                  T.C. Memo. 1996-516



                UNITED STATES TAX COURT



           ESTATE OF JOHN KENLY, DECEASED,
BETTY B. KENLY, PERSONAL REPRESENTATIVE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5107-95.                Filed November 21, 1996.



     R determined a deficiency in estate tax on the
theory that certain property titled in decedent's name
was decedent's separately owned property, only one-
third of which passed to decedent's wife. P contends
that no deficiency in estate tax exists because that
property was community property, and decedent’s share
passed to decedent's wife.
     Held: The property in issue was decedent's
separate property.



Gregory A. Robinson and Donald W. Harris, for petitioner.

Katherine Holmes Ankeny, for respondent.
                                - 2 -

               MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:    Respondent has determined a deficiency in

Federal estate tax of $1,837,266 and an accuracy related penalty

of $367,453.   Respondent’s determination of a deficiency relates

primarily to her determination that certain property was the

separate property of decedent John Kenly (decedent) at the time

of his death and was not community property.    As a result of

concessions made by respondent, the only issue we must decide is

whether the property in question was separate property or

community property.    Unless otherwise noted, all section

references are to the Internal Revenue Code in effect at the time

of decedent's death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

                          FINDINGS OF FACT

     Some facts have been stipulated and are so found.    The

stipulations of fact filed by the parties and accompanying

exhibits are incorporated herein by this reference.

     In the petition, petitioner Betty B. Kenly (petitioner)

represents that her address is in Meadview, Arizona.

     Decedent died intestate on December 23, 1990.    At the time

of his death, decedent was married to petitioner.    Decedent and

petitioner had been married for 35 years, and they had resided in

Arizona for all of that time.    Decedent was also survived by two

sons, Mark and Rodney Kenly, and by several grandchildren.
                                - 3 -

The New Mexico Ranch

     In 1958, Frank Kenly, decedent’s father, bought a ranch in

New Mexico (the New Mexico ranch).      Decedent did not pay any

money toward the purchase of the New Mexico ranch.      By statutory

warranty deed recorded in 1958, the New Mexico ranch was granted

to “FRANK KENLY and JOHN KENLY, as joint tenants”.      The recorded

statutory warranty deed included the following statement, which

was signed by Frank Kenly and decedent:

     STATEMENT OF INTENTION TO CREATE JOINT TENANCY

          FRANK KENLY and JOHN KENLY, hereby state that the
     effect of the foregoing deed has been explained to the
     [sic], and they hereby declare that it is their wish
     and intention that they take the property described in
     the deed as joint tenants with the right of
     survivorship and not as community property nor as
     tenants in common.

In 1971, Frank Kenly signed and recorded an affidavit stating

that he and decedent were the owners of the New Mexico ranch.

According to an exchange agreement signed by Frank Kenly and

decedent in 1974, decedent owned an undivided one-half interest

in the New Mexico ranch.

The Divorce Proceeding

     In February 1967, petitioner initiated an action for divorce

from decedent (the action) by filing a complaint (the complaint)

in an Arizona court (the divorce court).      Petitioner was

represented by counsel.    Petitioner filed a financial statement

with the divorce court (the financial statement).      The financial

statement contained a list of several properties that petitioner
                                 - 4 -

claimed were community property.    The financial statement failed

to list the New Mexico ranch as community property.    In the

complaint, petitioner requested that the divorce court order

decedent to file an inventory of all community property.    The

divorce court so ordered.   In June 1967, decedent filed an answer

to the complaint, which included a list of community property.

That list did not include the New Mexico ranch.    Petitioner made

no objection to that omission.    The action was twice set for

trial.   The action was not tried and was dismissed in February

1969.

