Ruth Wilson Hurley, Appellant, v. Donald T. Hartley, District Director of Internal Revenue, Appellee, 379 F.2d 205 (10th Cir. 1967)

Ruth Wilson Hurley, a widow, brought a civil action to recover a federal estate tax paid under protest on the estate of General Patrick J. Hurley, her deceased husband. From a judgment in favor of the District Director of Internal Revenue, the widow has appealed.

The uncontroverted material facts are as follows: Prior to the death of the General on July 30, 1963, he and his wife were residents of and domiciled in Santa Fe, New Mexico. They owned community property governed by the New Mexico community property law and valued at $1,921,558.01. On October 21, 1960, they filed an acknowledgment that all property which they owned was community property. Simultaneously, they made and executed individual wills which would take effect only on the death of the survivor of them. In the wills they reaffirmed the community property status of all their property. The will of the General, he having predeceased his wife, did not become operative and he died intestate.

The District Director of Internal Revenue made an assessment on the General's estate in the amount of $238,236.33 for federal estate taxes. The assessment was computed on one-half the adjusted value of the entire community property which the Director claimed represented the General's interest at the time of his death. Appellant widow paid the tax under protest and filed a claim for refund.

The only question presented is a question of law: Whether under § 2033¹  of the Internal Revenue Code of 1954 one-half of the community property is includable in General Hurley's gross estate for federal estate tax purposes.

Both parties agree that state law defines the nature of the interest held by General Hurley at the time of his death and appellant directs our attention to § 29-1-9, New Mexico Statutes 1953, as amended.²  It is contended that by virtue of § 29-1-9 the entire community property of the General and his wife belonged to the surviving wife without administration and, therefore, no transfer or taxable incident occurred under the estate tax provisions of the Code.

The resolution of this controversy is made more difficult because in 1942 Congress amended the estate and gift tax laws to provide special rules for community property,³  and then repealed the same sections in the Revenue Act of 1948.⁴ 

Appellant concedes that under the repealed provisions of the 1942 act, the interest of decedent would have been taxable, but asserts that under the present law no tax can be imposed. We examine the legislative history of the repeal to see what the Congress intended:

"Your committee does not believe that a satisfactory solution to the problem of a geographical equalization or the difficulties of tracing can be found under the 1942 amendments or amendments using a similar theoretical approach. Hence the repeal of these amendments is recommended, effective with respect to gifts made after the date of enactment of this bill and with respect to the estates of decedents dying after the date of such enactment. Your committee would be unwilling, however, merely to repeal the 1942 amendments. Repeal alone would reproduce the pre-1942 results which are even further from equalization than existing law." S.Rep.No. 1013, 80th Cong., 2nd Sess., March 16, 1948 (2 U.S.Code Cong.Ser. 1163, 1189). [Emphasis supplied.]

Thus, it is evident that mere repeal was not the goal of Congress. It sought by the repeal to ensure equality of treatment between community property states and non-community property states.

Appellant believes, however, that the intent of the repeal was to exclude community property from the taxable estate. In this regard she contends that what this court said in Hernandez v. Becker, 10 Cir., 54 F.2d 542 (1931) concerning New Mexico's community property laws is controlling. In that case, § 29-1-8⁵  was being construed, not § 29-1-9, and the differences then noted by Judge Phillips still remain:

"Here the interest of the wife in the community estate does not come within the purview of any specific provision of the statute, and no estate passed or was transferred upon the wife's death. On the contrary her interest in the community estate upon her death ceased and terminated, and the whole of the community estate, by virtue of the statute and the conveyance or transfer of the property to the community, belonged to, rather than passed to the husband. * * *

On the death of the husband, leaving the wife surviving, the whole community estate is subject to administration, to the payment of charges against his estate and the expenses of its administration, and one half passes to the wife and the other half according to the husband's will or the statute of descent. * * *

Therefore, on the death of the husband it is transferred within the meaning of section 401 * * *." Ibid., at 549.

Section 29-1-9, as amended, unlike § 29-1-8, provides that the husband retains until his death the power of testamentary disposition over one-half of the community property; provides for the dissolution of the community at the husband's death and obligates the property for debts, expenses and administration of his estate. "In New Mexico, if the husband dies first, one-half of the community property is included in his estate, but if the wife should predecease the husband, her interest ceases and no part of the property is taxable as part of her estate." 34 Am.Jur.2d ¶ 8615.

Affirmed.