DocketNumber： Docket No. 8527-09.
Citation Numbers： 2011 T.C. Memo. 43, 101 T.C.M. 1195, 2011 Tax Ct. Memo LEXIS 43
Judges： PARIS
Filed Date： 2/24/2011
Status： Non-Precedential
Modified Date： 11/21/2020
Decision will be entered under
PARIS, 2000 $2,996.00 $674.10 $749.00 $161.14 2001 204.20 100.00 51.05 -0- 2002 25,478.00 5,732.55 6,369.50 851.43 2004 3,329.00 749.03 1 TBD -0- 1 Amount to be determined under
| 2000 | $4,885.00 | $1,099.13 | $1,221.25 | $262.75 |
| 2001 | 7,112.20 | 1,600.20 | 1,778.00 | 284.20 |
| 2002 | 37,940.00 | 8,536.50 | 9,485.00 | 1,267.86 |
| 2004 | 11,884.00 | 2,673.90 | 2,971.00 | 340.58 |
Respondent has since conceded many items in the notice of deficiency and the amendment to the answer.9 After concessions, the issues for decision *46 are: (1) To what extent, if any, petitioner must include in her income wages, dividends, and Social Security benefits Mr. Oliver received in 2000; wages, unemployment compensation, and Social Security benefits he received in 2001; unemployment compensation and Social Security benefits he received in 2002; and Social Security benefits he received in 2004; (2) to what extent, if any, petitioner must include interest income the Olivers received in 2001 and 2002 and gain on the sale of stock the Olivers received in 2002; (3) to what extent, if any, petitioner must include proceeds the Olivers received in 2002 pursuant to a settlement agreement; (4) to what extent, if any, petitioner must include in income her Social Security benefits she received during the tax years at issue; (5) to what extent, if any, petitioner must include in income proceeds from the sale of real estate in 2004; (6) whether petitioner's filing status for the tax years at issue was married filing separate; (7) whether petitioner was entitled to the standard deduction for the tax years at issue; (8) whether petitioner was entitled to one personal exemption for the tax years at issue; and (9) whether petitioner is liable *47 for additions to tax under
Some of the facts have been stipulated, and the stipulation of facts and the attached exhibits are incorporated in the Court's findings by this reference. Petitioner did not work during the tax years at issue. She received Social Security disability benefits during those years of $9,690, $10,056, $10,296, and $10,663, respectively.
During 2000 and part of 2001 Mr. Oliver worked for Qwest Corp. (Qwest). During those years he received from Qwest wages of $52,834 and $14,561, respectively. In 2000 he also received dividends of $27. In 2001 he received unemployment compensation of $2,870. In 2002 Mr. Oliver received $5,125 in unemployment compensation and $23,546 in Social Security benefits. In 2004 he received $20,971 *48 in Social Security benefits.
Throughout 2000 and 2001 and until April 2002 the Olivers were engaged in a lawsuit they had filed against Qwest in 1997.10 In April 2002 the Olivers reached a settlement with Qwest, which was memorialized in part by a Settlement Agreement and Release of All Claims (settlement agreement). The settlement agreement provided that: (1) The Olivers would dismiss or withdraw any pending lawsuits or administrative proceedings and release all claims against Qwest, and (2) Qwest would pay the Olivers $201,000 "for alleged personal injuries, including emotional distress and compensatory damages; no portion of which represents payment of back, severance or front pay or lost benefits." Pursuant to the settlement agreement, the Olivers received a $201,000 check from Qwest in 2002, which they deposited into a savings account.11
Either petitioner or Mr. Oliver12 received interest income of $40 in 2001 and $958 in 2002. Also in 2002 petitioner or Mr. Oliver received $3,958 from the sale *49 of Qwest stock.13
During 2004 the Olivers sold real estate in Lawton, Oklahoma, for $65,000. Fourteen years earlier, when petitioner's mother owned the real estate, she, petitioner, and Mr. Oliver executed a contract for deed, which provided in relevant part that: (1) The Olivers would assume the then-existing mortgage on the real estate, (2) petitioner's mother would execute a warranty deed conveying to the Olivers title to the real estate,14 (3) an escrow agent would hold the deed until the Olivers fully paid the mortgage and, (4) if and when the Olivers fully paid the mortgage, the escrow agent would deliver the deed to the Olivers. The contract also provided: "It is understood and agreed between the parties this instrument is a contract for deed, and that *50 * * * [the Olivers] shall not acquire an interest in the above described property until terms of this contract are met".
