*1568 Held, upon the facts in this proceeding, that various items of income were not community income and are not taxable in their entirety to the petitioner, a resident of California.
*163 These are proceedings, duly consolidated for hearing and opinion, for the redetermination of asserted deficiencies in income taxes as follows:
| Docket No. | Year | Deficiency |
| 44321 | 1924 | $666.06 |
| 44939 | 1925 | 6,643.46 |
| 50178 | 1926 | 4,562.09 |
It is alleged that the respondent erred in adding to petitioner's taxable income for the years 1924, 1925 and 1926, the amounts of $8,459.32, $54,094.59 and $37,483.40, respectively, as additional community income, whereas such amounts were the income of petitioner's wife, Elna Carman, and were properly included in her separate income-tax returns.
FINDINGS OF FACT.
The petitioner is now, and has been since 1904 or 1905, a legal resident of the State of California. On March 30, 1910, petitioner was married to his present wife, Elna Carman, *1569 at Santa Anna, California.
On January 25, 1910, the petitioner acquired by deed a parcel of land consisting of about 160 acres located in Kern County, California, which will hereinafter be referred to as the "Carman Property."
The purchase price for the property was furnished by C. O. Fairbank and the property was purchased on behalf of a partnership composed of petitioner and Fairbank, but the deed was taken in the name of petitioner, who agreed to and did later pay his portion of the purchase price. Later, as a matter of sentiment and as security for the purchase price, this tract of land was deeded by petitioner to Fairbank. Shortly thereafter a holding company, the Elkridge Oil Company, was organized to hold this property. Petitioner and Fairbank each owned an equal interest in this corporation. The title remained in the corporation until the year 1919, when, because of an agreement with the Standard Oil Company of California, which will be referred to hereinafter, the corporation was dissolved and the land became owned by petitioner and Fairbank in equal proportions.
In addition to the Carman Property, the petitioner, at the time of his marriage, also owned some stock*1570 valued at $1,000 or $2,000, and also cash in the amount of a few thousand dollars.
At the time of her marriage to petitioner, Elna Carman owned an interest in a city lot in Los Angeles, corporate stock of the value of about $1,000, and some cash.
*164 At the time of the marriage of petitioner and his wife, petitioner was engaged principally in the business of promoting oil developments. At that time, Elna Carman was also employed but due to the fact that the petitioner was blind, she gave up her employment and joined petitioner in an office where she assisted him by taking care of the correspondence, reading to him letters and reports on geologic structures, drawing maps, and performing other duties.
Either prior to or at the time of their marriage, the petitioner and his wife entered into an oral agreement that they should pool their liquid resources and that if they had an opportunity to invest them in any promotion they would do so and share equally in the ownership and in any profits derived from the investments. Pursuant to such agreement, they opened a joint bank account immediately following their marriage into which were placed their combined liquid resources.
*1571 Between 1910 and 1916 petitioner remained in the promotion business and small investments were made from time to time, the profits being used in household expenses.
Petitioner and his wife had many discussions as to what could be done on a small capital and it finally occurred to petitioner that a region in Ontario, Canada, might contain oil. With the funds from the joint bank account, the petitioner obtained oil and gas leases in that region which were taken in his name. A South Dakota corporation, known as the Ontario Petroleum Company, was organized late in 1916, and the leases were transferred to it in exchange for its capital stock. After a few preliminary drillings, oil was struck in the earlier part of 1917 and petitioner found that he had a valuable, although small, oil field. Pursuant to the understanding that he had always had with his wife he assigned to her in 1917 and 1918 enough stock to equalize their stock ownership. Each owned 409,900 shares of stock of the company, ownership of each being about 40 per cent of the shares of that company.
In June, 1918, the Ontario Petroleum Company paid its first dividend to stockholders of record, Elna Carman receiving*1572 $20,494.95, while the petitioner was credited with the same amount on the books of the company to offset advances previously made to him. In October, 1918, a second dividend was paid, petitioner and his wife each receiving $8,197.98. A joint bank account had been opened by petitioner and his wife in a bank in Ontario, Canada, and the above mentioned dividends received by each were placed in that joint account.
