Imel v. U.S.

• Decision Date: 08 September 1975
• Docket Number: No. 74-1613,74-1613
• Citation: 523 F.2d 853
• Parties: 75-2 USTC P 9698 Ray C. IMEL, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 853

523 F.2d 853

75-2 USTC P 9698

Ray C. IMEL, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 74-1613.

United States Court of Appeals Tenth Circuit.

Sept. 8, 1975.

Ira C. Rothgerber, Jr., of Rothgerber, Appel & Powers, Denver, Colo., for plaintiff-appellee.

Jonathan S. Cohen, Washington, D. C., (Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, William A. Friedlander, and Carleton D. Powell, Attys., Tax Div., Dept. of Justice, and James L. Treece, U. S. Atty., of counsel, on the brief), for defendant-appellant.

Before BREITENSTEIN, HILL and DOYLE, Circuit Judges.

BREITENSTEIN, Circuit Judge.

Once again we have the problem of federal income tax liability on a transfer of appreciated property pursuant to a court approved divorce settlement. The husband-taxpayer paid the tax and brought this suit for refund. The district court held for taxpayer, Imel v. United States, D.Colo., 375 F.Supp. 1102, and the government has appealed. We affirm.

On the suit of the wife, a divorce was granted on July 31, 1964, by a Colorado state court. Jurisdiction was retained to settle questions of alimony and property division. On February 9, 1965, the court approved a property settlement agreement made by the parties. In so doing it found that the wife had "aided materially" in the accumulation of the family wealth; that the agreement was a "fair recognition" of the wife's participation; and that it made a "fair division" of the property. See 375 F.Supp. at 1104. The property transferred was corporate stock. The base value to taxpayer was $400,864 and the value at transfer was $1,114,170. The Commissioner of Internal Revenue held that the transfer was a taxable event and made a deficiency assessment. After a non-jury trial, the district court gave judgment against the United States for $119,588 plus interest. The court reasoned that the transaction in issue was a division of property between co-owners and not a sale or exchange resulting in a taxable capital gain.

The lead case on this recurring problem is United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335. The Court there held that a transfer by a Delaware taxpayer of appreciated property under a settlement agreement incorporated in a divorce decree was a taxable event. In so holding it applied Delaware law to determine the substantive rights of the parties in the transferred property. The Court recognized that its decision "may permit different tax treatment among the several States." Ibid. at 71, 82 S.Ct. at 1193.

We applied Davis in Pulliam v. Commissioner of Internal Revenue, 10 Cir., 329 F.2d 97, 99, cert. denied 379 U.S. 836, 85 S.Ct. 72, 13 L.Ed.2d 44. That case involved a Colorado divorce in which there was no voluntary property settlement and the transfer to the wife was under the court decree. We held that "(u) nder Colorado law the wife's rights during marriage do not vest in her an ownership of any part of the husband's property," Ibid. at 97. Hence, under Davis the transfer was a taxable event.

Then we have the Collins cases. Collins # 1 was Collins v. Commissioner of Internal Revenue, 10 Cir., 388 F.2d 353. We were concerned with an Oklahoma divorce where appreciated property was transferred by the husband pursuant to a property settlement agreement. Applying Davis, Pulliam, and Oklahoma law, we held that the transfer was a taxable event.

A few months after our decision the Supreme Court of Oklahoma decided Collins v. Oklahoma Tax Commission, Okl., 446 P.2d 290, Collins # 2. The issue was the liability of the same taxpayer for a state income capital gains tax. The Oklahoma Supreme Court said that our interpretation of Oklahoma law in Collins # 1 was wrong and that, in Oklahoma, property acquired during coverture is "a species of common ownership." Ibid. at 295.

Next is Collins v. Commissioner of Internal Revenue, 393 U.S. 215, 89 S.Ct. 388, 21 L.Ed.2d 355, Collins # 3. The Supreme Court granted certiorari to review our decision in Collins # 1, vacated the judgment therein, and remanded the case "for further consideration in the light of the opinion of the Supreme Court of Oklahoma" in Collins # 2. On remand we held that under the Oklahoma decision the transfer was nontaxable. Collins v. Commissioner of Internal Revenue, 10 Cir., 412 F.2d 211, 212, Collins # 4.

The instant case came to the federal district court with the mentioned decisional background. The court noted a change in Colorado statutory law after Pulliam, 375 F.Supp. at 1113, and reviewed a number of Colorado decisions, 375 F.Supp. at 1113-1115. The court said that it had "difficulty in defining the exact nature of a Colorado wife's interest in the marital property," 375 F.Supp. at 1115; that it differed with our interpretation of earlier Colorado law in Pulliam, 375 F.Supp. at 1113; and that a definitive statement of the applicable property law should be made by the Colorado Supreme Court, Ibid. at 1116.

