Harrah v. Comm'r of Internal Revenue
| Decision Date | 22 August 1978 |
| Docket Number | Docket Nos. 4325-75,9790-76. |
| Parties | SCHERRY HARRAH, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner and her former husband entered into a settlement agreement incident to their divorce which purported to reflect a division of community property. The settlement agreement was ratified and approved by the divorce court and incorporated in its divorce decree. Held: The transaction emanating from the settlement agreement wherein petitioner received certain stocks and other assets as her separate property was a division of community property and not an exchange of the husband's separate property for petitioner's marital or other rights. Consequently, petitioner's basis in the shares of stock received under the agreement is the basis of those stocks in the community. James E. Merritt, Laura Stern Seaver, and N. Keith Kellison, for the petitioner.
Eugene H. Ciranni, for the respondent.
In these consolidated cases respondent determined deficiencies in petitioner's income tax as follows:
The notices of deficiency raise several issues which have been settled by the parties. The issue to be resolved in this opinion was severed from those remaining for trial or settlement. That issue is whether certain property received by petitioner under a document entitled “Agreement” dated March 3, 1969, between William F. Harrah and petitioner, Scherry Harrah, which was “ratified, approved, and incorporated” in a decree of divorce entered by the Second Judicial District Court of the State of Nevada, for the County of Washoe, was received by petitioner as a division of community property or was a transfer by William F. Harrah to petitioner of his separate property in exchange for petitioner's marital or other rights. The agreement was negotiated by counsel for William and Scherry Harrah incident to their divorce, which divorce decree, entered March 3, 1969, referred to the instrument as a written property settlement and child custody agreement. Since the principal assets received by petitioner under the agreement (hereinafter referred to as settlement agreement), shares of stock in Harrah Realty Co. and Harrah South Shore Corp., were either sold by petitioner or transferred to a trust and then sold, a question has arisen as to petitioner's basis in the property received. If she received the property as a division of community property, as indicated in the settlement agreement, her basis was the community basis in the property. If the property she received was the separate property of William F. Harrah, her basis would probably be the fair market value of what she gave up in exchange for the property received.
We will not be concerned in this opinion with the amount of petitioner's basis, be it community or otherwise, nor with whether petitioner was taxable on the income of the trust, which questions and others will wait for later disposition. Consequently, no decision will be entered by this Court at this time in these cases.
Some of the facts have been stipulated and are so found.
On the date that each of her petitions in these cases was filed, petitioner Scherry Harrah (hereinafter referred to as Scherry) resided in Reno, Nev. She filed her individual income tax returns for the taxable years 1969, 1970, 1971, and 1974 with the Service Center of the Internal Revenue Service at Ogden, Utah.
Scherry and William F. Harrah (hereinafter referred to as William) were first married to one another in Gardnerville, Nev., on August 5, 1948. They were divorced by a decree of divorce in Nevada on March 11, 1952. In connection with this divorce the Harrahs, with the assistance of counsel, entered into a property settlement agreement which was approved by the court granting the divorce and made a part of the divorce decree.
On July 1, 1952, Harrah's Club was incorporated and all of the stock of the corporation was issued to William as his separate property. On July 1, 1952, Harrah's Land Development Co. was incorporated and all of the stock of that company was issued to William as his separate property. On August 4, 1952, Harrah's Bingo Club, Inc., was incorporated and all of the stock of that corporation was issued to William as his separate property.
Although divorced by decree of March 11, 1952, Scherry and William had continued living together since March 13, 1952, but they held themselves out to be unmarried, single persons. Thus, Harrah's Club, Harrah's Land Development Co., and Harrah's Bingo Club, Inc., were incorporated and all of their stock was acquired by William while William was unmarried.
Scherry and William were married to one another for the second time on December 30, 1954, in Winnemucca, Nev. Prior to this marriage, Scherry and William executed an antenuptial agreement which provides in part:
In anticipation (of the second marriage) they desire to fix and determine by ante-nuptial agreement the rights and claims that will accrue to each of them in the estate and property of the other by reason of the marriage, and to accept the provisions of this agreement in lieu of and in full discharge, settlement and satisfaction that either may hereafter have against the other.
