Opinion
Docket No. 38029.
1954-04-16
JESSIE LEE EDWARDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Geo. S. Atkinson, Esq. , and Tom B. Rhodes, Esq. , for the petitioner. Paul M. Newton, Esq. , for the respondent.
Transaction between husband and wife terminating their interests in community property by a settlement agreement embodied in a divorce decree was tantamount to a sale by the wife of her interest in certain community assets upon which a gain was realized, rather than a mere partition or division of community property. C. C. Rouse, 6 T. C. 908, followed. Frances R. Walz, Administratrix, 32 B. T. A. 718, distinguished. Geo. S. Atkinson, Esq., and Tom B. Rhodes, Esq., for the petitioner. Paul M. Newton, Esq., for the respondent.
The Commissioner determined a deficiency in income tax for the year ended June 30, 1949, of $6,279.23.
Certain adjustments are not in issue. The principal question is whether a property settlement agreement entered into between petitioner and her husband incident to a divorce proceeding with reference to community property resulted in a partition in which petitioner realized no taxable income, or a purchase and sale in which the husband purchased petitioner's one-half interest in certain of the community assets.
The Commissioner has taken inconsistent positions in this proceeding and in Docket No. 49399, the proceeding involving the husband, Gordon R. Edwards. The two cases were consolidated for hearing since the same witnesses and evidence were pertinent to both. Separate opinions will be filed.
FINDINGS OF FACT.
The petitioner, Jessie Lee Edwards (hereafter sometimes called Jessie), and Gordon R. Edwards (hereafter called Gordon) were married in Fort Worth, Texas, on February 16, 1913. They lived together as husband and wife until about May 1948 when they separated. They had been residents of Texas continuously since about 1925 and all the property they owned at the time of their separation was community property under the Texas laws.
On March 11, 1948, Jessie filed a suit for divorce in the appropriate court in Dallas County, Texas. She prayed, inter alia, for divorce, alimony pendente lite of $1,000 per month, attorney fees of $10,000, temporary restraining orders against banks, etc., and asked that all other community property be divided equally.
On March 18, 1949, pursuant to court order, Gordon filed an inventory and appraisal of community property.
During the succeeding two months a number of conferences were held looking toward a property settlement. Independent appraisals of the real estate were had. The principal disagreement arose about the stock of Gordon Edwards, Inc., but a valuation was finally agreed upon.
In looking toward a settlement, Jessie was insistent on receiving cash for her share of the community property. She was inexperienced in business and wanted to assume as little business risk as possible.
On May 20, 1949, a contract was entered into between Jessie and Gordon with reference to the community property. The primary intention of the parties was that it be divided equally and they recited in the agreement that the division provided for therein was ‘fair, just and equitable.’
The agreement assigned the following valuations to the various items comprising the community property:
+-----------------------------------------------------------------------------+ ¦Item No. 1, Real Estate: ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Tract #1. 1440 La Senda Place, Dallas, Texas ¦$17,500.00 ¦ +-----------------------------------------------------------------+-----------¦ ¦Tract #2. Lot at Greenbrier and La Senda Place, Dallas, Texas ¦2,800.00 ¦ +-----------------------------------------------------------------+-----------¦ ¦Tract #3. Part of Lot 3, and all of Lots 4 and 5, Block 4790–D, ¦5,300.00 ¦ ¦East Kessler Addition, Dallas, Texas ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Tract #4. Lots A through F, Block 4788–1/2–B, East Kessler ¦13,020.00 ¦ ¦Addition, Dallas, Texas ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Tract #5. 5229 Bryan Street, Dallas, Texas ¦7,780.00 ¦ +-----------------------------------------------------------------+-----------¦ ¦Tract #6. Three crypts in Restland Memorial Cemetery, Dallas, ¦1,638.75 ¦ ¦Texas ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Agreed valuation of Item No. 1–real estate ¦$48,038.75 ¦ +-----------------------------------------------------------------+-----------¦ ¦Item No. 2, Notes Receivable: ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦1. Note of Earl Edwards ¦$380.00 ¦ +-----------------------------------------------------------------+-----------¦ ¦2. Note of Mrs. Ouida Youngblood ¦800.00 ¦ +-----------------------------------------------------------------+-----------¦ ¦Agreed valuation of Item No. 2–notes receivable ¦$1,180.00 ¦ +-----------------------------------------------------------------+-----------¦ ¦Item No. 3, Personal Property: ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦1. Household furniture and fixtures ¦$1,000.00 ¦ +-----------------------------------------------------------------+-----------¦ ¦2. Chrysler sedan automobile ¦2,676.50 ¦ +-----------------------------------------------------------------+-----------¦ ¦3. Cash in bank ¦73.49 ¦ +-----------------------------------------------------------------+-----------¦ ¦Agreed valuation of Item No. 3—personal property ¦$3,749.99 ¦ +-----------------------------------------------------------------+-----------¦ ¦Item No. 4, Stock: ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦500 shares in Gordon Edwards, Inc., par value $100 per share ¦$93,858.75 ¦ +-----------------------------------------------------------------+-----------¦ ¦Agreed valuation of Item No. 4–stock ¦$93,858.75 ¦ +-----------------------------------------------------------------+-----------¦ ¦Item No. 5, Insurance: ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦1. Policy No. 1134308—life insurance Union Central Life Insurance¦$1,268.00 ¦ ¦Company, cash value ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦2. Policy No. 1406151—life insurance Union Central Life Insurance¦2,495.00 ¦ ¦Company, cash value ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦3. Policy No. 558463–12–A–85—life insurance Bankers Life Company,¦780.00 ¦ ¦cash value ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦4. Contract No. 468529—annuity Southwestern Life Insurance ¦13,458.58 ¦ ¦Company, cash value ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦5. Contract No. 478480—annuity Southwestern Life Insurance ¦6,914.21 ¦ ¦Company, cash value ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦6. Contract No. 679186—annuity Southwestern Life Insurance ¦13,358.99 ¦ ¦Company, cash value ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦7. Policy No. 735200—group Southwestern Life Insurance Company, ¦-0- ¦ ¦cash value ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Agreed valuation of Item No. 5—insurance ¦$38,274.78 ¦ +-----------------------------------------------------------------+-----------¦ ¦Total community estate ¦$185,102.27¦ +-----------------------------------------------------------------------------+
The preamble to the agreement recited, among other things, the following:
Whereas, the Parties are possessed of certain community property, and the said Parties desire to partition between themselves the community property; * * *
Because he believed the Ouida Youngblood note was worthless, Gordon gave it to Jessie and it was not a factor in the final settlement.
Under the agreement Jessie was to receive, in addition to the Ouida Youngblood note, the sum of $92,151.13 to be paid to her in personal property, cash, and note as follows:
+-------------------------------------------+ ¦Household furniture and fixtures¦$1,000.00 ¦ +--------------------------------+----------¦ ¦Chrysler automobile ¦2,676.50 ¦ +--------------------------------+----------¦ ¦Cash ¦40,000.00 ¦ +--------------------------------+----------¦ ¦Note of Gordon R. Edwards ¦48,474.63 ¦ +--------------------------------+----------¦ ¦Total ¦$92,151.13¦ +-------------------------------------------+ Gordon was to receive the following community property:
+----------------------------------------------------------------------+ ¦Real estate ¦$48,038.75 ¦ +----------------------------------------------------------+-----------¦ ¦Note of Earl Edwards ¦380.00 ¦ +----------------------------------------------------------+-----------¦ ¦Cash in bank ¦73.49 ¦ +----------------------------------------------------------+-----------¦ ¦Gordon Edwards, Inc., stock ¦93,858.75 ¦ +----------------------------------------------------------+-----------¦ ¦Life Insurance policies and annuity contracts (cash value)¦38,274.78 ¦ +----------------------------------------------------------+-----------¦ ¦Total ¦$180,625.77¦ +----------------------------------------------------------------------+
The agreement specified and the parties understood that in order to raise the $40,000 cash required, Gordon would have to borrow money on the life insurance policies and annuity contracts referred to and that he would have to sell certain of the real estate enumerated. In order to raise the $40,000 cash, Gordon did borrow against the life insurance and annuity contracts a few days prior to June 6, 1949.
On June 6, 1949, the appropriate Texas court entered a judgment incorporating and approving as ‘fair, just and reasonable’ the May 20, 1949, agreement, granting a divorce and ordering Gordon to pay $6,000 on Jessie's attorney fees.
The terms of the May 20, 1949, agreement were carried out by the parties and each received the property set out and executed such deeds, bills of sale, notes, and other conveyances as were necessary to effect such transfers.
By November 7, 1949, Gordon had paid the $48,474.63 required to liquidate the note referred to in the agreement.
