Cady v. Cady, No. 48693

• Court: United States State Supreme Court of Kansas
• Writing for the Court: OWSLEY
• Citation: 581 P.2d 358,224 Kan. 339
• Parties: John J. CADY, Appellant, v. Lowanda B. CADY and State of Kansas, Appellees.
• Decision Date: 15 July 1978
• Docket Number: No. 48693

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581 P.2d 358 224 Kan. 339 John J. CADY, Appellant,
v.
Lowanda B. CADY and State of Kansas, Appellees. No. 48693. Supreme Court of Kansas. July 15, 1978.

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Syllabus by the Court

1. The filing of a petition for divorce or separate maintenance creates a species of common or co-ownership and a vested interest in one spouse in jointly acquired property held by the other, the extent of which is to be determined pursuant to K.S.A.1972 Supp. 60-1610(B ) (now K.S.A. 60-1610(C )).

2. State law controls the determination of what constitutes a taxable transfer under federal tax statutes only in the event federal tax law, by express language or necessary implication, makes operation of the tax law dependent upon state law.

3. Where state law controls, federal courts, both trial and appellate, must ascertain and apply state law.

4. The field of domestic relations belongs exclusively to the state.

5. In a declaratory judgment action (K.S.A. 60-1701) the requirement of an actual controversy is provided when the construction of a state statute determines a taxpayer's liability for federal and state income taxes.

E. Lael Alkire of Alkire, Wood, Wilson & Wilson, Wichita, argued the cause, and Patrick J. Regan and James J. McGannon of Regan & McGannon, Wichita, were with him on brief, for appellant.

Clarence J. Malone, Asst. Atty. Gen., argued the cause, and Curt T. Schneider, Atty. Gen., and Donald R. Hoffman, Asst. Atty. Gen., were with him on brief, for appellee State of Kansas.

Jerry G. Elliott of Foulston, Siefkin, Powers & Eberhardt, Wichita, argued the cause, and Gerald L. Green, Wichita, was with him on brief, for appellee Lowanda B. Cady.

OWSLEY, Justice:

This is a declaratory judgment action brought to construe the provisions of K.S.A.1972 Supp. 60-1610(B ) (now K.S.A. 60-1610(C )). The issue is whether a spouse has a species of common or co-ownership in property held in the name of the other spouse before a judgment in a divorce action divides the property.

[224 Kan. 340] John J. Cady, plaintiff, and Lowanda B. Cady, defendant, were married in 1956. On

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February 28, 1973, they were divorced. The decree of divorce incorporated an executed property settlement agreement which determined alimony and a division of property. Included therein was a provision requiring plaintiff to assign to defendant 50,000 shares of corporate stock held in his name. This stock, as well as other stock retained by plaintiff under the property settlement agreement, was acquired during the marriage. After the divorce the Internal Revenue Service assessed a substantial income tax deficiency on the basis there had been a taxable transfer of appreciated property under 26 U.S.C. §§ 1001 and 1002.

Plaintiff filed this lawsuit against his former wife to determine the nature of the transfer under the laws of Kansas. Plaintiff joined the Director of Taxation of the Department of Revenue for the State of Kansas, fearing the state was also preparing to assess a tax deficiency.

The trial court dismissed the action on the basis that (1) it lacked jurisdiction of the subject matter of the action, (2) there was no real case in controversy, and (3) the action was a collateral attack on the original divorce decree. For the reasons set forth below we reverse.

The decision of the I.R.S. to assess taxes against property held by one spouse and transferred in a divorce proceeding to the other spouse evolves from United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335, (1962), reh. denied 371 U.S. 854, 83 S.Ct. 14, 9 L.Ed.2d 92. There a Delaware taxpayer transferred shares of stock to his wife pursuant to a property settlement agreement executed prior to divorce. The I.R.S. assessed a capital gains tax against the taxpayer for one-half the appreciation on the stock. The taxpayer paid the assessment and sued to recover for the alleged overpayment in the court of claims. He recovered there but the United States Supreme Court reversed.

The decision of the Supreme Court revolved around the issue of whether the stock transaction was a taxable event. If the disposition of the stock was a sale or other transfer the tax was due; otherwise, it was not. The taxpayer asserted the disposition was comparable to a division of property between two co-owners and was not a transfer. The government, on the other hand, contended the transaction resembled a taxable transfer of property[224 Kan. 341] given in exchange for an independent legal obligation (support and alimony). Although the Court recognized the binding effect of the Delaware law, it found there was no co-ownership by the wife in the husband's property, and held the transfer had been made to satisfy an independent and taxable legal obligation.

Under federal tax statutes a taxable transfer presents a question controlled by federal law. State law may control only in event the federal tax law, by express language or necessary implication, makes operation of the tax law dependent upon state law. (Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119 (1938).) Where state law controls, federal courts must ascertain and apply state law. (Huddleston v. Dwyer, 322 U.S. 232, 64 S.Ct. 1015, 88 L.Ed. 1246 (1944).) The field of domestic relations belongs exclusively to the state. (McCarty v. Hollis, 120 F.2d 540 (10th Cir. 1941).) Actions of this nature have been considered and decided by the Supreme Courts of the states of Colorado and Oklahoma.

In Pulliam v. C. I. R., 329 F.2d 97 (10th Cir. 1964), the Tenth Circuit applied the Davis decision to Colorado law, holding that such a property transfer was taxable. The court reasoned that since under Colorado law a wife did not have a vested right in any part of her husband's property during marriage, acquiring the property in a divorce was a taxable transfer. This decision was later nullified by the Colorado Supreme Court in Questions Re Imel v. U. S. A., 184 Colo. 1, 517 P.2d 1331 (1974). There the court disapproved the position of the federal appeals court and held:

". . . (U)nder Colorado law, the transfer involved here was a recognition of a 'species of common ownership' of the marital estate by the wife resembling a division of property between co-owners.

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We answer in the negative whether the transfer more closely resembles a conveyance by the husband for the release of an independent obligation owed by him to the wife. . . .

"Except for those rights which vest upon the filing of the divorce action, we in no way change the Colorado law that a husband's property is free from any vested interest of the wife and, with a possible exception or two, he can sell it or give it away. . . ." (p. 8, 517 P.2d p. 1334.)

The question was resolved in Oklahoma in a series of four cases. The first was Collins v. C. I. R., 388 F.2d 353 (10th Cir. 1968) (Collins I). There the court followed Pulliam and held that the transfer was taxable under Oklahoma law. In Collins v. Oklahoma Tax Commission, 446...