T.C. Memo. 1997-227
UNITED STATES TAX COURT
CHARLES F. URBAUER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5323-95. Filed May 13, 1997.
Charles F. Urbauer, pro se.
Mark I. Siegel, for respondent.
MEMORANDUM OPINION
RAUM, Judge: The Commissioner determined an $18,759
deficiency in petitioner's 1990 income tax. At issue is the
extent to which, if at all, petitioner is liable for tax upon
capital gain realized upon the sale of the principal family
residence in accordance with a divorce decree. The facts have
been stipulated.
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Petitioner, Charles F. Urbauer, resided in Troy, Michigan,
when he filed the petition in this case. On June 18, 1966,
petitioner and Kim Urbauer were married. During and through the
end of their marriage, petitioner's principal residence was in
Bloomfield, Michigan. On January 9, 1990, petitioner and Kim
were divorced.
In the Property Settlement of the Consent Judgment of
Divorce (property settlement), the divorce court ordered "that
the marital home at 2312 Hunt Club Drive, Bloomfield Hills,
Michigan, which is presently listed for sale, be sold and the
proceeds of the sale, after expenses, be applied in the following
manner". There followed four items of debts and liens. The
divorce court then ordered:
Fifth: Establishment of an escrow fund in the
amount of $62,000 for the payment of the
capital gains tax due in connection with
the marital home;
Sixth: Any balance split seventy-five (75%)
percent to the Plaintiff [Kim] and
twenty-five (25%) percent to the
Defendant [petitioner].
Kim was given control of the $62,000 escrow account, was
entitled to the interest therefrom, and was required to pay any
taxes on the marital home. She was to "hold [petitioner]
harmless from any taxes due and owing from the sale of the
marital home up to the estimated $62,000."
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On September 4, 1990, petitioner and his ex-wife sold the
marital home for $280,000. In contemplation of the sale, they
entered into a "Stipulation to Amend Judgment of Divorce
Regarding Tax Payment". This stipulation provides in relevant
part:
1. That the sale of the marital home did not produce
sufficient monies to pay the tax liabilities or
potential tax liabilities set forth in the judgement
[sic].
* * * * * * *
3. That item Fifth on page 6 is reduced to an escrow
fund of $54,000--the anticipated capital gains taxes on
the sale of the residence.
4. That the net proceeds of the sale of the property--
$14,551.91 shall be divided between the parties as
follows:
Kim U. Urbauer $10,913.94
Charles F. Urbauer 3,637.98
The division of the $14,551.91 between Kim and petitioner was on
a 75/25 basis. The stipulation was signed by both parties and
dated September 4, 1990. However, the $54,000 in the escrow fund
was not used to pay the income tax on the capital gain of the
marital home.
On January 12, 1995, the Commissioner issued a notice of
deficiency to petitioner which determined that petitioner was
liable for 50 percent of the tax on the gain from the sale of the
principal residence. The deficiency notice, which accompanied
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the petition herein, explained the Commissioner's determination
as follows1:
It is determined that you are responsible for fifty
(50) percent of the gain on the sale of your personal
residence. The residence was sold to a 3rd party as
part of the property settlement. When it was sold you
and your ex-wife held the property as tenants in the
entirety. Therefore, you are responsible for fifty
(50) percent of the gain and your taxable income is
increased by $82,915.00.
Section 61(a)(3)2 includes in gross income "Gains derived
from dealings in property". State law determines the property
ownership interest of a taxpayer; Federal law controls the tax
consequences. Aquilino v. United States, 363 U.S. 509, 512-513
(1960). Since the property in question, petitioner's principal
residence, was located in Michigan, Michigan law is controlling
as to ownership of the property. In accordance with Michigan
law, the marital home was held by husband and wife as tenants by
the entirety. Hoyt v. Winstanley, 191 N.W. 213 (Mich. 1922).
Moreover, under Michigan law:
Every husband and wife owning real estate as joint
tenants or as tenants by the entireties shall, upon
being divorced, become tenants in common of such real
estate, unless the ownership thereof is otherwise
1
A copy of the deficiency notice incorporated in the
stipulation of facts contained only a truncated portion of the
explanation above, cutting out several inches of the left hand
margin, apparently the result of careless photocopying.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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determined by the decree of divorce. [Citations
omitted.]
Mich. Stat. Ann. sec. 25.132 (Law. Co-op. 1992). On August 22,
1978, petitioner and his wife purchased the marital home and held
it as tenants by the entirety up to the time of their divorce.
Under the Michigan statute, unless the divorce decree provided
otherwise, upon their divorce they became tenants in common.