The Ontario Petroleum Company became involved in litigation, although it was solvent, and a receiver was appointed, pending the outcome of the litigation. There were no dividends paid during *165 the litigation, although the company accumulated during that time about $150,000 which was invested in Canadian bonds and in certain equipment. In 1920 the Ontario Petroleum Company was dissolved and the assets were obtained by the Diamond Oil Company, Ltd., and the petitioner and his wife exchanged their separately owned stock of Ontario Petroleum Company for shares in the Diamond Oil Company, Ltd. In 1929 the latter company was dissolved after having distributed its assets in kind to the stockholders.
On May 5, 1919, the petitioner and C. O. Fairbank, coowners of*1573 the Carman Property, entered into an agreement in writing with the Standard Oil Company of California, whereby the latter company agreed to develop the Carman Property for oil purposes, paying to petitioner and Fairbank a bonus of $100,000, and agreeing further that in the event that oil was discovered the profits therefrom should be divided equally between the Standard Oil Company, as one party, and petitioner and Fairbank, as the other. The bonus was paid by the Standard Oil Company in May or June, 1919, the petitioner receiving his share, $50,000. Late in 1919 the Standard Oil Company struck oil upon this property and during the year 1920 the petitioner received as his share of the profits for 1919 and 1920, the amount of $128,000. In 1921 he received payments amounting to more than those received in 1920. The amounts of $50,000 and $128,000 which were received by petitioner in the year 1920 were deposited, for the most part, in a joint bank account which petitioner and his wife had opened in 1920 with the Harriman National Bank of New York City. Some of these funds in the joint bank account were used in the purchase of $70,000 worth of Liberty bonds and some other bonds. The*1574 Liberty bonds were transferred to Elna Carman to carry out the understanding that she should have an equal share in the ownership or profits from the various investments. The amount which was received in 1921 by petitioner was deposited in the joint account at the bank and was used in the purchase of various securities, nearly all of which were taken in the joint names of petitioner and his wife. This stock was purchased by the Harriman National Bank and the amount was charged against the joint bank account. In neither of the years 1920 nor 1921 did Elna Carman return any of the income received from the Carman Property.
On December 20, 1921, the petitioner conveyed to his wife, by deed, a one-half interest in his half interest in the Carman Property. On the same day petitioner transferred to his wife a one-half interest in his interest in the agreement between the Standard Oil Company and petitioner and Fairbank. On March 16, 1922, the petitioner addressed a letter to the Standard Oil Company notifying them that he had assigned to his wife an undivided one-half interest in his *166 equity in the Carman Property and directing them to send one-quarter of the profits derived*1575 from the property to himself and his wife separately and in equal amounts. Thereafter the Standard Oil Company mailed separate checks to petitioner and his wife for their respective interest, which checks have been deposited in the Harriman National Bank of New York in their joint bank account.
Whatever funds petitioner and his wife had in the joint bank account in Canada were transferred to the joint bank account in the Harriman National Bank. The Liberty bonds which petitioner had given to his wife were also deposited with this bank.
In 1922 the petitioner and his wife opened a joint account in the name of F. J. and Elna Carman with Harriman & Company, stock brokers. The stock purchased by the bank was transferred to the brokerage company. The Liberty bonds belonging to Elna Carman were transferred by the bank to Harriman & Company, brokers, in 1921 and were sold in 1922. The interest upon these bonds was collected by the bank and credited to the joint bank account. The proceeds from the sale of the bonds were credited to the joint account of petitioner and wife with Harriman & Company, brokers. A considerable number of lots of stock were purchased and the stock certificates*1576 issued in the name of F.J. and Elna Carman. Some of the stock, however, was carried in the name of Harriman & Company, to be used as collateral security.
The petitioner and his wife always consulted about the purchase of stocks.
In his return for the year 1924 petitioner reported, as his share of the taxable income from the Carman Property, the amount of $5,874.47. The full amount of the taxable income derived by petitioner or by petitioner and his wife from the Carman Property in the year 1924 amounted to $16,918.64. The respondent held that this full amount was income from community property and was all taxable to the petitioner.
In 1925 the taxable income derived by petitioner or by petitioner and his wife from the Carman Property amounted to $30,274.64. The petitioner reported one-half of this amount as income taxable to him, but the respondent held that the full amount was taxable to him.
