bonds were owned by him and his wife as tenants by the entirety, and that only one-half the gains, dividends, and interest therefrom belonged to him.
Under the law of Pennsylvania, which is of course controlling here, *187 "A tenancy by entireties arises whenever an estate vests in two persons, they being, when it so vests, husband and wife. It may exist in personal as well as real property, in a chose in action as well as a chose in possession. [Citations]."
We first discuss the issue relating to the gains resulting from*188 the coal and coking operations. The respondent's brief states his position as follows:
* * * The Commissioner's primary contention is that all income derived from a realization on the increase in value of the coal in place as well as that resulting from the mining and coking thereof is taxable in its entirety to the petitioner.
In the alternative the respondent urges that the total income here in dispute should be considered as arising from two sources, viz.: (1) from the ownership of coal in place; and (2) from conducting the business of mining and selling coal and manufacturing and vending coke. With respect to the former source it is the respondent's position that the petitioner as co-owner is taxable on one-half of the gain measured by the difference between the in-place value of the mined coal at the time of its removal and the cost basis thereof. With respect to the latter source the respondent submits that the petitioner as the sole operator and proprietor of the mining business is taxable on the entire profits derived from the operation of that business measured by the difference between the ultimate selling price of the coal (less wages, depreciation on mining and coking*189 machinery, and all other allowable deductions attributable to the operation of said business) and the value of the coal in place when mined. * * *
* * * *
As a second alternative the respondent contends that the petitioner is taxable on the net profit resulting from the processing of the coal as coal (i. e., screening, sizing and distribution) and from the manufacturing and distribution of coke. That is to say, all the net profit attributable to the processing and handling *1265 of the coal, either as coal or as coke, from the mouth of the pit to the customer constitutes taxable income to the petitioner.
* * * *
One or more of these positions might have some merit in a case involving joint tenancy or tenancy in common, either of which is composed of divisible parts. See
The record discloses that on October 25, 1937, H. C. Frick Coke Co. conveyed to petitioner and Gayle P. Brennen, his wife, about 50 acres of coal land designated herein as "Mount Pleasant coal*190 lands." The Pennsylvania rule on estates by entirety is stated in
Fundamentally the estate rests on the legal unity of husband and wife. It is therefore a unit, not made up of divisible parts subsisting in different natural persons, but is an indivisible whole, vested in two persons actually distinct, yet to legal intendment one and the same. Each is seised of the whole estate from its inception, and upon the death of one, while the right of survivorship remains to the other, that other takes no new title or estate. "A conveyance to husband and wife creates neither a tenancy in common nor a joint tenancy. The estate of joint tenants is a unit, made up of divisible parts; that of the husband and wife is also a unit, but it is made up of indivisible parts. In the first case there are several holders of different moieties or portions, and upon the death of either the survivor takes a new estate. He acquires by survivorship the moiety of his deceased cotenant. In the last case, although there are two natural persons, they are but one person in law, and upon the death*191 of either the survivor takes no new estate. It is a mere change in the properties of the legal person holding, and not an alteration in the estate holden. The loss of an adjunct merely reduces the legal personage holding the estate to an individuality identical with the natural person. The whole estate continues in the survivor, the same as it would continue in a corporation after the death of one of the corporators. This has been the settled law for centuries." [
The petitioner and his wife having taken title to the Mount Pleasant *1266 coal lands, a presumption arose that such title vested in them by entireties, and, since there is nothing in this record contradicting that presumption, we think that such conveyance created an estate by entireties in those coal lands and the rents and profits therefrom in the petitioner and his wife.
Respondent argues that the rights to the royalties, the release of which was the consideration for the conveyance of the coal lands to petitioner and his wife, belonged solely to the petitioner, and that thus he paid the entire consideration for these coal lands. We think the premise of fact is at least doubtful, but, assuming it to be sound, the argument is without merit. Under Pennsylvania law an estate by entirety arises where the title to property is taken in the name of a husband and wife -- regardless of whether the consideration moves from one or both. So, in the case of
An agreement between the spouses, or other independent evidence of a transfer, was not necessary to create the entirety. And this is true although the account was originally opened in the name of the decedent alone, and notwithstanding*194 that the fund therein may have been contributed by him exclusively:
The same court reached a similar conclusion in the case of
It follows, we think, that the rents and profits of the Mount Pleasant coal lands are taxable here in equal shares to petitioner and his wife.
Are the proceeds from the sale of the coal mined from these lands and the coke converted therefrom "profits" from those coal lands? We think they are. As suggested by counsel for the petitioner, if the petitioner and his wife had found the outcrop of the coal on their property, and by their joint personal efforts had dug a ton therefrom and sold it to a neighbor for money, it would seem unquestionable that the money received from the sale of such ton of coal would have been theirs *1267 by entireties, since it resulted from the sale of a part of their property so held.
