Godlewski v. Comm'r of Internal Revenue

• Decision Date: 09 February 1988
• Docket Number: Dkt. No. 33699-86
• Citation: 56 USLW 2511,90 T.C. 200,90 T.C. No. 15
• Parties: MICHAEL J. GODLEWSKI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

56 USLW 2511

90 T.C. 200

90 T.C. No. 15

MICHAEL J. GODLEWSKI, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Dkt. No. 33699-86

United States Tax Court

Filed February 9, 1988.

Pursuant to a property settlement agreement, petitioner paid $18,000 to his ex-spouse and she transferred their former residence to him. Soon afterward, petitioner sold the house to a third party.

HELD, section 1041, as added by the Deficit Reduction Act of 1984, applies to these facts. Held further, petitioner cannot increase the basis of the house by the $18,000 he paid his former spouse for purposes of computing gain realized on the subsequent sale. Michael J. Godlewski, pro se.

Carolyn Lee Harber, for the respondent.

STERRETT, CHIEF JUDGE:

This case was assigned to and heard by Special Trial Judge Joan Seitz pate pursuant to the provisions of section 7456 of the Code and Rules 180 and 181. ¹ The Court agrees with and adopts the Special Trial Judge's opinion which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

PATE, SPECIAL TRIAL JUDGE:

Respondent determined a deficiency of $5,989 in petitioner's 1984 Federal income tax. After concessions by both parties, ² we need only determine the amount of gain realized by petitioner on the sale of a house transferred to him incident to his divorce.

FINDINGS OF FACT

Michael J. Godlewski (hereinafter ‘petitioner‘) resided in Lilburn, Georgia, at the time the petition in this case was filed. Some of the facts have been stipulated and are incorporated as a part of this opinion.

Petitioner was married to his former wife, Elizabeth Godlewski, on December 27, 1967. On July 13, 1973, they purchased a residence located at 1533 Sanden Ferry Drive in Decatur, Georgia, (hereinafter ‘the house‘) for $32,200. The purchase was funded by a cash down payment borrowed from petitioner's uncle and a first mortgage of $28,900. Mrs. Godlewski was named sole titleholder. ³ On June 24, 1984, the fair market value of the house was appraised at $86,500 by Mrs. Godlewski's professional appraiser.

Petitioner and Mrs. Godlewski lived in the house until May 16, 1981, when petitioner moved out because of marital difficulties. By court order dated June 10, 1981, Mrs. Godlewski was granted exclusive use of the house and petitioner never lived there again. Mr. and Mrs. Godjewski obtained a final divorce on October 31, 1983, but the divorce decree expressly reserved the division of marital property for later determination.

Consequently, Mr. and Mrs. Godlewski executed an agreement dated July 13, 1984, (hereinafter ‘Agreement‘) purporting to settle ‘all their property rights, and all other rights and duties growing out of or rising out of the marriage relationship between the parties.‘ Mrs. Godlewski signed the Agreement on July 13th and petitioner signed it on July 25th, 1984. Under its terms, Mrs. Godlewski was required to transfer title to the house to petitioner contemporaneously with the execution of the Agreement and petitioner was obligated to pay Mrs. Godlewski $18,000 within six months of the conveyance. If the payment was not made, the house was to be sold and one-half of the ‘net equity‘ distributed to each spouse. On August 2, 1984, the Court entered a consent judgment adopting the Agreement in its entirety.

Mrs. Godlewski executed a warranty deed transferring the house to petitioner on July 20, 1984, and the deed was recorded on September 5, 1984. There is no evidence in the record as to the actual delivery date of the deed to petitioner. Petitioner paid a total of $18,000 to Mrs. Godlewski in August and October 1984, consistent with the terms of the Agreement. Petitioner sold the house for $64,000 on October 26, 1984, and on December 3, 1984, he purchased a home in Lilburn, Georgia, for $75,000. Petitioner did not report the sale of the house or the acquisition of the Lilburn home on his 1984 income tax return.

Petitioner contends that respondent erred in computing the gain realized on the sale of the house by not increasing his basis to reflect the $18,000 he paid to Mrs. Godlewski. Respondent maintains that petitioner's basis in the house is its cost of $32,200 without adjustment for the $18,000 petitioner paid his ex-wife.

