*60 Decision will be entered under Rule 155.
Petitioner and his former wife, Jean, were divorced in Montana in 1978. Petitioner transferred appreciated ranch land to his former wife pursuant to a property settlement agreement incident to the divorce. Held, the transfer was in the nature of a division of property and was not a taxable transfer.
*31 OPINION
Respondent determined a deficiency in petitioner's Federal income tax for the year 1978 in the amount of $ 129,398. After concessions, the sole issue for decision is whether the transfer of a one-half interest in appreciated ranch land by John McIntosh to his former wife pursuant to a divorce settlement agreement is a taxable event.
This case was submitted fully stipulated pursuant to
Petitioner John McIntosh resided in Havre, Montana, at the time his petition was filed. Petitioner was married to Jean McIntosh (hereinafter referred*62 to as Jean or former wife) on July 22, 1954. Shortly thereafter, on September 17, 1954, petitioner executed a contract for deed, acquiring an equitable *32 fee interest in the Phillips Place, a tract of land containing 2,120 acres and costing $ 78,000. The title to the Phillips Place was held by petitioner in his name, alone. During the course of their marriage, petitioner's wife helped petitioner work the farm and ranch, cooked for him and the other farm workers, raised the couple's four children, and maintained the family home.
On October 17, 1978, a petition for dissolution of marriage was filed by Jean McIntosh. On or shortly after October 17, 1978, petitioner and his former wife entered into a property settlement agreement. This agreement states in pertinent part:
IV.The Parties are the owners of certain real and personal property which has been acquired both prior to and since their marriage through the efforts of both Parties. The Parties further declare to each other that they have fully disclosed to the other the complete nature, description and extent of all property interests acquired in their individual and in their joint names, both prior to and since the *63 date of their marriage and in which they have a present legal, equitable or beneficial ownership interest; and the Parties are each aware of the encumbrances and liabilities affecting their farm and ranch properties and the extent of their personal liability in connection therewith; and in consideration of the agreements herein contained, it is mutually agreed that the property of the Parties hereto shall be divided and finally distributed as follows:
* * * *
4. In lieu of alimony, support and maintenance, the Wife, Jean D. McIntosh, is to receive and retain ownership of an undivided one-half (1/2) interest in approximately 2,760 acres of farm and ranch lands. * * * [It] is understood the Wife will lease her interest in said lands to the Husband, John S. McIntosh, for a term of ten (10) years, on a one-fourth (1/4) crop share basis, with a minimum share guarantee of at least 3,000 bushels per year to be delivered in the Elevator in the Wife's name.
On October 25, 1978, petitioner, pursuant to the above agreement, tranferred an undivided one-half interest in 1,800 acres of the Phillips Place to his wife. Petitioner and his wife were divorced by decree of dissolution of marriage, dated*64 November 13, 1978. The court stated in the decree that both parties were able-bodied persons, capable of working and earning sufficiently to meet their needs, and neither required *33 any support from the other. The property agreement was incorporated as part of the decree.
In the notice of deficiency, the Commissioner included, among other adjustments, an amount of capital gain as a result of the transfer of the ranch land from petitioner to his former wife.
After concessions, the sole remaining issue in this case is whether petitioner's transfer of the undivided one-half interest in ranch land to his former wife, Jean, pursuant to a property settlement agreement, executed in connection with their divorce, constitutes a taxable disposition.
The leading case on this issue, applicable to the transfer herein, is
the inchoate rights granted a wife in her husband's property by the Delaware law do not even remotely reach the dignity of co-ownership. The wife has no interest -- passive or active -- over the management or disposition of her husband's personal property. Her rights are not descendable, and she must survive him to share in his intestate estate. Upon dissolution of the marriage she shares in the property only to such extent as the court deems "reasonable." * * * Regardless of the tags, Delaware seems only to place a burden on the husband's property rather than to make the wife a part owner thereof. In the present context the rights of succession and reasonable share do not differ significantly from the husband's obligations of support and alimony. They all partake*66 more of a personal liability of the husband than a property interest of the wife. * * * Although admittedly such a view may *34 permit different tax treatment among the several States, this Court in the past has not ignored the differing effects on the federal taxing scheme of substantive differences between community property and common-law systems. [
Petitioner in this case argues that, in accordance*67 with the Supreme Court's opinion in Davis, State law should be consulted to determine the nature of Jean's interest in the property. Under Montana law, Jean had a vested interest in the ranch land property. Therefore, the transfer constitutes a division of property between co-owners and is a nontaxable event.
