Opinion
B320270
03-19-2024
DONALD B. LIST, Plaintiff and Appellant, v. FRANCHISE TAX BOARD, Defendant and Respondent.
Rosenstein &Associates, Robert B. Rosenstein and Paul N. Evenson for Plaintiff and Appellant. Rob Bonta, Attorney General, Tamar Pachter, Assistant Attorney General, Lisa W. Chao and Douglas J. Beteta, Deputy Attorneys General for Defendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. 20SMCV01656, Mel Red Recana, Judge. Affirmed.
Rosenstein &Associates, Robert B. Rosenstein and Paul N. Evenson for Plaintiff and Appellant.
Rob Bonta, Attorney General, Tamar Pachter, Assistant Attorney General, Lisa W. Chao and Douglas J. Beteta, Deputy Attorneys General for Defendant and Respondent.
LAVIN, Acting P. J.
INTRODUCTION
California has adopted 26 U.S.C. section 1041, which provides that no gain or loss is recognized on a transfer of property from an individual to a spouse or, if the transfer is incident to a divorce, a former spouse. Plaintiff Donald List appeals from the judgment in favor of defendant the California Franchise Tax Board after the trial court sustained its demurrer to List's complaint, which asserted a claim for a tax refund under California Revenue and Tax Code section 19382 and California Government Code section 15677. List contends that the court incorrectly concluded that section 1041, subdivision (b), applied to a transfer of stock from Donna List, List's ex-wife, to List, which took place prior to the entry of the decree of dissolution of the Lists' marriage. He argues that the transfer was an arm's length sale of stock, which he paid for using his separate property, and that such a transaction does not fall within the ambit of section 1041. List's characterization of the transfer is not supported by the separation agreement executed by the parties, which was incorporated into the decree of dissolution of marriage entered by a Colorado court (the Lists' state of domicile at the time of their separation) and referenced in the complaint.
All undesignated statutory references are to the Internal Revenue Code, Title 26 of the United States Code.
We refer to Donald List as List and Donna List as Donna for clarity. No disrespect is intended.
We affirm on two grounds. First, we conclude that the allegations of the complaint establish as a matter of law that the Lists were married at the time of the alleged transfer. The law of the marital state of domicile determines marital status for purposes of federal tax law. List relies on the date he and Donna separated to establish that they were not married at the time of the alleged sale but fails to cite any pertinent authority supporting that the date of separation determines marital status under Colorado law. To the contrary, the Colorado Supreme Court has stated that a marriage conclusively ends on the date a court enters the decree of dissolution of marriage.
Second, even if the Lists were not married at the time of the transfer, we conclude that we may only consider the terms of the Lists' separation agreement in determining whether section 1041 applies as a matter of law. List contends that the parties' separation agreement is ambiguous and that the court should look to a declaration from Donna for the terms of the alleged sale of stock, but the complaint fails to identify any language in the agreement that is unclear or to advance an alternative reading of any provision. Under both Colorado and California law, extrinsic evidence cannot be admitted to vary the terms of a fully integrated contract. Thus, we conclude, as the trial court did, that a transfer of property that the parties agreed was marital property, described in and effected by a fully integrated separation agreement that is subsequently incorporated into a decree of dissolution, is a transfer incident to divorce and subject to section 1041 as a matter of law. We further conclude that the court did not abuse its discretion in sustaining the demurrer without leave to amend, and therefore affirm.
FACTS AND PROCEDURAL BACKGROUND
1. Allegations of the Complaint
On March 3, 1984, List and Donna married. Prior to the marriage, List owned stock in Alatec Products, Inc. as his separate property. After Alatec Products, Inc. merged with Pentacon, Inc., List received cash and stock as his separate property.
In 1988, List loaned $1 million to 3-V Fastener Co., Inc. (3V), which was later converted into stock ownership in 3V and equaled one-third of the then-issued stock. List then purchased an additional $333,000 of stock. After this purchase, the Lists owned 50 percent of 3V stock, with 25 percent belonging to Donna and 25 percent belonging to List. We refer to Donna's 25 percent interest in 3V as the Stock.
On or about November 10, 2003, while residing in Colorado, List and Donna separated. Thereafter, they lived apart with no intent to return to their marital relationship.
On December 21, 2004, List and Donna filed a petition for dissolution of their marriage in the District Court for Boulder County, Colorado. The decree of dissolution issued on June 17, 2005.
On May 17, 2005, using property tracing to the Alatec Products, Inc. transaction, List purchased all of Donna's right, title, and interest in the Stock for $5,898,322.00. The alleged purchase took place on the same date that the parties entered into a separation agreement (the Separation Agreement), which was attached as an exhibit to the complaint. The Separation Agreement "sets forth the terms of the sale of the Stock to [List]" but "did not act as a mechanism for the sale of the Stock."
In 2009, List sold 3V stock and reported his basis as the amount that he allegedly paid Donna for her interest plus $500,000, or half of the $1 million loan converted to stock, and $333,000, the amount he paid for the additional interest in 3V. List was audited by the Franchise Tax Board, which concluded that his basis in the stock should have been reported as $1.5 million, consisting of the original loan plus $500,000 paid to buy out another stockholder. Citing section 1041, subdivision (b), which California has adopted, the Franchise Tax Board refused to include the amount List paid Donna for the Stock in his basis. The Office of Tax Appeals affirmed the Franchise Tax Board's application of section 1041 to the transfer because it concluded that it was a transfer incident to divorce under section 1041. List's petition for rehearing was denied. The Franchise Tax Board also denied his request for abatement.
Under his sole cause of action, a claim for refund under California Revenue and Tax Code section 19382 and California Government Code section 15677, List alleged that his marriage to Donna did not cease on the date of the decree of dissolution but when they permanently separated, that Donna was entitled to be treated as "unmarried" after this date, and that the alleged sale of the Stock was not a transfer between spouses under section 1041 because the Separation Agreement did not serve as or detail the mechanism for the sale.
