Deyoe v. Comm'r of Internal Revenue

• Decision Date: 30 August 1976
• Docket Number: Docket No. 2084-73.
• Citation: 66 T.C. 904
• Parties: ELIZABETH L. DEYOE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

66 T.C. 904

ELIZABETH L. DEYOE, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2084-73.

United States Tax Court

Filed August 30, 1976.

Under a property settlement agreement in the course of a marital dissolution, petitioner sold ranch property to her husband at a substantial gain. Held, the sale occurred on May 21, 1969, before the divorce decree had been entered. Held, further, at the time of the sale the parties were ‘husband and wife’ so that under sec. 1239, the pending dissolution notwithstanding, petitioner's gain attributable to depreciable property was ordinary income. Gary Damon, for the petitioner.

Peter Bakutes, for the respondent.

HALL, Judge:

Respondent determined the following deficiencies in petitioner's Federal income tax:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦      ¦             ¦
                +------+-------------¦
                ¦1969  ¦$21,222.25   ¦
                +------+-------------¦
                ¦1970  ¦26,118.93    ¦
                +--------------------+
                

Because of concessions made by the parties, the sole issue before the Court is whether section 1239 of the Internal Revenue Code of 1954¹ applies to petitioner's sale of her community interest in a ranch to George W. Deyoe, her former husband. This in turn depends on the date the sale occurred, whether petitioner and George W. Deyoe were husband and wife within the meaning of section 1239 on that date, and whether section 1239 was intended to apply to a sale arising out of the dissolution of a marriage.

FINDINGS OF FACT

Some of the facts have been stipulated by the parties and are found accordingly.

Petitioner, at the time she filed her petition, resided in Modesto, Calif. She filed individual Federal income tax returns for 1969 and 1970.

On June 6, 1938, petitioner married George W. Deyoe (George). On July 3, 1968, petitioner and George separated, and on July 24, 1968, George filed an action for divorce from petitioner in the California Superior Court for Stanislaus County. Both petitioner and George were California domiciliaries during 1968 and 1969. On May 21, 1969, petitioner and George (through their counsel) reached an oral agreement for disposition of George's action for divorce, determination of petitioner's rights to maintenance and support, and division of their community property. Later that day, the attorneys for both parties stipulated to an oral summary of the agreement at a hearing on George's divorce complaint.

The stipulation provided that George would purchase petitioner's entire community property interest in their ranch located at 7424 Carver Road, Stanislaus County, Calif., for $175,000. The ranch consisted of real property (including orchard trees and other improvements) and farming equipment.

Subsequently petitioner's attorney drafted a written agreement (agreement) memorializing the stipulation, a grant deed conveying petitioner's interest in the ranch, a promissory note bearing interest at 7 percent per year from May 21, 1969, obligating George to pay $175,000 to petitioner for her interest in the ranch, and a deed of trust, securing the obligation under the note. The agreement, deed, note, and deed of trust all bore the effective date of May 21, 1969.

On June 18, 1969, petitioner and George executed the agreement. Petitioner acknowledged execution of the agreement before a notary public on June 20, 1969, and George did the same on July 1, 1969. The agreement provides, in part, as follows:

RECITALS

G. This document is intended to be a final and binding agreement between us irrespective whether our marriage remains undissolved or if a divorce is obtained by either of us.

I. Nature and Extent of Property

We agree that we are now possessed of real and personal property all of which is community property; and we acknowledge and agree that neither of us is now possessed of any separate property.

II. Equal Division

As used in this Agreement, the term ‘community property’ shall be deemed to mean our property in existence on May 21, 1969, it being understood and agreed that, except as herein expressly provided otherwise, all income earned and property acquired by each of us after May 21, 1969, is, and shall remain, the separate property of such party.

III. Property Transferred to Wife

Except as herein otherwise specifically provided, and effective upon the execution of this Agreement, Husband waives, relinquishes and quitclaims to the Wife as her sole and separate property, any or all right, claim or title which Husband has or may have as community or otherwise in and to any and all property, real, personal, or mixed, and wheresoever situate, including but not limited to the following:

F. A sum equal to one-half of all expenses actually paid up to May 21, 1969, in connection with the operation of our real property located at 7424 Carver Road, Modesto, California, for the crop year 1969 as determined by Francis B. De Ferrari, accountant, such sum to be paid out of the first proceeds derived from the sale of the 1969 crops.

