Ingham v. U.S.

• Citation: 167 F.3d 1240
• Decision Date: 11 February 1999
• Docket Number: No. 97-35729,97-35729
• Parties: -833, 99-1 USTC P 50,249, 43 Fed.R.Serv.3d 535, 99 Cal. Daily Op. Serv. 1126, 1999 Daily Journal D.A.R. 1403 Marsha Hatch INGHAM, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1240

167 F.3d 1240

83 A.F.T.R.2d 99-833, 99-1 USTC P 50,249,

43 Fed.R.Serv.3d 535,

99 Cal. Daily Op. Serv. 1126,

1999 Daily Journal D.A.R. 1403

Marsha Hatch INGHAM, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 97-35729.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 7, 1999.

Decided Feb. 11, 1999.

James J. Rigos, Seattle, Washington, for the plaintiff-appellant.

Thomas J. Sawyer, United States Department of Justice, Tax Division, Washington, D.C., for the defendant-appellee.

Appeal from the United States District Court for the Western District of Washington; Barbara J. Rothstein, District Judge, Presiding. D.C. No. CV-95-00578-BJR.

Before: CANBY, and GRABER, Circuit Judges, and BREWSTER, ¹ Senior District Judge.

GRABER, Circuit Judge:

Plaintiff, Marsha Ingham, brought this action against defendant, the United States, seeking a tax refund of $362,632 under I.R.C. § 1041(a)(2) and damages for defendant's alleged wrongful disclosure of tax return information in violation of I.R.C.

§ 6103(a). Plaintiff also alleged that defendant spoliated material evidence during her tax-related administrative proceedings. The district court granted summary judgment in favor of defendant on all claims. Plaintiff appeals, challenging the district court's grants of summary judgment and various discovery rulings. We affirm.

FACTUAL AND PROCEDURAL HISTORY

Plaintiff married Ken Hatch in December 1974. During the following year, the couple purchased a parcel of land on the shore of Lake Washington, near Seattle, for $160,000. The property consisted of four lots, situated in a rectangular pattern, two of which were adjacent to the lake and two of which were adjacent to a roadway. The couple's house was located on one of the two lakefront lots. By 1991, the value of the property, including the house, had appreciated dramatically to about $4 million.

In February 1991, plaintiff and Hatch divorced. As part of the property settlement, plaintiff received the two lakefront lots and the house, and Hatch received the two roadside lots. Plaintiff also agreed to pay Hatch $404,102, representing the value of his community and separate property interests in the lakefront properties. The "Decree of Dissolution of Marriage" provided that Hatch's interests "in the family residence shall be paid by [plaintiff] to [Hatch] immediately upon sale, trade or exchange of said residence but in no event later than five years from the date of entry of the Decree herein." Hatch secured that obligation by obtaining a lien against the two lakefront lots.

Shortly after the divorce, in May 1991, plaintiff and Hatch sold all four lots to the same buyer for $4.25 million. The sale price equaled the combined values of the two lakefront parcels, $3.1 million, and the two roadside parcels, $1.15 million. As required by the divorce decree, plaintiff paid her outstanding debt to Hatch immediately after the sale.

On her federal tax return for 1991, plaintiff reported her share of the sale proceeds, and she paid $382,143 in tax. On April 15, 1993, plaintiff filed her first claim for refund. She argued that she was liable for only half the capital gain on the sale, $91,538, on the theory that the lakefront lots were "community property" when sold. The IRS rejected plaintiff's claim in September 1994. The IRS's disallowance of plaintiff's first claim for refund is not at issue here.

While plaintiff's first claim for refund was pending, the IRS also was reviewing Hatch's tax return for 1991. Hatch had realized significant gain from the sale of the two roadside lots, but had attempted to defer that gain under I.R.C. § 1034, which permits nonrecognition of gain on the sale of a principal residence when that gain is used to buy a new residence. The IRS rejected Hatch's attempted deferment; Hatch then filed an administrative appeal.

In December 1994, during that appeal process, the IRS informed Hatch that the initial audit report relating to his tax deficiency would be withdrawn and amended to assert that he was responsible also for a portion of the capital gain resulting from plaintiff's sale of the lakeside properties. The IRS took that action in order to protect itself against a "whipsaw," that is, the possibility that part of the tax resulting from plaintiff's sale of the lakefront lots would go unpaid if she ultimately prevailed on her claim for refund. See Bouterie v. Commissioner, 36 F.3d 1361, 1373 (5th Cir.1994) ("A whipsaw occurs when taxpayers treat the same transaction involving the same income inconsistently, thus creating the possibility that the income could go untaxed."). When notifying Hatch of the additional tax assessment, the IRS disclosed to Hatch that plaintiff had filed a claim for refund, that plaintiff had based her claim on the community property laws, and that the IRS's primary position was that plaintiff was liable for the tax. The next day, plaintiff's counsel contacted the IRS and accused it of unlawfully disclosing confidential tax return information.

