Gaughan v. Commissioner
| Decision Date | 20 July 1993 |
| Docket Number | Docket No. 150-91.,Docket No. 259-91. |
| Parties | John M. Gaughan v. Commissioner. Gloria J. Gaughan v. Commissioner. |
| Court | U.S. Tax Court |
Norman Riedmueller, 12 Grennway Plaza, Houston, Tex., for the petitioner in Docket No. 150-91. Jay R. Houren, 909 Fannin, Houston, Tex., for the petitioner in Docket No. 259-91. Carol B. Reeve, for the respondent.
Memorandum Findings of Fact and Opinion
By separate statutory notices of deficiency, respondent determined deficiencies in petitioners' Federal income tax and an addition to tax as follows:
Petitioner John M. Gaughan, Docket No. 150-91
Year Deficiency
1984 .................... $236,901
Petitioner Gloria J. Gaughan, Docket No. 259-91
Addition to Tax
Year Deficiency Sec. 6661
1983 .................... $331,473 $82,868
When petitioners filed their petitions, petitioner John M. Gaughan was a resident of Houston, Texas, and petitioner Gloria J. Gaughan was a resident of Santa Fe, New Mexico. By order of the Court, these cases have been consolidated for trial, briefing, and opinion.
Respondent has conceded that Mrs. Gaughan is not liable for the addition to tax under section 66611 for substantial understatement of her 1983 income tax liability.
The issues for decision are (1) whether a certain corporate share transaction incident to petitioners' 1983 divorce was a taxable sale or a tax-free division of community property and (2) whether the 6-year limitation period of section 6501(e) applies to Mrs. Gaughan. For the reasons discussed below, we hold that the transaction was a taxable sale on which Mrs. Gaughan recognized gain to the extent her amount realized exceeded the adjusted basis of her community interest in the shares, and that Mr. Gaughan obtained an increased basis (equal to his purchase price) in the share interest he purchased from Mrs. Gaughan. Consequently, there is a deficiency in Mrs. Gaughan's Federal income tax for the taxable year 1983 as determined by respondent, and no deficiency in Mr. Gaughan's Federal income tax for the taxable year 1984. Because Mrs. Gaughan failed to report or disclose the transaction on her 1983 Federal income tax return, the 6-year period of limitations applies to her, and assessment and collection of the deficiency determined against her is not barred by the statute of limitations.
Most of the facts have been stipulated and are so found.
When petitioners divorced on September 7, 1983, they were residents of Texas, a community property State. Except for clothing and jewelry, petitioners had no separate property.
Incorporated in the divorce decree was a property settlement agreement executed by petitioners on the date of the divorce. Under the property settlement agreement, Mrs. Gaughan's community interest in 61,328 shares of stock in Telecommunication Specialists, Inc. (TSI), a closely held corporation 45.5 percent of whose outstanding stock was owned by petitioners, was set aside for Mr. Gaughan. In lieu of receiving her community interest in the TSI stock (30,664 shares), Mrs. Gaughan received $1.7 million in cash from Mr. Gaughan upon entry of the divorce decree.2 He obtained the funds to make this payment by means of a $2 million loan from InterFirst Bank of Houston, N.A. The loan was evidenced by a demand note, dated September 7, 1983, executed solely by Mr. Gaughan as maker, and Mrs. Gaughan's name does not appear anywhere on the note. The loan was secured by the 61,328 shares of TSI stock, Mrs. Gaughan's community interest in which she had transferred to Mr. Gaughan earlier that day. The allocation of community debts in the property settlement agreement does not specifically mention the $2 million loan and does not allocate any such liability to Mrs. Gaughan. However, Schedule C of the agreement provides that included among Mr. Gaughan's liabilities was:
Any and all notes, liabilities, guarantees, contingent guarantees, contingent liabilities and/or indebtedness entered into or signed by * * * [Mr. Gaughan] without the joinder of * * * [Mrs. Gaughan].
Mr. Gaughan instructed the bank to write a cashier's check payable to Mrs. Gaughan in the amount of $1.7 million "in connection with the settlement of the divorce proceedings". The bank turned the check over to Mr. Gaughan, who immediately hand-delivered it to his attorney to hold in accordance with escrow instructions. During the interval between execution of the loan documents and entry of the divorce decree, the cashier's check payable to Mrs. Gaughan was held in escrow by Mr. Gaughan's attorney and was not handed over to Mrs. Gaughan's attorney until the divorce decree had been entered. Mr. Gaughan retained the $300,000 balance of the loan proceeds.
Respondent granted Mrs. Gaughan two extensions of time to file her 1983 Federal income tax return, and she timely filed the return on October 17, 1984. Mrs. Gaughan did not report on her 1983 return the $1.7 million she received from Mr. Gaughan for her community interest in the TSI stock or otherwise disclose the transaction to respondent.