In the year 1925 petitioner and his wife reported profit on the sale of certain Louisiana oil stock in the amount of $31,681.54, each reporting one-half of that amount as income. The amount of $31,681.54 is the correct profit derived from the sale of this stock. This stock had*1577 been purchased in 1922 with the joint funds of petitioner and his wife, and the certificates were issued in the name of Harriman & Company. The stock was sold in 1925 by Harriman & Company. *167 The respondent held that the full amount of $31,681.54 is taxable to petitioner.
In 1925 there were purchased with joint funds from the joint bank account some shares of stock of Lago Petroleum Company. This stock was sold in the same year at a profit of $26,151.48. Petitioner reported as his share of the profits from the sale, the amount of $12,075.74. The respondent held that the full amount of $26,151.48 is taxable to petitioner.
In the year 1925 the taxable dividends received on stock owned by petitioner and his wife were $18,075. The interest received by petitioner or by petitioner and his wife in the year 1925 from joint bank deposits was $6.52. The petitioner returned one-half of such amounts as taxable to him. Respondent held that the full amounts were taxable to petitioner.
In the year 1926 the taxable income derived by petitioner or by petitioner and his wife from the Carman Property amounted to $43,856.18. Petitioner reported in his income-tax return for*1578 the year 1926 as his share of the income from the Carman Property the amount of $21,597.84. The respondent held that the full amount of $43,853.18 is taxable to petitioner.
In the year 1926 the taxable income from dividends on stock owned by petitioner and his wife was $30,300. The taxable income received by petitioner or by petitioner and his wife in that year as interest on joint bank deposits was $156.12. The petitioner returned one-half of this income and his wife returned the other half. Respondent held that the full amounts are taxable to petitioner.
Separate returns were filed by petitioner and his wife in each of the years in question.
OPINION.
MCMAHON: The petitioner having abandoned his assignment of error in Docket No. 44321 regarding the refusal of the respondent to allow as deductions certain expenses incurred in the drilling of oil wells and other development, there remains for determination only the question of whether the items of income set forth in our findings of fact are taxable in their entirety to the petitioner, or whether he is taxable upon only one-half of each of such items. The respondent held that the property from which the income was produced*1579 was community property and that the income therefrom is also community property and taxable to the husband in its entirety, relying upon . The petitioner denies that the property was community property and contends that petitioner's wife, Elna Carman, had a present existing and vested *168 ownership in such property and that petitioner is taxable upon only one-half of the income in question.
The Civil Code of California which was in effect in the years in question provides in part as follows:
§ 161. May be joint tenants, etc. A husband and wife may hold property as joint tenants, tenants in common, or as community property.
§ 162. Separate property of the wife. All property of the wife, owned by her before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with the rents, issues, and profits thereof, is her separate property. The wife may, without the consent of her husband, convey her separate property.
§ 163. Separate property of the husband. All property owned by the husband before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with the rents, *1580 issues, and profits thereof, is his separate property.
§ 164. Community property. All other property acquired after marriage by either husband or wife, or both, including real property situated in this state, and personal property wherever situated, heretofore or hereafter acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this state, is community property; but whenever any property is conveyed to a married woman by an instrument in writing, the presumption is that the title is thereby vested in her as her separate property.
Conveyance of real property to and by married women. And in case the conveyance is to such married woman and to her husband, or to her and any other person, the presumption is that the married woman takes the part conveyed to her, as tenant in common, unless a different intention is expressed in the instrument, and the presumption in this section mentioned is conclusive in favor of a purchaser or encumbrancer in good faith and for a valuable consideration.
* * *
On April 28, 1927, section 161, supra, was amended by the enactment of section 161(a), which provides as follows:
*1581 Interests in community property. The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband as is provided in sections 172 and 172a of the Civil Code. This section shall be construed as defining the respective interests and rights of husband and wife in community property. [New section added April 28, 1927; Stats. 1927, p. 484.]
In , the Supreme Court held that under section 161(a), supra, the wife has such an interest in the community income that she should separately report and pay tax on one-half of such income, citing ; ; and .