1.1. Terms of the Separation Agreement
The Separation Agreement, which was incorporated by reference in the complaint, stated that the Lists were residents and domiciles of Colorado as of the time they filed their copetition for dissolution of their marriage.
Section 7 of the Separation Agreement, entitled "Property Division," described and allocated the Lists' assets between them, including personal property, financial accounts, real property, retirement accounts, cash, life insurance policy, and, as is relevant here, businesses. With respect to businesses, the Separation Agreement stated: "The parties own interests in the following businesses: [3V] and Adept Fasteners. The parties agree that the current fair market value of their interest in [3V] is approximately $1,500,000. Adept Fasteners is a new company that was started in 2003. The Husband owns a 50% interest in Adept Fasteners. The parties agree that the fair market value of the Husband's interest in Adept Fasteners is $0. The Husband shall retain the interests in both [3V] and Adept Fasteners as his sole property, free of any claims of the Wife."
Pursuant to the distribution of property in the Separation Agreement, and as will be relevant below, Donna received certain accounts with Oppenheimer & Co., including four accounts totaling $5,898,322.00, which were held in the Lists' family trust.
With respect to taxes, section 10 of the Separation Agreement stated: "The parties stipulate and agree that it is their intention that all transfers of property by and between the parties as set forth herein, regardless of title to said property, are transfers of marital property and not separate property, and are in exchange for marital rights and considerations, and, therefore, the transfers are not a taxable event and no capital gains have been declared or need be declared." It further provided that the parties would file joint income tax returns for the tax year 2004 and that the parties had filed joint federal and state income tax returns during their marriage but would file separate returns in 2005 and all subsequent years.
Section 13 of the Separation Agreement provided that it would be governed by and construed under and in accordance with the laws of Colorado.
Section 16, titled "Acknowledgment - Legal Counsel; Complete Agreement," stated: "The parties acknowledge that they are entering into this Agreement freely and voluntarily; that each of them has ascertained and weighed all the facts and circumstances likely to influence their judgment herein; . . . that each of them clearly understands and assents to all of the provisions hereof, and such provisions are acknowledged as the entire understanding of the parties. This Agreement shall supersede any and all prior agreements between the parties hereto, it being the intention of the parties that this Agreement shall constitute a full and complete settlement of all property rights and interest of whatever kind and nature between the parties in regard to their dissolution of marriage, . . . all claims with respect to separate property of the parties hereto, and all claims of whatsoever kind or character, that in absence thereof, could arise out of the marital relationship between the parties or otherwise. It is further expressly understood by and between the parties that this is a full and complete settlement between them, that there are no representations, promises, covenants, or undertakings between the parties other than those expressly set forth herein."
Section 18 of the Separation Agreement obligated the parties to "execute such documents as are necessary to implement this Agreement within ten (10) days of entry of the decree of dissolution of marriage." Section 19 provided that the Separation Agreement, if approved by the court, would be incorporated by reference into and made part of any decree of dissolution entered by the court.
2. Procedural Background
List filed the complaint in November 2020.
In April 2021, the Franchise Tax Board filed a demurrer to the complaint in which it argued that section 1041 applied to the alleged transaction as a matter of law and List therefore could not show that he was entitled to a refund. The Franchise Tax Board asserted that section 1041 applied to the transfer of 3V stock to List because it applies to any transfer between spouses and the alleged transfer took place in May 2005, a month before the Colorado court entered the decree of dissolution. The Franchise Tax Board asserted that, even if the Lists were still married at the time of the transfer, it was related to the "cessation of marriage" for purposes of section 1041 because: (1) the Separation Agreement explained that all transfers described therein were transfers of marital property and contemplated that the Separation Agreement would be incorporated into the decree of dissolution; and (2) as a matter of law, the Separation Agreement transferred the Stock to Donna. It further contended that the transfer could not have been a sale based on any agreement of the parties prior to, contemporaneous with, or subsequent to the execution of the Separation Agreement because: (1) the Separation Agreement expressly superseded all prior agreements between the parties; (2) no contemporary agreement could exist because the Separation Agreement stated that it was the full and complete understanding of the parties; and (3) any subsequent sale would be illusory because the Separation Agreement effected the transfer of stock.
In his opposition brief, List argued, without citation to authority, that section 1041 "is intended to apply only to situations where a dissolution results in one party receiving community property assets and then selling them to the other party of the marriage, who pays for such community assets with separate community funds that the buying party also received." He argued that section 1041 did not apply because List used separate property to purchase the Stock and that the sale took place more than a year after the marriage ended. Rather, relying on a declaration from Donna, which he attached as an exhibit to his opposition (the Donna declaration), List argued that he "purchased from Donna, using his pre-existing separate property, all of Donna's rights, title, and interest in her ownership of the Stock, for the sum of $5,898,322.00, more than one year after the cessation of [his] marriage to Donna," that "[t]his was a transfer of [List's] separate property, assets in which Donna had no interest," and that the "transfer was the result of an agreement reached between Donna and [List], and was only memorialized in the [Separation] Agreement." List further contended that demurrer was inappropriate in light of the Donna declaration, which established that "the Agreement is controverted."
The Donna declaration states that Donna was previously married to List and that their marriage "ended by way of dissolution, pursuant to the laws of the State of Colorado" and that the Lists lived in the state of Colorado at the time of the dissolution of their marriage. List owned stock interest in Alatec Products, Inc., which he obtained primarily by way of a gift from his parents, that Alatec merged with another company, and that List "received substantial proceeds from the merger of Alatec, which assets were his separate property." List and Donna separated on November 10, 2003, and they filed a petition for dissolution of their marriage on or around December 21, 2004. Pursuant to an agreement reached between the parties (the date of which was not stated in the Donna declaration), it was decided that List would purchase the Stock from Donna using his separate property, which related to the Alatec Products, Inc. merger. Some of the separate assets were in the form of cash, while other assets had once been held in the family trust. Donna received the sum of approximately $5,898,322.00 as a" 'buy out' (purchase) of [her] interest in 3V."
