Krueger v. Wisconsin Dept. of Revenue

• Decision Date: 24 June 1985
• Docket Number: No. 84-2410,84-2410
• Citation: 124 Wis.2d 453,369 N.W.2d 691
• Parties: Thomas R. KRUEGER, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent,
• Court: Wisconsin Supreme Court

Page 691

369 N.W.2d 691

124 Wis.2d 453

Thomas R. KRUEGER, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent,

No. 84-2410.

Supreme Court of Wisconsin.

Argued May 28, 1985.

Decided June 24, 1985.

John M. Kelly (argued), and Dempsey, Magnusen, Williamson & Lampe, Oshkosh, on brief, for petitioner-appellant.

Alan Lee, Asst. Atty. Gen. (argued), with whom on brief was Bronson C. La Follette, Atty. Gen., for respondent.

William A. BABLITCH, Justice.

Thomas R. Krueger (Krueger) seeks review of an order which assessed income taxes and interest against him. The Wisconsin Department of Revenue (Department) determined that Krueger's transfer of appreciated property to his wife, pursuant to a divorce settlement, was a taxable event. The Department's decision was affirmed by the Wisconsin Tax Appeals Commission (Commission) which in turn was affirmed by the circuit court. We reverse the circuit court. Because we conclude that Wisconsin statutes presume an equal ownership interest in property acquired during marriage, Krueger's transfer of appreciated property to his wife, pursuant to a divorce settlement in which each party received approximately one-half of the marital property, did not constitute a taxable event for Wisconsin income tax purposes.

The parties have stipulated to the facts in this case and this stipulation constitutes the entire record on appeal. Krueger and his wife were divorced in 1980. Prior to their divorce, the couple had owned farm real property as tenants in common. Krueger was the sole owner of farm machinery and equipment.

Pursuant to a divorce agreement entered in January of 1980, the couple divided their property. Krueger transferred his one-half undivided interest as a tenant in common in the farm real property to his wife. His one-half interest had a fair market value of $125,000.00 and an adjusted basis of $41,815.40 at the time of the transfer. This real property was subject to a jointly-held debt in the total amount of $136,162.00. Krueger also transferred farm equipment and machinery to his wife, along with its indebtedness. At the time of this transfer, this personal property had a fair market value of $32,000.00 an adjusted basis of $26,205.82 and a jointly-held debt in the amount of $4,188.00.

In exchange for these transfers, Krueger received a promissory note from his wife in the amount of $60,000.00. This note was secured by a lien against the farm real property. Krueger also retained some land, a business and some personal property that he had held in his own name during the marriage. The net fair market value of all of the property received by Krueger in the divorce property division was approximately equal to the net fair market value of the property received by his wife.

Krueger filed a Wisconsin personal income tax form for the calendar year ending December 31, 1980. He indicated that he had a taxable income of $2,071.32 and that there was a $720.40 refund due to him. On February 15, 1982, the Department issued a Notice of Amount Due, assessing an additional $10,879.98 in income taxes and interest for the calendar year 1980 as a result of Krueger's transfer of appreciated property to his wife.

Krueger, by letter dated March 16, 1982, objected to the additional income tax assessment. The Department treated this letter as a Petition for Redetermination and, in an action letter dated May 10, 1982, denied Krueger's petition. In a letter dated May 12, 1982, Krueger filed a petition to the Commission. The Commission affirmed the Department's assessment holding that the transfer of appreciated property, incident to a divorce, constituted a taxable event in Wisconsin.

Krueger sought judicial review in the circuit court for Fond du Lac county. The circuit court affirmed the decision of the Commission. Krueger subsequently filed a petition to bypass the court of appeals which this court granted, 367 N.W.2d 225. The issue on appeal is: Is the transfer, pursuant to a divorce property division agreement, by a husband to his wife of full title in appreciated real property held as tenants in common during the marriage together with appreciated personal property titled solely in the husband's name, in exchange for a promissory note and retention of other solely owned property when the property is of approximately equal value, a taxable event for Wisconsin income tax purposes?