Section 161(a), supra, does not affect property acquired prior to its enactment. . In the instant proceeding the income was derived prior to the passage of section 161(a), supra, and if it was community income it is *169 *1582 taxable in its entirety to petitioner, since petitioner's wife did not have a vested interest therein. But if the petitioner's wife did have a vested property right in such income, it is clear, under the decision in , and cases cited therein, that she should report and pay tax on that portion which she owned and that the petitioner should not be required to report and pay tax on such portion.
The income involved in the instant proceeding was derived from various sources and we will discuss the various items of income separately.
Prior to the taxable years in question the petitioner owned as separate property a one-half interest in the Carman Property, located in California. He also owned a one-half interest in a contract between himself and Fairbank, on the one hand, and Standard Oil Company, on the other, under which he was to receive one-fourth of the total profits derived from the oil development of this property. On December 20, 1921, petitioner conveyed to his wife by deed a one-half interest in his half interest in the Carman Property and on the same date transferred*1583 to his wife a one-half interest in his interest in the agreement with the Standard Oil Company. During the years 1924, 1925 and 1926, taxable income was derived by petitioner or by petitioner and his wife from the sales of oil from the Carman Property in the respective amounts of $16,918.64, $30,274.64 and $43,853.18.
As will be noted, section 164 of the Civil Code of California provides that whenever any property is conveyed to a married woman by an instrument in writing the presumption is that the title is vested in her as her separate property. In California a husband may convey real or personal property to his wife, and whether the property be his separate property or community property, the presumption is that it thereby becomes, and is thereafter to be treated as, her separate property. ; , and cases cited therein. See also ; . There is a presumption, therefore, under the statutes of California, that petitioner's wife, Elna Carman, was during the years in question vested with title to one-fourth of the property rights*1584 in the Carman Property itself and was also vested with title to an interest Equal to that of her husband in the contract with the Standard Oil Company as her separate property. There is nothing in the record to rebut this presumption. On the contrary the presumption is fortified by the agreement entered into by petitioner and his wife at the time of their marriage and described in our findings of fact. We conclude that the interests in question became the separate property of petitioner's wife. The income therefrom was also separate property *170 of petitioner's wife. Section 162 of the Civil Code of California, supra.
Furthermore, it will be observed that this section provides that all property of the wife acquired by her after her marriage by gift is her separate property. Were we to consider this a gift from petitioner to his wife, we would have to conclude that the interest of the wife became her separate property.
We hold that one-half of the income in question from the Carman Property was income belonging to the wife and taxable to her, and that the respondent erred in taxing any more than one-half of the amounts in question to petitioner.
We next turn*1585 to a discussion of the income derived by petitioner or by petitioner and his wife by way of dividends upon corporate stock. The evidence discloses that such dividends amounted to $18,075 in 1925 and $30,300 in 1926. In order to determine how this stock was owned it is necessary to enter into a brief resume of the facts, showing the sources of the funds with which such stocks were purchased.
At the time of their marriage petitioner and wife agreed that they would each pool their separate liquid assets, the exact amount of which is not shown, and that they would invest such funds and share equally in the ownership of the property purchased and the income derived therefrom. The separate property of the husband and wife before marriage continues to be the separate property of each after marriage and the rents, profits and issues thereof are also the separate property of each. Sections 162 and 163 of the Civil Code of California. These funds were placed in a joint bank account immediately following the marriage. With these funds the petitioner obtained oil and gas leases in Ontario, Canada, and transferred them to the Ontario Petroleum Company, which was organized to hold them, *1586 and received capital stock in exchange therefor. In 1917 and 1918 petitioner, in accordance with the agreement with his wife, transferred enough stock in this corporation to her to equalize their holdings therein. This action of the petitioner was sufficient to render this stock the separate property of petitioner's wife, as shown above in the discussion with regard to the income from the Carman Property.
Petitioner and his wife opened a joint bank account in a bank in Ontario, Canada, and there were deposited therein in 1920 the amount of $28,692.93, dividends received by Mrs. Carman from her Ontario Petroleum Company stock, and the amount of $8,197.98, dividends received by petitioner from such stock.
In 1920 petitioner and his wife opened a joint bank account with the Harriman National Bank in New York City and there were transferred thereto whatever funds petitioner and his wife had in the joint bank account in Canada.