In its reply brief, the Franchise Tax Board argued that statutory and contractual interpretation are questions of law that may properly be decided on demurrer. It contended that List had failed to identify any relevant authorities supporting that the date of separation rather than the date of the dissolution decree determined whether the Lists remained married at the time of the transaction. The Franchise Tax Board further argued that, as a matter of law and regardless of any purported prior agreement between the Lists, the Separation Agreement transferred the Stock to List. Moreover, under Colorado law, which governed whether parol evidence was admissible, List was required to show that the Separation Agreement was ambiguous before any extrinsic evidence was admissible. Because he had failed to do so, the Donna declaration could not be considered to change its terms.
Following oral argument, the court sustained the demurrer. The court noted that, contrary to List's contention, "contract interpretation may be the subject of a demurrer, where the contract's express language is clear and unambiguous." The court examined sections 7(d) and 16 of the Separation Agreement and concluded that their "language is clear and unambiguous in establishing that the Separation Agreement transferred the [Stock]" from Donna to List. It noted that List failed to identify any language in section 7(d) "which might be interpreted that the Separation Agreement is only describing the alleged prior . . . Stock sale" and that "[n]one of Section 7(d)'s language refers to any separate agreement pertaining to the . . . Stock." The court stated that the only evidence of a prior agreement of sale between the Lists was in the Donna declaration, which was extrinsic evidence and not part of the Separation Agreement. In light of the integration clause in section 16 of the Separation Agreement, the court concluded that any "prior agreements relating to any property interests that [List] and [Donna] had before the Separation Agreement had to be expressly identified and preserved in the Separation Agreement, since the Separation Agreement expressly supersedes all prior agreements." Thus, to the extent there was any prior agreement to sell the Stock, it was superseded by the Separation Agreement, "which expressly makes clear that it fully and completely settles all property rights and interests between these parties."
Having concluded that the transfer of the Stock took place pursuant to the terms of the Separation Agreement, the court considered whether the transfer was "incident to divorce" because it was "related to the cessation of marriage" pursuant to section 1041. It concluded that, "by finding that the Separation Agreement served to transfer the . . . Stock from [Donna] to [List], it necessarily follows as a matter of law that the transfer was 'incident to the divorce' since the agreement was 'related to the cessation of the marriage'" because the Separation Agreement was incorporated into the decree of dissolution entered by the Colorado district court, consistent with section 19 of the Separation Agreement. The court noted that, even if the Lists were not still married as of the date the decree of dissolution was entered, List failed to dispute that the decree of dissolution was "related to the cessation of marriage."
The court granted the Franchise Tax Board's motion for judicial notice of the decree of dissolution entered by the Colorado district court.
The court held that the issue of whether the Lists were still married when the transfer took place was mooted by its prior determinations. It further observed that List's assertion that section 1041 is intended to apply only to situations "where a dissolution results in one party receiving community property assets and then selling them to the other party of the marriage, who pays for such community assets with separate community funds that the buying party also received" was unsupported by authority and was refuted by the Franchise Tax Board's authorities.
The court entered judgment in February 2022. List timely appealed.
DISCUSSION
List frames the issue before us as whether section 1041 applies to his use of separate property to acquire property that Donna received as part of the dissolution. He contends that this question requires a "new interpretation and application of [section] 1041," and that it cannot be resolved on an appeal from a demurrer. We are not persuaded that this is an accurate description of our task. The first question before us is whether, as a matter of Colorado law, the Lists were married at the time of the transfer, in which case the transfer falls within section 1041 regardless of whether it was an arm's length sale. If the Lists were not married as a matter of law, we must consider whether List can properly rely on the Donna declaration to support his description of the sale, even though the Separation Agreement stated that it constituted a full and complete settlement of all property rights between the Lists in regard to their dissolution of marriage and that there were no agreements between them other than those set forth explicitly in the Separation Agreement. Only if List establishes that parol evidence can be admitted to vary and supplement the terms of the Separation Agreement are we faced with the question of whether the transfer as he describes it falls within section 1041 and whether that is a question we can properly resolve on an appeal from a judgment following a demurrer. If his parol evidence cannot be considered, we need only determine whether a transfer of marital property described in and effected by a separation agreement, which in turn is incorporated into the parties' decree of dissolution of marriage, is a transfer incident to divorce such that section 1041 applies as a matter of law.
This appeal primarily requires the interpretation and application of Colorado statutory law and Colorado and California contract principles. Once these state law issues are resolved, we conclude that the application of section 1041 to the facts is required by the plain language of the statute and all relevant authorities. We hold that the court did not err in its determination that section 1041 applied to the transaction as a matter of law and did not abuse its discretion in sustaining the demurrer without leave to amend.
1. The court properly sustained the demurrer.
1.1. Standard of Review
"[A] demurrer accepts as true all well-pleaded facts and those facts of which the court can take judicial notice but not deductions, contentions, or conclusions of law or fact." (Fox v. JAMDAT Mobile, Inc. (2010) 185 Cal.App.4th 1068, 1078.) "We also consider matters shown in exhibits attached to the complaint and incorporated by reference. [Citation.] '[T]o the extent the factual allegations conflict with the content of the exhibits to the complaint, we rely on and accept as true the contents of the exhibits.' [Citation.]" (Performance Plastering v. Richmond American Homes of California, Inc. (2007) 153 Cal.App.4th 659, 665.) The interpretation of both contracts and statutes presents a question of law that may properly be decided on demurrer. (See Hervey v. Mercury Casualty Co. (2010) 185 Cal.App.4th 954, 962; California Apartment Assn. v. City of Fremont (2002) 97 Cal.App.4th 693, 699.)
We recognize that issues of contract interpretation may not always be resolved on demurrer." '[W]hen the plaintiff alleges a meaning to the document that is reasonable in light of its terms, the court cannot grant a demurrer but must permit the admission of extrinsic evidence regarding the meaning of the document as intended by the parties.' [Citations.]" (Hervey v. Mercury Casualty Co., supra, 185 Cal.App.4th at p. 962.) As we discuss below, List did not allege a meaning to the Separation Agreement that is reasonable in light of its terms and thus the admission of extrinsic evidence is not warranted.