Petitioner's mother's last will and testament was signed and witnessed contemporaneously with the contract for deed. The will devised the real estate "unto * * * [her] daughter, Micka Oliver." Petitioner's mother passed away before or during 1994.15 Petitioner, in her capacity as heir, filed a petition to probate her mother's will in Oklahoma State court. Petitioner's sister then petitioned the court to avoid probate and to set aside the deed and the contract for deed. The Olivers had not completed the terms of the contract before petitioner's mother's death,16 nor had the escrow agent released any of the title documents. Petitioner and her sister eventually settled the matter and executed an agreement, which they filed with the Oklahoma court clerk on September 20, 1995 (will contest agreement). The will contest agreement, however, reflected neither the provision in the will regarding the real estate nor the terms of the 1990 contract for deed. Rather, it stated that the parties agreed that the contract *51 and deed
Petitioner filed the will contest agreement, and that same day the Olivers executed another agreement to assume the then-remaining *52 amount of the mortgage. The Olivers paid the mortgage until sometime in 2001, when they made the final mortgage payment on the real estate.
When petitioner sold the real estate in September 2004, the buyers signed a promissory note, which obligated them to make 360 monthly payments of $335.51 "to the order of Baron Leone Oliver and Micka Maria Oliver".18 The principal amount of the promissory note was $62,500. The first monthly payment was due October 1, 2004; all subsequent payments were due the first of each month, with the last payment due September 1, 2034. The buyers signed a payment letter stating the details of the October 2004 payment. The letter also stated: "Your loan will be serviced by Baron Leone Oliver and Micka Maria Olviver [sic]." In addition, the letter instructed the buyers to mail each monthly payment to both petitioner and Mr. Oliver.
To provide security for their obligation, the buyers executed a mortgage on the real estate, which listed the Olivers as mortgagee. The Olivers and the buyers also executed a joint tenancy warranty deed and a real estate purchase contract. The real estate *53 purchase contract provided, among other things, that the buyers would pay $2,500 earnest money, which would be deposited with Oklahoma Abstract Co.
By the end of 2004 the Olivers had received the earnest money and three installment payments totaling $1,006.53. Respondent has conceded that the basis of the real estate on the date of sale was $30,000.
Respondent determined that, in accordance with Arizona law, petitioner must include in income her community property share of wages and dividends Mr. Oliver received in 2000, wages and unemployment compensation he received in 2001, and unemployment compensation he received in 2002. Arizona law presumes that property acquired by one spouse during marriage is community property unless acquired: (1) By gift, devise, or descent; or (2) after service of a petition for divorce, separation, or annulment.
The Olivers were married during the tax years at issue. Mr. Oliver admitted that he received wages, dividends, and unemployment compensation during the years and in the amounts respondent determined. Thus, the Court presumes those income items are community property. While Mr. Oliver believes all income received is his alone, the Olivers never executed a premarital agreement of any kind. Petitioner produced no additional evidence to rebut the Arizona community property presumption but merely asserted that Arizona community property law should not apply to them. Therefore, the Court holds that petitioner must include in income her community property share of Mr. Oliver's wages, dividends, and unemployment compensation.
Respondent's amended answer affirmatively asserted that Mr. Oliver's Social Security benefits received during the tax years at issue must be included in income as petitioner's share of community property. Respondent must prove this affirmative allegation. See
Respondent determined that petitioner should include in income her community property share of interest income either she or Mr. Oliver received in 2001 and 2002, as well as her community property share of gain on stock either she or Mr. Oliver sold in 2002. The Olivers admitted that they received the interest income and gain from the stock sale during the years and in the amounts respondent determined. Because they were married during those years, the community property presumption applies. See
Respondent determined that petitioner should include in income her community property share of cash proceeds the Olivers received in 2002 pursuant to the settlement agreement with Qwest. In this instance, the community property presumption does not apply; rather, recovery for personal injuries includes components, some of which constitute separate property.
The settlement agreement provided a lump-sum recovery for Mr. Oliver's personal injuries, including emotional distress. Such injuries clearly represent injuries to Mr. Oliver's personal well-being. Furthermore, the settlement agreement specifically excluded lost wages from the recovery. Lastly, petitioner produced no evidence that the Olivers incurred *57 any medical expenses as a result of Mr. Oliver's injuries. Thus, the Court finds that the settlement proceeds are Mr. Oliver's separate property. Therefore, the Court holds that petitioner need not include in her income any proceeds Mr. Oliver received pursuant to the settlement agreement.