*171 In 1919 the petitioner had received as his separate property $50,000 bonus from the Standard Oil Company and had received in 1920 as his separate property the amount of $128,000 as profits upon the operations of the Carman Property. In the*1587 year 1921 he received an amount in excess of the amount received in 1920 from this source. These funds were deposited in the joint bank account in the Harriman National Bank. Out of these funds, petitioner purchased $70,000 worth of Liberty bonds which he transferred to his wife to carry out their agreement to own equally all profits from various investments. These bonds became her separate property. In or after 1921, the Harriman National Bank purchased various securities and charged the amount against the joint bank account. Most of these securities were taken in the joint names of petitioner and his wife. As has been pointed out above, after 1921 the income from the Carman Property was the separate property of petitioner and his wife in equal amounts. All this income was deposited in the Harriman National Bank in the joint bank account. The Liberty bonds belonging to Elna Carman were transferred to the bank and the interest thereon was collected by the bank and credited to the joint bank account.
In 1922 petitioner and his wife opened a joint account with Harriman & Company, stock brokers in New York, and the stock which had been purchased by the Harriman National Bank*1588 and the Liberty bonds belonging to Elna Carman were transferred to the brokerage company. The Liberty bonds were sold by the brokers in 1922 and the proceeds were credited to the joint account with the brokerage company. The petitioner and his wife always consulted about the purchase of stocks and a considerable number of lots of stock have been purchased through Harriman & Company, brokers. Some of this stock was issued in the name of F. J. and Elna Carman and some of it was carried in the name of Harriman & Company, to be used as collateral security.
It is our opinion that the evidence shows that the joint bank account with the Harriman National Bank and the stock trading account with Harriman and Company, brokers, were created and the securities were purchased with separate funds of the petitioner and his wife. Each contributed to these accounts in substantial amounts from their separate property, and there is no evidence to show that any community property was contributed thereto or that any stock was purchased with community property. Apparently all of the funds in the joint bank account, and those used to purchase stocks consisted of separate property or issues and profits*1589 thereof which, in turn, became separate property. As was pointed out in , property received in exchange for or purchased by separate property is also separate property.
*172 ; , the Supreme Court of California stated in part:
* * * There are to be found, in many of the decisions of this court, expressions to the effect that the separate character of property acquired by either of the spouse after marriage is to be established only by "clear and convincing evidence," "clear and decisive proof," or the like. [Citing , and other California cases.] But, as is said in , "it was never intended by this court to lay down a rule requiring demonstration in such matters; that is, such a degree of proof as, excluding possibility of error, produces absolute certainty, Code Civ. Proc. § 1826. Such proof is never required. Generally, moral certainty only is required, or that degree of proof which produces conviction in an unprejudiced mind, *1590 and evidence which ordinarily produces such conviction is satisfactory." Code Civ. Proc. §§ 1826, 1835. And, in speaking of a similar question in , we said that "whether or not the evidence offered * * * is clear and convincing is a question for the trial court. * * * In such cases, as in others, the determination of that court in favor of either party upon conflicting or contradictory evidence is not open to review in this court."
Apparently neither petitioner nor his wife was regularly employed except in the business of investing in securities, and so far as the record discloses neither earned income which became community property. However, even if an inconsiderable amount of community funds did become confused with the separate funds used in the purchase of securities, such community funds took on the character of the separate funds, the larger estate. . See also .
Considering the whole record, it is our opinion that the stocks were owned by petitioner and his wife together equally as separate property and not as community*1591 property, and that the income therefrom belonged to each in equal proportions as their separate property. It follows that only one-half of such income is taxable to petitioner. The respondent erred in taxing more than one-half of such income to the petitioner. , and .
For the same reasons enumerated above, we hold that only one-half of the profit of $31,681.54 derived from the sale of the Louisiana oil stock in the year 1925, that only one-half of the amount of $26,151.48 profits derived from the sale of Lago Petroleum Company stock in 1925, and that only one-half of the amounts of $6.52 and $156.12, representing interest received on joint bank deposits in the years 1925 and 1926, respectively, constitute income taxable to the petitioner.
Reviewed by the Board.
Judgment will be entered under Rule 50.