Collins v. Oklahoma Tax Commission
| Decision Date | 15 October 1968 |
| Docket Number | No. 43006,43006 |
| Citation | 446 P.2d 290 |
| Parties | George F. COLLINS, Jr., Plaintiff in Error, v. OKLAHOMA TAX COMMISSION, Defendant in Error. |
| Court | Oklahoma Supreme Court |
Syllabus by the Court.
1. Under 12 O.S.1961, § 1278, property acquired by joint efforts of the parties during marriage is jointly acquired property as to which traditional elements of co-ownership, i.e., title, descendible interest, right to control disposition etc., are not prerequisite to spouse having vested interest therein.
2. Equitable division of jointly acquired property which trial court is required to make in divorce proceeding under statute, supra, is not satisfaction of an independent legal obligation amounting to sale, exchange or other disposition of property within meaning of tax code.
3. A court approved property settlement agreement between parties in a divorce action, under which agreed amount of jointly acquired property was transferred to wife in satisfaction of her claims, and to effect an equitable division of jointly acquired property, was not a sale, exchange or other disposition of property within meaning and intent of 68 O.S.1961, § 883.
Appeal from order and judgment of Oklahoma Tax Commission.
Taxpayer's action to recover additional income taxes paid under protest. Taxpayer appealed from denial of protest. Reversed and remanded with directions.
Garrett Logan, Donald P. Moyers, William A. Goffe, Tulsa, for plaintiff in error.
Albert D. Lynn, E. J. Armstrong, Mike Tapp, Oklahoma City, for defendant in error.
Plaintiff in error, herein designated Taxpayer, has appealed directly from an order of the Oklahoma Tax Commission, hereafter referred to as the Commission, denying Taxpayer's protest against assessment of ($21,770.64) additional income tax and interest for year 1959. This assessment was entered by reason of Taxpayer's transfer of (26,592) stock shares of Liberty Glass Company, pursuant to a written settlement agreement incident to divorce.
The single issue is whether transfer of stock under these circumstances constituted a sale or exchange within the meaning of applicable provisions of our tax code (68 O.S.1951, § 883), or was a non-taxable division of property jointly acquired during marriage. Hereafter the essential facts providing basis for the controversy are summarized.
Taxpayer married Beverly Lorton, a widowed mother of one child, in 1942. This child was adopted by Taxpayer, and three other children were born of the marriage. Much of the Taxpayer's estate consisted of inherited property, and during the marriage he was the principal stockholder and executive officer of the company. During their marriage the wife was not employed, but was interested in and so conducted herself as to be of great assistance to Taxpayer in his business affairs. On December 31, 1942, the company's net worth, plus other interests was approximately $1,000,000.00, while on December 31, 1958, net worth exceeded five million dollars.
The parties became unable to continue their marriage and in April 1959, after considerable negotiation, entered into a written agreement fixing custody and support of the children and generous alimony. Additionally this agreement, after enumerating various transfers of personal property not involved herein, required Beverly to relinquish and transfer all life insurance policies upon Taxpayer's life, a 10% Interest in stock of another family corporation owned principally by a trust which held 88% For benefit of the children and Beverly, which interest she had acquired in 1944 with her own funds. In complete settlement of Beverly's rights and to effect a fair and equitable division of the parties' jointly acquired property, Taxpayer transferred the mentioned shares of stock, constituting 16.62% Of the total outstanding common stock of the company, but amounting to 20% Of Taxpayer's holdings.
Thereafter Beverly filed suit for divorce, asking alimony, child support and a just and equitable division of property jointly acquired during marriage. Taxpayer answered acknowledging terms of the agreement and asked approval by the trial court in event divorce was granted. The trial court found Taxpayer's estate at time of marriage was largely by inheritance, but during years of marriage Beverly had made valuable contributions toward success and growth of Taxpayer's business enterprises. The court then found the settlement agreement effected a fair and just division and settlement of the parties' affairs which Beverly desired to accept in lieu of all statutory rights, including right to division of property. The agreement was not incorporated in or superseded by the decree, but was to remain in full force and effect. The parties thereafter effected transfers requisite to complete settlement of their property rights.