We find that in order to answer this question, the following sub-issues must be addressed:

(1) Did the adoption of the federal definition of income by the Wisconsin legislature in 1965 legislatively overrule sub silentio this court's decision in Department of Taxation v. Siegman, 24 Wis.2d 92, 128 N.W.2d 658 (1964), which held that the transfer of appreciated, jointly-held real property was not a taxable event in Wisconsin?

(2) If so, does Wisconsin property and divorce law place this case under the rule of United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962), which held that the transfer of appreciated assets is a taxable event where the transferee spouse has no co-ownership interest in the assets during the marriage, or should this case fall outside of the Davis rule and the transfer of appreciated property be deemed to be a nontaxable division of property between co-owners?

In Siegman, this court held that inter-spousal transfers of appreciated property made pursuant to a court-imposed divorce judgment were not subject to Wisconsin income tax, pursuant to the provisions of sec. 71.03(1)(g), Stats. Siegman 24 Wis.2d at 106, 128 N.W.2d 658. Section 71.03(1)(g) defined taxable income as: "All profits derived from the transaction of business or from the sale or other disposition of real estate or other capital assets...." (Emphasis added.) This court determined that: "Because of the difficulty in assessing the economic benefit conferred upon the taxpayer in this context, we conclude that the legislature did not intend the transfer of appreciated property, as an incident of a property settlement, to be a taxable event within the meaning of sec. 71.03(1)(g), Stats." Id. at 106, 128 N.W.2d 658.

The petitioner argues that Siegman is the controlling law to be applied in this case and that the circuit court erred in not applying it. The Department argues that Siegman is not applicable because the state legislature, following the Siegman decision, amended chapter 71 and changed the definition of taxable income to be co-extensive with the federal definition of income. We find the Department's argument to be compelling in this regard.

Chapter 163, Laws of 1965, federalized Wisconsin tax law and adopted many definitions from the Internal Revenue Code as Wisconsin law. Section 71.02(2)(e), Stats. 1979-80, states that " 'Wisconsin adjusted gross income' means federal adjusted gross income, with the modifications prescribed in s. 71.05(1) and (4)." We find that in adopting a definition of state income to mean the same as federal income, the legislature intended that the federal definition of income be applicable as it is interpreted and modified. In other words, what constitutes income for Wisconsin purposes changes as the federal standard evolves.

Krueger argues that the federalization of the definition of taxable income did not undermine Siegman because the Siegman court found that the language "sale or other disposition of property" did not include transfers at divorce and that this definition is the same as the one used by the Internal Revenue Code in defining taxable income. See Internal Revenue Code, sec. 1001, (26 U.S.C. § 1001) which imposes a tax on the "gain from the sale or other disposition of property...." (Emphasis added.) According to Krueger, federalization has changed nothing with respect to the imposition of Wisconsin tax on "gains from the sale or other disposition of property" because Siegman stands for the proposition that a divorce transfer is not a "sale or other disposition" of property subject to Wisconsin taxation. We find that this argument is without merit.

The legislature did not merely adopt the definition of taxable income as it appeared in the Internal Revenue Code, but rather stated that Wisconsin adjusted gross income means federal adjusted gross income. In so doing, the legislature adopted a standard for state income tax purposes that requires modification as the federal definition of income receives modification. Thus, in order to determine Krueger's tax liability in the instant case it is necessary to determine whether the transfer of appreciated property is a taxable event within the federal definition as it has evolved to date.

The Department argues that this case is governed by the rule in Davis, and that therefore Krueger's transfers are taxable income within the definition of federal taxable income. In Davis, the Supreme Court held that there was a taxable event within the meanings of sections 61 and 1001 of the Internal Revenue Code when a husband transfers property to his wife in exchange for the release of her marital property rights in her husband's separately-owned property where, under state law, such rights are not the equivalent of ownership. Davis 370 U.S. at 70-71, 82 S.Ct. at 1193-1194.

The Davis Court examined the wife's marital rights in her husband's property under the law of Delaware, the marital domicile, and found that she had no interest in the management and disposition of her husband's...