"We review de novo an order sustaining a demurrer. [Citation.] . . . In deciding whether a demurrer was properly sustained, '[w]e are not bound by the trial court's stated reasons, if any, supporting its ruling; we review the ruling, not its rationale.' [Citation.]" (Center for Environmental Health v. Perrigo Co. (2023) 89 Cal.App.5th 1, 16.) "A trial court's decision to deny leave to amend will be left undisturbed unless we conclude that there was an abuse of discretion." (SI 59 LLC v. Variel Warner Ventures, LLC (2018) 29 Cal.App.5th 146, 152.) The burden of establishing that there is a reasonable possibility that the complaint could be amended to state a cause of action "is squarely on the plaintiff." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
1.2. Section 1041
List contends that section 1041 "is intended to apply only to situations where a dissolution results in one party receiving community property assets and then selling them to the other party of the marriage, who pays for such community assets with separate community funds which were originally community property that the buying party received as part of the division of assets." Although the court pointed out his failure to support this same assertion below, List again fails to identify any case law, language in section 1041, or other pertinent authority that supports his contention. We do not find his narrow reading of section 1041 to be substantiated.
"Section 1041 provides a broad rule of nonrecognition for sales, gifts, and other transfers of property between one spouse (or former spouse) and another. It provides in relevant part, that: [¶] No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)- [¶] (1) a spouse, or [¶] (2) a former spouse, but only if the transfer is incident to the divorce. [¶] [Citation.] Thus, the provision is not limited to transfers in divorce, but also applies to conveyances between spouses who are not contemplating divorce. Under § 1041(b), property received in a transfer subject to § 1041 is excluded from the recipient's gross income as if it were a gift, even if the transfer is a cash sale or is made without donative intent as part of a contested divorce. The recipient takes a 'carryover' basis for the property equal to the transferor's basis, even if it exceeds the value of the property at the time of the transfer." (Craven v. United States (11th Cir. 2000) 215 F.3d 1201, 1204-1205 (Craven).) Section 1041, subdivision (c), defines a transfer "incident to divorce" as one that either "occurs within 1 year after the date on which the marriage ceases" or "is related to the cessation of the marriage."
"The policy animating § 1041 is clear. Congress has chosen to 'treat a husband and wife [and former husband and wife acting incident to divorce] as one economic unit, and to defer, but not eliminate, the recognition of any gain or loss on interspousal property transfers until the property is conveyed to a third party outside the economic unit.' [Citations.]" (Young v. C.I.R. (4th Cir. 2001) 240 F.3d 369, 375.)
In 1984, the IRS issued a temporary treasury regulation interpreting section 1041, Temporary Treasury Regulation § 1.1041-1T (the Temporary Treasury Regulation). The Temporary Treasury Regulation states: "Section 1041 applies to any transfer of property between spouses regardless of whether the transfer is a gift or is a sale or exchange between spouses acting at arm's length (including a transfer in exchange for the relinquishment of property or marital rights or an exchange otherwise governed by another nonrecognition provision of the Code). A divorce or legal separation need not be contemplated between the spouses at the time of the transfer nor must a divorce or legal separation ever occur." (26 C.F.R. § 1.1041-1T, Q&A-2, italics added.)
"Treasury regulations 'are binding on the Government as well as on the taxpayer.' [Citation.]" (Romano-Murphy v. Comm'r of the IRS (11th Cir. 2016) 816 F.3d 707, 718.) Courts "must defer to a Treasury Regulation so long as it is reasonable." (Mayo Found. for Med. Educ. & Research v. United States (8th Cir. 2009) 568 F.3d 675, 681, citing Cottage Savings Ass'n v. Commissioner (1991) 499 U.S. 554, 560-561; accord, Estate of Mabury (1976) 54 Cal.App.3d 969, 982-983 [" 'as "contemporaneous constructions by those charged with administration of the Code (Internal Revenue Code), the Regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes," and "should not be overruled except for weighty reasons"' "].) Although the regulation was temporary, courts interpreting section 1041 have given it the same weight as a final regulation. (See Craven v. United States (N.D.Ga. 1999) 70 F.Supp.2d 1323, 1328, fn. 5 ["On August 30, 1984, a temporary treasury regulation was issued interpreting Section 1041. [T]hese temporary regulations are given the same weight as final regulations. [Citation.]"]; but see Arnes v. Commissioner (1994) 102 T.C. 522, 535 (conc. opn. of Beghe, J.) ["Even though a temporary regulation has the same dignity as any other interpretative regulation on the subject that is fairly within its ambit, [citation], its temporary character also tells us that it should not be extended by implication beyond the area with which it purports to deal."].)
It further provides: "A transfer of property is treated as related to the cessation of the marriage if the transfer is pursuant to a divorce or separation instrument, as defined in section 71(b)(2), and the transfer occurs not more than 6 years after the date on which the marriage ceases." (26 C.F.R. § 1.1041-1T, Q&A-7.) In turn, former 26 U.S.C.A. § 71, subd. (b)(2) states: "[T]he term 'divorce or separation instrument' means-[¶] (A) a decree of divorce or separate maintenance or a written instrument incident to such a decree, [¶] (B) a written separation agreement, or [¶] (C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse."
Former 26 U.S.C.A. § 71 was repealed in its entirety in 2017. An identical definition of "divorce or separation agreement" now appears in 26 U.S.C.A. § 121, subd. (d)(3)(C).
With respect to the tax treatment of transfers of property under section 1041, the Temporary Treasury Regulation states: "The transferor of property under section 1041 recognizes no gain or loss on the transfer even if the transfer was in exchange for the release of marital rights or other consideration. This rule applies regardless of whether the transfer is of property separately owned by the transferor or is a division (equal or unequal) of community property. Thus, the result under section 1041 differs from the result in United States v. Davis, 370 U.S. 65 (1962)." (26 C.F.R. § 1.1041-1T, Q&A-10, italics added; see also In re Marriage of Bergman (1985) 168 Cal.App.3d 742, 762 ["As a result [of section 1041], where one spouse takes more than half of the community property, compensation of the other spouse with separate property or a promissory note, is not a taxable event."].) "Even if the transfer is a bona fide sale, the transferee does not acquire a basis in the transferred property equal to the transferee's cost (the fair market value). This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than its fair market value at the time of transfer (or the value of any consideration provided by the transferee) and applies for purposes of determining loss as well as gain upon the subsequent disposition of the property by the transferee. Thus, this rule is different from the rule applied in section 1015(a) for determining the basis of property acquired by gift." (26 C.F.R. § 1.1041-1T, Q&A-11, italics added.)
