Friscone v. Commissioner

T.C. Memo. 1996-193

UNITED STATES TAX COURT

EUGENE K. FRISCONE AND NICOLE FRISCONE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7412-94. Filed April 22, 1996.

Kenneth J. Freeman, for petitioners.

Jeffry J. Erney, for respondent.

MEMORANDUM OPINION

RAUM, Judge: The Commissioner determined deficiencies in

petitioners' 1990 and 1991 income taxes, pursuant to sections

61(a)(3) and 1001(a),1 in the amounts of $10,307 and $1,817,

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 2 -

respectively. The principal issue is whether, following an

agreement between husband and wife incorporated in a divorce

decree, the gain on the subsequent sale of certain stock

theretofore owned by the husband is to be attributed solely to

him or only that portion awarded to him by the divorce decree.

We hold that, in the circumstances of this case, he is chargeable

only with that portion.

Eugene K. and Nicole Friscone, petitioners, resided in

Strongsville, Ohio, at the time their petition in this case was

filed. Prior to his marriage to Nicole, Eugene (hereinafter

sometimes referred to as petitioner) was married to Linda

Friscone. On November 17, 1988, Eugene and Linda Friscone

entered into an Agreed Judgment Entry of Divorce. Eugene was the

plaintiff in the divorce proceedings. The defendant Linda filed

a counterclaim, and the plaintiff withdrew his complaint. The

litigation proceeded with Linda as the moving party,

notwithstanding that she continued to be referred to as the

defendant and Eugene as the plaintiff.

Both husband and wife were represented by counsel, and the

parties entered into an in-court agreement that was adopted by

the court and set forth in the divorce decree. The divorce

decree found that the "principal remaining assets of the

marriage" consisted of the husband's 50-percent interest in

Maintenance Unlimited, Inc. (MUI), evidenced by his ownership of

150 shares of its stock, and a 25-percent interest in two car
 - 3 -

washes, one a corporation and the other a partnership.2 The

remaining 150 shares of MUI were owned by Eugene's brother

Joseph. It would appear from the record that Eugene and Joseph

had come to a parting of the ways. Both Joseph and MUI were made

parties defendant in the divorce litigation.

The decree found that on or about February 14, 1985, Eugene

and his brother Joseph "entered into a Buy-Sell Agreement with

respect to Plaintiff's [Eugene's] shares of stock in Defendant

Maintenance Unlimited, Inc." The decree further found that

Eugene's employment with MUI was terminated on August 8, 1986,

and that since that time he "has been unable to negotiate a

satisfactory resolution of the sale or redemption" of that

business interest. The decree then granted the divorce, and

provided for the "division of property" of the "principal

remaining assets of the marriage" as follows:

The Court further finds that the principal
remaining assets of the marriage consist of Plaintiff's
business interests in Defendant Maintenance Unlimited,
Inc., of which Plaintiff owns fifty percent (50%) of
the issued and outstanding stock, and [the two car
washes] * * *.

* * * * * * *

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that
Plaintiff [Eugene Friscone] is hereby awarded, as
division of property, the following assets:

2
The car washes appear to be of relatively minor importance
here, and nothing in controversy is concerned with them in this
case. Both were parties defendant in the divorce proceedings.
 - 4 -

1. Forty-five percent (45%) of any and all proceeds
derived from the sale of Plaintiff's shares of stock in
Defendant Maintenance Unlimited, Inc., as well as
forty-five percent (45%) of all proceeds derived from
the sale of Plaintiff's interest in [the two car
washes] * * *.

* * * * * * *

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that
Defendant Linda D. Friscone is hereby awarded, as division
of property, the following assets:

1. Fifty-five percent (55%) of any and all proceeds
derived from the sale of Plaintiff's shares of stock in
Defendant Maintenance Unlimited, Inc., also a Defendant
herein, as well as fifty-five percent (55%) of all
proceeds derived from the sale of Plaintiff's interest
in [the car washes] * * *.

* * * * * * *

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that
Plaintiff shall immediately notify Defendant Maintenance
Unlimited, Inc. of Plaintiff's intention to invoke the terms
of the Buy-Sell Agreement.

