Prater v. Commissioner
| Decision Date | 24 August 1993 |
| Docket Number | Docket No. 22489-89.,Docket No. 10956-90. |
| Citation | 66 T.C.M. 471 |
| Parties | Joan E. Prater v. Commissioner. Ronald R. Prater v. Commissioner. |
| Court | U.S. Tax Court |
Ken W. Dannenberg and John A. Vetter, 100 S. Main, Wichita, Kan., for the petitioner in Docket No. 22489-89.
Thomas R. Docking, 200 W. Douglas Ave., Wichita, Kan., for the petitioner in Docket No. 10956-90.
Bruce K. Meneely, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal individual income tax against petitioners1 as follows:
Joan E. Prater Ronald R. Prater
Year Docket No. 22489-89 Docket No. 10956-90
1984 ............ $14,346.44 $34,936.00
1985 ............ 46,408.60 66,746.00
1986 ............ 26,709.60
After concessions by respondent, the issue for decision2 is whether payments made by Ronald to Joan are periodic payments includable in Joan's gross income under section 71(a)(1)3 and are deductible by Ronald under section 215(a), or whether they are part of a property settlement.4
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
Joan and Ronald resided in Wichita, Kansas, at the times their respective petitions were filed in these consolidated cases.
Joan and Ronald were married on September 22, 1956. They had two sons, one born about 1960 and the other born about 1962. By mid-1983, both of the children were adults.
Ronald filed a petition for divorce on March 20, 1981, in the District Court of Sedgwick County, Kansas (hereinafter sometimes referred to as the Kansas court). The Kansas court held a 2-to-3-week trial in the divorce case in late 1982. About 90 to 95 percent of the time in that trial was devoted to the valuation of an oil and gas lease known as the Binger lease.
The Binger lease consists of an 87.5-percent working interest in an oil and gas property in Pratt County, Kansas. Ronald and his brother bought the Binger lease in December 1968. Ronald, a petroleum engineer, has made the operating decisions regarding the Binger lease since December 1968; he bought out his brother's share in 1975.
Expert witnesses who testified before the Kansas court were not able to agree on a value for the Binger lease, but testified that the Binger lease had a value of between $324,000 and $1,500,000.
At the time of the divorce, Ronald was about 49 years old and Joan was about 44 years old. Joan did not work outside the home during the marriage. At some point, the Kansas court awarded to Joan temporary support of $2,000 per month. Ronald paid this amount, and also voluntarily paid to Joan an additional $1,000 per month up to September 1982.
In the divorce proceeding, Ronald proposed to meet his obligation to support Joan by (1) paying alimony of $2,500 per month for 10 years, and (2) using certain proceeds from the proposed sale of the marital home to buy an annuity which would provide Joan with an income of $35,448 per year for the 10 years after the end of the alimony payments. Ronald asserted that $10,000 per year of the annuity payments would be a tax-free return of capital. Ronald proposed that the $2,500 per month support payments "shall cease upon the death of either party or Joan Prater's remarriage or cohabitation."
Joan acknowledged the difficulty of setting a value for the Binger lease, and proposed "that the only fair and equitable way of handling the situation is to order that the oil and gas production be sold and the net proceeds be equally divided." She proposed that, until the Binger lease was sold, either (1) Ronald continue to pay certain bills and also pay temporary alimony of $3,000 per month, or (2) Ronald not pay those bills but pay temporary alimony of $11,000 per month.
On March 11, 1983, divorce counsel for Joan and Ronald orally argued their analyses of the evidence, and presented and supported their respective proposals. During the course of the presentation, Ronald's divorce counsel described the Binger lease as "simply a business situation in which Joan has an interest, as any other investor would." Ronald's divorce counsel argued for Ronald's retention of the Binger lease and focused on the alimony-annuity-sale-of-family-home approach. Joan's divorce counsel rejected alimony and focused on alternatives as to the Binger lease, as follows:
Now, Your Honor, we really don't need to worry about alimony in this case. There's sufficient property to divide up between parties. And by that I'm talking about the oil and gas.
