Cook v. Comm'r of Internal Revenue , Docket No. 6463-80.

• Decision Date: 08 March 1983
• Docket Number: Docket No. 6463-80.
• Parties: CHARLES D. COOK and CAROLYN C. COOK, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

80 T.C. 512

CHARLES D. COOK and CAROLYN C. COOK, PETITIONERS
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 6463-80.

United States Tax Court

Filed March 8, 1983.

Petitioner and his former wife, Sheila, were divorced in Connecticut in 1976. In a brief memorandum of decision, the divorce court ordered petitioner to transfer to Sheila certain assets he had acquired during the marriage by gift or purchase from Sheila and her parents. Held, the transfer was in the nature of a division of property and was not a taxable transaction. United States v. Davis, 370 U.S. 65 (1962), distinguished.

[80 T.C. 512]

Julian S. Greenspun, for the petitioners.

[80 T.C. 513]

Robert E. Marum, for the respondent.

DRENNEN , Judge:

Respondent determined a deficiency in, and an addition to, petitioners' 1976 Federal income tax in the amounts of $384,437 and $19,222, respectively. The issues for decision are (1) whether the transfer of appreciated stock and real properties by Charles D. Cook to his former wife pursuant to a divorce decree was a taxable transaction, and (2) whether petitioners are liable for an addition to tax pursuant to section 6653(a).¹:

FINDINGS OF FACT

Petitioner Charles D. Cook (petitioner) and Carolyn C. Cook, husband and wife, resided in Cos Cob, Conn., at the time they filed their petition herein. They filed a joint return for the taxable year 1976 with the Internal Revenue Service, Andover, Mass. Petitioner Carolyn C. Cook is a party herein only because she filed a joint return with her husband.

Petitioner was married to Sheila Gamble Cook (hereinafter referred to as Sheila or the former wife) on March 10, 1945. Sheila was the daughter of John Gamble, one of the founders and principal stockholders of Procter & Gamble Co. Petitioner and Sheila separated in 1974, and their marriage was formally dissolved on May 12, 1976. Pursuant to a court order in respect of the marital dissolution, petitioner transferred to Sheila 8,995 shares of Procter & Gamble stock and his interest in three parcels of real property located in Maine. The dispute herein centers on whether such transfer constitutes a taxable disposition.

At the time of their divorce, petitioner and Sheila each submitted an individual financial statement to the divorce court. These statements indicated that petitioner had assets valued at $1,851,777, while Sheila had assets valued at $2,587,957. Petitioner's assets included at least 8,995 shares of Procter & Gamble stock,² and an interest in three parcels of

[80 T.C. 514]

land located in and around Sorrento, Maine. The facts surrounding his acquisition of these assets follow.

Procter & Gamble Stock

Petitioner acquired his Procter & Gamble stock by way of gifts from Sheila, as well as from his father-in-law, John Gamble, and his mother-in-law, Elizabeth Gamble (hereinafter referred to as his in-laws). These gifts were made each year beginning in 1947 and continuing through 1961. The following table reflects the amount and value of the Procter & Gamble stock received by petitioner from Sheila and his in-laws:

+------------------------------------+
                ¦Gifts from Sheila ¦
                +------------------------------------¦
                ¦ ¦ ¦ ¦
                +------+-----------+-----------------¦
                ¦ ¦Number ¦Market value ¦
                +------+-----------+-----------------¦
                ¦Year ¦of shares ¦at date of gift ¦
                +------+-----------+-----------------¦
                ¦ ¦ ¦ ¦
                +------+-----------+-----------------¦
                ¦1947 ¦45 ¦$3,072.65 ¦
                +------+-----------+-----------------¦
                ¦1948 ¦45 ¦2,947.50 ¦
                +------+-----------+-----------------¦
                ¦1949 ¦40 ¦3,182.80 ¦
                +------+-----------+-----------------¦
                ¦1950 ¦750 ¦65,737.50 ¦
                +------+-----------+-----------------¦
                ¦1951 ¦80 ¦5,813.60 ¦
                +------+-----------+-----------------¦
                ¦1952 ¦85 ¦5,695.00 ¦
                +------+-----------+-----------------¦
                ¦1953 ¦88 ¦5,900.40 ¦
                +------+-----------+-----------------¦
                ¦1954 ¦80 ¦5,852.80 ¦
                +------+-----------+-----------------¦
                ¦1955 ¦65 ¦6,040.45 ¦
                +------------------------------------+
                

Gifts from in-laws1
                 Number Market value
                Year of shares at date of gift
                1947 80 5,546.40
                1948 80 5,140.00
                1949 60 5,000.00
                1950 80 5,536.80
                1951 80 5,746.40
                1952 80 5,497.60
                1953 80 5,500.80
                1954 60 5,745.00
                1955 60 5,922.00
                1956 120 5,936.80
                1957 120 5,904.00
                1958 60 4,452.60
                1959 30 2,669.40
                1960 30 2,922.00
                1961 20 2,799.60
                

[80 T.C. 515]

Due to various stock splits, petitioner held 17,118 shares of Procter & Gamble stock in October 1974.