On the other hand, respondent argues that the question of the taxability of a transfer of appreciated property in connection with a divorce is a Federal question to be decided by Federal courts using Federal criteria. Respondent contends that considering the rights granted a spouse by Montana law and evaluating those rights in light of the Davis criteria, e.g., descendible rights, management of property, the transfer of the property in the instant case more resembles a taxable transfer of property in exchange for the release of an independent legal obligation than it resembles a nontaxable division of property between two co-owners.
The key question presented in this case then is what is the nature of the former wife's interest, if any, in the ranch land and what criteria should be used to determine that interest.
In determining the criteria, we note the well-settled*68 principles that State law creates legal interests and rights. Federal law determines what transactions involving interests or rights created by State law should be taxed.
Respondent has argued previously that the Davis case established Federal criteria by which to determine whether a former spouse has a sufficient property interest to characterize as co-ownership. Respondent's argument has been rejected, in particular, in the series of Collins cases. The issue there was whether the transfer of property, which was held in the husband's name only, to his former wife pursuant to a property settlement agreement was a taxable event. The pertinent Oklahoma statute provided:
*35 As to such property, whether real or personal, as shall have been acquired by the parties jointly during their marriage, whether title thereto be in either or both of said parties, the court shall make such division between the parties respectively as may appear just and reasonable, *69 by a division of the property in kind, or by setting the same apart to one of the parties, and requiring the other thereof to pay such sum as may be just and proper to effect a fair and just division thereof. [
The Tax Court in
However, the Court went on to conclude the following:
whatever the nature of the rights granted by Oklahoma law to spouses in jointly acquired property it is clear they do not include the traditional ownership rights in property. These rights such as descendible interest, right to control and disposition of property and vested interest are set out by the Supreme Court in
*36 The Oklahoma Supreme Court 7 months later in
neither the actual investiture of title, a right to make present disposition of property, nor absence of a descendible interest are controlling. A wife has a vested interest in jointly acquired property of the marital community. [
One month later, the Supreme Court, acting on Mr. Collin's petition for writ of certiorari from Collins I, vacated the judgment and remanded the case to the Court of Appeals for further consideration in light of the opinion of the Oklahoma Supreme Court in Collins II.
On remand, the Tenth Circuit in
Having the benefit of an interpretation of state law on this very point, we must conclude that the stock transfer operated merely to finalize the extent of the wife's vested interest in property she and her husband held under "a species of common ownership." [
The Tenth Circuit rejected respondent's argument*73 that Federal criteria were established in Davis, e.g., right of control, descendible interest: "The [Supreme] Court merely discussed certain general characteristics of co-ownership in an attempt to determine whether the wife possessed the rights of a co-owner under state law." (
In
During the marriage, and absent any divorce action, the parties have their separate property and, possibly subject to an exception or two, can dispose of it as he or she desires. * * *
However, at the time of the filing of the dissolution action in which the division of property will be later determined, a vesting takes place.
[
The U.S. District Court concluded that Davis and Collins IV, when coupled with the Colorado Supreme Court's answers to the certified questions, mandated a judgment in favor of the taxpayer that the transfer was nontaxable.
