McKinney v. Comm'r of Internal Revenue, Docket No. 4132-73.
| Decision Date | 21 May 1975 |
| Docket Number | Docket No. 4132-73. |
| Citation | 64 T.C. 263 |
| Parties | WORTHY W. MCKINNEY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
James C. Higgins, for the petitioner.
Donald W. Mosser, for the respondent.
Held: A transfer of appreciated stock by petitioner to his wife pursuant to a property settlement agreement incident to a divorce under West Virginia law constitutes a taxable event resulting in realization of a capital gain by petitioner. In addition, petitioner is taxable on other gains and is entitled to deductions for losses on the other transfers of property pursuant to the property settlement agreement and the divorce decree.
The Commissioner determined deficiencies in petitioner's Federal income tax as follows:
+----------------------------+
¦Taxable year ¦Deficiency ¦
+---------------+------------¦
¦ ¦ ¦
+---------------+------------¦
¦1969 ¦$25,243.58 ¦
+---------------+------------¦
¦1970 ¦3,447.25 ¦
+----------------------------+
Due to concessions, the sole issue is whether petitioner realized taxable gain on the transfer of appreciated stock to his former wife pursuant to a property settlement agreement subsequently approved in a divorce decree. All of the facts are stipulated and are so found.
At the time the petition was filed, and at all times pertinent, petitioner Worthy W. McKinney resided at Professional Park, Beckley, W.Va. Petitioner erroneously filed a joint Federal income tax return with his former wife, Esther L. Mckinney, for 1969. Petitioner filed an individual Federal income tax return for 1970. Both returns were filed with the Internal Revenue Service Center, Covington, Ky.
Petitioner married Esther L. McKinney on December 30, 1945. On November 10, 1969, Mrs. McKinney filed for divorce from petitioner in the Circuit Court of Raleigh County, W. Va. (divorce court). On december 18, 1969, the divorce court entered a final order decree of divorce between Mrs. McKinney and petitioner. That order approved a property settlement agreement; provided for joint custody of the son of the parties; ordered petitioner to provide for the future maintenance and eduction of his son and to pay alimony to Mrs. McKinney. The alimony payments consisted of $1,500 per month, premiums on life insurance and medical insurance policies, property taxes on an automobile, and principal payments on a promissory note on which both parties to the divorce were liable. The alimony payments were to cease upon the remarriage of Mrs. McKinney.
Petitioner and Mrs. McKinney entered into the above-mentioned property settlement agreement on December 11, 1969. The agreement provided, in general, that for and in consideration of his wife's mutual performance of covenants specifically enumerated in the agreement and for the consideration of her instituting a civil action for the termination of their marital contract, petitioner agreed to transfer to her the following assets: A new automobile; $10,000 in cash; his real and personal property interests in their residence; stock of Wellington Fund and Putnam Growth Fund; and all incidents of ownership in four life insurance policies. The agreement also provided that petitioner would indemnify his wife for her liability on a certain promissory note. The agreement further provided that as the owner and holder of 3,500 shares of Professional Optical Co. Inc.,1 $1 common stock (representing all of the issued and outstanding shares of a total authorization of 5,000 such shares), petitioner would transfer 1,715 shares of said stock to his wife and would not vote his retained shares to authorize issuance of additional shares of that class of stock. The agreement further provided that petitioner would cause Professional Optical, Inc., to authorize and issue 50,000 shares of a second class of stock (each share having a $1 par value and dividend rights of $.032 per year) to petitioner's wife in exchange and redemption of the 1,715 shares of the existing stock that she was to receive. In consideration for the performance of all of the acts required in the agreement by petitioner, the agreement provided, in general, that petitioner's wife agreed to perform the following:
1. Institute a civil action for the termination of their marital contract.
2. Transfer to the petitioner her interest in certain real estate jointly owned with the petitioner.
3. Allow the petitioner the first option of repurchasing their residential property at a specific appreciated value should she desire to sell that property.
4. Lease the petitioner the basement apartment in their residence subject to certain limitations; and allow the petitioner to pay certain utilities and certain other expenses in lieu of the payment of rent.
5. Deposit a key to the residence with petitioner's attorney so that access could be gained to the premises on the happening of certain events.
6. Provide for a testamentary assignment to her son of her interests in the life insurance policies that she was to receive; and provide for a testamentary reversion of such interests to the petitioner should her son predecease her.
Mrs. McKinney was not employed during her marriage to petitioner and all assets accumulated during the marriage were paid for out of petitioner's earnings. Prior to the property settlement agreement, petitioner owned all of the assets that he was to transfer to his wife under the agreement except for certain real estate jointly owned by petitioner and Mr.s McKinney.
Mrs. McKinney owned 175 shares of Professional Optical, Inc., stock prior to the agreement. Therefore, in compliance with the terms of the property settlement agreement providing that she was to receive 1,715 shares of Professional Optical, Inc., stock, petitioner transferred to Mrs. McKinney in 1969 an additional 1,540 shares of the 3,325 shares of such stock held in his name. Mrs. McKinney's shares were subsequently redeemed in exchange for 50,000 shares of a second class of Professional Optical, Inc., stock as required under the terms of the property settlement agreement.
Petitioner and Mrs. McKinney valued the 1,715 shares of Professional Optical, Inc., stock (owned by Mrs. McKinney by virtue of petitioner's performance of the terms of the property settlement agreement) at $50,000. Petitioner's basis in the 1,540 shares of Professional Optical, Inc., stock transferred to Mrs. McKinney pursuant to the property settlement agreement was $1,540.
Petitioner did not report any gain or loss on the transfer of the 1,540 shares of Professional Optical, Inc., stock on his 1969 Federal income tax return. In addition to other adjustments which have been resolved by the parties, the Commissioner determined that petitioner realized a $43,358.75 long-term capital gain on the disposition of such stock giving the following explanation in the statutory notice of deficiency:
+---------------------------------------------------------+
¦ ¦Sale price ¦Basis ¦Gain ¦
+-------------------------+------------+-------+----------¦
¦ ¦ ¦ ¦ ¦
+-------------------------+------------+-------+----------¦
¦1,540 shares Professional¦ ¦ ¦ ¦
+-------------------------+------------+-------+----------¦
¦Optical, Inc. ¦$44,898.75 ¦$1,540 ¦$43,358.75¦
+---------------------------------------------------------+
Inasmuch as a value of $50,000.00 was placed on 1715 shares (during property settlement negotiations incident to a divorce) and as Esther McKinney already possessed ownership of 175 shares, the 1540 shares transferred to her in a property settlement had a value of $44,898.75 ($50,000.00 x 1540/1715). 2
Respondent under the authority of United States v. Davis, 370 U.S. 65 (1962), contends that petitioner realized a taxable gain upon the transfer of Professional Optical, Inc., shares to his wife pursuant to the property settlement agreement incident to the divorce. Emphasizing that under the applicable West Virginia statutes3 the divorce court merely had jurisdiction to award alimony and to compel either of the parties to return property in his or her possession...
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