King v. Comm'r of Internal Revenue

• Decision Date: 22 October 1958
• Docket Number: Docket Nos. 64571,65719.
• Citation: 31 T.C. 108
• Parties: E. EUGENE KING AND VERA F. KING, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.E. EUGENE KING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

31 T.C. 108

E. EUGENE KING AND VERA F. KING, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.E. EUGENE KING, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 64571

65719.

Tax Court of the United States.

Filed October 22, 1958.

Edwin J. Welsh, Esq., and William F. Meyer, C. P. A., for the petitioners.

Aaron S. Resnik, Esq., and Jack T. Fuller, Esq., for the respondent.

In anticipation of divorce, petitioner and his then wife entered into an agreement, subsequently incorporated in a divorce decree, whereby, inter alia, petitioner obligated himself to convey to his wife a life estate in his undivided one-half interest in a ranch, with remainder to their children, and to satisfy an existing mortgage encumbrance thereon. Petitioner's then wife agreed to accept benefits flowing to her under the agreement in full satisfaction of her rights to alimony and support and fully released petitioner from any further obligations toward her, with exceptions not here material. The value at that time of an unencumbered one-half interest in the rance exceeded petitioner's basis therein. Held:

1. Petitioner realized taxable income as a result of the above transaction. Estate of Gordon A. Stouffer, 30 T.C. 1244, followed.

(a) Petitioner's taxable gain is limited to that part of the increase in value over his basis allocable to the life estate transferred to his wife, on a pro rata basis.

(b) No reduction in the amount of petitioner's taxable gain is warranted by virtue of the mortgage indebtedness.

(c) No reduction in the amount of petitioner's taxable gain is warranted by virtue of the former inchoate right to dower of his ex-wife.

3. No part of the income from the ranch subsequent to the conveyance is taxable to petitioner.

4. Petitioner is liable for the additions to tax imposed by sections 294(d) (1)(A) and 294(d)(2), I.R.C. 1939.

FORRESTER, Judge:

The Commissioner has determined a deficiency in the income tax of petitioner E. Eugene King for 1952 and additions thereto under sections 194(d)(1)(A) and 294(d)(2) of the Internal Revenue Code of 1939, and deficiencies in the income tax of both petitioners for 1953 and 1954, as follows:

+---------------------------------------------------------+
                ¦            ¦          ¦Additions                        ¦
                +------------+----------+---------------------------------¦
                ¦Taxable year¦Deficiency¦Sec. 294 (d) (1)¦Sec. 294 (d) (2)¦
                +------------+----------+----------------+----------------¦
                ¦            ¦          ¦(A)             ¦                ¦
                +------------+----------+----------------+----------------¦
                ¦1952        ¦$12,032.80¦$1,770.49       ¦$1,180.32       ¦
                +------------+----------+----------------+----------------¦
                ¦1953        ¦235.94    ¦                ¦                ¦
                +------------+----------+----------------+----------------¦
                ¦1954        ¦237.54    ¦                ¦                ¦
                +---------------------------------------------------------+
                

The issues to be decided are as follows:

1. Did respondent err in determining that petitioner E. Eugene King realized taxable gain in 1952 as the result of the transfer by him of his interest in a certain ranch property?

2. If respondent did not so err, the following additional questions must be answered:

(a) Is taxable gain limited to that realized by petitioner E. Eugene King in the transfer to his former wife of only a life estate in his one-half interest in the ranch property?

(b) Must the value of the interest of petitioner E. Eugene King so transferred be reduced by any part of a mortgage encumbrance on the ranch property at the time of the transfer?

(c) Must such value be further reduced by the value of the dower rights in the ranch property of the former wife of petitioner E. Eugene King, and if so, what value should be assigned to such rights?

3. Did respondent err in determining that the income from the interest transferred was taxable to petitioner?

4. Did respondent err in determining that petitioner E. Eugene King is liable in respect of 1952 for the additions to tax for failure to file a declaration of estimated tax and for substantial underestimation?

FINDINGS OF FACT.

Some of the facts have been stipulated, and are so found.

Petitioner E. Eugene King filed his individual income tax return for the calendar year 1952 with the director of internal revenue at Portland, Oregon. Petitioners E. Eugene King and Vera F. King filed their joint income tax returns for 1953 and 1954 with the same director. E. Eugene King alone will hereinafter be referred to as the petitioner.

