1937 BTA LEXIS 882 | B.T.A. | 1937
Lead Opinion
There appears to be no dispute with respect to the income received or the amounts of the several deductions. The only questions raised are as to what portions of the income and deductions constitute separate income and separate deductions of the petitioner, and what portions, if any, are community income and deductions.
Since, under the general rule in Texas, income from the separate property of a spouse is the income of the community (Anna Davis Terry, 26 B. T. A. 1418; affd., 69 Fed. (2d) 969), the interest, rents, and dividends received by petitioner constitute community income taxable to petitioner and her husband in equal amounts. The record is not clear as to the source of the “other income” reported by petitioner in the sum of $23,881.06. This has been treated in part as community and the balance as separate income. In view of the record, we sustain the respondent upon his allocation.
However, oil and gas royalties are an exception to the general rule just stated. Under the laws of Texas, an oil and gas lease constitutes a sale of those minerals in place. True, for Federal income tax purposes, those royalties are ordinary income from the property leased. Burnet v. Harmel, 287 U. S. 103. But, in Texas, such royalties are not income from the property, per se, but are the separate property, in another form, of the spouse owning the lands from which the royalties arise, and thus are not community income. Commissioner v. Wilson, 76 Fed. (2d) 766; David Hannah, 31 B. T. A. 971; Rosalie Hampton, 31 B. T. A. 853; J. T. Sneed, Jr., 30 B. T. A. 1121. It follows that the oil and gas royalties received by petitioner from her separate property, less the depletion of $19,529.13, are taxable in their entirety to petitioner.
This brings us to the question of the deductions which respondent has treated as allowable in equal parts to petitioner and her husband, with the exception of one item of $2,000 which he now alleges is a capital expense. Petitioner urges that even though it be held that
Where separate property is encumbered, the revenue therefrom may be applied to the discharge of the encumbrance, leaving only the excess to fall into the community [31 C. J. 32, Sec. 1116.]
In accordance with this principle, the respondent has consistently computed the income of the spouses by including in the net income of each, one-half of the net community income, thus giving each, equally, the benefit of the deductions properly attributable to such income. As far as we have been able to find, no question has been raised heretofore as to this treatment. The usual method pursued was to have each spouse report all of the community income, and the deductions therefrom, and then include in his or her individual income, one-half of the net amount so computed. The rule consistently applied is stated by O. D. 909, 4 C. B. 254, as follows:
In returns in wbicb community income is divided between husband and wife domiciled in States where such income is divisible for income tax purposes, both husband and wife should report in detail the gross income from such community property. The deductions properly chargeable against such income should be equally divided between husband and wife.
It is conceded that the contested contributions made by petitioner in 1930 were of charitable character as defined by the applicable revenue act. Eespondent contends, however, that they constitute a community deduction because made from a bank account in which community income was deposited. But, the funds in such bank account belonged to the petitioner and not to the community. The contributions were made by the petitioner out of her funds, and she is, therefore, entitled to deduct them in full. ' No part of the charitable contributions made by petitioner’s husband is deductible by her.
Included in the deductions is one of $4,139.44, expenses incurred in connection with receipt of oil and gas royalties. Eespondent does not question the accuracy or reasonableness of this expense but treats it as a community deduction. This is error, as decided above, since these royalties were separate income of and taxable, in their entirety, to petitioner. We conclude this item is a deduction, to the-whole of which petitioner is entitled.
We also hold respondent to be in error in treating as a community -deduction a loss of $33,401.28 from sale of stock in 1930. This stock was purchased by the wife and paid for with her separate property. It became her separate property. Trammell v. Trammell, 269 Fed. 114; Armstrong v. Turbeville, supra; O'Farrell v. O'Farrell, 119 S. W. 899; Gale Mfg. Co. v. Dupree, 146 S. W. 1048. Any loss resulting from a sale of petitioner’s separate property constitutes a reduction of or decrease in her separate estate. Certainly, a decrease in her estate as a result of a sale, constitutes a loss substained by her. In our judgment, the amount of this loss, which is not contested, is allowable in full to petitioner. Similarly, the loss of $302 sustained by petitioner’s husband on the sale of stock plays no part in computation of petitioner’s net income.
The same reasoning applies to the bad debt deduction of $2,954.60, since this debt constituted an investment by petitioner of her separate property. The loss occasioned by its becoming worthless is allowable in full to petitioner. The items of deduction consisting of interest, taxes, depreciation, salaries, and miscellaneous office expenses are not questioned as to their amounts, except for certain small adjustments not in controversy. As to these we sustain the respondent in treating them as community deductions to which petitioner and her husband are entitled in equal amounts.
With respect to the deduction of $2,556 as “Esperson Industrial District Expenses” we sustain the respondent in his contention that $2,000 of this amount, constituting payments for subdividing and plotting the Esperson Industrial District tract for sale, is a capital, expenditure and not deductible. Frishkorn Real Estate Co., 15 B. T. A. 463. Respondent, apparently, does not question the balance of this total deduction as one to which petitioner is separately entitled.
In addition to the deductions discussed, petitioner has claimed as community deductions, losses due to the financial collapse of certain corporations. The bases for these losses are investments in stock and advances made to the corporations. This issue has been closed by a formal stipulation that during 1930 petitioner sustained a deductible capital loss in the amount of $10,000, which constituted her share of a community loss from the investments in question. Effect will be given to this stipulation.
Reviewed by the Board.
Decision will Toe entered- under Rule 50.