Webster defines coke as "The solid left when a caking coal is deprived of its volatile constituents by heating in a retort or oven. It consists mainly of carbon and is hard, porous, and gray with a submetallic luster. It is much used in metallurgy, and also as a domestic fuel, etc." Thus it is argued that "If, having individually mined such ton of coal, they had carried it to their dwelling in Scottdale, which they owned as an estate by entireties, and there*196 had coked it in their kitchen range, which can be done," how can it be reasonably denied that such coke would have been likewise held by them by entireties "just as the coal was in the hill before it was mined, and just as the coal had been after it had been severed from the land?" And, the argument continues, if they had then sold such coke, the moneys received therefrom would have been held by them by entireties. We think that contention is sound. And it would seem no different conclusion should result from the fact that the owners of the entirety, instead of using only their personal efforts in mining and coking this coal, had employed other persons to do it for them. The Supreme Court of North Carolina implicitly so decided in
The moneys used in the mining and coking operations here came from the entirety and all the gains therefrom were deposited in a bank account having the same status. That the mining and coking*197 operations were under the management of the husband does not warrant the inference that a severance of the estate by the entireties was intended. It is well settled under the law of Pennsylvania that in matters involving estates by entirety either spouse, so long as the marriage subsists, has power to act for both without specific authorization, provided the fruits or proceeds of such action inure to the benefit of both and the estate is not thereby terminated.
In
Although "Pennsylvania goes further in the direction of chivalry than most states * * *, 2 we do not now decide whether the law of that state is in accord with that of Vermont on the facts considered in the
The remaining issue concerns respondent's treatment of the dividends *200 from certain corporate stock and the interest on certain bearer bonds received in the respective taxable years. Where the evidence establishes the existence of an estate by entireties with respect to corporate securities, under the law of Pennsylvania, it necessarily follows that the income therefrom belongs to the entirety.
As to the dividends on the remaining shares of stock, and the interest on the bearer bonds, we are not convinced that petitioner has established that they were owned by entireties. Petitioner largely relies upon the stipulated fact that since 1933, he and his wife had rented in their joint names a safe deposit box, to which either had access, and on October 16, 1944, those securities were in the joint safe deposit box. A joint lease by husband and wife of a safe deposit box is not in itself sufficient to establish joint ownership of the securities found therein.
The record further discloses that on October 16, 1944, all the stock certificates in the joint safe deposit box, excepting those herein previously referred to as having been issued in the joint names of petitioner *1270 and his wife, bore the name of the petitioner alone. The transfer form printed on the back of the certificates was signed by petitioner in blank. It does not appear when this was done. Petitioner testified that the certificates were endorsed "usually" and "about the time they were received mostly." He *204 admitted on cross-examination that he had never made any gift tax returns. On brief, petitioner now contends that with respect to the stocks and bonds acquired prior to January 1, 1938, he had made a gift of one-half thereof to his wife. Clearly, the evidence is insufficient to establish a gift or other transfer of such securities. The many infirmities in the evidence seriously impair or wholly destroy its probative value. Petitioner's general assertions carry little weight in view of the many inconsistencies in petitioner's treatment of the property for tax purposes. We conclude that petitioner has failed to establish the ownership of these securities by the entirety. We find no error in respondent's determination that the dividends from the shares of stock other than those issued in the joint names, and the interest on the bonds, belonged to petitioner in the respective taxable years.
Opper,
But even a casual acquaintance with the background of titles by the entirety shows that the varied principles upon which they are founded are at war with the theories to which we resort in dealing with current tax problems, and that if they are employed, they lead to results which are both absurd and contrary to the superficial consequences. Thus, the very foundation of a tenancy by the entirety is that both husband and wife own all the property. They each have it all, and not half -- "
Correspondingly, the doctrine derives from the ancient assumption *1271 that husband and wife are one; yet our tax law treats them as two, and only such treatment could lead to the result reached in the opinion in this proceeding. It is even doubtful whether such changes as have been made in the legal status of married women entitled petitioner's wife to any of this income as a matter of law. The implication from the Pennsylvania cases at least is that, if the husband secures the income, he is entitled to retain it in the absence of a severance of the matrimonial relationship by divorce.
For my part, I should have been satisfied to see this situation treated as we would if it were the ordinary carrying on of a business in which the parties to the marriage participated to a greater or less extent. This might require an ascertainment of the contribution in property and services made by petitioner and his wife, *207 respectively, to the earning of the income which is sought to be taxed. But that is no insuperable obstacle. Cf.
Stuckey v. Keefe's Executors , 26 Pa. 397 ( 1856 )
Wohleber's Estate , 320 Pa. 83 ( 1935 )
Geist v. Robinson , 332 Pa. 44 ( 1938 )
Werle v. Werle , 332 Pa. 49 ( 1938 )
Berhalter v. Berhalter , 315 Pa. 225 ( 1934 )
Madden v. Gosztonyi S. T. Co. , 331 Pa. 476 ( 1938 )
Gasner v. Pierce , 286 Pa. 529 ( 1926 )
Wilbur Tr. Co. v. Knadler , 322 Pa. 17 ( 1936 )
Bostrom v. Nat. Bk. of McKeesport , 330 Pa. 65 ( 1938 )
Berkowitz's Estate (No. 1) , 344 Pa. 481 ( 1942 )
Merritt v. Whitlock , 200 Pa. 50 ( 1901 )
Alles v. Lyon , 216 Pa. 604 ( 1907 )
Beihl v. Martin , 236 Pa. 519 ( 1912 )
O'Malley v. O'Malley , 272 Pa. 528 ( 1922 )
Magee Et Ux. v. Morton B. L. Ass'n. , 103 Pa. Super. 331 ( 1930 )