Respondent asserted in his amended answer that petitioner must include in income her community property share of Social Security benefits she received during the tax years at issue. As with his previous affirmative allegation, respondent bears the burden of proof. See
Petitioner admitted that she received Social Security disability benefits during the tax years at issue in the amounts respondent determined. Arizona law provides that Social Security benefits paid to one spouse are that spouse's separate property.
Respondent determined that petitioner should include in income her community property share of the entire gain from the sale of the real estate. The Court disagrees and holds that (1) the real estate was petitioner's separate property, (2) petitioner sold the real estate on the installment method, (3) petitioner must include in income the capital gain portion of the earnest money received in 2004, (4) petitioner must include in income her community property share of the capital gain received in 2004 pursuant to the promissory note, and (5) petitioner must include in income her community property share of the interest income received in 2004 pursuant to the promissory note.
The real estate was petitioner's separate property. In Oklahoma, if a contract and deed are executed as part of the same transaction and delivery of the deed is only part performance of the contract's terms, the contract does not merge into the deed.
Petitioner's separate property retains its status unless changed by agreement or operation of law. See
The sale of the real estate in 2004 qualified as an installment sale. Thus, interest income and capital gain received in 2004 must be reported using the installment method. An installment sale is a disposition of property where at least one payment will be received after the year of sale.
Under the installment method, the seller recognizes capital gain as installment payments are received.
The selling price and total contract price equaled $65,000. Petitioner's adjusted basis in the real estate, as respondent conceded, was $30,000.25 Thus, the gross profit on the sale equaled $35,000. In 2004 petitioner received $2,500 earnest money and three installment payments of $335.51 pursuant to the promissory note. The earnest money consisted of nontaxable recovery of basis and taxable capital gain. Each installment payment consisted of nontaxable recovery of basis and taxable capital gain and interest income.
The status of the real estate as petitioner's separate property became fixed at the time she acquired it.26 See
In 2004 petitioner received earnest money and three installment payments. The capital gain portion of the earnest money and of each installment payment would ordinarily constitute income from petitioner's separate property. The documents surrounding the installment sale, however, evince clear intent for the three installment payments to be community property. The promissory note required the buyers to make payments "to the order of" both petitioner and Mr. Oliver, the mortgage listed the Olivers as mortgagees, and the payment letter stated that the Olivers would service the loan. Thus, the Court finds that the Olivers intended the *65 installment payments to become community property. Therefore, the Court holds that petitioner must include in income her community property share of the capital gain received in 2004 pursuant to the promissory note. However, the record contains no evidence of such intent regarding the earnest money. Therefore, the Court holds that petitioner must include in income the capital gain portion of the earnest money received in 2004 as her separate property.
Petitioner must also include in income her community property share of interest received in 2004 pursuant to the promissory note. The Olivers received the interest income solely because they executed an installment sale agreement and charged interest.27*66 Because the Olivers received the interest income while they were married, the community property presumption applies. See
Respondent determined that petitioner's filing status for the tax years at issue was married filing separate. The Olivers were married throughout the tax years at issue. To claim married filing joint return filing status, however, the Olivers needed to file valid joint tax returns either before or after respondent issued the notice of deficiency. See
In addition, respondent determined that petitioner was entitled to the standard deduction for the tax years at issue. A taxpayer is entitled to the standard deduction if she does not itemize deductions.
Furthermore, respondent determined that petitioner was entitled to one personal exemption for the tax years at issue. A taxpayer may claim one exemption for herself during a given tax year.
Respondent determined that petitioner is liable for additions to tax for failing to file tax returns for the tax years at issue.28 See
Petitioner admitted that she did not file tax returns for the tax years at issue. She also produced no evidence to establish that she had reasonable cause for her failure to file and that her failure did not result from willful neglect.29 Therefore, the Court holds that petitioner is liable for the additions to tax.
The Court has considered all arguments for contrary holdings and, to the extent *69 not discussed above, finds those arguments to be without merit.
To reflect the foregoing and concessions of the parties,
1. Petitioner also did not file tax returns for 2005, 2006, or 2008. Petitioner and her husband, Baron Oliver (Mr. Oliver), filed a joint Federal income tax return for 2007.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the tax years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. The notice of deficiency also reflected respondent's determinations that: (1) Petitioner's filing status for the tax years at issue was married filing separate, (2) petitioner was entitled to the standard deduction for the tax years at issue, (3) petitioner was entitled to one personal exemption for the tax years at issue, and (4) petitioner was entitled to a rate reduction credit for 2001.
