*1468 A resident of California in 1929 transferred in trust a tract of land separately owned by him and a tract for which his wife paid one-ninth of the cost with separate funds and both signed a note for the remainder, secured by mortgage on both tracts. The trust was revocable, and the husband was entitled to the use and income of the land for life. In 1931 he and his wife signed an agreement that all their property be held in community. The mortgage note was paid with income from the tracts. Held, the value of the husband's gross estate uopn his death in 1937 includes (1) one-half of the value of the personalty of both spouses; (2) the full value of the separately owned tract, transferred in trust; (3) four-ninths of the value of the second tract, transferred in trust.
*696 The Commissioner determined a deficiency of $11,129.29 in estate tax. He denied the petitioner's contention that property was held in community, and that only one-half of its value should be included in gross estate. Petitioner contends, in the alternative, that part of*1469 the property was the separate estate of decedent's wife.
FINDINGS OF FACT.
The Bank of America National Trust & Savings Association, successor of the Bank of Italy National Trust & Savings Association, is a national banking association, with branch office at Watsonville, California. It is executor of the estate of William John McGowan, deceased, and trustee of a trust created by him on January 4, 1929. McGowan died testate on August 13, 1937, leaving his wife and seven children surviving.
In 1888 McGowan, then single, purchased 93.14 acres of land, called the home place, in Monterey County, California, subject to a mortgage, for $10,500. He was married in 1889. On October 30, 1920, he purchased 131.57 acres of land, called the Trafton tract, in Monterey County, California, for $45,000. The mortgage debt on the home place, owed to the Watsonville Savings Bank, remained unpaid. To raise funds to meet his combined obligations of $55,500, he and his wife executed a note for $50,500 in favor of the Watsonville Savings Bank, secured by a mortgage on both tracts, and his wife paid $5,000, received by her as part of a legacy from an uncle's estate. On February 21, 1921, his*1470 wife received an additional $2,500 of the legacy, and applied it to payment of the mortgage note. Five thousand dollars more was paid in 1924 from crop profits. On January 21, 1926, a new note was executed, secured by deed of trust, for $43,000, the unpaid remainder of the old note, in favor of the Bank of Italy.
On January 4, 1929, McGowan executed a trust instrument. It is stipulated that at that time the home place was his separate property. He conveyed both tracts to the Bank of Italy as trustee, reserving to himself for life the right to possession and income, and directing that upon his death the trustee enter into possession with full power to manage, lease, and encumber; to collect the income and pay expenses; to pay the net income to his wife for life, if surviving; to pay it for five years after the death of the survivor of himself and wife in equal shares to his children or the issue of a deceased child per stirpes; and thereafter to distribute corpus equally among them. He reserved the right to change or amend any of the trust provisions, to revoke the trust in whole or in part "by writtin declaration or agreement, subscribed by the trustor and by the trustee", *1471 and to withdraw "any part or all of the trust estate." "If not revoked by the Trustor during his lifetime the Trust shall become irrevocable upon his death * * *". By an attached declaration his wife *697 waived any "community or other interest" which she might have in the real property transferred in trust. On January 4, 1929, McGowan also made a will, by which he devised and bequeathed all his property to his wife, if surviving; otherwise to his seven children in equal shares.
On April 13, 1929, McGowan leased the Trafton tract and the home place (exclusive of a dwelling house and a few acres) to the H. P. Garin Co., for a period of five years. A new lease was made with the lessee's receiver in 1931; and with the lessee in 1932. At the end of each lease McGowan's wife signed the statement: "I * * * hereby consent to and join in the making of said lease * * *." In October 1937 the trustee bank leased the tracts to H. P. Garin, as receiver for the company. The rent for the year beginning in 1929 was $15,750, and for succeeding years ranged from $10,000 to $12,600. The two tracts contained about 210 acres of tillable soil, of which 123 were in the Trafton tract. This*1472 tract contained a well, was under irrigation, and most of the income from the two tracts was attributable to it. The home place had no well.
On the $43,000 note a principal payment of $8,000 was made in May 1929 with profits on crops of the mortgaged properties, and additional payments aggregating $20,000 were made before 1931 with rents from the properties, thus reducing the unpaid principal to $15,000. On December 16, 1930, McGowan and his wife gave the bank a new note for $15,000, secured by a mortgage on the two tracts. Before 1936 $10,000 was paid on it.
On December 29, 1931, McGowan and his wife signed a declaration:
That all the property, wherever situate, of whatsoever kind or nature now owned or held by the parties hereto, or either of them, and standing of record in the name of either of the parties hereto, or otherwise, is the community property of the marriage of the parties hereto as community property is defined by the laws of the State of California.
Between May 1, 1934, and February 1, 1937, McGowan made loans to his children for which they gave him interest-bearing promissory notes. When the loans were made his only income was rents of the leased tracts. *1473 At the time of his death these loans aggregated $16,215.50; accrued interest on them, $654.78.