Exchange of Interest in New Mexico Ranch for Interest in
Dunlap Property

     In 1939, Frank Kenly and decedent's mother, Zona Kenly,

bought property near Dunlap Road in Phoenix, Arizona (the Dunlap

property).   In 1974, decedent exchanged his interest in the New

Mexico property for Frank Kenly’s interest in the Dunlap

property.    The intent of decedent and Frank Kenly was that Frank

Kenly divest himself of his interest in the Dunlap property and

decedent divest himself of his interest in the New Mexico

property.    Attorney John Hughes represented decedent in that

exchange.    In a statutory quitclaim deed executed in 1974, Frank

Kenly conveyed his interest in the Dunlap property to decedent.

In a replacement deed signed in 1975, Frank Kenly again

quitclaimed his interest in the Dunlap property to decedent.
                               - 5 -

     In 1975, to insure that decedent had received all of Frank

Kenly's interest in the Dunlap property, Frank Kenly conveyed his

interest in an additional strip of land on the border of the

Dunlap property.   That conveyance was evidenced by a quitclaim

deed that identified decedent as the grantee.    On May 3, 1979,

decedent explained in an affidavit that “since March of 1975, the

date on which the interest of FRANK KENLY was conveyed to your

affiant, your affiant and his mother ZONA KENLY have paid the

taxes on and have been in open and adverse possession of the

* * * [additional strip of land].”     In 1979, the former owners of

the Dunlap property executed a quitclaim deed to correct title to

the Dunlap property.   That quitclaim deed identified the donees

as decedent and Zona Kenly.

     In 1979, Zona Kenly and decedent sold a portion of the

Dunlap property.   The warranty deed that evidenced the sale

identified the sellers as "ZONA KENLY, an unmarried woman, and

JOHN KENLY husband of Betty Blair Kenly dealing with his sole and

separate property".

Exchange of 40 Acres in Dunlap Property for Windmill Ranch

     In 1980, Zona Kenly and decedent exchanged a 40-acre parcel

of the Dunlap property (the 40-acre parcel) for property in

Kingman, Arizona (the Windmill Ranch).    In addition to that

property, the former owners of the Windmill Ranch assigned to

Zona Kenly and decedent their rights under a lease (the lease).

John Hughes represented decedent in the exchange.
                                - 6 -

     The title report prepared in connection with the exchange

lists the insureds as Zona Kenly and decedent and states that the

interest insured under the policy is "a fee simple vested in ZONA

KENLY, a widow, and JOHN KENLY, a married man, as his sole and

separate property."    The sellers of the Windmill Ranch assigned

the lease to "Zona Kenly, a divorced woman, and John Kenly, as

his sole and separate property”.   According to the warranty deed

for the 40-acre parcel, the sellers were “Zona Kenly, a widow and

John Kenly, a married man dealing with his sole and separate

property.”   The sellers of the Windmill Ranch, by warranty deed,

conveyed title to that property to "ZONA KENLY, a widow and JOHN

KENLY, a married man as his sole and separate property”.

     On May 3, 1979, petitioner had signed and recorded a

disclaimer deed with respect to the 40-acre parcel.   That deed

referred to petitioner as the undersigned and decedent as the

spouse.   It stated:

     1.    The spouse has acquired title to * * *
           [description of the 40-acre parcel].

     2.    The property above described is the sole and
           separate property of the spouse having been
           purchased with the separate funds of the
           spouse.

     3.    The undersigned has no past or present right,
           title, interest, claim or lien of any kind or
           nature whatsoever in, to or against said
           property.

     4.    This instrument is executed not for the
           purpose of making a gift to the spouse, but
           solely for the purpose of clearly showing of
                               - 7 -

           record that the undersigned has and claims no
           interest in and to said property.

     NOW THEREFORE, in consideration of the premises, the
     undersigned does hereby disclaim, remise, release and
     quit-claim unto the spouse and to the heirs and assigns
     of said spouse forever, all right, title, interest,
     claim and demand which the undersigned might appear to
     have in and to the above described property.