Petitioner and Vaunda Haller (hereinafter called Vaunda) were married in 1932. On April 8, 1944, petitioner and his brother Harold each acquired from their parents in an inter vivos transaction and for consideration an undivided one-half interest in certain real property, known as the Umatilla ranch property (hereinafter called Umatilla). On January 25, 1951, petitioner, Harold, and their respective wives joined in executing a mortgage on Umatilla, securing a loan in the amount of $47,500. Petitioner and Harold used the proceeds of the loan for business purposes.

On an undisclosed date, Vaunda commenced divorce proceedings against petitioner. Thereafter, on July 3, 1952, the parties entered into a ‘Property Settlement Agreement’ (hereinafter called the agreement), which read as follows:

WHEREAS, the parties hereto are now husband and wife but have separated and the above named plaintiff (Vaunda) has heretofore commenced a suit for a divorce against the defendant and in said suit the defendant and in said suit the defendant was required to make monthly payments of $300.00 a month for the support of plaintiff and the minor children, and it is desired to settle and adjust all property rights between the parties, and all other rights save and except the marriage relationship,

NOW, THEREFORE, it is hereby understood and agreed:

Custody of Minor Children: The parties stipulate that plaintiff is a fit and proper person to have the exclusive custody, care and control of the minor children, subject to the Court's approval, and in any suit for a divorce, the defendant will not resist the award of the minor children to plaintiff.

Payments: The defendant shall continue making the monthly payments of $300.00 a month to plaintiff to and including September 1, 1952, and upon said date, all liability for said payments shall terminate.

The defendant agrees to assign to plaintiff a claim against Leonard King in the sum of $2,000.00, of which $1,000.00 with interest is payable in the Fall of 1952; and a further payment of $1,000.00 with interest payable in the Fall of 1953, and said amount of money, to-wit: $2,000.00 with interest, shall be plaintiff's individual property.

The defendant shall convey to plaintiff a life estate in:

Lot 6, Block 51, Redmond, Oregon,

with the remainder to Margaret Ann King, age 16; Robert E. King, age 11, and Richard Lester King, age (sic) and to their heirs and assigns.

IT IS UNDERSTOOD AND AGREED that there is an unpaid balance owing by the defendant on the purchase price of the said premises, and the defendant covenants and agrees that he will make all payments against the aforesaid property and will pay the annual taxes on said property until the same has been paid for in full, and that upon full and complete payment of all indebtedness against the aforesaid Lot 6, Block 51, Redmond, Oregon, the property shall be conveyed to plaintiff during her lifetime and the remainder to the above named children by a warranty deed.

Eugene King covenants and agrees that he is the owner of an undivided interest in and to:

The South half of Section 28; North half of Section 33, Township 5 North, Range 32, E. W. M., the Southwest quarter of Section 33 in Township 5 North, Range 32, E. W. M., the Southwest quarter of Section 33, excepting therefrom the following, viz: Beginning at the Southwest corner of the Southwest quarter of said Section; thence North 9 chains, 85 links to the middle of a public road; thence along said road South 83 degrees 10' West 4 chains; thence South 85 degrees 30' West 37 chains; thence North 86 degrees 0' West 9 chains, 61 links to a point 7 chains 15 links North of the Southwest corner of said Section 33; and thence South to the place of beginning.

IT IS UNDERSTOOD AND AGREED that the land just above described is owned by Harold J. King of Umatilla County, Oregon, and Everett E. King, subject to a mortgage indebtedness of record in Umatilla County, and the defendant covenants and agrees that said mortgage indebtedness shall be paid in full and that he will convey a life estate in and to the aforesaid property of a one-half interest therein together with the rents, hereditaments, and tenements, to plaintiff, with the remainder upon the death of plaintiff, in equal shares to Margaret Ann King, Robert E. King and Richard Lester King, the children of plaintiff and the defendant. The aforesaid deed shall further provide that in the event of the death of said children, or any of them, during the lifetime of plaintiff, then the surviving children shall take the interest of such child as shall predecease plaintiff. In the event that plaintiff shall survive all of the minor children, then the remainder after the death of plaintiff, to the heirs and assigns of said children.

IT IS SPECIFICALLY UNDERSTOOD that the above described farm lands in Umatilla County are presently rented on a crop-share lease to King Ranches, by an oral lease providing that the owners, to-wit: the defendant, Eugene King and his brother, Harold King, shall receive one-third of the rents and profits as rental, and King Ranches receive two-thirds of the crop for farming the same. From and after the date of the execution of this agreement, plaintiff shall receive defendant's share of the rentals, or one-sixth of the crops produced on said lands in Umatilla County for the year 1952, and from then on during her...