4. Miss Harrah (Scherry) hereby waives and releases any and all claims of every kind, nature and description that she may acquire as Mr. Harrah's surviving spouse in his estate upon his death, save and except as herein set forth in paragraphs 1, 2 and 3 hereof.1
5. Miss Harrah acknowledges that she has certain real and personal property of her own. Mr. Harrah hereby waives and releases any and all rights and claims of every kind, nature and description that he may have in said property.
6. Miss Harrah acknowledges that all of the property, both real and personal, which Mr. Harrah now has is his own separate property and that she has no interest therein.
7. Each party shall during his or her lifetime keep and retain sole ownership, control and enjoyment of all property, real and personal, now owned or hereafter acquired by him or her, free and clear of any claim by the other.
On June 1, 1958, Harrah's Land Development Co. merged with Harrah's Bingo Club, Inc. The surviving entity was renamed Harrah Realty Co., Inc. William, sole shareholder of both corporations prior to the merger, remained the sole shareholder of Harrah Realty Co., Inc.
Harrah Realty Co., Inc., functions as a landlord which owns real estate and leases it to Harrah's Club. The lease agreements provide for fixed rental payments rather than rental payments determined from a percentage of sales or income of Harrah's Club.
Harrah's Club operates gambling casinos and hotels, restaurants, and bar facilities in Reno and South Lake Tahoe, Nev. For several years Harrah's Club has been either the first or second largest employer in Nevada. In 1969 it employed approximately 3,500 persons.
Harrah South Shore Corp., a California corporation, was incorporated in October 1959. William purchased for $2,000 all of its issued and outstanding stock which amounted to 2,000 shares. The source of the funds used by William to purchase this stock is not certain. He probably borrowed the funds from Harrah's Club, however. Harrah South Shore Corp. also functioned as a landlord of Harrah's Club. It owned and leased to Harrah's Club the parking lots located across the State line in California but adjacent to the Harrah's Club Lake Tahoe Casino which was in Nevada. Harrah South Shore Corp. also performed advertising and promotional services for Harrah's Club.2 It sponsored bus and air transportation programs to Lake Tahoe and it maintained reservation offices in various California cities.
Throughout the period from the date of incorporation or formation of Harrah's Land Development Co., Harrah's Bingo Club, Inc., Harrah Realty Co., Inc., Harrah South Shore Corp., and Harrah's Club to March 3, 1969, William was the sole shareholder of each corporation and represented that these stockholdings were his separate property. On the joint Federal income tax return filed by the Harrahs for the taxable year 1967, the stock of Harrah's Club is represented as William's property. In 1967, estate planning for William was prepared on the assumption that the Harrah Realty Co., Inc., stock was his separate property.
The joint return also indicates that William was employed by Harrah's Club and Harrah Realty Co., Inc. His salaries from the corporations were $186,000 and $25,000, respectively.3
The Harrah's second marriage proved unsuccessful and sometime during 1968 the couple decided to obtain a divorce. As a result of this decision William and Scherry and their representatives negotiated the settlement agreement referred to above.
In these negotiations Scherry was represented by Harry B. Swanson, an attorney in Reno. Swanson employed Albert E. Cartlidge, a certified public accountant in Reno, to assist him.4 William was represented by Louis Mead Dixon, an attorney practicing in Reno, and by Joseph W. McMullen, a certified public accountant also in Reno. Dixon had represented William personally for approximately 10 years and had represented his corporations on a fairly regular basis since 1957. Throughout the period 1954 through 1969, the accounting firm, Semenza, Kottinger & McMullen, was retained by William and each of his corporations to render accounting services. McMullen was the partner in charge of these accounts and was responsible for reviewing all workpapers leading to the preparation of financial statements for the corporations.
The negotiations over the settlement...
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