Exchange of 80 Acres in Dunlap Property for Portion of
Bard Property

     In November 1981, Zona Kenly and decedent exchanged an

80-acre parcel of the Dunlap property (the 80-acre parcel) for

794 acres of property in Bard, California (the 794-acre Bard

parcel).   (In this triangular exchange, Phoenix Commerce Center

Venture (Venture) bought the 794-acre Bard parcel from Mr.

Conley, and Venture exchanged it with Zona Kenly and decedent for

the 80-acre parcel of the Dunlap property.)     The sales price for

the 80-acre parcel was $5,750,000.     According to the warranty

deed for the 80-acre parcel, the sellers were “ZONA KENLY, a

divorced woman, and JOHN KENLY, a married man dealing with his

sole and separate property”.   According to the grant deed for the

794-acre Bard parcel, the buyers were “ZONA KENLY, a divorced

woman, and JOHN KENLY, a married man dealing with his sole and

separate property.”

      The escrow instructions involved in the exchange of the

80-acre parcel and the 794-acre Bard parcel identified the

sellers of the 80-acre parcel and the purchasers of the 794-acre

Bard parcel as "ZONA KENLY, a divorced woman, and JOHN KENLY, a
                                - 8 -

married man, dealing with his sole and separate property".     The

title insurance policy covering the 794-acre Bard parcel

identified the owners of that parcel as "ZONA KENLY, a divorced

woman, and JOHN KENLY, a married man dealing with his sole and

separate property".    In November 1981, petitioner signed a

quitclaim deed to decedent with respect to the 794-acre Bard

parcel.   In 1983, petitioner signed a quitclaim deed with respect

to the 80-acre parcel.

     In 1984, Zona Kenly and decedent agreed to lease the 794-

acre Bard parcel to Tanimura & Antle, Inc. (Tanimura & Antle),

from January 1, 1985, to June 30, 1988, for a total rent of

$754,600.    According to the lease agreement, the lessors were

“JOHN KENLY and ZONA KENLY, dealing with their sole and separate

property”.

Purchase of Additional Parcel of Bard Property

     In 1986, Zona Kenly and decedent bought an additional

125 acres of property in Bard, California (the 125-acre Bard

parcel; the 794-acre Bard parcel and the 125-acre Bard parcel,

together, will be referred to as the Bard property), for

$440,000.    Before completing the purchase of the 125-acre Bard

parcel, decedent and Zona Kenly made a counteroffer to the

sellers of that parcel.    That counteroffer identified the

offerors to include "John Kenly, husband of Betty Kenly, * * *

[dealing with] his sole and separate property, and Zona Kenly, a

widow".
                                 - 9 -

     According to the terms of that sale, the buyers made a

downpayment of $270,866.50 and gave a promissory note for

$149,840.    Zona Kenly made the downpayment with a check drawn on

her checking account in the amount of $270,866.50.    Zona Kenly

and decedent signed a promissory note for $149,840, for the

balance of the purchase price.    The escrow instructions relating

to the purchase of the 125-acre Bard parcel identified the buyers

of the 125-acre Bard parcel as decedent and Zona Kenly, stated

that Zona Kenly was a widow, and stated that decedent was dealing

with his sole and separate property.     The sellers of the 125-acre

Bard parcel, by warranty deed, conveyed title to that property to

“JOHN KENLY husband of Betty Kenly as his sole and separate

property and; [sic] ZONA KENLY, a widow”.

     In 1986, petitioner signed and recorded a disclaimer deed

with respect to the 125-acre Bard parcel.    That deed referred to

petitioner as the undersigned and decedent as the spouse, and

stated:

     1.     The spouse has acquired title to * * *
            [description of the 125-acre Bard parcel].

     2.     The property above-described is the sole and
            separate property of the spouse having been
            purchased with the separate funds of the
            spouse.

     3.     The undersigned has no past or present right,
            title, interest, claim or lien of any kind or
            nature whatsoever in, to or against said
            property.

