Bishop v. Comm'r of Internal Revenue

• Decision Date: 03 February 1971
• Docket Number: Docket No. 1812-68.
• Citation: 55 T.C. 720
• Parties: GRANT R. BISHOP, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

55 T.C. 720

GRANT R. BISHOP, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1812-68.

United States Tax Court

Filed February 3, 1971.

Roger A. Pott, for the petitioner.

Eugene H. Ciranni and Joel A. Sharon, for the respondent.

1. Monthly payments by petitioner to his former wife in the amount of $1,700 during 1964 were alimony within the meaning of secs. 71 and 215, I.R.C. 1954, to the extent of $1,000 and capital investments for the acquisition of her share of the community property to the extent of $700.

2. Petitioner did not realize taxable income in 1964 with respect to the value of the family residence which he obligated himself in a separation and property settlement agreement to deed, or cause a corporation to deed, to his wife.

FEATHERSTON, Judge:

Respondent determined a deficiency in petitioner's Federal income tax for 1964 in the amount of $35,653.65. The only issues presented for decision are:

(1) Whether payments made by petitioner to his former wife are deductible by him as alimony under section 215;¹ and

(2) Whether the value of the family residence which petitioner agreed, as one feature of a separation agreement, to deed, or cause a corporation to deed, to his wife is taxable to him as a constructive dividend in 1964.

FINDINGS OF FACT

Grant R. Bishop (hereinafter Grant) was a legal resident of Saratoga, Calif., at the time he filed his petition. He filed a separate Federal income tax return for 1964 with the district director of internal revenue at San Francisco, Calif.

In July 1962, after 15 stormy years of matrimony, Grant and his wife, Beverlee Parker Bishop (hereinafter Beverlee), separated; she remained in the family residence and he moved to an apartment. On February 13, 1963, Beverlee filed a complaint in a California court, seeking a divorce on the grounds of extreme cruelty, custody of their children, an equitable division of the community property, and support payments for herself and the three children, then 13, 9, and 7 years of age, respectively. Grant filed an answer and cross-complaint in the action on April 24, 1963, requesting a divorce, custody of the children, and an equitable division of the community property. During the period of the separation and continuing to April 1964, Grant voluntarily paid Beverlee $1,000 per month for her support and that of the children. In addition, he paid bills and certain other expenses relating to her residence which aggregated approximately $300 to $400 per month.

After the suit was instituted by Beverlee, Grant represented himself for about 6 weeks in negotiations with Colin M. Peters, her attorney, for a property settlement. Grant then retained the services of John M. Burnett (hereinafter Burnett) as his counsel. From the inception of the negotiations, the parties contemplated a division of the community property, together with an allowance for Beverlee's support. During the early stages of the negotiations, the efforts of both parties, through their respective counsel, were directed primarily toward establishing a reasonable value for the community property. Numerous letters were exchanged by the attorneys discussing the values of the various community assets, but no agreement was reached.

The parties finally decided that independent appraisals of the community's worth would be helpful. Beverlee obtained the services of a certified public accountant, who set the net value at $525,528.09. Relying in part on an appraisal of the real property by a third party, Grant placed the net value at $434,007.58. At this stage of the negotiations, Beverlee retained other counsel, Eugene L. Trope (hereinafter Trope), to handle the negotiations on her behalf.

Trope's general objective was ‘to obtain one-half of the community for the wife and support based upon (the) income capabilities of the manager of the community, or the husband.’ To aid in accomplishing this objective, he retained Cohen, Hammer & Co., certified public accounts, to appraise the assets of the community. Their report, placing the net value at $707,850, was submitted on March 12, 1964. While this report was being prepared, however, on March 5, 1964, Trope and Burnett tentatively agreed on an integrated ‘Agreement of Separation, of Property Rights, of Alimony and for Support of Children.’ The agreement was executed by the parties on March 18, 1964.

Under the terms of the agreement, the following stipulations were made:

(a) All property standing in the name of either of the parties and all property in the possession of either of the parties was community property of the parties under the laws of the State of California.

(b) Beverlee was to have custody of the three minor children of the parties.