On September 19, 1984, Mr. Gaughan sold his entire interest in TSI for $13,392,000.3 Mr. Gaughan timely filed his Federal income tax return for the taxable year 1984, pursuant to extension, on August 5, 1985. On Schedule D of his return, Mr. Gaughan reported that his basis in the TSI stock included the $1.7 million he transferred to Mrs. Gaughan for her community interest in the stock and computed his long-term capital gain using such basis. Mr. Gaughan later filed an amended return for 1984 on Form 1040X on which he claimed an increased basis for his selling expenses.
On October 5, 1990, respondent mailed Mrs. Gaughan a statutory notice of deficiency for the year 1983 determining that she received the $1.7 million in a taxable sale of her community interest in the TSI stock to Mr. Gaughan and allowing her a $3,000 basis in the stock.4 Respondent thus determined that Mrs. Gaughan recognized $1,697,000 in long-term capital gain in 1983 and determined a $331,473 deficiency in her 1983 income tax and an addition to tax under section 6661 for substantial understatement of her income tax liability. On the same date, respondent mailed Mr. Gaughan a statutory notice of deficiency for 1984. This notice determined that Mr. Gaughan received the TSI shares in a tax-free division of community property, that his basis in the shares did not include the $1.7 million he paid Mrs. Gaughan, but that he was entitled to a $510,167 basis in the shares, which included his initial $3,000 basis plus his selling expenses as shown on his amended return. Accordingly, respondent determined a $236,901 deficiency in Mr. Gaughan's 1984 income tax.
Respondent has taken inconsistent positions with respect to the TSI stock transaction between petitioners and, in order to protect herself from being whipsawed, issued notices of deficiency to both Mr. and Mrs. Gaughan. Petitioners and respondent have so framed and argued the issues that a decision in favor of either petitioner will necessarily result in a decision against the other. Respondent, on brief, has favored Mrs. Gaughan's position, but has also made the alternative arguments to protect respondent's position if the Court should find in favor of Mr. Gaughan.
OpinionA preliminary issue in this case is whether the 6-year statutory limitation period on assessment and collection applies to Mrs. Gaughan. Section 6501(e)(1) provides that if a taxpayer omits from gross income5 an amount of gross income greater than 25 percent of the gross income reported on the return, the period of limitations on assessment and collection is 6 years rather than the 3 years provided in section 6501(a).
Respondent has the burden of proof on this issue. Wood v. Commissioner [57-2 USTC ¶ 9790; 57-2 USTC ¶ 9975], 245 F.2d 888, 893-895 (5th Cir. 1957), affg. in part and revg. in part [Dec. 21,330(M)] T.C. Memo. 1955-301; Bardwell v. Commissioner [Dec. 25,450], 38 T.C. 84, 92 (1962), affd. [63-2 USTC ¶ 9558] 318 F.2d 786 (10th Cir. 1963). To carry this burden, respondent must prove (1) that an amount of gross income not reported on Mrs. Gaughan's 1983 Federal income tax return was properly includable in gross income, and (2) that such amount was in excess of 25 percent of the amount of gross income reported on the return. Estate of Whitlock v. Commissioner [74-1 USTC ¶ 9388], 494 F.2d 1297 (10th Cir. 1974), affg. in part and revg. in part [Dec. 31,797] 59 T.C. 490 (1972); see Stafford v. Commissioner [Dec. 48,613(M)], T.C. Memo. 1992-637. In addition, section 6501(e)(1)(A)(ii) provides that an item is not considered omitted from gross income if the taxpayer adequately disclosed the amount on the return or on an attached statement. Mrs. Gaughan has the burden of proving that she made adequate disclosure. Whitesell v. Commissioner [Dec. 44,699], 90 T.C. 702, 708 (1988); University Country Club, Inc. v. Commissioner [Dec. 33,277], 64 T.C. 460, 468 (1975).
Whether the 6-year limitation period applies to Mrs. Gaughan depends on the outcome of the main issue: Was the TSI stock transaction a taxable sale of stock for cash between petitioners or was it a nontaxable approximately equal division of community property between divorcing spouses? Because we conclude that the transaction was a taxable sale, Mrs. Gaughan recognized $1,697,000 in long-term capital gain on the transaction. Inasmuch as this amount is in excess of 25 percent of the gross income shown on her 1983 Federal income tax return and was not disclosed thereon, the 6-year period of limitations applies to her.
Mrs. Gaughan obtained two extensions of time to file and timely filed her 1983 Federal income tax return on October 17, 1984. Respondent mailed the notice of deficiency to Mrs. Gaughan on October 5, 1990. Therefore, the...
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