Davis v. Comm'r of Internal Revenue

• Citation: 56 USLW 2067,88 T.C. No. 82,88 T.C. 1460
• Decision Date: 11 June 1987
• Docket Number: Docket Nos. 31386-84,36032-85.
• Parties: PRISCILLA L. DAVIS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTHOMAS C. DAVIS and KAREN J. DAVIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

56 USLW 2067

88 T.C. 1460

88 T.C. No. 82

PRISCILLA L. DAVIS, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, RespondentTHOMAS C. DAVIS and KAREN J. DAVIS, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 31386-84

36032-85.

United States Tax Court

Filed June 11, 1987.

In 1979, the ill-fated and tempestuous marriage of Priscilla and Cullen Davis was dissolved. The divorce decree specified the manner in which the community property was divided. Among other community assets, Priscilla was awarded a money judgment equal to one-half of the net value of the community estate. HELD, the money judgment effectuated a distribution to Priscilla of a right of reimbursement. Because the right of reimbursement was a community asset, its award to Priscilla is not a taxable event. Ronald M. Mankoff, G. Tomas Rhodus, and Ronald A. Stein, for the petitioner in docket No. 31386-84.

Harry E. Bartel, David C. Bakutis, and William Davis, for the petitioners in docket No. 36032-85.

Deborah A. Butler, for the respondent.SWIFT, JUDGE:

In timely statutory notices of deficiency, respondent determined the following deficiencies in Federal income tax for 1979 in these consolidated cases:

+----------------------------------------+
                ¦Docket No.¦Petitioner(s)     ¦Deficiency¦
                +----------+------------------+----------¦
                ¦31386-84  ¦Priscilla L. Davis¦$647,518  ¦
                +----------+------------------+----------¦
                ¦36032-85  ¦Thomas C. Davis   ¦662,262   ¦
                +----------+------------------+----------¦
                ¦          ¦and Karen J. Davis¦          ¦
                +----------------------------------------+
                

After concessions and severance of an issue raised in docket No. 36032-85, the sole issue for decision is whether the manner in which the community property of petitioners Priscilla Davis and Thomas C. Davis was divided constitutes a nontaxable division of the community property or a taxable sale thereof.

FINDINGS OF FACT

Many of the facts have been stipulated and are so found. Petitioners were residents of Fort Worth, Texas, at the time the petitions herein were filed.

Petitioners Priscilla L. Davis (‘Priscilla‘) and Thomas Cullen Davis (‘Cullen ‘) were married on August 29, 1968. On July 30, 1974, Priscilla and Cullen separated. The following day, Priscilla filed for divorce against Cullen in the 324th Judicial District Court in Tarrant County, Texas (hereinafter referred to as the ‘Tarrant County district court‘ or ‘district court‘). After lengthy and contested proceedings, Priscilla and Cullen were divorced on April 23, 1979.

Under Texas law, each spouse owns a vested one-half interest in all community property of the marriage. ¹ Priscilla and Cullen were unable to agree on the value and distribution of the community property. The Tarrant County district court set forth its determination of the community property and the fair market value thereof in the divorce decree (Findings of Fact No. 12) as follows:

+-----------------------------------------------------------------------------+
                ¦Community assets and liabilities2                               ¦Value       ¦
                +----------------------------------------------------------------+------------¦
                ¦Cash                                                            ¦$692,058    ¦
                +----------------------------------------------------------------+------------¦
                ¦Receivables                                                     ¦3,229,114   ¦
                +----------------------------------------------------------------+------------¦
                ¦Investments                                                     ¦6,447,743   ¦
                +----------------------------------------------------------------+------------¦
                ¦Reimbursement due community from Cullen's separate estate       ¦3,929,273   ¦
                +----------------------------------------------------------------+------------¦
                ¦Personal assets (e.g., furniture, art objects, home furnishings)¦1,964,368   ¦
                +----------------------------------------------------------------+------------¦
                ¦Total community assets                                          ¦16,262,556  ¦
                +----------------------------------------------------------------+------------¦
                ¦Total community liabilities                                     ¦($9,312,557)¦
                +----------------------------------------------------------------+------------¦
                ¦Net community estate                                            ¦6,949,999   ¦
                +----------------------------------------------------------------+------------¦
                ¦Value of each spouse's one-half interest in net community estate¦3,475,000   ¦
                +-----------------------------------------------------------------------------+
                