The*75 Tenth Circuit in
In applying Delaware law in Davis the Court did not define the time when the interest of the wife had to vest. The Court refers to the interest of the *38 wife "[upon] dissolution of the marriage." * * * Both the Oklahoma and Colorado courts said that the vesting occurred at the time of the filing of the divorce suit. [
The court distinguished two other Tenth Circuit cases,
Respondent argues that to allow the State courts to define the interests of former spouses as "species of common ownership" bestows on States the power to override the Federal tax system. Respondent points to Kansas and Oregon statutes which were amended in reaction to adverse court decisions which found that the respective pre-amended State statutes did not confer a vested interest on the non-title-holding spouse. According to respondent, the subsequent amendments*77 did not change the nature of the substantive property interests of the spouses but simply labeled the property interests as "species of common ownership" in order to avoid the application of Davis.
Even if we accepted respondent's interpretation of these statutes, it is irrelevant in the instant case which is not concerned with Kansas or Oregon law. Respondent has not argued, nor could he, that the pertinent Montana statutes, as discussed infra, were enacted in response to adverse court decisions. It is well-settled that States have the power to determine property interests.
In
*80
*40 Montana is not a community property State. Neither husband nor wife has any interest in the property of the other. Under
All the property of a married person owned before marriage and that acquired afterwards is his individual property. The married person may, without consent, agreement, and signature of his spouse, convey and transfer his individual property, real or personal, including the fee simple title to real property, or execute a power of attorney for the conveyance and transfer thereof.
However, in a divorce proceeding, the court is required to equitably apportion the property under
Disposition of property. (1) In a proceeding for dissolution of a marriage, legal separation, or disposition of property following a decree of dissolution of marriage or legal separation by a court which lacked personal jurisdiction over the absent spouse or lacked jurisdiction to dispose of the property, the court, without regard to marital misconduct, shall, and in a proceeding for legal separation may, finally equitably apportion*81 between the parties the property and assets belonging to either or both, however and whenever acquired and whether the title thereto is in the name of the husband or wife or both. In making apportionment, the court shall consider the duration of the marriage and prior marriage of either party; antenuptial agreement of the parties; the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, and needs of each of the parties; custodial provisions; whether the apportionment is in lieu of or in addition to maintenance; and the opportunity of each for future acquisition of capital assets and income. The court shall also consider the contribution or dissipation of value of the respective estates and the contribution of a spouse as a homemaker or to the family unit. In disposing of property acquired prior to the marriage; property acquired by gift, bequest, devise, or descent; property acquired in exchange for property acquired before the marriage or in exchange for property acquired by gift, bequest, devise, or descent; the increased value of property acquired prior to marriage; and property acquired by a spouse after a decree*82 of legal separation, the court shall consider those contributions of the other spouse to the marriage, including:
(a) the nonmonetary contribution of a homemaker;
(b) the extent to which such contributions have facilitated the maintenance of this property; and
(c) whether or not the property disposition serves as an alternative to maintenance arrangements.
(2) In a proceeding, the court may protect and promote the best interests of the children by setting aside a portion of the jointly and separately held *41 estates of the parties in a separate fund or trust for the support, maintenance, education, and general welfare of any minor, dependent, or incompetent children of the parties. 3
*83
Under the statute and decisions of the Montana Supreme Court, the source of and title to marital property is irrelevant to the division of such property upon dissolution of the marriage. The courts have the power to divide the property on an equitable basis regardless of where title lies.
The Montana Supreme Court in In
The decisions of this Court following the enactment of the Uniform Marriage and Divorce Act declare that as a housewife, the wife acquires a vested interest in the property accumulated by the parties during the marriage.
