Westbrook v. Comm'r of Internal Revenue
| Decision Date | 23 September 1980 |
| Docket Number | Docket No. 618-79. |
| Citation | 74 T.C. 1357 |
| Parties | YVONNE WESTBROOK (NOW YVONNE WESTBROOK MACIEL), PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Under a settlement agreement incident to a divorce, petitioner W received monthly child support and alimony, property, and a $100,000 fixed principal sum to be paid in 11 annual installments. Held, W proved that, under California law, a substantial part of her husband's interest in a partnership was community property which she relinquished in the settlement agreement. Held, further, the installment payments W received on the $100,000 principal sum were part of a division of community property and were not taxable to petitioner as alimony under sec. 71, I.R.C. 1954. Philip M. Schafer, for the petitioner.
Barbara Leonard, for the respondent.
The respondent determined a deficiency of $3,579 in petitioner's Federal income tax for 1975. The only issue presented is whether a payment received by petitioner under a 1974 separation agreement constitutes taxable alimony under section 71.1
Some of the facts were stipulated and are found accordingly.
At the time she filed her petition in this case, petitioner Yvonne Westbrook, now Yvonne Westbrook Maciel (hereinafter petitioner), was a resident of Crescent City, Calif.
Petitioner married Robert Westbrook (hereinafter Robert) in 1955 at the age of 18. Throughout their marriage, the couple lived in Smith River, Calif., in the northernmost part of the State. They had four children, born between 1956 and 1961. Petitioner and Robert separated and were divorced in 1974.
The couple's financial status was initially based upon Robert's inheritance from his father. During the year prior to his marriage to petitioner, Robert inherited one-half of his father's 40-percent interest in a partnership called Reservation Ranch, plus stocks, bonds, and other property. The total after-tax value of Robert's inheritance was $79,251. Robert's brother, Henry, inherited the other half of their father's interest in Reservation Ranch; each brother's 20-percent share was then worth $50,570.
Petitioner was never informed about the financial details of her husband's business and was always excluded from such knowledge. Although Robert testified in this case, he was unable to provide exact figures about the size or growth of his wealth or business interests during his marriage to petitioner. Consequently, the full value of his holdings in Reservation Ranch at the time of the divorce can only be estimated.
When petitioner and Robert were married in 1955, Reservation Ranch had a net value of approximately $250,000. The company's office took up one room of Robert and Henry's mother's house and was staffed by their mother and one other lady. By 1974, Reservation Ranch employed between 150 to 200 people, had a main office with a staff of at least 6, including a full-time CPA and other accountants, and had several other offices for the business's various divisions and affiliates, each with its own full-time staff. In February 1980, when this case was tried, Robert estimated the current annual gross income of Reservation Ranch and its affiliates to be approximately $80 million. However, Robert guessed that the business's 1974 gross income was only 10 percent or less of the 1979-80 figure. Robert attributed this 10-fold or larger growth in income over the 5-year period following the divorce to his brother's skill in managing timber operations. At trial, Robert was unable to remember the amount of his 1974 net worth or income, or Reservation Ranch's income or worth for 1974.
Robert and Henry managed Reservation Ranch as equal partners. The record does not disclose whether the 60-percent interest in the ranch not held by their father at his death was already owned by the brothers, was later acquired by them, or continued to be held by third parties. Each of the brothers was responsible for one or more divisions or affiliates of Reservation Ranch, which may or may not have been separate legal entities. Henry managed the ranch, itself, and later, the logging part of the business. Robert managed a number of other projects. All of the various affiliates of the business will be treated herein as component parts of “Reservation Ranch.”
The first affiliate Robert managed was called Countrymaid Dairy. Organized as a marketing division of Reservation Ranch, Countrymaid Dairy distributed the ranch's dairy products. Robert oversaw all of the dairy's day-to-day operations and controlled its finances. Although Countrymaid Dairy more than doubled in size and continued to be run as a full-scale operating division of the business throughout Robert's marriage to petitioner, Robert testified that the dairy had never “turned” a profit and did not increase in value during the marriage.