1.3. Whether the Lists were married at the time of the transfer
As set forth above, section 1041 applies to transactions between spouses, regardless of whether they are contemplating divorce. (Craven, supra, 215 F.3d at pp. 1204-1205.) The court did not reach the question of whether the Lists were still married at the time of the transfer of stock, as it concluded that its determination that the Separation Agreement legally triggered the transfer of stocks mooted the question. However, as we may affirm on any ground, we elect to take up this issue first.
List alleged that he "purchased all of Donna's right, title and interest in the Stock" on May 17, 2005, and that the final dissolution decree was not entered until June 17, 2005. Thus, according to the complaint, the dissolution of the Lists' marriage was not final at the time of the alleged transfer. However, List contends that his allegation that his marriage to Donna "ceased" in November 2003 when they separated creates a dispute of fact and precludes a demurrer on the ground that the Lists were still married at the time of the transfer.
We are not convinced. The Franchise Tax Board does not challenge the date of the Lists' separation but contends that it is irrelevant to determining whether the Lists were married for purposes of Colorado law, their state of domicile when they separated and dissolved their marriage, which in turn determines whether the Lists were married for federal tax purposes. (See Boyer v. Commissioner (D.C. Cir. 1984) 732 F.2d 191, 194 [Tax Court correctly looked to the state law of the marital domicile to determine marital status for federal tax purposes]; accord, Boyter v. Commissioner (4th Cir. 1981) 668 F.2d 1382, 1385 [courts are bound by state law rather than federal law when attempting to construe marital status].) The question of which date is relevant to determining whether the Lists were married under Colorado law, and thus whether section 1041 applies, is one of law, not of fact.
Colorado law provides: "A decree of dissolution of marriage or of legal separation is final when entered, subject to the right of appeal." (Colo. Rev. Stat. Ann. § 14-10-120.) In Estate of Burford v. Burford (Colo. 1997) 935 P.2d 943, 954 (Burford), the Colorado Supreme Court concluded that section 14-10-120 means "that an unappealed dissolution decree is final when entered by the court to determine the marital status of the parties" and that this conclusion was supported by "[s]ound public policy." The court explained: "When parties to a dissolution challenge the status of the marriage, they must be able to rely upon the decree as conclusive.... Authorizing the district court to enter an order severing the marital status permits a final resolution by allowing the parties to move forward with their lives. It permits certainty with respect to filing tax returns as a single individual or as a married person filing separately ...." (Burford, at p. 954.)
List's contention that Burford is irrelevant because it involved a dissolution dispute is not well taken. The views of the high court of Colorado on when a marriage has definitively concluded under the laws of that state are highly pertinent to our analysis.
According to the Separation Agreement incorporated by reference in the complaint, List and Donna filed joint state and federal tax returns throughout their marriage and agreed to do so again for the tax year 2004. This supports that the Lists continued to be married for purposes of Colorado and federal tax law up until the legal dissolution of their marriage, notwithstanding their separation in 2003.
List contends that the date of separation is relevant because it is the date on which the Lists evinced "an intent to end their marriage and engag[ed] in conduct consistent with that intent, resulting in a complete and final break in the marital relationship." In support of this, he cites California Family Code section 70 and In re Marriage of Engelman (Colo. 1979) 43 Colo.App. 531 (Engelman). Although this is a California tax dispute, Colorado was the Lists' state of domicile during their separation. List fails to explain why Family Code section 70 governs or is relevant. Further, we agree with the Franchise Tax Board that Engelman is inapposite.
In Engelman, supra, 43 Colo.App. 531, "[t]he parties to th[e] action were husband and wife. In 1971, during the term of their marriage, a marital home was purchased. Thereafter, the parties separated, and the wife moved to Kansas. After establishing residency, she filed for and was granted a dissolution of marriage . . . by a Kansas court which stated in its decree that it had no jurisdiction to decide any issues concerning real property located in Colorado." (Id. at p. 531.) A Colorado court subsequently "treated that real estate as marital property, but ordered that all equity which had accumulated from the date of the dissolution decree until the date of the property hearing be awarded to the husband," who had made all mortgage payments and had resided in the property before renting it out. (Id. at p. 532.) The wife challenged this award on appeal. (Ibid.) The Colorado Court of Appeals noted that this question was determined by a Colorado statute, which provided for the division of" 'the marital property . . . in such proportions as the court deems just after considering all relevant factors ....'" (Ibid.) The statute further provided that the" 'property shall be valued as of the date of the decree or as of the date of the hearing on disposition of property if such hearing precedes the date of the decree.'" (Ibid.) The Court of Appeals concluded that the trial court had jurisdiction to distribute the property and chose the proper date, the date of the Kansas dissolution decree, for evaluation. (Ibid.)
List does not contend that the statute governing the outcome in Engelman, supra, 43 Colo.App. 531 applies in this case. Even if it were relevant by analogy, the Court of Appeals held that the trial court correctly ordered that the husband be awarded equity in the residence accrued since the date of the Kansas dissolution decree, not the date of the parties' separation. Thus, we fail to see how this decision furthers List's position that the date of separation governs marital status under Colorado law.
