Walker v. Commissioner
| Citation | 86 T.C.M. 683 |
| Decision Date | 08 December 2003 |
| Docket Number | Docket No. 13842-02. |
| Parties | Claudia F. Walker v. Commissioner. |
| Court | U.S. Tax Court |
J. Scott Moede and Jan R. Pierce, for the petitioner.
Shirley M. Francis, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies of $9,104 and $32,949 in petitioner's Federal income taxes for 1997 and 1998, respectively, and penalties of $1,821 and $6,590 under section 6662(b)(1) or, in the alternative, section 6662(b)(2), for those years, respectively. The issues for decision are: (1) Whether petitioner reported the correct amount of gain resulting from the sale of her interest in a parcel of property deeded to petitioner by her former (now deceased) husband, Bert Walker (Mr. Walker), on her 1997 and 1998 Federal income tax returns and (2) whether petitioner is liable for accuracy-related penalties under section 6662(a) for 1997 and 1998.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. At the time the petition in this case was filed, petitioner resided in Clackamas, Oregon.
Petitioner and Mr. Walker were married on July 16, 1966. Prior to their marriage, petitioner had worked in several factories and had obtained a high school equivalent education. During their marriage, petitioner did not work outside the home. Mr. Walker worked as a realtor, property developer, and home builder. Petitioner and Mr. Walker divorced effective December 20, 1996.
At the time of their divorce, petitioner's and Mr. Walker's marital estate was worth several million dollars. Included in the marital estate was a piece of real property (Happy Valley property) located next to petitioner's and Mr. Walker's home in Clackamas County, Oregon, in which petitioner and Mr. Walker jointly owned a 50-percent interest. The other 50-percent interest in the Happy Valley property had been conveyed to a trust for the benefit of petitioner and Mr. Walker's children and grandchildren (Walker Family Irrevocable Trust).
The marital settlement agreement that was entered into by petitioner and Mr. Walker severed their joint ownership in the Happy Valley property and conveyed separate 25-percent interests to each of them. In accordance with the terms of the marital settlement agreement and pursuant to a bargain and sale deed signed and dated by petitioner and notarized on October 10, 1996, and signed and dated by Mr. Walker and notarized on October 17, 1996, petitioner and Mr. Walker, as grantors, conveyed to petitioner, as grantee, one-half of their previously jointly owned 50-percent interest in the Happy Valley property. The stated consideration for this conveyance was the Stipulated Judgment of Dissolution of Marriage (divorce decree) entered in Clackamas County (Oregon) Circuit Court Case No. 96 04 504, Walker v. Walker. Neither the marital settlement agreement nor the divorce decree addressed the sale of the Happy Valley property.
In addition to providing to petitioner and Mr. Walker separate 25-percent interests in the Happy Valley property, the marital settlement agreement divided the rest of their real property and their personal property, contained a provision for an equalizing money judgment that required Mr. Walker to pay to petitioner $500,000, and required Mr. Walker to pay to petitioner spousal support in the amount of $4,000 per month until he satisfied the equalizing money judgment. The equalizing money judgment provided that Petitioner's equalizing money judgment against Mr. Walker was secured by a note and a trust deed on several pieces of real property that were conveyed to Mr. Walker pursuant to the marital settlement agreement, including his 25-percent interest in the Happy Valley property. The equalizing money judgment was entered against Mr. Walker on November 20, 1996.
On April 21, 1997, petitioner's divorce attorney, Raymond Young (Young), wrote a letter to Gary Leavitt (Leavitt), an accountant in Oregon City, Oregon, requesting advice on a possible transaction involving petitioner, Mr. Walker, and the Happy Valley property. The pertinent parts of Young's letter to Leavitt are as follows:
I am writing this letter on behalf of my client, Claudia Walker, who has a significant post-decree tax question. * * *
In the divorce decree from Clackamas County in November 1996, Ms. Walker was awarded a $500,000 judgment against Mr. Walker. The judgment is due one year from the date of the judgment. As long as it is paid when due, no interest will accrue on the judgment. * * *
Five months later, Mr. Walker is running into financial difficulties and two of the properties, an apartment complex and some bare land, are in the process of being sold. * * * In regards to the bare land, Mr. Walker holds a one-quarter interest in the property with Mrs. Walker holding another one-quarter interest in the property. After that sale is made, Mr. Walker's one-quarter interest should net him about $200,000 from the sale.
