Yonadi v. C.I.R.
| Decision Date | 14 April 1994 |
| Docket Number | Nos. 93-7353,No. 93-7353,No. 93-7354,93-7353,93-7354,s. 93-7353 |
| Citation | 21 F.3d 1292 |
| Parties | -1713, 62 USLW 2687, 94-1 USTC P 50,183 Vincent YONADI and Nancy Yonadi, Appellants, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Mollie E. YONADI, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Appellant, Vincent Yonadi and Nancy Yonadi (Appellants in), Commissioner of Internal Revenue Service (Appellant in). & 93-7354. |
| Court | U.S. Court of Appeals — Third Circuit |
Andrew P. Fradkin (argued), Bruce E. Goldman, Goldman, Jacobson, Kramer Fradkin & Starr, P.C., Roseland, NJ, for appellants Vincent and Nancy Yonadi.
Mollie E. Yonadi, appellee, no appearance.
Gary R. Allen, David English Carmack (argued), Janice B. Geier, Dept. of Justice, Tax Div., Washington, DC, for C.I.R.
Before: STAPLETON, COWEN and ALITO, Circuit Judges.
Vincent Yonadi (Vincent) and Nancy Yonadi appeal from a United States Tax Court order determining a deficiency in their federal income tax due for 1986. The Tax Court held that Vincent was liable for the capital gains tax attributable to the portion of the sale proceeds of certain appreciated assets distributed to his former wife, Mollie E. Yonadi (Mollie), pursuant to a divorce settlement agreement entered under New Jersey state law. The Commissioner of Internal Revenue (Commissioner) appeals from a separate order of the Tax Court holding that Mollie was not liable for the tax. A stakeholder entitled to tax from either Vincent or Mollie, the Commissioner asks us to affirm both or reverse both orders. We conclude that Mollie received an ownership interest in the appreciated assets upon her divorce. She therefore must pay taxes on the appreciation realized. We will reverse both orders.
For thirty-eight years Vincent and Mollie were husband and wife. That long union came to an end on March 19, 1982, when the Superior Court of New Jersey entered a judgment of divorce (the judgment). Incident to the divorce, Vincent and Mollie divided their marital property pursuant to an agreement between them. This agreement was incorporated as part of the judgment. At issue in this case are the tax consequences of the division and subsequent sale of the ownership of VAY, Inc. (VAY) and a sole proprietorship doing business as Vincent A. Yonadi (together the "VAY assets").
VAY was formed in 1970 by Vincent as a New Jersey corporation. The stock had a basis of $300,000. Shortly afterwards VAY bought land and certain buildings in Neptune, New Jersey and improved the property into a thriving country club, commonly known as Jumping Brook Country Club and Restaurant. Vincent also formed a sole proprietorship doing business as Vincent A. Yonadi to operate the restaurant and golf course on the VAY property. The judgment dividing the marital property provided, in part:
3. The plaintiff [Mollie] shall also receive a one-third interest in VAY, Inc., which is a corporation of the State of New Jersey which holds land commonly known as Jumping Brook Country Club and Restaurant. This land also includes the buildings and improvements thereon. The plaintiff shall also receive a one-third interest in the business operation of the sole proprietorship known as Vincent J. Yonadi.... The interest will be a non-management interest and is solely held for the purposes of receiving the plaintiff's one-third interest at the time the property may be sold.
4. The property shall be sold at the discretion of the defendant [Vincent] so long as he is [in] active management of that place. In the event the defendant at any time is not [in] active management then a sale shall take place. The defendant, prior to any sale and during the time that he is in active management, may receive all of the funds from the operation of Jumping Brook Country [Club] and VAY, Inc., respectively. He shall be responsible, however, to pay all expenses in connection with the sole proprietorship and the aforesaid corporation. Said expenses would include all incidental expenses in connection with the operation of the two business including mortgage, taxes, principal, utilities, repairs and maintenance. The defendant shall indemnify and hold the plaintiff harmless from any obligations in the operation of [the VAY assets].
5. In the event that Jumping Brook Country Club and/or the corporation shall be sold, the plaintiff shall receive one-third of the net selling price less the sum of $500,000.00....
. . . . .