On the estate tax return the executor reported the decedent's property at the time of death as follows:
| Accrued rentals on real property | $4,562.50 |
| Shares of Watsonville Airport Co | 200.00 |
| Notes of children with accrued interest | 16,870.28 |
| Cash in bank | 4,482.50 |
| Household furniture and automobile | 185.00 |
| The home place | 57,000.00 |
| The Trafton tract | 79,550.00 |
| Total | 162,850.28 |
*698 He included one-half of this amount, or $81,425.14 in gross estate, and took deductions of $2,680.05, thereby arriving at a figure less than the $100,000 exemption, and reported no tax due. The Commissioner included in gross estate the full value of reported property, and determined a deficiency of $11,129.29 in estate tax.
OPINION.
STERNHAGEN: The Commissioner arrived at the deficiency by expanding the decedent's gross estate to include the entire value at the time of his death of the personalty, the home place, and the Trafton tract. The petitioner assails this and points to the community property agreement of December 29, 1931, to support the contention that all of*1474 the property, real and personal, was the subject of this agreement and that only one-half thereof was properly in the gross estate.
As to the personal property, there is no doubt that the community agreement of 1931 covered it and that only one-half the value thereof is properly within the gross estate. The community property agreement was valid and effective under California law, In re Sill's Estate,121 Cal. App. 202">121 Cal.App. 202; 9 Pac.(2d) 243; Yoakam v. Kingery,126 Cal. 30">126 Cal. 30; 58 Pac. 324; covered property previously as well as subsequently acquired by either spouse, In re Henderson's Estate,128 Cal. App. 397">128 Cal.App. 397; 17 Pac.(2d) 786; Roberts Land & Improvement Co. v. Dallas,124 Cal. App. 86">124 Cal.App. 86; 11 Pac.(2d) 1103; In re Wahlefeld's Estate,105 Cal. App. 770">105 Cal.App. 770; 288 Pac. 870; and is binding upon the Federal Government in the determination of the gross estate, United States v. Goodyear, 99 Fed.(2d) 523; *1475 Bank of America National Trust & Savings Association v. Rogan,33 Fed.Supp. 183. As shown by the findings, this personal property consisted of the five items aggregating $26,300.28.
The home place was acquired by the decedent prior to his marriage, and it is stipulated by the parties that it was his separate property when it was transferred in trust in 1929. The trust was revocable and hence the home place is, by section 302(d) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1936 (see sec. 811(d), I.R.C.), within the gross estate to the extent of its entire value. Helvering v. City Bank Farmers Trust Co.,296 U.S. 85">296 U.S. 85. This must be held, irrespective of the later community property agreement of 1931. Having made the transfer by a revocable trust, the decedent could not avoid the inclusion of the entire value thereof in his gross estate by subsequently executing a community property agreement. This can be readily seen by supposing an outright gift of the home place in contemplation of death. In such case the property would have been included within the gross estate in its entirety, notwithstanding any *699 *1476 subsequent agreement converting his separate property into community property.
By the declaration of 1929, the Trafton tract was likewise transferred in trust, and by the same reasoning the decedent's interest must be included in his gross estate, notwithstanding the community agreement of 1931. The extent of such interest is to be determined. It depends upon the proportions of the investment in the tract which decedent, his wife, and the marital community contributed. In re Fellow's Estate,106 Cal. App. 681">106 Cal.App. 681; 289 Pac. 887. These proportions can not be determined with precision. As shown by the findings, the property was acquired in 1920 for a price of $45,000, of which the $5,000 paid in cash was contributed by the wife from her separate bequest. The remaining $40,000 was covered by a note given by both and secured by a mortgage on the combined home place and Trafton tract. Soon thereafter a payment of $2,500 was made on the note with money contributed by the wife from a separate bequest. Thereafter the remainder of the note was paid in several payments with money attributable to income from farming operations and rents of the combined properties. *1477 With some doubt, we think that the only part of the investment that can be clearly said to support a separate interest of the wife is the original $5,000 which she paid in the purchase of the Trafton tract. This was one-ninth of the entire purchase price of $45,000; the other eight-ninths was community property until the transfer in trust. The property transferred in trust by the decedent is one-half of this community estate, or four-ninths of the value of the Trafton tract. The other four-ninths is to be regarded as the remaining community property attributable to the wife and one-ninth is to be regarded as the wife's separate property. This apportionment, it must be admitted, is mathematically less than satisfactory, but it is as precise as the evidence permits. The rents and income which were used to discharge the note can not be identified as to their source between the home place and the Trafton tract; and since the home place is stipulated to have been the husband's separate property and by California law the income from separate property is itself separate property of the owner thereof, section 163, Deering's Civil Code of California; *1478 In re Dargie's Estate,179 Cal. 418">179 Cal. 418; 177 Pac. 165; Van Camp v. Van Camp,53 Cal. App. 17">53 Cal.App. 17; 199 Pac. 885, it would be a hopeless task to apportion among the husband, the wife, and the community the payments that were made of the purchase price before the 1931 agreement. Although the $2,500 payment by the wife in 1921 is specific, it is, since an approximation is necessary, fair to leave this item out of the account as a proper offset to the other uncertainties in the calculation.
*700 To summarize, therefore, the decedent's gross estate is held to include (1) one-half the value of the five items of personal property which are held to be covered by the community agreement of 1931; (2) the entire value of the home place at the date of death; and (3) four-ninths of the value of the Trafton tract at the date of death.
Decision will be entered under Rule 50.