Appellate Rule 21.1 of the Colorado Supreme Court permits the certification to it by federal courts of questions of Colorado law when there are no controlling precedents. Accordingly, the federal court made a "certification of question" to the Colorado Supreme Court. 375 F.Supp. at 1116-1117.

The Colorado Supreme Court accepted the certified questions. In re Questions submitted by United States District Court for District of Colorado, Colo., 517 P.2d 1331. In adversary proceedings and after a review of the decisional law both state and federal and of the Colorado statutes, the court held that the wife had a "species of common ownership" of the marital estate which vested at the time of the filing of the divorce action. 517 P.2d at 1335.

The federal court then considered the answers of the Colorado Supreme Court to the certified questions and said, 375 F.Supp. at 1118:

"Even with Pulliam v. Commissioner of Internal Revenue in mind, I think that Davis and Collins # 4, when coupled with the Colorado Supreme Court's answers to the certified questions, mandate that judgment here enter in favor of plaintiff, and it shall so enter."

The basic argument of the government is that a state court cannot determine what is a taxable event under the federal income tax laws. The occurrence of a taxable event in the situation presented depends on whether the transaction was a nontaxable division of property by co-owners or was a sale or exchange resulting in a capital gain taxable under §§ 1001(c) and 1002 of the 1954 Internal Revenue Code, 26 U.S.C. §§ 1001(c) and 1002. Ownership is determined by the law of Colorado. The field of domestic relations "belongs exclusively to the laws of the states." McCarty v. Hollis, 10 Cir., 120 F.2d 540, 542, and cases there cited. Legal interests and rights are created by, and exist under, state law. Morgan v. Commissioner of Internal Revenue, 309 U.S. 78, 80, 60 S.Ct. 424, 84 L.Ed. 585. Federal law determines what transactions involving interests or rights created by state law shall be taxed. Ibid. The Supreme Court has consistently recognized these controlling principles. See Freuler v. Helvering, 291 U.S. 35, 45, 54 S.Ct. 308, 78 L.Ed. 634 (federal income tax); Blair v. Commissioner of Internal Revenue, 300 U.S. 5, 9-10, 57 S.Ct. 330, 81 L.Ed. 465 (federal income tax); Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (federal estate tax); and United States v. Mitchell, 403 U.S. 190, 195, 91 S.Ct. 1763, 29 L.Ed.2d 406 (federal income tax). See also Estate of Goldstein v. Commissioner of Internal Revenue, 10 Cir., 479 F.2d 813, 816 (federal estate tax).

The government argues that the Colorado Supreme Court decision on the certified questions runs contrary to Davis. We do not agree. Davis was decided on Delaware law. The Court said, 370 U.S. at 70, 82 S.Ct. at 1193:

"Regardless of the tags, Delaware seems only to place a burden on the husband's property rather than to make the wife a part owner thereof."

The highest court of Colorado has said that the wife had a species of common ownership which vests upon the filing of the divorce action. 517 P.2d at 1335. In Collins # 2 the Oklahoma Supreme Court charactered the wife's interest as "a species of common ownership." 446 P.2d at 295. After the remand to us by Collins # 3, we considered the effect of Collins # 2, and said, 412 F.2d at 212:

"Having the benefit of an interpretation of state law on this very point, we must conclude that the stock transfer operated merely to finalize the extent of the wife's vested interest in property she and her husband held under 'a species of common ownership.' "

In Collins # 1 we said, in discussing the effect of Pulliam, 388 F.2d at 357:

"It is difficult for us to see any distinction between Oklahoma and Colorado law sufficient to justify a different characterization of the property division."

We have now gone the full circle. Just as Oklahoma held that we were wrong in Collins # 1 so has Colorado ruled that Pulliam does not state Colorado law. We followed the Oklahoma decision and the question is whether we should follow the Colorado decision.

The government argues that the Colorado decision does not control the taxability of the transfer because (1) the recognized interest of the wife "is not within the concept of common ownership for federal tax purposes," and (2) under Davis taxability "is based on the scope of the rights of the wife during the marriage and not when the marriage is pulling apart." As we read Davis it did not establish a federal standard as to the nature of the pre-transfer right in the transferred property. See Wiles v. Commissioner of Internal Revenue, 10 Cir., 499 F.2d 255, 257, cert. denied 419 U.S. 996, 95 S.Ct. 310, 42 L.Ed.2d 270, and Mills v. Commissioner of Internal Revenue, 10 Cir., 442 F.2d 1149, 1151. In applying Delaware law in Davis the Court did not define the time when the interest of the wife had to vest. The Court refers to the...