     4.     This instrument is executed not for the
            purpose of making a gift to the spouse, but
                                - 10 -

          solely for the purpose of clearly showing of
          record that the undersigned has and claims no
          interest in and to said property.

     NOW THEREFORE, in consideration of the premises, the
     undersigned does hereby disclaim, remise, release and
     quitclaim unto the spouse and to the heirs and assigns
     of said spouse forever, all right, title, interest,
     claim and demand which the undersigned might appear to
     have in and to the above described property.

               *      *     *      *     *     *     *

     NOTE: The parties are cautioned that by completing and
     executing this document, legal rights, duties and
     obligations are created. By signing, the parties
     acknowledge that they have been advised to seek and
     obtain independent legal counsel to all matters
     contained in the within document prior to signing same
     and that said parties have obtained advice or choose to
     proceed without same.

     In 1987, Zona Kenly and decedent executed a new lease

agreement with Tanimura & Antle, leasing the Bard property from

January 1, 1988, to June 30, 1991, for a total rent of $907,525.

According to the lease agreement, the lessors were “JOHN KENLY

and ZONA KENLY, c/o Windmill Ranch, Box 33 Sandy Route, Kingman,

Arizona 86401, dealing with their sole and separate property.”

Decedent’s Acquisition of Zona’s Interest in Bard Property

     Decedent and Zona Kenly were partners in the Windmill Ranch

Partnership (the partnership).    The partnership managed the Bard

property and the Windmill Ranch.    In November 1990, decedent and

Zona Kenly received a proposal to purchase the Bard property and

the Windmill Ranch.   Zona Kenly did not want to receive cash but,

instead, wanted to receive a substitute property.   As a result,

on December 20, 1990, by a document titled “Memorandum Agreement
                                - 11 -

of Reduction of Partnership Interest”, Zona reduced her interest

in the partnership to 1 percent in consideration for receiving

the Windmill Ranch.   The intended results were that decedent

would own 99 percent of the Bard property and Zona would own 100

percent of the Windmill Ranch.

     According to the warranty deed granting the Windmill Ranch

to Zona Kenly, the grantors were “Windmill Ranch Partnership and

John Kenly, husband of Betty Kenly, dealing with his sole and

separate property”.

     Decedent died before he could complete a sale of the Bard

property.

California Ancillary Probate Proceeding

     Decedent died intestate.    Michael Hughes was attorney for

petitioner in her capacity as personal representative of

decedent.   Michael Hughes and his father, attorney John Hughes,

advised decedent's children, Rodney Kenly and Mark Kenly, that

the Bard property was community property.    In January 1991,

Rodney Kenly and Mark Kenly each renounced any intestate share in

decedent's estate.    The documents evidencing their renunciation

were prepared by Michael Hughes.

     By letter dated March 4, 1991, Phillip J. Krum, Jr., a

California attorney, advised Michael Hughes of certain options

concerning the disposition of the Bard property.    In pertinent

part, the letter stated:
                                - 12 -

          Under our Corporations Code §15026 a partnership
     interest is classified as "personal property." While
     it is sometimes necessary to probate personal property
     belonging to a decedent who was not domiciled in
     California, California will apply the law of the
     decedent's domicile for purposes of determining
     intestate succession. Accordingly if we take the view
     that title to the property in Bard was really held by
     the partnership (rather than in tenancy-in-common),
     California will apply Arizona law. As I understand it
     from our earlier conversation, then the decedent’s
     children would in effect take 1/4 of decedent’s
     partnership interest.