The property settlement attached to the divorce decree
ordered that the house be sold, an escrow fund be established,
the ex-wife be responsible for paying the taxes out of the escrow
fund, and the balance be split 75/25 between the spouses.
Although the decree directed the distribution of the proceeds
from the sale of the house, it did not change the ownership of
the property. At the time of the sale, petitioner owned 50
percent of the property. As a result, he is responsible for 50
percent of the tax from its disposition.
Petitioner argues that since his ex-wife received the
proceeds of sale, she is liable for the entire capital gain. We
hold otherwise. In the first place, the wife did not receive the
proceeds of sale. The sale price was $280,000, and the great
bulk thereof was used to discharge debts of both husband and
wife. Indeed, there was an insufficient amount to discharge all
the tax liabilities for years preceding the sale. Moreover,
$54,000 was set aside in escrow to pay the tax on the gain on
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sale of the marital home. Only $14,551.91 remained to be divided
between the spouses on a 75/25 basis.
The owner of property or income is responsible for tax with
respect thereto. As indicated above, since the divorce court did
not change the result of the operation of Michigan law,
petitioner owned a one-half interest in the house and is thus
responsible for half the tax.
Petitioner also contends that since his ex-wife received 75
percent of the net proceeds and was responsible for paying the
tax, she was the beneficial owner of the property. In support of
his argument, petitioner relies on Friscone v. Commissioner, T.C.
Memo. 1996-193. On brief the Government also relies upon
Friscone and has reduced its claim to tax to only 25 percent of
the gain. That 25-percent figure comes from the provision in the
divorce decree for distribution of the small amount remaining
after discharge of all the liabilities relating to the property
and the establishment of the $54,000 escrow for payment of tax on
the gain. Nowhere else is there any indication in the decree
that the property or its proceeds is being divided on a 75/25
basis between the spouses.
Both parties misconceive the holding in Friscone. There the
taxpayer-husband owned stock, the proceeds of which the divorce
court divided between the spouses, 45 percent to the husband and
55 percent to the wife, with tax liability divided in the same
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manner. The husband had a buy-sell agreement in place with his
brother, which had not been implemented at the time of the
divorce. We held that the taxpayer was liable for only 45
percent of the tax on the gain on sale of the stock. We relied
on the outstanding buy-sell agreement:
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 decree did not
order a transfer of title to 55 percent of the shares
directly to Linda [the taxpayer's ex-wife], it plainly
provided, in the division of the assets of the
marriage, for a transfer to her of beneficial ownership
of the stock. * * * 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. * * * Since she was
the legal, if not the record, owner of 55 percent of
the shares, * * * [the taxpayer] 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. * * *
Id.
The present case is entirely different. In Friscone, the
divorce court felt constrained by the existing buy-sell
agreement. In order to reach the same result, outright transfer
of 55 percent of the stock to the wife, the divorce court did the
next best thing--it gave her beneficial ownership. Unlike
Friscone, in petitioner's case there was no impediment to the
divorce court dividing ownership of the house between petitioner
and his ex-wife. To make Kim the owner, the divorce court had
merely to transfer full title to Kim, which it chose not to do.
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It does appear that the divorce court gave Kim control of the
escrow account so that she could use the interest. The property
settlement provided:
IT IS FURTHER ORDERED AND ADJUDGED that the escrow
fund established for the payment of the Federal and
State capital gains tax on the marital home in the
amount of Sixty-Two Thousand ($62,000.00) Dollars
[subsequently reduced to $54,000.00] shall be under the
exclusive control of the Plaintiff, who shall be
entitled to the interest thereon until the date the tax
is paid which interest shall be applied towards [sic]
Plaintiff's alimony as provided for in the Alimony
paragraph of this Judgment.
This arrangement also benefited petitioner, since it lessened his
overall alimony obligation.
Petitioner also argues that since the divorce decree
allocates responsibility for paying the tax to his ex-wife, he
cannot be held liable for tax. To the contrary, petitioner "can
not divest [himself] of liability for tax by execution of a
contract to which the United States is not a party." Humbert v.
Commissioner, 24 B.T.A. 828, 829 (1931); Neeman v. Commissioner,
13 T.C. 397, 399 (1949), affd. 200 F.2d 560 (2d Cir. 1952).
We conclude that the Commissioner was correct in the
deficiency notice in attributing 50 percent of the gain to
petitioner. However, since the Government on brief, in ill-
advised reliance upon a misunderstanding of Friscone, has reduced
its claim to tax from 50 percent to 25 percent of the gain, it
must take the consequences of that latter position. Accordingly,
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since petitioner will be charged with tax on 25 percent of the
gain from the sale of the family residence,
Decision will be entered
under Rule 155.