On March 30, 1990, petitioner and MUI (through Joseph)

finally entered into an agreement in which petitioner agreed to

sell and MUI agreed to purchase (redeem) the 150 shares of MUI

stock owned by petitioner, leaving Joseph as the 100-percent

owner of MUI. In exchange for the 150 shares of stock, MUI

agreed to give petitioner the following consideration: $23,000

in cash; a long-term note in the amount of $143,039.25; and the

cancellation of petitioner's outstanding debt to MUI in the

amount of $31,200. The long-term note received by petitioner,

dated April 3, 1990, was for a term of 180 months and carried an

interest rate of 10 percent.
 - 5 -

Petitioners' 1990 Federal individual income tax return

included only 45 percent of the principal received on the long-

term note. The gain was determined under the installment method.

The return failed to include, as part of the computation of gain,

the $23,000 cash received, the debt from which petitioner was

relieved in the amount of $31,200, and the remaining 55 percent

of the sales proceeds. Petitioners' 1991 return similarly

included only 45 percent of the principal payments on the long-

term note in the computation of gain under the installment

method. Petitioners' returns for 1990 and 1991 each included

only 45 percent of the interest income received on the long-term

note.

During 1990, petitioner paid Linda Friscone $17,798.02 from

the proceeds he received on the sale of the MUI stock. During

1991, petitioner paid Linda Friscone $10,041.16 from the proceeds

he received on the sale of the MUI stock.

Section 61(a)(3) includes in gross income "all income from

whatever source derived, including * * * Gains derived from

dealings in property". Section 1001(a) defines the amount of

gain from sale or other disposition of property as "the excess of

the amount realized therefrom over the adjusted basis". The

amount realized also includes "the amount of liabilities from

which the transferor is discharged as a result of the sale or

disposition." Sec. 1.1001-2(a)(1), Income Tax Regs. Section

1001(c) requires that "Except as otherwise provided in this
 - 6 -

subtitle, the entire amount of the gain or loss * * * on the sale

or exchange of property shall be recognized."

Petitioners' brief does not dispute the Commissioner's

determination that the $23,000 cash and the discharge of Eugene's

$31,200 indebtedness to MUI were includable in the computation of

petitioners' capital gain for 1990. Nor is there any controversy

over petitioners' right to use the installment method. However,

petitioners do challenge the Commissioner's determination that

the entire amount of the redetermined sales proceeds was

reportable on their 1990 return. They contend that they are

liable for the taxes on only 45 percent of the proceeds of the

sale. They also object to being charged with the entire amount

of the interest received in 1990 on the long-term note, and

contend that they are accountable for only 45 percent of that

amount. They take like positions with respect to 1991 to the

extent that capital gain from the sale of MUI stock and interest

on the long-term note are involved.

The Government argues that petitioner was the owner of the

entire 150 shares of MUI and is chargeable with all the gain

realized. The difficulty with the Government's position is that

it fails to recognize just what the decree of the divorce court

covered. The court found that "the principal remaining assets of

the marriage consist of Plaintiff's [Eugene] business interests

in Defendant Maintenance Unlimited, Inc., of which Plaintiff

[Eugene] owns fifty percent (50%) of the issued and outstanding
 - 7 -

stock," and a 25-percent interest in two (2) car washes. The

court then further decreed that it "awarded [to Eugene], as

division of property, the following assets: 1. Forty-five

percent (45%) of any and all proceeds derived from the sale of

Plaintiff's [Eugene's] shares of stock in Defendant Maintenance

Unlimited, Inc." (Emphasis added.)

Plainly, the court was providing for a division of the

assets of the marriage. And it is obvious that it cast the

provisions of the decree in terms of percentages of the proceeds

of sale of Eugene's stock interest in MUI rather than in terms of

percentages of the stock itself because there was outstanding a

buy-sell agreement between Eugene and his brother, Joseph. But

the substance of the decree, in providing for the division of

property, was to award Linda 55-percent ownership of the stock.