          On the other hand, if we can take the position
     that the property was not at the time of the decedent’s
     death truly a partnership asset, but was held (as title
     reflects) by the decedent as tenants-in-common with his
     mother, then California law will apply, and if the
     decedent’s interest is community, that interest will
     pass entirely to the spouse. * * *

     On April 8, 1991, petitioner filed a spousal property

petition in the Superior Court of California, County of Imperial

(the California court), averring that the Bard property was

community property.   The petition also requested the California

court (1) to determine that a one-half interest in the Bard

property passed from decedent to petitioner by intestate

succession and (2) to confirm that the remaining one-half

interest was petitioner’s in her own right.    A hearing was

scheduled for April 26, 1991.    Notice of hearing was given to

petitioner and to decedent's two sons, Mark and Rodney Kenly.     No

notice was given to any of decedent's grandchildren.    A hearing

was held on April 26, 1991.   No one asked to be heard, and no one

opposed the petition.   The petition was granted, the judge
                               - 13 -

finding that petitioner was the surviving spouse and that "the

described property passes to her."1

The Estate Tax Return

      Petitioner included one-half of the value of the Bard

property in the gross estate as decedent's interest in that

property.    Petitioner then deducted the value of that interest as

property passing to decedent's spouse.    Thus, none of the value

of the Bard property was included in decedent's taxable estate.

                               OPINION

I.   Introduction

      Decedent died intestate on December 23, 1990, survived by

his wife (petitioner), two sons, and grandchildren.     Decedent

possessed an interest in certain California real property (the


1
      A full transcript of the hearing is as follows:

THE COURT:    John Kenly.

MR. KRUM:    That matter is ready, your honor.

THE COURT: Is there anyone who wishes to be heard in the
petition of Betty Kenly to survive under spousal property
petition to the property of her husband, John Kenly?

MR. KRUM: Your honor, for the record, perhaps the court will
note that Betty Kenly is present today, as is Mark Kenly, the
son.

THE COURT: Anyone who wishes to oppose this petition? The
record will show no appearances. Everything appears to be in
order. The petition is granted. The court finds that Betty
Kenly is the surviving spouse and the described property passes
to her.

MR. KRUM:    Thank you, your honor.
                               - 14 -

Bard property) at the time of his death.2   We must decide

whether, at the time of decedent's death, the interest in the

Bard property was decedent’s separate property or community

property.

II.   Relevant Law

      A.   State Law

      We look to State law to determine property rights.     Estate

of Rowan v. Commissioner, 54 T.C. 633, 639 (1970) (citing

Commissioner v. Estate of Bosch, 387 U.S. 456 (1967)).     “The

realty of a decedent is disposed of in accordance with the laws

of the state in which it is located.”    In re Herbert’s Estate,

109 P.2d 729 (Cal. Ct. App. 1941); cf. Cal. Civ. Code sec. 755

(West 1982) ("Real property within this State is governed by the

law of this State, except where the title is in the United

States.").    The Bard property is located in California, and,

consequently, we must look to California law to determine how it

passed on decedent’s death.    If the Bard property was decedent's

separate property, then one-third of his interest in that

property passed to petitioner under the intestate succession law


2
     The record is ambiguous as to whether, at the time of
decedent's death, the Bard property was owned by the Windmill
Ranch partnership (the partnership). Petitioner clearly believes
that the Bard property was not owned by the partnership, although
she has not proposed a finding to that effect. At trial,
respondent's counsel stated that she had no knowledge that the
Bard property had ever been deeded to the partnership. We shall
assume, without deciding, that the Bard property was not owned by
the partnership.
                              - 15 -

of the State of California.   Cal. Prob. Code sec. 6401(c)(2)

(West 1981).   If the Bard property was community property, then

petitioner owned one-half of the property in her own right and

received the other half pursuant to the California intestate

succession law.   Cal. Prob. Code sec. 100 (West 1981) ("Upon the

death of a married person, one-half of the community property

belongs to the surviving spouse and the other half belongs to the

decedent."); Cal. Prob. Code sec. 6401(a) (West 1981) ("As to

community property, the intestate share of the surviving spouse

is the one-half of the community property that belongs to the

decedent under Section 100."); see also In re Estates of Spear,

845 P.2d 491, 493-494 (Ariz. Ct. App. 1992) (surviving spouse

owns one-half of the community property outright, and this one-

half ownership interest is not a part of the decedent spouse's

estate).