G. Promissory note dated May 21, 1969 in the sum of One Hundred Seventy-Five Thousand Dollars ($175,000), bearing interest at the rate of 7% per annum on the unpaid balance from May 21, 1969. The said promissory note shall be payable as follows: The sum of $50,750, on or before August 19, 1969, and thereafter in annual installments * * * . Interest as provided shall be payable in quarterly installments commencing August 19, 1969. The said payments shall be made at the Law Offices of Stockton & Schrimp, P.O. Box 3153, Modesto, California, or at such other address as may be designated by Wife.

The said promissory note shall be secured by a first deed of trust, which deed of trust shall contain an acceleration clause, on certain real property situate in the County of Stanislaus, State of California (the ranch) * * *

IV. Property Transferred to Husband

Except as herein otherwise specifically provided, and effective upon the execution of this Agreement, Wife waives, relinquishes and quitclaims to the Husband as his sole and separate property, any or all right, claim or title which Wife has or may have as community or otherwise in and to any and all property, real, personal, or mixed, and wheresoever situate, including but not limited to the following:

H. Farming equipment utilized in farming the real property described in subparagraph J hereof.

* * *

J. That certain real property (the ranch), including insurance thereon, situate in the County of Stanislaus, State of California.

IX. Warranties, Releases and Waivers

D. Husband and Wife acknowledge that in connection with the operation of their property located at 7424 Carver Road, Modesto, California, there are outstanding obligations which have been incurred, some of which have not yet been paid. All such obligations remaining unpaid on May 21, 1969 are hereby assumed by Husband and he agrees to pay the same and to indemnify and hold Wife free and harmless therefrom.

H. Each of us agrees upon request of the other at any time to execute and deliver to the other such further deeds, papers or other instruments as may be necessary or convenient to carry out the provisions of this agreement.

X. Finality and Survival

This Agreement is entire. We may not alter, amend, or modify it except by an instrument in writing executed by both of us. It includes all representations of every kind and nature made by each of us to the other. This Agreement shall survive its incorporation or merger into or approval in an interlocutory judgment of divorce.

XI. Effectiveness of Agreement Not Dependent on Court Approval

It is specifically understood and agreed that this Agreement is not an agreement for divorce, but it is agreed that upon the trial of any action between us involving our matrimonial rights, this settlement agreement may be presented to the Court for its approval; and each of the executory terms and provisions hereof may be incorporated in any decree made based thereon, and each of us may be ordered to comply therewith, but this agreement shall not depend for its effectiveness on such approval, not be affected thereby.

IN WITNESS WHEREOF, we execute this Agreement on June 18, 1969, and make it effective as of the 21st day of May, 1969.

Pursuant to the terms of the agreement petitioner executed a deed conveying to George her interest in the ranch. At the time petitioner and George had made their stipulation before the divorce court on May 21, 1969, they contemplated that the deed would be executed within approximately 1 week. However, the deed was not signed and acknowledged until August 27, 1969, and was recorded on August 28, 1969.

The note was executed by George sometime prior to August 19, 1969, and delivered to petitioner's attorney on that date along with two checks. One of these checks, in the amount of $3,062.49, represented 90 days' interest on the note, commencing May 21, 1969. The other check, in the amount of $50,750, represented a principal payment on the note. These checks were transferred to petitioner on August 28, 1969.

Petitioner lived on the ranch for approximately 13 years; she maintained the books and records for the ranch. On or about June 5, 1969, petitioner delivered these books and records to George's accountant, and moved off the ranch. Thereafter a ranch foreman, who had previously assisted petitioner in the operation of the ranch, assumed operating control of the ranch.

An interlocutory decree of divorce was granted to George on July 31, 1969. The decree provided, in part, as follows:

The Court expressly makes no finding concerning the property settlement agreement, it having been stipulated by the parties that the effectiveness of the said agreement shall not be conditioned upon the approval of the same by the Court.

On August 6, 1969, George was granted a final decree of divorce.

Petitioner received $50,750 in 1969 and $124,250 in 1970 from George for her interest in the ranch. Petitioner's adjusted basis in the ranch at the time of the...