Cady v. Cady

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

Page 358

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.

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.

John J. Cady, plaintiff, and Lowanda B. Cady, defendant, were married in 1956. On 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 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.

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 P.2d 290 (Okl.1968) (Collins II), the Oklahoma Supreme Court disagreed with the holding in Collins I and held the transfer was a division of property between co-owners and not a taxable event. On the heels of Collins II, the United States Supreme Court decided Collins v. Commissioner of Internal Revenue, 393 U.S. 215, 89 S.Ct. 388, 21 L.Ed.2d 355 (1968) (Collins III). It remanded Collins I to the lower court for a redetermination of its prior holding in light of Collins II. On remand the court of appeals reversed itself and followed Collins II, stating:

"As indicated in the former opinion, we read United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962) to require that state law be consulted in determining the nature of the disposition of property undertaken in connection with a termination of marital relations. Just as the Court in Davis, we seek to determine whether, under state law, the present transfer more nearly resembles a nontaxable division of property between co-owners, or whether it is a taxable transfer in exchange for the release of an independent legal obligation. Having the benefit of an interpretation of state law on this very point, we must conclude that the stock transfer operated merely to finalize the extent of the wife's vested interest in property she and her husband held under 'a species of common ownership.'

"The Commissioner agrees that state law is significant, but argues that a determination of whether the wife's rights in the transferred property reach the dignity of co-ownership does not depend upon the labels assigned to that interest for state tax purposes. It is contended that when the Court in Davis discussed such factors as right of control, descendable interest, and the like, federal criteria were established that must be met before the rights conferred by state law can be said to constitute co-ownership. The language of Davis will not support that interpretation. The Court merely discussed certain general characteristics of co-ownership in an attempt to determine whether the wife possessed the rights of a co-owner under state law. In so doing, the Court determined that 'regardless of the tags, Delaware seems only to place a burden on the husband's property rather than to make the wife a part owner thereof.' 370 U.S. at 70, 82 S.Ct. at 1193. Collins v. Oklahoma Tax Commission proclaims that in Oklahoma the wife is made 'a part owner thereof,' consequently, there is no need to search state law for indications of other factors that might signify the nature of the wife's property interest.

"In sum, we look to the law of the state, as the Supreme Court did in Davis and as this court did in Pulliam v. C. I. R., 329 F.2d 97 (1964), and conclude that the transfer of stock was a nontaxable division of property between co-owners." (Collins v. C. I. R., 412 F.2d 211, 212 (10th Cir. 1969).)

Subsequently, the Oklahoma court modified Collins II, limiting the vesting of the rights in the wife to the filing of the divorce action. The court stated:

"Plain...