     In relevant part, the California Probate Code, section 28(b)

and (c) (West 1981), states that the term "community property"

means:

          (b) All property wherever situated, and all real
     property situated in this state, heretofore * * *
     acquired during the marriage by a married person while
     domiciled elsewhere, that is community property * * *
     under the laws of the place where the acquiring spouse
     was domiciled at the time of its acquisition.

          (c) * * * all real property situated in this
     state * * * acquired during the marriage by a married
     person in exchange for real * * * property, wherever
     situated, that is community property * * * under the
     laws of the place where the acquiring spouse was
                                - 16 -

     domiciled at the time the property so exchanged was
     acquired.

     Decedent was domiciled in Arizona at all times here

relevant, so that we must look to Arizona law to determine the

applicable community property law.       If the Bard property was

community property under the laws of Arizona, or was acquired in

exchange for property that was community property under the laws

of Arizona, then it is community property under the laws of

California.   We must ascertain the law of Arizona as the highest

court of the State would apply it.       Commissioner v. Estate of

Bosch, 387 U.S. 456, 465 (1967).

     Under Arizona law, property acquires its character as

community or separate property at the time of its acquisition.

Potthoff v. Potthoff, 627 P.2d 708, 712 (Ariz. Ct. App. 1981);

Bender v. Bender, 597 P.2d 993, 995 (Ariz. Ct. App. 1979);

Myrland v. Myrland, 508 P.2d 757, 762 (Ariz. Ct. App. 1973).

Property received by one spouse as a gift is the separate

property of that spouse.   Ariz. Rev. Stat. Ann. sec. 25-211

(1991).   That ownership does not change except by operation of

law or through an agreement between husband and wife.       Potthoff

v. Potthoff, 627 P.2d at 712.    In certain cases, the character of

a spouse's separate property may be changed to community property

"if the circumstances clearly demonstrate that [that] * * *

spouse intended to effect a change in the status of his separate

property."    Moser v. Moser, 572 P.2d 446, 448 (Ariz. Ct. App.
                               - 17 -

1977) (citing Beam v. Bank of America, 490 P.2d 257 (Cal. 1971)).

Where one spouse exchanges his separate property for new

property, the new property remains his separate property.      Nace

v. Nace, 448 P.2d 76, 79 (Ariz. 1968) ("Property purchased during

marriage with separate property remains such.").

     B.    The Federal Estate Tax

     The Federal estate tax law requires that there shall be

included in the value of the gross estate the value of all

property to the extent of the decedent’s interest therein at the

time of his death.    Sec. 2033.    In determining the value of the

taxable estate, there is allowed a deduction for the value of any

interest in property that is included in the gross estate and

that passes from the decedent to the surviving spouse.     Sec.

2056(a).    One-half of the value of property held in community

(that being the decedent's interest in the property) is

includable in a decedent's gross estate.      Ahmanson Foundation v.

United States, 674 F.2d 761, 773 (9th Cir. 1981) ("The surviving

spouse's [one-half interest in] community property is excluded

from the gross estate".); see also Estate of Lepoutre v.

Commissioner, 62 T.C. 84, 88 (1974); Estate of Vandenhoeck v.

Commissioner, 4 T.C. 125, 135-136 (1944).      Property passing to

the surviving spouse by intestate succession qualifies for the

deduction provided for in section 2056(a) (the marital

deduction).    Sec. 20.2056(c)-1(a)(5), Estate Tax Regs.   Thus, if

we find that the Bard property was decedent’s separate property,
                                  - 18 -

the full value of that property is includable in the gross

estate, and the marital deduction equals one-third.      If we find

that the Bard property was community property, then only one-half

of the value of that property is includable in the gross estate,

and the marital deduction equals that one-half.      Petitioner bears

the burden of proof.       Rule 142(a).