The community asset reflected above as a ‘Reimbursement due community from Cullen's separate estate‘ arose from the following circumstances. During the pendency of the divorce proceedings, Cullen incurred legal expenses (not related to the divorce) totaling $3,688,311, which he paid from community-owned bank accounts. Also during the divorce proceedings, Cullen paid his friend (and current wife) Karen Masters Davis and her father funds from community bank accounts totaling $240,962. In the divorce proceedings, the Tarrant County district court determined that under Texas law, the community estate had an equitable claim against Cullen for reimbursement of those amounts totaling $3,929,273. ³

The Tarrant County district court entered its divorce decree on April 23, 1979. The district court determined that the community estate should be divided equally between Priscilla and Cullen. Due to the animosity between the parties, the district court determined that it was unwise to allow them to continue joint ownership of any community asset. In its Findings of Fact, Conclusions of Law, Final Divorce Decree and Judgment, the district court made the following distribution of the property of Priscilla and Cullen.

In its Finding of Fact No. 13, the district court found that —

Taking into account the age and education of the parties, their ability, present and future, to work and earn money, the duration of the marriage, the nature and extent of the separate estates of each party, all other facts and circumstances proper to be considered and supported by admissible evidence in the record of this trial, and disregarding the matter of fault on the part of either party with regard to problems and conflicts in their marital relationship, a fair, just, and equitable division of their community estate is as follows:

[Priscilla] shall receive:

(a) All personal bank accounts, checking or saving, presently standing in her name.

(b) The automobile in her possession which has been used for her personal use.

(c) All household pets and the horse presently in her possession.

(d) All items of personal belongings presently in her possession, such as clothing, furs, and jewelry.

(e) A personal money judgment against [Cullen] in the amount of $3,475,000, representing one-half of the value of the net community estate, less the amounts advanced to her under court orders during the pendency of this cause, which advancements are in the total amount of $134,182, and are now found by the court to be advancements against her interest in the net community estate, leaving a net personal judgment against [Cullen] in the amount of $3,340,818.

[Priscilla] shall be solely responsible for the payment of any notes or other indebtedness incurred by her since July 31, 1974.

[Cullen] shall receive:

All property; real, personal, or mixed; separate or community, standing in his name or in the name of [Cullen] and [Priscilla] and not otherwise disposed of in the judgment to be rendered. Such award includes all retirement benefits, bonus and pension benefits accruing due to past or present employment or from the ownership of capital stock in any corporation. [Cullen] shall be solely responsible for the payment of any indebtednesses owing by him or by him and [[[Priscilla], except for the indebtednesses expressly imposed against [[[Priscilla] hereinabove. [Cullen] shall be solely responsible for the payment of any federal income tax, assessments, or penalties imposed for the calendar year 1978 or prior years.

In paragraphs (2) and (6) of its Decree of Divorce and Final Judgment (as distinguished from the Findings of Fact portion of its final decree), the district court made the following award to Priscilla:

(2) [Priscilla] is awarded as her sole and exclusive property the following items:

(a) All personal bank accounts, checking or saving, presently standing in her name.

(b) The automobile in her possession which has been used for her personal use.

(c) All household pets and the horse presently in her possession.

(d) All items of personal belongings presently in her possession, such as clothing, furs, and jewelry.

* * *

(6) In lieu of any and all interest in the community estate of the parties and of any claim by [Priscilla] against the separate estate of [Cullen] and in satisfaction of all claims against [Cullen] by [Priscilla] and her attorneys for attorneys fees and expenses of litigation, there is awarded to [[[Priscilla] and against [Cullen] the following personal money judgments:

(a) A personal money judgment, effective 90 days from the date hereof, for the use and benefit of [Priscilla] in the principal sum of $3,340,818, together with interest on the unpaid balance thereof computed at the rate of 9% per annum from the date of entry of this judgment until paid.

* * *

In paragraph (4) of its Decree of Divorce and Final Judgment, the district court made the following award to Cullen:

(4) [Cullen] is awarded as his sole and exclusive property the following items:

All property; real, personal or mixed; separate or community, standing in his name or in the name of [Priscilla] save and except the items described in Paragraph numbered (2) above. Such award includes but is not limited to the home located at 4200 Mockingbird Lane and [Cullen's] undivided interest in the real estate on which it was constructed, capital stock in any corporation...