4. Petitioner and Mr. Oliver had been married to each other for over 40 years at the time of trial.↩
5. Arizona is a community property State. See
6. The asserted increase in petitioner's 2001 deficiency contained in the amendment includes a minor mathematical error when compared with Form 5278, Statement—Income Tax Changes.↩
7. The amended answer specifically asserted that, in accordance with Arizona law, petitioner must include in income her community property share of: (1) Social Security benefits she received during the tax years at issue, (2) retirement account distributions Mr. Oliver received during the tax years at issue, and (3) Social Security benefits Mr. Oliver received during the tax years at issue.↩
8. The amendment to the answer also asserted that the Court should disallow the standard deduction afforded to petitioner in the notice of deficiency. See
9. Specifically, respondent has conceded petitioner's liability for additions to tax under
10. Both petitioner and Mr. Oliver were plaintiffs in the lawsuit.↩
11. The Olivers used the settlement proceeds to purchase vehicles, build a home in Arizona, and repair real estate in Oklahoma.↩
12. The Court need not determine which of the Olivers received the income. The mere fact that one of the Olivers received the income allows the Court to dispose of all relevant issues involving this fact.↩
13. Respondent concedes that the cost basis of the Qwest stock sold was $3,544. Thus, the gain on the sale was $414. Again, the Court need not determine which of the Olivers received the proceeds from the stock sale. See
14. Petitioner's mother executed the warranty deed in December 1990.↩
15. The record does not reflect the exact date petitioner's mother passed away. However, the probate number "P-94-18" appeared on documents in a petition petitioner's sister filed to contest the will. Furthermore, petitioner produced a bill from an attorney with dates in 1994 on which he handled matters regarding the probate of her mother's will.↩
16. Petitioner produced checks showing payments the Olivers made to the mortgage company as late as November 1995 and during the course of the probate and will contest.↩
17. Nothing in the will contest agreement, the will, or the contract for deed reflects or approximates the real estate's value on the day the will and the contract for deed were executed. Nor does the record reflect the real estate's value on the date petitioner's mother passed away. Petitioner produced part of a 1994 appraisal, but it did not show the appraised value of the real estate.↩
18. Each payment included principal and interest. The interest rate was 5 percent.↩
19. Petitioner agrees with respondent's modified position.↩
20. Delivery occurred pursuant to the will contest agreement.↩
21. Respondent argues that petitioner should not be allowed to report the sale on the installment method simply because, to date, petitioner has not reported any gain from the sale. Respondent's argument has no merit. The statutes, caselaw, and regulations governing installment sales clearly make installment-method reporting the default method absent an affirmative election. See
22. The interest income is ordinary income.
23. The gross profit ratio is also referred to as the gross profit percentage.↩
24. The record contains no evidence that, on the date of sale, the property was subject to any qualified indebtedness.
25. Petitioner claims that the adjusted basis was equal to the fair market value on the date she sold it in 2004. Petitioner produced no evidence to substantiate her claim. Thus, the Court finds that petitioner's adjusted basis is $30,000, as respondent conceded.↩
26. Petitioner testified that the Olivers paid expenses for repairs, maintenance, and improvements between 1995 and 2004. However, petitioner produced no evidence to substantiate such expenses. Furthermore, even if the Olivers did pay such expenses, doing so would not make the real estate community property. See
27. In other words, the nature of the property sold—appreciated real estate—did not affect the Olivers' receipt of interest income.
28. Initially, respondent determined that petitioner is also liable for additions to tax under
29. Petitioner did testify that she had health problems during the tax years at issue. However, she has consistently argued that she was not required to file tax returns. She has not, before doing so in her answering brief, argued that her health problems impeded her ability to file returns. Thus, the Court finds that petitioner's health problems had no effect on her ability or failure to file returns for the tax years at issue.↩
Jurek v. Jurek , 124 Ariz. 596 ( 1980 )
Tyson v. Tyson , 61 Ariz. 329 ( 1944 )
Arizona Central Credit Union v. Holden , 6 Ariz. App. 310 ( 1967 )
Luna v. Luna , 125 Ariz. 120 ( 1979 )
Rundle v. Winters , 38 Ariz. 239 ( 1931 )
Horton v. Horton , 35 Ariz. 378 ( 1929 )
In Re Estate of Sims , 13 Ariz. App. 215 ( 1970 )
Wheeler v. Commissioner , 521 F.3d 1289 ( 2008 )
Millsap v. Commissioner , 91 T.C. 926 ( 1988 )