III.    Analysis

       A.   Introduction

       The parties agree that decedent’s ownership of the Bard

property can, at least in major part, be traced back to

decedent’s ownership of an interest in the New Mexico ranch.3      We

must decide whether the New Mexico ranch was community property

or separate property in decedent's hands at the time he acquired

his interest therein.       If decedent acquired his interest in the

New Mexico ranch as separate property, we must determine whether

3
     On brief, petitioner states: “The evidence shows that the
Bard Ranch property was acquired in exchange for Dunlap property
in Arizona which was exchanged for the * * * [New Mexico] Ranch
property in New Mexico.” Petitioner ignores the fact that 125
acres of the Bard property was acquired by purchase. Petitioner
has neither averred nor proposed as a finding of fact that any of
the purchase price of that 125 acres was paid with community
funds. Indeed, we have found that a substantial portion of the
purchase price was paid by decedent’s mother. That, of course,
suggests a gift to decedent. We assume from petitioner’s failure
to plead or propose facts consistent with decedent’s purchase of
his interest in the property with community funds that petitioner
relies solely on the argument that, although not initially
community property, decedent’s interest in the 125 acre tract
subsequently became community property. If petitioner intends
any other argument, she has failed either to propose a factual
predicate therefor or to state such argument. We shall consider
only the argument petitioner made.
                               - 19 -

it was converted to community property.   If the New Mexico ranch

was not converted to community property, we must determine

whether any of the property for which it was exchanged (or the

125-acre Bard parcel4) was converted to community property.

Petitioner argues for any alternative that would make the Bard

property community property.

     B.   California Ancillary Probate Proceeding

     Following decedent’s death, petitioner filed a spousal

property petition in the Superior Court of California, County of

Imperial (the California court), averring that the Bard Property

was community property.   Petitioner also requested the California

court (1) to determine that a one-half interest in the Bard

property passed from decedent to petitioner by intestate

succession and (2) to confirm that the remaining one-half

property interest was petitioner’s in her own right.    The

petition was granted, the judge finding that petitioner was the

surviving spouse and that “the described property passes to her.”

     Petitioner relies on the determinations of the California

court to support her argument that the Bard property was

community property.   Respondent argues that the determinations of

the California court do not bind this Court, relying on

Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).     We agree

with respondent.


4
     See supra note 3.
                               - 20 -

     The lesson of Commissioner v. Estate of Bosch, 387 U.S. 456

(1967), is that, respondent, having been absent from the State

court proceeding that established rights to the decedent’s

property, is entitled to her day in Federal court, unless she

could not there prevail.   The California court did not explain

the basis of its determinations5; we do not know whether the

California court was determining a question of California law as

to community property or was relying on the unopposed averments

made by petitioner that the Bard property was community property.

Therefore, we cannot rule out that respondent, had she been

present in the California court, would have prevailed in opposing

petitioner’s claim that the Bard property was community property.

The situation here is not unlike the situation we faced in Estate

of Rowan v. Commissioner, 54 T.C. 633, 638 (1970) (Bosch applied;

State court decision concerning ownership of property of decedent

(including community property) not determinative:    “On the record

before us, there is no explanation of how and why the State court

reached its decision.”).   We conclude that we are not bound by

the determinations of the California court, and we will not

follow those determinations.

     C.   Decedent’s Acquisition of an Interest in
          the New Mexico Ranch

     Decedent acquired an interest in the New Mexico ranch when

that property was bought and paid for by decedent’s father.    The

5
     See supra note 1.
                              - 21 -

property was granted to decedent and his father as joint tenants,

and petitioner was not a grantee.   Decedent paid nothing towards

the purchase price of the property, which suggests that he

received his interest in the property as a gift from his father.

Petitioner testified that she and decedent worked at the New

Mexico ranch for five or six summers after the ranch was acquired

by decedent and his father.   She testified that she did not

consider that work as liquidating a debt to decedent’s father for

decedent’s interest in the property.   She testified that

”probably nothing” would have happened if she and decedent had

not worked at the property.   Petitioner has failed to prove that

decedent’s father did not make a gift to decedent (and to

decedent alone) of decedent’s interest in the New Mexico ranch.