Sheila decided to make yearly gifts of her Procter & Gamble stock in order to equalize her and petitioner's respective financial positions. The in-laws made yearly gifts to petitioner, as well as to his and Sheila's four children, in equal amounts. The number of shares given each year by each of the donors was measured by the number of shares that could be given without incurring gift tax liability.

The gifts were made free of any restrictions on petitioner's use of the stock. At the time the gifts were made, ownership was transferred to petitioner's name on Procter & Gamble's books, and dividends on such stock were paid to him. ³ However, it was the hope of the donors that the stock would remain Gamble “family resources,” and petitioner testified that he did not feel free to sell his stock “without family consultation.”

In November 1974, after petitioner and Sheila had separated, petitioner sold 8,000 shares of his Procter & Gamble stock.⁴ There was no way of determining whether the stock sold had been received from Sheila, or from his in-laws. The proceeds received from this sale, as well as the dividends received on his Procter & Gamble stock, were deposited into petitioner's separate account at the Loring Wolcott agency, which was his and Sheila's investment counselor. These funds later were used to pay for both family expenses and personal investments.⁵

[80 T.C. 516]

The Maine Properties

On February 16, 1961, petitioner purchased a one-half interest in real property known as Calf Island from his father-in-law for $9,500, the fair market value of the property. This property was located in Sorrento, Maine, and consisted of Calf Island and two smaller islands. The remaining one-half interest was purchased by Sheila's brother, James B. Gamble, Jr. Calf Island had been used by the Gamble family for summer vacations for many years, and John Gamble was buried there.

On October 16, 1961, petitioner and Sheila, as joint tenants, purchased a one-half interest in real property located in Sorrento, Maine, known as Shoremead. The property was purchased from Christine J. Sommer for $5,000, its fair market value at that time.

On November 19, 1963, petitioner purchased real property located in Sorrento, Maine, known as Doan's Point. The property was purchased from his mother-in-law, Elizabeth Gamble, for $2,500, its fair market value at that time.

Petitioner initiated a divorce action against Sheila on November 26, 1974, seeking to have the marriage dissolved. In a cross-complaint filed on May 3, 1976, Sheila also sought to have the marriage dissolved and claimed, inter alia, her right (1) to alimony; (2) to the return of assets acquired by reason of their marriage, including but not limited to, realty and stocks; and (3) to counsel fees.

In a “Memorandum of Decision” filed by the divorce court on May 12, 1976, petitioner's marriage to Sheila was dissolved. The decision did not indicate which party prevailed; it simply found that there had been an irretrievable breakdown of the marriage and that “The marriage is dissolved.” This decision made no provision for alimony or counsel fees sought by Sheila. The court did, however, order that—-

title and ownership of the following assets of the plaintiff [petitioner] be transferred by the plaintiff to the defendant [Sheila]:

(1) 8,995 shares of Procter & Gamble;

(2) An undivided one-half of Calf Island, Sorrento, Maine;

(3) Doan's Point, Sorrento, Maine; and

(4) A one-quarter share of Shoremead, Sorrento, Maine.

The order stated no reason or basis for the directed transfer.

Thereafter, on June 7, 1976, petitioner filed a “Motion for

[80 T.C. 517]

Clarification and/or Modification of Judgment” with the divorce court. It was petitioner's position that the court's decision omitted an essential element, namely, the income tax consequences of the above-ordered transfer. The stock and real properties had all appreciated in value, and on May 6, 1976, the date of the dissolution proceeding, their aggregate value was $1,037,475.60. The aggregate basis of these properties was $26,553.30, and thus the potential gain realized on the transfer was $1,010,922.30. On brief, in support of his motion, petitioner stated that the “memorandum of decision does not make clear whether the property transfer is in settlement of marital rights or simply a division of property. The distinction is highly relevant for tax purposes.” Petitioner concluded that because of the unfairness which he perceived would result by virtue of the court's order, the court should modify its decision of May 12, 1976, by ordering the transfer of...