The response of the Kansas court judge, rejecting both Joan's recommendations and Ronald's recommendations, was as follows:
I can tell you right now the Binger lease is not going to be sold, and I'm not going to order somebody to buy annuities for somebody. What they get is going to come out of what's here, and they do with it as they wish. I also am going to say this before I recess: Somebody has to be absolutely wrong in the valuation of this oil lease when somebody puts it at three hundred and fifty-one or three hundred twenty-four thousand dollars and somebody else puts it at a real good sale at one million seven hundred and some thousand. Now, if you're really trying to get at what the value of something is, you're not going to miss it that much, folks, if either one of you is being honest or if you both are being honest or both know what you're doing. The only other conclusion that the Court can say is somebody is either wrong intentionally or somebody doesn't know what the thunder they're doing. That just comes down to that thing now because one of these things doubles the value and then leaves a million dollars in question, or one of them—On the other hand, one of them says it is half of what it should be, and then there's a million dollars in question. And if those experts couldn't get to it, gentlemen, sure puts me out on a limb with a dozen termites working on the limb at the base of the tree, doesn't it? Court's going to take a short recess. Then we'll come back and we will settle it, if you haven't.
On March 25, 1983, the Kansas court issued a memorandum, or letter ruling, announcing the decision in the divorce proceeding. The ruling does not refer to alimony, does not value the Binger lease, awards the Binger lease to Ronald, and orders Ronald to pay to Joan The ruling does not refer to the contingencies of Joan s remarriage or cohabitation, or Ronald's death.
Over the next 3 months, divorce counsel for Joan and Ronald tried to agree on the details of a journal entry, but did not succeed in doing so.
On June 8, 1983, Ronald's divorce counsel wrote a letter to the Kansas court (copy to Joan's divorce counsel), which stated in pertinent part as follows:
2) Termination of Alimony. We still believe that the alimony should be terminable upon the death, remarriage, or cohabitation of Joan Prater. This is the usual language employed by most courts. Only in unusual circumstances, not present here, does alimony continue in the event of death, remarriage, or cohabitation by the recipient. Furthermore, the [sic] Joan Prater will receive, upon Plaintiff's [Ronald's] death, an immediate tax-free lump-sum payment of $300,000.00 or, if the death is accidental, $600,000.00. Finally, the continuation of alimony despite these three events obviously has characteristics of a property settlement and therefore there could be tax disadvantages to the plaintiff about which the court has already expressed disapproval and has no desire to impose these severe tax consequences on Plaintiff.
A hearing was held on June 28, 1983, at which the Kansas court ruled that Joan would receive 33 percent of the gross income from the Binger lease for the next 121 months, and would have to pay her proportionate share of the lease expenses. The Kansas court ruled that the payments from the Binger lease would not stop upon Joan's remarriage or cohabitation, but would stop if production from the Binger lease is terminated for good cause. The Kansas court also ruled that if the Binger lease is sold or assigned, then Joan would receive 33 percent of the proceeds and pay her share of expenses in connection with the sale or assignment.
Petitioners were divorced by a Journal Entry divorce decree (hereinafter sometimes referred to as the Journal Entry of Divorce). The Journal Entry of Divorce, which was dated June 28, 1983, but was filed on July 28, 1983, was drafted by Ronald's divorce counsel, and was not signed by Joan or her divorce counsel.
The Journal Entry of Divorce awards marital property and liabilities as shown in table 1.
Category Joan Ronald
Assets with values $653,988 $716,764
specified in
Journal Entry
of Divorce
Liabilities with (157,732) (289,086)
values specified
in Journal Entry
of Divorce
Items which bank accounts bank accounts
are awarded, 1978 Mercedes-Benz, 1977 Lincoln
but the values Personal speed boat
of which are Property house boat
not specified in in her residence personal property
Journal Entry except in his residence
of Divorce for certain certain personal
items property
in her residence
In addition, Ronald received the Binger lease, which the Kansas court did not value.
The Journal Entry of Divorce provides, under the heading Method of Alimony Payment, that Ronald is to pay to Joan "as alimony and support an amount equal to 33.0% of...
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