OPINION

The outcome of this case turns on whether section 1041 (section 421(a) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 794) applies to the instant set of facts. The application of section 1041 is critical to our determination because it markedly changes the tax treatment accorded divorced spouses. Under section 1041 the transferor of appreciated property transferred incident to a divorce recognizes no gain and the transferee's basis in the property after transfer is the same as the transferor's basis before the transfer. In contrast, prior law provided that the transfer of appreciated property incident to a divorce resulted in the recognition of gain to the transferor and the transferee received a basis equal to the asset's fair market value at time of transfer. United States v. Davis, 370 U.S. 65 (1962). ⁴ Moreover, prior law recognized gain on the sale of property between spouses even when transacted in connection with a divorce. See McKinney v. Commissioner, 64 T.C. 263, 268-269 (1975). Since these provisions result in materially disparate tax consequences, it is incumbent upon us to correctly determine which of these provisions apply to the transaction at issue. ⁵

In general, section 1041 applies to property transfers between former spouses incident to a divorce if such transfer took place after July 18, 1984, the enactment date of the Deficit Reduction Act of 1984. Sec. 421(d)(1), Deficit Reduction Act of 1984, Pub. L. 98- 369, 98 Stat. 795. ⁶ However, by its terms, it does not apply ‘to transfers under any instrument in effect on or before the date of the enactment * * *.‘ Therefore, to determine whether section 1041 applies to the facts presented here, we must decide whether the house was ‘transferred‘ after July 18, 1984, and, if so, whether such transfer was made under any instrument in effect on or before July 18, 1984.

The answer to the first question is fairly straightforward. The house was titled in Mrs. Godlewski's name and she executed a Warranty Deed in favor of petitioner on July 20, 1984. Since Mrs. Godlewski executed the deed on July 20, 1984, the transfer necessarily occurred after July 18, 1984.

The answer to whether such transfer was made under any instrument in effect on or before July 18, 1984, is not nearly so easily determined. Although, admittedly, the transfer was incident to the divorce, ⁷ the divorce decree specifically reserved the determination of property rights for later hearing. The inescapable conclusion, therefore, is that the transfer of the house was not ‘under‘ that ‘instrument.‘

Having eliminated the divorce decree, we next consider whether the Agreement was the operative ‘instrument.‘ The Agreement was dated July 13, 1984, and was signed by Mrs. Godlewski on that date, clearly prior to the enactment date of July 18, 1984. However, the Agreement was not executed by petitioner until July 25, 1984, obviously after the enactment of section 1041.

To be effective, an agreement settling marital rights between residents of Georgia must meet the same requisites of formation and enforceability as other contracts. See Blum v. Morgan Guar. Trust Co. of New York, 709 F.2d 1463, 1467 (11th Cir. 1983) (applying Georgia law for general litigation settlement); McKie v. McKie, 213 Ga. 582, 100 S.E.2d 580 (1957). Initially, there must be a meeting of minds between the parties concerning all the essential terms of the agreement. Ga. Code Ann. sec. 13-3-1 et seq. (1981). Moreover, under the Georgia statute of frauds, a contract transferring an interest in land must be in writing. Ga. Code Ann. 13-5-30 (4) (1981); see Stamps v. Ford Motor Co., 650 F. Supp. 390 (N.D. Ga., 1986); Smith v. Cox, 247 Ga. 563, 277 S.E.2d 512 (1981).

The record does not disclose any information surrounding the negotiation, preparation or execution of the Agreement except that the $18,000, at least initially, was Mrs. Godlewski's ‘asking‘ figure based on the fair market value as determined by the June 1984 appraisal. Therefore, there is no evidence indicating a meeting of minds prior to petitioner's execution of the Agreement on July 25, 1984. Further, even if there was, the statute of frauds would establish, as the effective date, the day the Agreement was reduced to writing. The earliest date this could have occurred was when the Agreement was signed by petitioner on July 25, 1984. Thus, we conclude that section 1041 is applicable to this transaction because the Agreement became effective and the transfer of the house both occurred after July 18, 1984.

As previously stated, section 1041 provides that no gain or loss is recognized on a transfer of property between the taxpayer and his former spouse if the transfer is incident to the divorce. Section 1041(a)(2). Rather, the property is treated as if acquired by gift. Section 1041(b). Moreover, the ‘non-recognition rule applies whether the transfer is for the relinquishment of marital rights, for cash or other property * * * or for other consideration * * *.‘ H. Rept. 98- 4170 (Pub. L. No. 369), 98th Cong., 2d Sess. 1491-1492 (1984).

Consequently, the basis to the transferee in the property is the adjusted basis of the transferor as contended by respondent. Section 1041(b)(2). Even so, petitioner argues that the transfer of the house was the result of a bona fide sale and, therefore, the $18,000 paid by petitioner to Mrs. Godlewski should rightfully be added to his basis to determine the amount of the gain he has to report. The temporary regulations, however, set out the unambiguous rule that- In all cases, the basis of the transferred property in the hands of the transferee is the adjusted basis of such property in th e hands of the transferor immediately before the transfer. EVEN IF THE...