List further contends that "Colorado has a 'cooling off period' in place for couples that are legally separated" and cites Colorado Revised Statutes Annotated section 14-10-106(2), which provides that a court will convert a legal decree of separation into a decree of dissolution of marriage after 180 days. However, the complaint did not allege-nor does List argue on appeal that it could be amended to allege-that he and Donna obtained a legal decree of separation more than 180 days prior to the transfer of the property, such that the marriage could have been legally dissolved at the time of transfer. List does not argue or allege that a legal separation could be achieved without application to the court, nor does Colorado law appear to contemplate this. (See Nehme v. INS (5th Cir. 2001) 252 F.3d 415, 426 &fn. 11 [identifying Colorado as a state with a statutory mechanism for legal separation contemplating a judicial decree; observing that, "in the United States, the term 'legal separation' is uniformly understood to mean judicial separation"].)
And even if the complaint could be amended to allege this fact, it would not alter our conclusion. That the marriage could have been dissolved, but was not, does not establish that it had concluded for purposes of Colorado law.
In his reply brief, List contends that applying section 1041 differently to couples who separate without taking legal action to dissolve their marriage and couples who do "could be viewed as infringing on the First Amendment right of the free exercise of religion and constitutional due process." Although List raised this contention briefly during the hearing on the demurrer, he failed to raise it in his opening brief and provides no explanation for that failure. (Baugh v. Garl (2006) 137 Cal.App.4th 737, 746 ["contentions not raised in appellant's opening brief are deemed waived"]; Tellez v. Rich Voss Trucking, Inc. (2015) 240 Cal.App.4th 1052, 1066 [" '" 'points raised in the reply brief for the first time will not be considered, unless good reason is shown for failure to present them before'"' "].) List also failed to cite any authority or provide legal analysis supporting his assertion. (Keyes v. Bowen (2010) 189 Cal.App.4th 647, 655-656 [matters not properly raised or that lack adequate legal discussion are deemed forfeited].) His contention is therefore forfeited.
Our independent research indicates that tax treatment that "penalizes" persons for being married is not unconstitutional. For example, the Second Circuit Court of Appeals held that provisions of the Internal Revenue Code which had the effect of requiring taxpayers to pay higher income tax as a married couple than two single individuals with the same income did not deprive taxpayers of any constitutional right. (Druker v. Commissioner (2d Cir. 1982) 697 F.2d 46.) The Second Circuit noted that a prior United States Supreme Court decision established that" 'reasonable regulations that do not significantly interfere with decisions to enter into the marital relationship may be legitimately imposed.' [Citation.]" (Id. at p. 49.) The Second Circuit held that "[t]he adverse effect of the 'marriage penalty' . . . is merely 'indirect'; while it may to some extent weight the choice whether to marry, it leaves the ultimate decision to the individual" and was "most certainly not 'an attempt to interfere with the individual's freedom [to marry]'. [Citation.]" (Id. at p. 50; see also Mueller v. Commissioner (2000) 79 T.C.M. (CCH) 1887 [United States Tax Court has "consistently denied constitutional challenges to marital classifications in the tax code"].)
In sum, although we accept as true the factual allegation that the Lists' marriage ceased for practical purposes in November 2003, we are not required to accept the legal conclusion that the Lists ceased to be married for purposes of Colorado law as of this date. The Colorado Supreme Court evinced an intent to treat the date of the decree of dissolution of marriage as "conclusive" for all purposes, including taxation. (Burford, supra, 935 P.2d at p. 953.) The complaint alleges that the Lists' marriage was not judicially dissolved until after the alleged transfer. Thus, accepting the allegations of the complaint as true, the transfer was "a transfer from an individual to . . . a spouse" and section 1041 applied. (§ 1041, subd. (a).) As case law and the Temporary Treasury Regulation establish, the fact that the transfer was allegedly an arm's length sale between spouses does not render section 1041 inapplicable. (See Craven, supra, 215 F.3d at pp. 1204-1205; 26 C.F.R. § 1.1041-1T, Q&A-2.)
1.4. Whether the sale or transfer was incident to divorce
Even if the allegations of the complaint permitted the conclusion that the Lists' marriage ended prior to the transfer under Colorado law, section 1041 applies as long as the transaction is incident to divorce, meaning that it took place "within 1 year after the date on which the marriage ceases" or "is related to the cessation of the marriage." (§ 1041, subd. (c).) Assuming for purposes of argument that the marriage ended in November 2003, more than one year before the transaction allegedly took place, we will focus on the "related to the cessation of the marriage" prong. (Ibid.)
The complaint alleges that, on May 17, 2005, List purchased Donna's right, title, and interest in the Stock using his separate property. The Separation Agreement was executed the same day. The complaint concedes that the Separation Agreement "sets forth the terms of the sale of the Stock to [List]" but contends that it "did not act as a mechanism for the sale of the Stock." The Separation Agreement is incorporated by reference in the complaint and attached as an exhibit thereto. To the extent the allegations of the complaint conflict with the content of the Separation Agreement, we accept the Separation Agreement as true. (Performance Plastering v. Richmond American Homes of California, Inc., supra, 153 Cal.App.4th at p. 665.)
On appeal, List argues that the Separation Agreement "was poorly drafted and contains ambiguities" and relies on the Donna declaration to establish the terms of the parties' alleged agreement concerning the sale of the Stock. The court, in contrast, concluded that the terms of the contract were "clear and unambiguous" and the Donna declaration could not be used to vary the terms of the Separation Agreement, which described a transfer that was subject to section 1041 as a matter of law. We agree with the trial court.
1.4.1. The court did not err in concluding that the Separation Agreement was unambiguous and that parol evidence was not admissible to alter its provisions.
"The 'threshold determination of "ambiguity" . . . is a question of law,' 'subject to independent review.' [Citation.]" (Oakland-Alameda County Coliseum Authority v. Golden State Warriors, LLC (2020) 53 Cal.App.5th 807, 816.) "An ambiguity arises when language may be applied in more than one way.... Every substantial claim of ambiguity must tender a candidate reading of the language which is of aid to the claimant. One must ask what meanings are proffered and examine their plausibility in light of the language. A party attacking a meaning succeeds only if the attacker can propose an alternative, plausible, candidate of meaning." (Estate of Dye (2001) 92 Cal.App.4th 966, 967.) This principle applies where the sustaining of a demurrer is based upon the interpretation of a written instrument: a party proceeding on the theory that a contract's terms are ambiguous must "allege in the complaint the meaning which the party ascribes to that contract." (Hayter Trucking, Inc. v. Shell Western E&P, Inc. (1993) 18 Cal.App.4th 1, 17.)