(c) Grant was to pay child support to Beverlee in the amount of $125 per month for each child until the child reached the age of 21, or married, or became self-supporting, or ceased to remain in Beverlee's custody. Beverlee was to pay the cost of the college education of the children, provided they have the requisite aptitudes.

(d) Beverlee was to receive (1) the family residence at 19695 Glen Una Drive, Saratoga, Calif., free and clear of encumbrances; (2) a new and fully insured 1964 Chevrolet Impala station wagon with accessories, and (3) the family household furniture, furnishings, silverware, flatware, objects of art, and jewelry.

(e) Grant was to receive the balance of the community property of the parties.

(f) Grant was to pay Beverlee $1,700 per month for a period of 168 months (14 years) provided, however, that if Beverlee remarried after 132 months (11 years) elapsed such payments would stop immediately and provided, further, that if Beverlee remarried before 132 months (11 years) elapsed the payments continued until 132 months (11 years) elapsed.

(g) The right of Beverlee to receive the $1,700 per month payments described above was to continue after Grant's death and was to be enforceable as a claim against Grant's estate.

With respect to the manner in which the property was divided, the agreement contained the following:

It is specifically acknowledged, understood and agreed by and between the parties hereto that the division of community property as between (Grant) and (Beverlee) is unequal in this agreement. This inequality of distribution and division of community property between (Grant) and (Beverlee) is intentionally made as one of the considerations for the payment of alimony and support in the sums and amounts set forth herein * * * . Therefore, the parties hereto specifically acknowledge that the division of community property between them, being substantially unequal, is made and agreed to by (Beverlee) in consideration of the amount of alimony and support to be paid to (Beverlee) pursuant to the terms hereof and in further consideration of the fact that said amounts for alimony and support may never be modified in any respects whatsoever except as specifically set forth herein in this paragraph.

After this agreement was reached between the parties, it was submitted to the court in connection with the divorce proceedings. The court incorporated by reference the terms of the agreement in its interlocutory decree of divorce entered on April 3, 1964. The divorce became final on May 5, 1966.

Both parties received advice on the tax consequences of the agreement, and for the years 1964, 1965, and 1966 each party consistently created the $1,700 monthly payments as alimony, i.e., Grant deducted the payments and Beverlee included them in her income. Beverlee later filed amended returns, claiming the payments were installments on the purchase price of her share of the community property.

At all times during the negotiations, Beverlee was concerned with obtaining her fair share of the community assets; however, with the exception of the residence and its furnishings, valued at about $95,000, he did not want any of the community assets themselves. Many of the household furnishings and a portion of the cost of the family residence had been given to the couple by Beverlee's parents. Consistent with Beverlee's desire to receive her fair share of the community assets, the separation agreement provided that:

If at any time in the future it is discovered that (Grant) owned any right, title of interest in any property, real or personal, not described * * * (in the agreement), any such property not so listed and described shall be awarded to (Beverlee) as her separate property and estate.

At the time the agreement was signed, title to the family residence which Beverlee was to acquire as one feature of the settlement was held by Los Gatos Securities, Inc. (hereinafter Los Gatos), a corporation wholly owned by the community. The separation agreement provided that ‘as between the parties * * * the family residence * * * is hereby declared to be the community property of the parties.’ It further provided that Grant would ‘deed or cause to be deeded’ the residence to Beverlee, free and clear of all encumbrances, within 14 days of the date of the execution of the agreement. The residence was not conveyed to her at that time. It was subject to a mortgage which was not removed until February 1966, and title was then transferred to Beverlee. During this period, while title remained in the corporation, Grant paid Los Gatos $300 per month as rent for Beverlee's use of the residence.

Beverlee continued to live in the family residence from the time of the final separation in 1962 until August 1965. After the separation agreement was signed and the interlocutory decree of divorce was entered in April 1964, she paid all the costs of operating and maintaining the house, as well as insurance on it and its furnishings, except that Los Gatos paid the property taxes for 1964 and 1965.

The Commissioner determined that the payments of $1,700 per month were installment payments on ‘the purchase price of (Beverlee's) interest in the community property’ and were not...