In that case, the marital assets consisted of ranch property which was inherited by the husband and was in his name, alone. Glenda, his wife, was not employed outside the home but had the homemaking and child raising responsibilities. In addition, she would, as needed, help with the ranch work. The court reviewed several Montana Supreme Court cases decided prior to the Uniform Marriage and Divorce Act which found that a wife's contribution as a homemaker and mother was equivalent to the husband's financial contribution and concluded:
It is therefore*84 obvious that Glenda acquired a vested interest in the major marital asset, the ranch property, regardless of its source and title. She did so by virtue of her fourteen years as mother, housewife and part-time ranch hand. [
The Montana Supreme Court in In
In In
These cases all conclude that under Montana law the wife acquires a vested interest in the property accumulated by the parties in marriage. In
These cases clearly indicate that in Montana, which is not a community property state, a wife may gain rights to a portion of property legally titled in the name of her husband alone. These property interests will inure as a result of monetary and non-monetary contributions to the acquisition and maintenance of the property titled in the husband's name. [
In
Where the parties negotiate a property settlement agreement, which is thereafter incorporated into the divorce decree, without an independent determination by the court as to the nature of any payment set forth therein, this court has held that we must look to the laws of the state to resolve any dispute as to the character of any property described in the agreement. [
*43 Here, in the context of a transfer of appreciated property, we have looked to Montana State law to determine the property interest of the spouse. Respondent argues, citing
Respondent argues that the vesting of the property interest is itself a taxable event. Respondent cites, however, no authority for this proposition. In
Finally, respondent argues that based on the facts of this case, this transfer was in lieu of a support obligation and not in satisfaction of any property rights. In support of this contention, respondent cites the property settlement agreement, itself, which expressly provides that the transfer was made *88 "in lieu of alimony, support, and maintenance."
The labels attached to payments provided for in a marital settlement agreement or a divorce decree are not controlling.
In the preamble of section IV, the agreement provides that --
The Parties are the owners of certain real and personal property which has been acquired both prior to and since their marriage through the efforts *44 of both Parties. * * * it is mutually agreed that the property of the Parties hereto shall be divided and finally distributed as follows: * * *
Thus, the parties intended in this section to divide and distribute the marital assets which include the Phillips Place. In addition, the divorce decree specifically made a finding that no support*89 was required. The agreement and the decree are unambiguous that no support payments are contemplated.
Respondent points to the portion of the agreement which provides that in conjunction with the transfer of the ranch land, the former wife would lease her interest to petitioner for a 10-year period on a one-fourth crop-share basis with a minimum share guarantee of 3,000 bushels per year. Respondent relies on the following four factors listed in
Respondent's reliance on DeSmyter is misplaced. The issue in DeSmyter was whether cash payments made by the husband represented alimony or property settlement. Here, the issue is whether the transfer of an undivided one-half interest in a property is a taxable disposition. If one looks at the property transfer, it is impossible to apply the factors listed above because there are no "payments." Respondent appears to be referring to the crop share. However, these payments are not the issue in this case. These payments are in fact rental payments which are given in consideration of the lease.
In conclusion, the parties intended the transfer to be a division of property accumulated by their joint efforts during their marriage. Under Montana law, husband and wife at the dissolution of marriage have a vested interest in property *75 acquired during marriage regardless of which spouse holds title. Therefore, the transfer of this property resembles more a division between co-owners than a release of a legal obligation. Accordingly, *91 the transfer is a nontaxable event.
Because of concessions,
Decision will be entered under Rule 155.
Footnotes
1. The Tax Reform Act of 1984, Pub. L. 98-369, sec. 421, 98 Stat. 793, added a new
Internal Revenue Code sec. 1041 which provides that no gain or loss will be recognized on a transfer of property from an individual to a former spouse incident to a divorce. This section, which effectively overrules the Davis↩ decision, applies to transfers made after July 18, 1984, with some exceptions not applicable in this case. Hereinafter, unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect in the tax year in issue.2. See also
Beard v. Commissioner, 77 T.C. 1275">77 T.C. 1275 , 1290 n. 9 (1981) (and cases cited therein);Lewis v. Commissioner, T.C. Memo 1983-770">T.C. Memo. 1983-770 ;Test v. Commissioner, T.C. Memo. 1984-649↩ .3. This statute was amended in 1983 to change the references to disposition of property to references to division of property and to add two new subsections. These subsections provide, in general, that each spouse is considered to have a common ownership in marital property that vests immediately preceding the entry of the decree of dissolution and that the apportionment of marital property is a division of common ownership for purposes of the property laws of the State as well as the Federal income tax laws. Because the divorce proceeding in the instant case occurred in 1978, we are concerned with the Montana statute, as quoted above, which was in effect during that year.↩