## Facts

- Ignatz Weiss owned shares in Popular Dry Goods Corporation before his marriage.
- During the marriage, the corporation earned substantial profits and accumulated surplus.
- While Weiss was married, the corporation declared and issued him a stock dividend of 2,900 shares on his pre-marriage stock.
- Weiss transferred portions of the dividend shares to his wife and children during his lifetime.
- He reported and paid federal gift tax on the transfers as though the dividend shares were entirely his separate property.
- Weiss later died, and his widow, acting as executrix of his estate, filed a refund suit against Scofield, the Collector of Internal Revenue.
- The executrix alleged the dividend shares were Texas community property because they reflected earnings accumulated during the marriage, so Weiss could be taxed only on gifts of his one-half community interest.
- The federal district court agreed with the executrix and entered judgment ordering a refund; the Collector appealed to the Fifth Circuit.

## Issues

1. Under Texas community-property law, were the stock dividend shares issued during marriage on pre-marriage stock the husband’s separate property or community property when the dividend represented earnings accumulated during the marriage?
2. If the dividend shares were community property, did Weiss overpay federal gift tax by treating transfers of the shares as gifts of his entire interest, entitling the estate to a refund?

## Decision

- The Fifth Circuit affirmed the district court’s judgment for the executrix.
- The court held the 2,900-share stock dividend was community property under Texas law because it represented corporate earnings accumulated during the marriage.
- Because Weiss owned only an undivided one-half interest in community property, he could be taxed only on gifts of his half; gift tax paid on the wife’s half interest was an overpayment refundable to the estate.

## Legal Principles

- Federal gift tax liability depends on the property interest the donor actually owns, and ownership interests are determined by state law.
- Under Texas community-property rules, earnings and profits acquired during marriage are community property, even if connected to a spouse’s separate property.
- A stock dividend that capitalizes corporate earnings accumulated during marriage is treated, for community-property purposes, as representing those marital earnings rather than a mere increase in the husband’s separate estate.
- Changing the form of marital earnings (e.g., from retained surplus to capital stock issued as a dividend) does not change their community character.
- A taxpayer cannot make (or be taxed on) a gift of property he does not own; a spouse’s vested one-half interest in Texas community property is not transferred by the other spouse when he gives community assets away.
- When gift tax is computed as though the donor owned 100% of community property, the tax attributable to the non-donor spouse’s half is an overpayment subject to refund in a proper refund action.

## Conclusion

Scofield v. Weiss held that, under Texas law, a stock dividend issued during marriage that reflected corporate earnings accumulated during the marriage was community property, even though it was issued on stock the husband had owned before marriage; therefore, the husband’s lifetime transfers of the dividend shares could be taxed as gifts only to the extent of his one-half community interest, and the estate was entitled to recover the gift tax paid on the wife’s half.


Scofield v. Weiss, 131 F.2d 631 (1942)