The complaint does not identify any language in the Separation Agreement susceptible to differing interpretations. Rather, it alleges that there was an entirely separate agreement providing the "mechanism" for the transfer of stock. On appeal, List only obliquely contends with the fact that the Separation Agreement contains an integration clause stating that the Separation Agreement supersedes all other agreements between the parties and was intended to be a full and complete settlement of property rights between them. He argues that the Franchise Tax Board's argument as to "superseding language [is] without any legal basis" and that "read[ing] such a clause in an agreement to mean that any prior agreement between the parties would be superseded would result in 'absurd' arguments." In light of the express integration clause in the Separation Agreement, we do not find the Franchise Tax Board's argument to be legally baseless, nor does it require that anything be read into the agreement. List's suggestion that integration clauses are invalid or that enforcing their terms would be absurd is itself legally unsupported.
Although the question of the applicable law for determining whether parol evidence may be considered is not taken up by either party directly on appeal, the Franchise Tax Board argued below that the relevant law is Colorado law in light of the choice of law provision in the Separation Agreement designating Colorado law as the governing law. The Franchise Tax Board also cites Colorado case law on appeal in support of its contention that parol evidence of another agreement between the parties cannot be considered.
As the Franchise Tax Board observed below, "[t]he parol evidence rule is a rule of substantive law." (IIG Wireless, Inc. v. Yi (2018) 22 Cal.App.5th 630, 640; accord, Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169, 1174 [parol evidence rule is not a rule of evidence but of substantive law].) "Contractual choice of law clauses are generally construed to designate the substantive law of the chosen jurisdiction." (Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal.App.4th 227, 251, fn. 13.) Kanno v. Marwit Capital Partners II, L.P. (2017) 18 Cal.App.5th 987, 1001, establishes that, where a contract contains a choice of law provision, a California court will apply the law of the designated state concerning parol evidence "if the chosen state has a substantial relationship to the parties or the transaction, or if there is any other reasonable basis for the parties' choice of law, and the chosen state's law is not contrary to a fundamental policy of California." In the absence of any argument on these points, we will examine the law of both states. We conclude that the outcome is the same under both California and Colorado law.
The Franchise Tax Board contends that, under Colorado law, extrinsic evidence cannot be used to vary the terms of a fully integrated, unambiguous agreement, citing Am. Family Mut. Ins. Co. v. Hansen (Colo. 2016) 375 P.3d 115, 117. We agree. As the Colorado Supreme Court explained: "Integration clauses generally permit contracting parties to limit future contractual disputes to issues relating to the reciprocal obligations expressly set forth in the executed document. [Citations.] Thus the terms of a contract intended to represent a final and complete integration of the parties' agreement are enforceable and parol evidence offered to establish the existence of prior or contemporaneous agreements is inadmissible to vary the terms of such contract." (Keller v. A.O. Smith Harvestore Products, Inc. (Colo. 1991) 819 P.2d 69, 72.)
"California's parol evidence rule is codified in section 1856 of the Code of Civil Procedure. Subdivision (a) of section 1856 provides: 'Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.' As explained by Justice Traynor, '[w]hen the parties to a written contract have agreed to it as an "integration"-a complete and final embodiment of the terms of an agreement-parol evidence cannot be used to add to or vary its terms.' [Citation.]" (Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 953.)
"In considering whether a writing is integrated, the court must consider the writing itself, including whether the written agreement appears to be complete on its face; whether the agreement contains an integration clause; whether the alleged parol understanding on the subject matter at issue might naturally be made as a separate agreement; and the circumstances at the time of the writing. [Citations.] Whether a contract is integrated is a question of law when the evidence of integration is not in dispute. [Citations.]" (Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., supra, 109 Cal.App.4th at pp. 953-954.) "The existence of an integration clause is a key factor in divining . . . intent. [Citation.] 'This type of clause has been held conclusive on the issue of integration, so that parol evidence to show that the parties did not intend the writing to constitute the sole agreement will be excluded. [Citations.]' [Citation.]" (Grey v. American Management Services (2012) 204 Cal.App.4th 803, 807.)
Here, List does "not offer the oral agreement to explain or provide meaning to the written instrument. [He] offer[s] it as a new, additional and completely different agreement." (Banco Do Brasil, S. A. v. Latian, Inc. (1991) 234 Cal.App.3d 973, 1009, overruled on another ground by Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., supra, 55 Cal.4th 1169.)" 'Testimony of intention which is contrary to a contract's expressed terms . . . does not give meaning to the contract; rather it seeks to substitute a different meaning. It follows . . . that such evidence must be excluded.' [Citation.]" (Banco Do Brasil, at pp. 1008-1009.) Further, because the distribution of marital assets was "covered so explicitly and so extensively in the written contract, we conclude they would not naturally be made as a separate oral agreement and that any other agreement would certainly have been included in the written instrument." (Marani v. Jackson (1986) 183 Cal.App.3d 695, 703.)
In sum, under both Colorado and California substantive law, the Donna declaration is inadmissible to establish that the Lists did not intend to treat all transfers of property described in the Separation Agreement as exchanges of marital property for marital rights and considerations; that the fair market value of the Stock was not approximately $750,000 (i.e., half of the $1.5 million approximate value of all 3V stock held by the Lists, as stipulated to in the Separation Agreement) but nearly $5.9 million; or to otherwise alter or contradict its provisions.