In the mid-sixties, Robert turned his attentions to a small fishing resort located at the mouth of the Smith River called Ship Ashore. A manager was hired for Countrymaid Dairy. Ship Ashore was named for a large ship that had been pulled up on shore and that contained a gift shop. The business was purchased by Reservation Ranch for approximately $200,000, and an additional $500,000 to $1 million was invested in expanding the project. A 30-room motel was added, the restaurant was completely remodeled, and the boat dock and trailer park were improved. Ship Ashore had trailer park facilities for 50 to 60 permanent mobile homes and 50 to 60 travel spaces. Robert testified that Ship Ashore was also not profitable, although it continued to be operated as a going concern.
Other enterprises of Reservation Ranch that had not turned out to be profitable were discontinued. These included a homebuilding business, which marketed prefabricated houses, and a bulb farming business, which at one time was a leading national distributor.
At some point during petitioner's marriage, Robert's brother, Henry, turned his attention to the timber business. Reservation Ranch's logging operations were carried on throughout Oregon as well as in northern California. Although petitioner could not put a dollar value on the logging business, she knew it was doing very well, with foreign and domestic sales, a 20- to 30-truck fleet of new equipment, a company helicopter, and the logging business's separate offices.
During the marriage, Reservation Ranch was able to acquire numerous other properties in northern California. The Lehman Ranch was purchased for approximately $200,000, the Mello Ranch for approximately $180,000, and the McNamara Ranch for a total of $300,000 under a lease-purchase agreement.
Nearly all of the wealth Robert acquired was kept inside the Reservation Ranch partnership. According to the separation agreement petitioner and Robert executed in 1974, the only assets the couple owned besides their clothes and furniture were 100 shares of Gulf Oil stock worth about $2,250, a savings account containing $450, and certificates of deposit worth approximately $9,000. They did not own the house they lived in or the car petitioner used as her own; presumably these were the property of Reservation Ranch. They lived modestly. For household expenses, Robert gave petitioner his “paycheck,” which at first was $600 a month and in the last 2 years of the marriage was increased to $1,200 a month. What Robert described in testimony as his “paycheck” was in fact an even dollar amount of partnership draw and did not represent a salary or other form of compensation paid by Reservation Ranch.
When the couple decided to separate, Robert Dedekam (hereinafter Dedekam) acted as attorney for both petitioner and Robert. Petitioner chose Dedekam because she trusted him more than the other attorneys she knew, all of whom worked for Reservation Ranch on a regular basis. However, Dedekam had also done some work for Robert and had been a friend of Robert's since the two attended private school together during childhood. Robert and Dedekam occasionally went duck hunting together, and they kept in touch socially. Dedekam explained to petitioner that either she or Robert would need separate counsel if disagreements arose between them about reaching a settlement. However, Dedekam continued to represent them both during negotiations even after petitioner rejected Robert's first offer out of hand. At the time of the trial in this case, petitioner was suing Dedekam in the California courts alleging that he failed to represent petitioner adequately during the settlement and divorce because of an improper conflict of interest.
In the settlement agreement executed March 1, 1974, which Dedekam negotiated for both parties, it was agreed that petitioner would receive $600 per month as alimony and $600 per month as child support. With respect to community property, petitioner received approximately $11,700 in stocks and bank obligations, her clothes and all the home furnishings, and the car she drove (“which vehicle is presently not owned by the couple”). Robert received his clothing and personal effects plus “Any possible community interest that Husband might have in a certain partnership known as Reservation Ranch, Countrymaid Dairy, Ship Ashore, and all of their affiliated and related organizations, whether corporate, partnerships, or otherwise.” The effect of the agreement was that petitioner turned over to Robert her entire “possible” community property rights in Robert's share of Reservation Ranch in return for a car, her home furnishings, and $11,700.
The parties also agreed that petitioner would receive $100,000 in installments. Robert originally offered her $35,000, whereupon petitioner completely lost her self-control and demanded at least $100,000. She felt that the wealth of the family was obvious, that $35,000 was grossly unfair. Robert acquiesced without making a counteroffer. The agreement provided:
With respect to support for the Wife, Husband agrees that h...
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