That this is so is supported by the following provision in the

in-court agreement between Eugene and Linda as incorporated in

the divorce court's decree:

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that
in the event that the sale of Plaintiff's business
interests as set forth hereinabove constitutes a
taxable event, Plaintiff and Defendant Linda D.
Friscone shall each be liable and responsible for
payment of any such taxes due in proportion to the
share of the proceeds that each receives; and,
accordingly, Plaintiff shall be responsible for payment
of forty-five percent (45%) of any such tax so
generated, and Defendant Linda D. Friscone shall be
responsible for the payment of fifty-five percent (55%)
of any such tax so generated.
 - 8 -

We recognize that although neither the parties nor the State

court can authoritatively construe Federal tax law, the agreement

as to Federal taxes may nevertheless throw strong light on what

was intended in the agreement and decree with respect to the

division of the marital property. This is particularly so since

section 1041(a) provides for nonrecognition of gain or loss on a

transfer of property incident to a divorce "to (or in trust for

the benefit of) a spouse," and section 1041(b)(2) provides that

the basis of the transferee "shall be the adjusted basis of the

transferor."3

It obviously appeared more convenient to cast the divorce

decree in terms of percentages of the proceeds to be received,

since a satisfactory resolution of the details of the sale under

the buy-sell agreement had not yet been negotiated. Although the

3
Sec. 1041. TRANSFERS OF PROPERTY BETWEEN SPOUSES OR
INCIDENT TO DIVORCE.

(a) General Rule.--No gain or loss shall be recognized on a
transfer of property from an individual to (or in trust for
the benefit of)--

(1) a spouse, or

(2) a former spouse, but only if the transfer is
incident to the divorce.

(b) Transfer Treated as Gift; Transferee Has Transferor's
Basis.

* * * * * * *

(2) the basis of the transferee in the property shall
be the adjusted basis of the transferor.
 - 9 -

decree did not order a transfer of title to 55 percent of the

shares directly to Linda, it plainly provided, in the division of

assets of the marriage, for a transfer to her of beneficial

ownership of the stock. See Cepeda v. Commissioner, T.C. Memo.

1994-62 (to determine ownership for tax purposes, "a court must

consider * * * when the benefits and burdens of the property, or

the incidents of ownership, were acquired"), affd. without

published opinion 56 F.3d 1384 (5th Cir. 1995). When the divorce

decree became final, Linda acquired both the benefits--

entitlement to 55 percent of the proceeds from the sale--and the

burdens--the obligation to pay taxes on 55 percent of the

proceeds--of stock ownership. Cf. Serianni v. Commissioner, 80

T.C. 1090 (1983), affd. 765 F.2d 1051 (11th Cir. 1985). Since

she was the legal, if not the record, owner of 55 percent of the

shares, petitioner was acting on her behalf to the extent of her

beneficial ownership in the 150 shares of MUI when the stock was

sold to MUI. Petitioner was acting on his own behalf with regard

only to the 45-percent interest awarded to him in the divorce

decree.

We give effect to the substance of the transaction, rather

than its form,4 and hold that petitioner is chargeable with only

4
See Griffiths v. Helvering, 308 U.S. 355, 357 (1939) ("We
cannot too often reiterate that 'taxation is not so much
concerned with the refinements of title as it is with actual
command over the property taxed--the actual benefit for which the
tax is paid.'"); Houchins v. Commissioner, 79 T.C. 570, 589
(continued...)
 - 10 -

45 percent of the gain realized on the sale of the MUI stock.

The obligation as to the remaining 55 percent falls on Linda.

Decision will be entered

under Rule 155.

4
(...continued)
(1982) ("It is well established that the economic substance of a
transaction, rather than its form, controls for Federal tax
purposes."); Kraut v. Commissioner, 62 T.C. 420, 428 (1974) ("It
is a cardinal rule that, in characterizing a transaction for
purposes of taxation, we are obliged to look beyond the form in
which the parties have chosen to cast it and to draw our
conclusions from that which we perceive to be the substance of
the matter."), affd. 527 F.2d 1014 (2d Cir. 1975).