To the extent List seeks to argue that the Separation Agreement is missing a necessary term because it does not provide any "mechanism" for the transfer of the Stock to List, we disagree. Under Colorado law, no "mechanism" beyond the Separation Agreement was required to effect the transfer of the Stock from Donna to List. In Camack v. Camack (Colo.App. 2002) 62 P.3d 1097, 1098, the husband and wife purchased a property in joint tenancy with right of survivorship but subsequently separated. The marriage was dissolved, and the decree of dissolution incorporated a separation agreement signed by husband and wife. The agreement provided that: (1) the parties had "effected to their mutual satisfaction a division of all other property, real and personal, in which they had an interest, either singly or jointly" and that all property currently in either party's possession would remain his or her own property "free from any claim whatsoever on the part of the other"; and (2) that each party would "execute any and all deeds, bills of sale, endorsements, forms, conveyances or other documents, and perform any act which may be required or necessary to carry out and effectuate any and all of the purposes and provisions herein set forth." (Ibid.) The wife had moved out of the property prior to the entry of the dissolution decree and had not lived in the property since. (Ibid.) When the wife brought a quiet title action for the property, the husband's son, who resided in the property, filed for summary judgment on the grounds that the decree of dissolution incorporating the separation agreement extinguished wife's interest in the property. (Ibid.) The trial court denied the motion. (Ibid.) Even though it found that the wife did not retain an interest in the property due to the separation agreement, the trial court concluded that there were issues of fact concerning alleged postdecree events by which wife may have obtained an interest in the property based on the provision of the decree that each party would execute the documents necessary to carry out the property division. (Ibid.)
The Colorado Court of Appeals concluded that the separation agreement extinguished the wife's interest in the property and reversed. (Camack v. Camack, supra, 62 P.3d at pp. 1098-1099.) The court stated that "[t]he separation agreement and decree were self-executing, that is, wife's interest in the property was transferred to husband by the separation agreement and decree, and no further action was required to accomplish that transfer as between husband and wife." (Id. at p. 1099.) It rejected the wife's argument that the separation agreement "require[d] the parties to execute any deeds to carry out the purpose of the agreement, and therefore, following the dissolution, husband did not own the property free of wife's interest, but only had the right to compel wife to convey the property to him." (Ibid.) The court observed that this "[t]his argument mischaracterizes the self-executing separation agreement and subsequent decree and also misapprehends the clear meaning of the provision requiring the future execution of documents to 'effectuate any and all of the purposes and provisions herein set forth.'" (Ibid.) That provision "does not limit any other clause in the separation agreement or decree, including that which expressly transfers wife's interest to husband, nor does it limit husband's interest in the property or serve to restore any interest to wife"; rather, it merely required the wife to "cooperate and perform such ministerial acts as may be required to provide husband the interest transferred to him in the separation agreement and the decree." (Ibid.)
The Separation Agreement in this case contains very similar provisions. As discussed, section 16 states that the parties agreed and intended that the Separation Agreement "shall constitute a full and complete settlement of all property rights and interest of whatever kind and nature between the parties in regard to their dissolution of marriage." And consistent with Camack, we understand section 18 of the Separation Agreement to obligate the parties to take any practical steps needed to complete transfers already made by the Separation Agreement. List does not address Camack on appeal.
1.4.2. The court did not err in concluding that the transfer of Stock was governed by section 1041 as a matter of law.
Because List failed to identify any ambiguity in the language of the Separation Agreement and cannot rely on extrinsic evidence to alter or supplement its provisions, we "will construe the language of the contract on its face" to determine whether the court correctly sustained the demurrer on the ground that section 1041 applies as a matter of law under the Separation Agreement. (Hayter Trucking, Inc. v. Shell Western E&P, Inc., supra, 18 Cal.App.4th at p. 18.)
As set forth in the Temporary Treasury Regulation, "[a] transfer of property is treated as related to the cessation of the marriage if the transfer is pursuant to a divorce or separation instrument"-i.e., a written separation agreement or instrument incident to a decree of dissolution-"and the transfer occurs not more than 6 years after the date on which the marriage ceases." (26 C.F.R. § 1.1041-1T, Q&A-7.) We agree with the court that, on its face, the Separation Agreement establishes that the transfer of the Stock to List-which took place less than two years after the alleged end of the Lists' marriage-was "related to the cessation of the marriage" as a matter of law. (§ 1041, subd. (c)(2).)
Section 7 of the Separation Agreement provided that the Lists owned interests in 3V and Adept Fasteners and that they agreed that List would "retain the interests in both [3V] and Adept Fasteners as his sole property, free of any claims of [Donna]." In section 10 of the Separation Agreement, the Lists agreed that it was their intention "that all transfers of property by and between the parties as set forth herein, regardless of title of said property, are transfers of marital property and not separate property, and are in exchange for marital rights and considerations." Section 16 of the Separation Agreement provided, in part, that the Separation Agreement "constitute[d] a full and complete settlement of all property rights and interest of whatever kind and nature between the parties in regard to their dissolution of marriage" and that no other agreements existed between them. Finally, section 19 stated that the parties agreed that the Separation Agreement would be incorporated in the decree of dissolution entered by the court, thus reaffirming that it related to the cessation of the Lists' marriage. The decree of dissolution of the Lists' marriage, of which the court took judicial notice, expressly incorporated the Separation Agreement.
In sum, List and Donna agreed to treat all interest in 3V as marital property and agreed that List would retain those interests free and clear of any claim of Donna in exchange for marital rights and considerations, thereby transferring all interests in 3V to him. They further agreed that the Separation Agreement constituted their sole agreement with respect to the division of marital property and that it would be incorporated into the decree of dissolution of their marriage, which it was. Considering these provisions, we agree with the trial court that, as a matter of law, the transfer of the Stock took place pursuant to the Separation Agreement, which was both a written separation agreement and an instrument incident to a decree of dissolution. (26 C.F.R. § 1.1041-1T, Q&A-7; former 26 U.S.C.A. § 71.) The transfer was therefore related to the cessation of marriage for purposes of section 1041.
We further conclude that the court did not abuse its discretion in sustaining the demurrer without leave to amend. On appeal, List does not explain how he could amend the complaint to plead a cause of action in the event that the court correctly sustained the demurrer and therefore fails to carry his burden of establishing any abuse of discretion. (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.)
DISPOSITION
The judgment is affirmed. The Franchise Tax Board shall recover its costs on appeal.
WE CONCUR: EGERTON, J. ADAMS, J.