Taurog v. Comm'r of Internal Revenue
| Decision Date | 14 December 1948 |
| Docket Number | Docket No. 11429. |
| Citation | 11 T.C. 1016 |
| Parties | NORMAN TAUROG, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A husband and wife contemplating divorce and desirous of settling their property rights without resort to a court for that purpose, divided California community property by an instrument conveying to each his interest therein. The instrument was to be delivered upon divorce and was delivered immediately after divorce. It separately provided for the maintenance and support of the wife. The divorce decree specifically adopted and made a part thereof the agreed provisions dividing the community property and directed that ‘The plaintiff and defendant are hereby ordered and required to perform all of the obligations of said agreement.‘ Held, the transfer thus effected to the wife of one-half interest in the community property was not a gift by the husband under sections 1000(d) and 1002 of the Internal Revenue Code. J. Everett Blum, Esq., for the petitioner.
A. J. Hurley, Esq., for the respondent.
The Commissioner has determined a deficiency in petitioner's gift tax for the calendar year 1943 in the amount of $14,560.69. The deficiency results from an addition to the amount reported on petitioner's gift tax return of ‘Additional item A— $118,181.52.‘ The Commissioner in his deficiency notice explained the addition of this item as follows:
Additional item A represents the value of the property which the donor transferred to Julie C. Taurog pursuant to a pre-divorce property settlement dated October 5, 1943. It appears that the transfer was not made for a full and adequate consideration in money or money's worth and that it, therefore, is includible in gifts.
The petitioner by appropriate assignments of error contests this determination of the Commissioner.
Most of the facts have been stipulated, and we adopt the stipulated facts as part of our findings of fact. Any of the facts hereinafter recited which are not contained in the stipulation are found from the oral testimony.
Petitioner is a resident of California and the gift tax return for the taxable year was filed with the collector at Los Angeles.
The petitioner and Julie C. Taurog were married in California in 1925. Their daughter Patricia, born in 1932, was the sole issue of the marriage. Petitioner and his wife separated about November 1, 1941, lived separately until about February 11, 1942, then resumed marital relations, and again separated about July 1, 1943, and ever since have lived separately. They both employed attorneys, both after the first separation and after the second, in connection with their marital troubles, the wife's attorney being employed to represent her in the negotiation for a settlement of her right to support and maintenance and her property rights in the community property, all of which was acquired subsequent to July 19, 1927. The community property had a fair market value on October 5, 1943, of $236,363.04.
About August 20, 1943, the wife filed a divorce action in the State of Nevada and the husband employed an attorney there to represent him in the action. There was strong adverse feeling between the husband and wife, requiring intercession of counsel, and, after prolonged negotiations carried on exclusively between counsel, the husband and wife executed an instrument which was dated October 5, 1943. Thereby the community property was divided as near equally as reasonably possible, each taking one-half as separate property. The instrument was signed by the parties about August 15 to 20, 1943, with the agreement that there was to be no delivery to either party until the divorce decree was obtained. On October 5, 1943, the wife's action for divorce was heard and a judgment and decree of absolute divorce was granted to her against the petitioner. The ground for divorce does not appear in the record herein. After the divorce, petitioner and his former wife each received one-half of the community property, each receiving property of a value of $118,181.52. The petitioner agreed to the division of community property, among other reasons, because he was advised by his attorney that if he went into court with respect to such division the court could give one-half of it to his wife.
The instrument dividing the community property provided, in pertinent part, as follows: That the parties were desirous of fully determining and settling their property rights, and all other matters by agreement and without resort to court for that purpose; That the agreement was freely and voluntarily entered into by both; that each ‘hereby sells, assigns, grants, transfers and conveys‘ to the other as separate property ‘all his (her) right, title and interest‘ in the community property, list of which was attached; that (paragraph 7) the husband should pay the wife as and for her future support and maintenance, until her death or remarriage, $24,000 for the first year and $20,000 per annum thereafter until his death (with possible reduction if she allowed her insurance to lapse, but not less than $18,000); with provision for proportionate increase or reduction as his net income compared with that for 1942, or in case of change after December 31, 1943, in tax rate, allowable deductions, exemptions or credits, in Federal income taxes, or change in his salary above or below the amount thereof on October 5, 1943; that the husband would keep and furnish the wife, under oath, a written record of his income; that the wife should support, educate and maintain the daughter, of whom she should have custody, with certain rights of visitation and temporary custody in the husband; that he would assign to her certain insurance policies and she ‘hereby assigns, relinquishes, waives, quitclaims and transfers‘ to him any claim to certain other policies; and ‘hereby waives, quitclaims, transfers and vests‘ in him still other policies, that each agreed to execute all papers and documents required by the insurance companies, that the wife ‘hereby relinquishes, releases and quitclaims all her right, title and interest in and to any property‘ that the husband might thereafter acquire and any claim or obligation with respect to property, maintenance, or support, other than as provided, and to any claim to his estate, or to any family allowance; that ‘The Husband hereby relinquishes, releases and quitclaims all his rights, title and interest in and to any property‘ that his wife had or might thereafter acquire, other than as in the agreement provided, and any claim or obligation wtih respect to property, maintenance, or support which he might have or assert against the wife, and all right to her estate or any part thereof, or to seek any family allowance; that ‘This agreement * * * shall constitute a final settlement, adjustment and division of the property and financial matters of said parties‘; that each released and discharged the other from all existing debts and obligations, other than as in the agreement provided, and agreed to contract no debts or obligations in the name of the other; that (paragraph 16) ‘In the event that the bonds of matrimony * * * shall be dissolved and a decree of divorce granted in favor of either party‘ each waived and released any right to alimony or for support and maintenance (except that the husband was not released from agreement to pay the wife the sums in the instrument agreed upon); that ‘Such decree of divorce, if any may incorporate this agreement or any decree or court order based hereon, as a part thereof‘; that each ‘shall be given immediate and exclusive possession and control of any and all property owned by them respectively, or hereby agreed to be given to them respectively‘; and that each would execute all instruments required for the purpose of giving full effect to the agreement.
The decree of divorce, after dissolving the bonds of matrimony, recited further, in pertinent part:
IT IS FURTHER ORDERED, ADJUDGED and DECREED that all matters concerning property and the support and maintenance of the plaintiff and the care, custody, control and support of the minor child, to-wit: PATRICIA ANN TAUROG be, and they hereby are settled in accordance with the terms and provisions of the agreement in writing made and entered into by the plaintiff and defendant on October 5th, 1943, a copy of which is now in evidence as plaintiff's Exhibit ‘A‘ and which is hereby expressly referred to and made a part hereof; and the said agreement, in all respects, is hereby approved and adopted in full by the Court and is hereby merged into and made a part of this decree by reference as completely as if herein set forth in full. The plaintiff and defendant herein are hereby ordered and required to perform all of the obligations of said agreement and the defendant is specifically directed to perform and comply with all of the terms and conditions of Paragraph 7 of said agreement.
At the time of trial herein, the parties were in litigation over the custody of the child.
The petitioner filed a gift tax return for the year 1943, reporting gifts to his daughter and containing a statement with reference to the property settlement with his wife, as follows:
A property settlement agreement was entered into on the 5th day of October 1943 by and between Norman Taurog and Julie Taurog, husband and wife, respectively, by which a division of their community property was made. Inasmuch as there was no donative intent present in making said division of community property, but said division of property resulted from the separation of the parties which terminated in divorce, the provisions of Regulations 108, section 86.2(c) are not deemed to be applicable.
The Commissioner, in support of his determination that petitioner made a gift of $118,181.52 to his wife when in 1943 he agreed to an equal division of community property with her, attendant...
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