Early in 1961 sale or redemption of her stock by Taxpayer was discussed but they were unable to agree upon price. Shortly afterward her stock was sold to an official of a Liberty competitor for $900,000.00 or $33.84 per share. Operational difficulties engendered from this individual's activities eventually necessitated Taxpayer's repurchase (June 1962) of the stock for $1,300,000.00, or $48.92 per share.
Taxpayer reported no gain resulting from the stock transfer to Beverly on his 1959 income tax return. The Commissioner of Internal Revenue issues a deficiency assessment, fixing $20.00 per share as fair market value when transferred, and determined the transfer constituted a disposition which established a long term capital gain. The deficiency assessment of $128,006.20 for 1959 income tax was paid under protest.
This ruling was attacked in a proceeding before the U.S. Tax Court, which ruled adversely to Taxpayer upon grounds the stock transfer pursuant to the settlement agreement and incident to divorce constituted disposition of property resulting in taxable gain. See George F. Collins, Jr. v. C.I.R., 46 TC 461. The decision reflects that court's recognition of our statute, 12 O.S.1961, § 1278, and decisional law relevant to nature, existence of, and necessity for equitable division of property jointly acquired during marriage. The decision also reflects the interpretation that the stock transfer, required to effect an equitable property division, was merely in return for Beverly's release of an independent legal obligation, to-wit: the legal obligation placed upon all property held in Taxpayer's name by Oklahoma law.
This is bottomed upon the reasoning that Beverly had no specific interest in Liberty stock as distinguished from a general interest in all property jointly acquired during marriage, thus the transfer was not a division of jointly owned stock as would have been true '* * * in a community property State if the stock were considered community property or the situation existing when the spouses are legally joint owners of the property divided.' Thus, because the parties neither held property as in a community property state, nor showed specific property to which title was taken jointly, the court declared the transaction was an exchange rather than 'a division of property by co-owners', as was the case in United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335.
Petition for review to the U.S. Circuit Court of Appeals resulted in affirmance of the Tax Court, upon grounds that under Oklahoma law the transfer was a 'taxable exchange' of property 'in satisfaction of a marital obligation' resulting in gain to the taxpayer, rather than division of jointly acquired property. Collins v. C.I.R. (CCA 10) 388 F.2d 353 (1966). The determination that Oklahoma law made this a sale or transfer, based upon factors and asserted differentiations not heretofore recognized or found in our decided cases, coupled with reliance upon authorities which will require further consideration. This becomes necessary because of the Tax Commission's adjudication, holding the Federal rule governed Taxpayer's Oklahoma income tax liability.
Immediately after Collins, supra, was decided, the Oklahoma Tax Commission on February 1, 1968, advised Taxpayer an amended audit disclosed additional tax and interest, amounting to $21,770.60, due upon his 1959 income tax return. Taxpayer paid this assessment under protest, denied the transfer was a taxable event and asserted the statute, supra, supported his claim the transfer in settlement of a division of property was not a taxable transfer.
After hearing, the Commission found the facts and contentions to be identical with those made in the Federal case, and decreed the same rule of law applied and governed the Oklahoma income tax liability. In denying Taxpayer's protest the Commission adopted the rules announced in the decision of the appeals court, the gist being stated in the editorial syllabi:
Beyond argument, determination as to what constitutes a taxable transfer under Federal tax statutes presents a question controlled by Federal law as to which Congress establishes its own criteria. State law may control only in event the Federal tax law, by express language or necessary implication, makes operation of the taxing law dependent upon state law. Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119; New York Trust Co. v. Pedrick, D.C., 94 F.Supp. 369. This principle is well settled, despite the equally recognized principle that where state law controls Federal courts, both trial and appellate, must ascertain...
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