After the disallowance of her first claim, plaintiff filed a second claim for refund in February 1995, this time seeking $362,632. She argued that section 1041(a)(2) did not require her to recognize any gain on the sale of her properties, because the sale qualified as a transfer between a spouse and former spouse incident to a divorce. The IRS again Before the IRS issued audit reports to plaintiff and to Hatch disallowing their respective claims, an IRS disclosure agent reviewed copies of the reports for potential disclosure violations. The disclosure agent did not review any other materials related to plaintiff's or Hatch's claims, nor did she review any original materials. After completing her assessment and finding no violations, the disclosure agent ordered her clerk to shred the reports. At some later time, plaintiff received copies of both reports.

denied plaintiff's claim for refund, concluding that section 1041(a)(2) did not apply to plaintiff's arm's-length sale of the lakefront properties to a third-party buyer.

After the IRS denied her second claim for refund, plaintiff filed this action, seeking a refund of taxes under section 1041(a)(2) and alleging wrongful disclosure of return information in violation of section 6103(a). Plaintiff later amended her complaint to include a claim of spoliation of evidence. The district court granted summary judgment in favor of defendant on all claims.

The district court denied plaintiff's motion for reconsideration. Plaintiff then filed a motion to compel production of the notes made by plaintiff's expert witness, which defendant had not returned. The district court denied plaintiff's motion. Plaintiff now brings this timely appeal.

STANDARD OF REVIEW

We review de novo a district court's grant of summary judgment. See San Pedro Hotel Co. v. City of Los Angeles, 159 F.3d 470, 477 (9th Cir.1998). Likewise, we review de novo a district court's interpretation of the Internal Revenue Code. See Miller v. United States, 38 F.3d 473, 475 (9th Cir.1994).

CLAIM FOR REFUND

Plaintiff contends that she was not required to pay income tax on any capital gain arising from the sale of the two lakefront properties, because that transaction qualified for nonrecognition as a transfer of property to a former spouse "incident to ... divorce" under section 1041(a)(2). ² Plaintiff argues that, although she transferred the lakefront properties to a third party and not to Hatch, her former spouse, the sale should be treated as a constructive transfer to a former spouse, because she sold the properties in order to satisfy her financial obligation to Hatch under the divorce decree. In other words, plaintiff asserts that, for tax purposes, the transaction should not be treated as a direct sale from plaintiff to the third-party buyer, but rather as a constructive transfer first to Hatch and then a direct sale by Hatch to the third party. Hatch then would be liable for any tax arising from the sale.

Plaintiff bases her argument on the Treasury Department's temporary regulation implementing section 1041, Temp. Treas. Reg. § 1.1041-1T. That regulation provides that, in certain circumstances, "transfers of property to third parties on behalf of a ... former spouse" qualify for nonrecognition as a transfer incident to divorce. Id. at Q-9 (emphasis added). Such a transfer of property

will be treated as made directly to the nontransferring spouse (or former spouse) and the nontransferring spouse will be treated as immediately transferring the property to the third party. The deemed transfer from the nontransferring spouse (or former spouse) to the third party is not a transaction that qualifies for nonrecognition of gain under section 1041.

Id. at A-9. See also Arnes v. United States, 981 F.2d 456, 458 (9th Cir.1992) (observing

that, under section 1041, "the tax consequences of any gain or loss arising from the transaction would fall upon the nontransferring spouse for whose benefit the transfer was made, rather than upon the transferring spouse").

In Arnes, this court considered the question of when a transfer of property to a third party could qualify for nonrecognition of gain as a transfer incident to divorce under section 1041(a)(2). The court observed that the temporary regulation makes plain that "a transfer by a spouse to a third party can be treated as a transfer to the [former] spouse when it is 'on behalf of ' the [former] spouse." Id. at 458-59 (emphasis added). The court then held that, "[g]enerally, a transfer is considered to have been made 'on behalf of' someone if it satisfied an obligation or a liability of that person." Id. at 459.

Applying that definition to this case, plaintiff's sale of the lakefront properties was not a transfer "on behalf of" Hatch, because that transaction did not relieve him of any obligation or liability that he owed to plaintiff or to a third party. Instead,...