7. The defendant shall not further encumber the premises without the consent of the plaintiff which consent shall not be unreasonably withheld.
Vincent was anxious to retain control over the country club, while Mollie was eager to ensure that she would receive a "legal interest." At the hearing on the entry of the judgment, the following colloquy took place:
MR. DONAHUE [counsel for Vincent]: ... Just a few matters by way of clarification. I don't believe I have any more additions[.] The one-third ownership that Mrs. Yonadi will have is not an active ownership. The ownership takes effect in essence upon the sale of the property when she receives her interest in it. Mr. Yonadi will operate the business without any interference from Mrs. Yonadi until such time as a sale occurs, or he no longer is involved in it.
THE COURT: I guess what you are really saying, she has a one-third beneficial interest at the time that the property is sold. Is that right, Mr. Abrams?
MR. ABRAMS [counsel for Mollie]: I thought it was going to be a legal interest.
Not satisfied with this, Mollie subsequently filed a post-judgment motion in May 1982 to request that (1) one-third of the VAY stock be transferred to her, and (2) Vincent execute partnership papers in respect of the sole proprietorship making Mollie a one-third partner in that business. The reason she gave was that under the agreement she would receive a "legal interest." The court denied her motion but permitted her to record the judgment with any and all deeds on the property to protect her interest in the VAY assets. The court ordered Vincent to notify Mollie at least 60 days in advance of any intention to transfer or dissolve either VAY, Inc. or the sole proprietorship, and to hold the proceeds from any such transfer or dissolution for a minimum of 30 days after their receipt.
In 1986 Vincent effected a sale of all the assets of VAY and the sole proprietorship for a total of $6,200,000, realizing a substantial amount of capital gain. Vincent and Mollie disagreed as to who should pay the capital gains tax on the gain attributable to Mollie's one-third interest in the sale proceeds. They attempted in vain to resolve the dispute. The last dollar of the sale proceeds was distributed pursuant to the judgment of divorce on April 8, 1988, without an agreement as to who would pay the capital gains tax at issue. None of the New Jersey state court orders specified whose responsibility it was to pay the capital gains tax on the appreciation in Mollie's one-third interest in the VAY assets upon liquidation. In their federal tax returns, neither Vincent nor Mollie reported the capital gain in dispute, each with a view that it was the responsibility of the other.
The Tax Court held that Mollie did not receive an ownership interest in the VAY assets and was not liable for the capital gains tax attributable to her interest. Yonadi v. Commissioner, 64 T.C.M. (CCH) 1052, 1054 (1992). The Tax Court appeared to characterize Mollie's interest as an "award of a payment of money contingent as to time and amount." Id. at 1055. According to the Tax Court, the statements made on behalf of Mollie regarding her "legal interest" during the hearing on the entry of the judgment of divorce did nothing more than "encompass[ ] an interest in the nature of collateral security for Vincent's promise of future payment." Id. at 1056. Characterizing Mollie's interest as a non-ownership interest, the Tax Court ruled that Vincent must pay capital gains tax on all the appreciation in the VAY assets, although he received only two-thirds of the sale proceeds before tax pursuant to the judgment of divorce. These consolidated appeals followed. The Tax Court had jurisdiction pursuant to Secs. 6213, 6214 and 7422 of the Internal Revenue Code (I.R.C.). We have appellate jurisdiction pursuant to I.R.C. Sec. 7482.
Individuals are taxed on "all income from whatever source derived." I.R.C. Sec. 61(a). Dealings in property qualify as "whatever source" and gains realized from such dealings certainly constitute "income." Id. Secs. 61(a)(3), 1001(a), (b), (c). Accordingly, there is no dispute that either Vincent or Mollie is liable for the capital gains tax attributable to Mollie's one-third interest in the VAY assets. The dispute is which of the two must pay the capital gains tax. As the owner reaps the gain and shoulders the loss from a sale or exchange of property, the resolution of this question turns on whether, for federal income tax purposes, Vincent or Mollie was the true owner of Mollie's one-third interest in the VAY assets. If we conclude that Mollie's interest was an ownership interest, a second question to be decided is whether the basis for her interest is the market value of her interest at the time of divorce in 1982 or the adjusted basis for her interest.
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