Jessie timely filed her individual income tax return for the fiscal year ended June 30, 1949, with the collector of internal revenue for the district of Tennessee. In her return Jessie did not report any gain or loss as a result of the consummation of the property settlement agreement.
In the statutory notice of deficiency the Commissioner determined that Jessie had realized a long-term capital gain on the sale of her share of community property.
Ultimate Finding.
The consummation of the settlement agreement was tantamount to a sale by petitioner to Gordon of her share in certain of the community assets.
OPINION.
TIETJENS, Judge:
The Commissioner determined that petitioner realized a long-term capital gain of $31,170.97 on the ‘sale of [her] share of community property’ to Gordon in accordance with the property settlement agreement described in the Findings of Fact.
Petitioner contends that nothing more is involved here than an equal division or partition of community property incident to a divorce which is a nontaxable transaction, citing Frances R. Walz, Administratrix, 32 B. T. A. 718, and dicta to that effect in C. C. Rouse, 6 T. C. 908, affd. (C. A. 5) 159 F. 2d 706.
We think the transaction before us differs from a mere division or partition of the community property, and this is true despite the language used in the settlement agreement and the avoidance, whether calculated or not, of the usual verbiage connoting a sale. This is clear from an examination of the items comprising the community property and the result of the ‘division.’ Summarized, the community property and the agreed valuation were as follows:
+------------------------------------------+ ¦Household furniture and fixtures¦$1,000.00¦ +--------------------------------+---------¦ ¦Chrysler automobile ¦2,676.50 ¦ +--------------------------------+---------¦ ¦Real estate ¦48,038.75¦ +--------------------------------+---------¦ ¦Note ¦380.00 ¦ +--------------------------------+---------¦ ¦Cash ¦73.49 ¦ +--------------------------------+---------¦ ¦Gordon Edwards, Inc., stock ¦93,858.75¦ +--------------------------------+---------¦ ¦Life insurance and annuities ¦38,274.78¦ +------------------------------------------+
After the distribution, we find petitioner possessed of but two items of the community property—the household furniture and the automobile, with a total value of about $3,600. In this respect she testified that she did not want to take one-half of the community property because she didn't know anything about business and didn't want the responsibility of having the business or the property and, accordingly, that she insisted on cash instead. Petitioner's husband acquired all the other items of the community, valued at $180,625.77. Prior to the consummation of the agreement he raised approximately $40,000 in cash by borrowing against the life insurance and annuity. This he turned over to petitioner pursuant to the settlement. In addition, he gave petitioner his promissory note in the principal sum of $48,474.63. This note, of course, did not represent any part of the community property. In addition, Gordon paid $6,000 toward Jessie's attorney fees. In other words, after the settlement Gordon had the great bulk of the community property and petitioner had two items of small value, plus cash raised on certain of the items transferred to Gordon, and, in addition, his note for some $48,000, and a $6,000 payment on her attorney fees.
This transaction did not amount to a partition of each item of community property; it was not a complete liquidation of the community property with a consequent division of the proceeds; neither was it an out and out division of the community property with the wife and husband each taking certain items in kind and of an approximately equal value. In our opinion it does not add up to the kind of equal partition or division which the Court felt it was dealing with in the Walz case, supra. In referring to that case in C. C. Rouse, supra, we said, at page 914:
Petitioner cites Frances R. Walz, 32 B. T. A. 718, where there was admittedly an equal division of the property. The only question considered was whether the husband was entitled to take a loss for the amount of the depreciation of certain stock allotted to his wife from its cost to the market value at which it was so allotted. We pointed out in that case that, while the stock in question was awarded to the wife by the property settlement, ‘other property of an equivalent value was awarded to the husband.’ We concluded that there was no sale or exchange of property, but merely a division.
In has been held before that settlements of community property interests may result in taxable transactions in which a gain or loss is realized. Johnson v. United States, (C. A. 9) 135 F. 2d 125; Long v. Commissioner, (C. A. 5) 173 F. 2d 471, reversing a Memorandum Opinion of this Court; C. C. Rouse, supra. In those cases it was concluded that the settlements were tantamount to bargains and sales and constituted taxable events. The fact that the settlements were characterized as ‘fair and equitable’ or were incident to and adopted in a divorce decree was considered to be of no consequence. We think the facts of this case bring it within the principles set out in the cited cases. The settlement agreement amounted to a virtual sale of Jessie's interest in certain of the community assets for a consideration, over and above a mere exchange or division of community property.
We are of the opinion that there was no error in the Commissioner's determination.
Decision will be entered for the respondent.