Section 25-211 of Arizona Revised Statutes, Annotated, provides:

“All property acquired by either husband or wife during the

marriage, except that which is acquired by gift, devise or

descent, is the community property of the husband and wife.”

Implicitly, property acquired by gift to one spouse alone is the

separate property of that spouse.   Decedent’s interest in the New

Mexico property was acquired by gift to decedent and, for that

reason, was not, upon its acquisition, community property.

     D.   Decedent did not Change the Character of his
          Interest in the New Mexico Property or any of the
          Successor Properties to Community Property

     Decedent’s ownership of the Bard property can, for the most

part, be traced through a series of exchanges to his ownership of
                                - 22 -

an interest in the New Mexico ranch.     (Hereafter, the Bard

property and its predecessors, the Windmill Ranch and the Dunlap

property, but not the New Mexico ranch, will be referred to as

the “successor properties”.)    We have determined that, upon

acquisition, decedent’s interest in the New Mexico ranch was his

separate property.    Under Arizona law, when one spouse uses

separate property to purchase new property, the new property

remains separate property.     Nace v. Nace, 448 P.2d at 79.    Thus,

unless the character of decedent’s interest in either the New

Mexico property or any of the successor properties changed to a

community interest, the Bard property was decedent’s separate

property.

     Petitioner has failed to show such a change.     The various

deeds and other documents set forth or discussed in our findings

of fact speak against a change.    John Hughes, who represented

decedent and petitioner in certain of the transactions here

involved, testified that decedent had told him that decedent’s

interests in the New Mexico ranch and Dunlap property were

community property.    On the other hand, Robert Harman, a real

estate broker who brokered the exchange of the Dunlap property

for the Bard property and the purchase of the 125-acre Bard

parcel, testified that decedent had told him that his interests

in those properties were to be his sole and separate interests.

Petitioner testified that she believed that she had a community

interest in the New Mexico ranch and the successor properties,
                              - 23 -

yet she failed to list the New Mexico property in the financial

statement filed with the divorce court during the course of the

divorce proceeding she initiated.    Moreover, she did not object

when decedent failed to list that property in the inventory of

community property he filed with the divorce court.    Petitioner

testified that she performed bookkeeping and other management

services in connection with the operation of the partnership.

That testimony does not lend support to her argument that the

character of the New Mexico ranch and the successor properties

was changed to community property.     The performance of services

by one spouse will not, standing alone, effect a change in

character of the other spouse's separate property.     Myrland v.

Myrland, 508 P.2d at 763 (husband performed services for his

wife's business, one of the assets of which was the wife's

separately owned real property;   held, husband's performance of

services did not change the character of the real property to

community property);   Horton v. Horton, 278 P. 370, 371 (Ariz.

1929) (fact that husband helped construct a building on the

wife's separately owned real estate does not transmute the

building or the real estate into community property).

     Based on the evidence before us, we are unable to conclude

that decedent intended to, or did, change the character of his

interest in the New Mexico property or any of the successor

properties to community property.    Petitioner has failed to carry

her burden of proving such a change.    We find as an ultimate fact
                              - 24 -

that the Bard property was decedent’s separate property at the

time of his death.

     E.   Conclusion

     The New Mexico ranch was decedent's separate property.

Petitioner has not persuaded us that the character of either that

property or the successor properties changed during decedent's

lifetime.   Therefore, decedent's interest in the Bard property

was decedent's separate property on the date of his death, and

therefore the value of that property is includable in his gross

estate.   Petitioner received a one-third interest in that

property under the intestate succession laws of the State of

California, and only the value of that one-third interest is

deductible in computing the taxable estate.


                                         Decision will be entered

                                    under Rule 155.