The big question is, should Mr. Walker Quitclaim his * * * one-quarter interest in the bare land to Ms. Walker prior to the sale with a simple notation on the Quitclaim Deed that the consideration is a credit against the judgment owed to her for whatever amount she receives from the sale, who is responsible for the capital gains on Mr. Walker's portion? Essentially, it boils down to if Mr. Walker transfers his interest in the real property to Mrs. Walker, is it a taxable event for him, which requires him to declare the capital gains, or whether the capital gains responsibility and the basis carries over to Mrs. Walker so she has to pay capital gains on the proceeds of the sale herself.
Young sent a copy of this letter to petitioner, and she reviewed it.
On April 29, 1997, Young faxed the letter that he had sent to Leavitt to Kelly Coburn (Coburn), petitioner's accountant, seeking Coburn's views on the tax consequences for the facts stated in the letter to Leavitt. Petitioner and Mr. Walker had been clients of Coburn's firm for many years, and Coburn continued to prepare their individual tax returns after their divorce. On May 1, 1997, Coburn wrote a response to Young. The pertinent parts of Coburn's response are as follows:
I received your fax of a letter you sent to Gary Leavitt regarding a possible transfer of properties from Bert to Claudia prior to their sale. If the transfers occur within one year of the divorce, it is clear that Internal Revenue Code Section 1041 would apply. No gain or loss would be reported by Bert Walker, and Claudia Walker would take his basis in the property as her own. Therefore, she would be responsible for any income taxes due on a subsequent sale. [Emphasis added.]
There are a couple of alternatives that could be considered. First, since Claudia will probably have little other income in 1997, she may be in a lower tax bracket than Bert and thus would pay less income tax on the gains than Bert would. If Claudia were to accept an assignment of the properties, Bert could perhaps agree to reimburse her for the income tax due on the gains.
Or, since Claudia holds trust deeds on these properties, it should be possible for the escrow instructions to provide for a payment of some or all of the proceeds from the sales, even though Bert would be the seller. In that case, Bert would remain responsible for the income taxes on any gain. If this were done, Bert may wish to retain a portion of the proceeds, in order to pay the income taxes on the gains.
Coburn sent copies of his response to Young's letter to both petitioner and Mr. Walker, and petitioner reviewed her copy of his response.
The Happy Valley property was listed for sale with a realtor sometime during 1997. Mr. Walker served as the primary contact person for the realtor on the sale of the Happy Valley property. On or about August 19, 1997, a prospective purchaser, Cruz Development, Inc. (Cruz Development), offered to buy the Happy Valley property. Cruz Development was not related to petitioner or to Mr. Walker, and neither petitioner nor Mr. Walker had any legal obligations to Cruz Development. Cruz Development's offer to buy the Happy Valley property was based on obtaining approval for 48 buildable lots on the property at a price of $20,000 per lot. The sale of the Happy Valley property to Cruz Development, however, was not completed.
On September 22, 1997, petitioner signed a document entitled "Settlement Agreement" whereby she agreed to accept Mr. Walker's 25-percent interest in the Happy Valley property in consideration for a credit against the $500,000 equalizing money judgment. The Settlement Agreement used the following language:
I Claudia F. Walker hereby agree to accept from Bert Walker his 25% interest in real property Tl. 2000 and Tl.2090 — Happy Valley, Oregon.
This assignment will credit Bert Walker his 1/4 interest being approximately $213,500 less approximately $60,000 Capital Gains Tax; leaving $153,500 credit towards the divorce settlement.
This calculation is based on 44 future building lots; the settlement amount may be adjusted up or down by $20,833,-per lot after subdivision approval. Claudia Walker agrees to pay deferred property taxes on hers and Bert's share.
The Settlement Agreement was also signed by Mr....
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