                            T.C. Summary Opinion 2017-87



                            UNITED STATES TAX COURT



    DAVID W. STAPLETON AND MELINDA STAPLETON, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 4860-16S.                             Filed December 4, 2017.



      Sarah K. Ritchey and Jonathan S. Bender, for petitioners.

      Gretchen W. Altenburger and Nancy C. Carver, for respondent.



                                 SUMMARY OPINION


      GUY, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                          -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined deficiencies of $4,483 and $4,453 in petitioners’

Federal income tax for 2013 and 2014 (years in issue), respectively. The

deficiencies are attributable to respondent’s disallowance of deductions for capital

losses that petitioners carried forward from the taxable year 2012. Petitioners,

husband and wife, resided in Colorado at the time the petition for redetermination

was filed with the Court.

        After concessions,2 the sole issue remaining for decision is whether section

1041(a) bars David W. Stapleton (petitioner) from recognizing a capital loss that

he realized on a sale of property to his former spouse, Maureen Stapleton, in

2012.




        1
       (...continued)
Revenue Code (Code), as amended and in effect for the taxable year 2012, and all
Rule references are to the Tax Court Rules of Practice and Procedure. Monetary
amounts are rounded to the nearest dollar.
        2
       Petitioners did not challenge in their petition and thus have conceded all
other adjustments set forth in the notice of deficiency.
                                            -3-

                                     Background3

      Petitioner and Maureen Stapleton are longtime residents of Aspen,

Colorado. They married in 1991 and separated and divorced in 2007.

      Petitioner works as a fundraiser for a nonprofit organization that provides

ski lessons to children living in Aspen Valley. Maureen Stapleton is an

established real estate agent and broker.

I. Marital Separation Agreement

      Maureen Stapleton initiated divorce proceedings against petitioner in

August 2007. In November 2007 the couple executed a marital separation

agreement and parenting plan (MSA) which provided for the division of the

couple’s marital assets, including several properties. The property at issue in this

case, the so-called Horse Ranch Property (ranch property), apparently had

previously served as the marital home.

      In 2007 the ranch property was encumbered by a mortgage of $1,826,000

and a line of credit of $243,000. Petitioner and Maureen Stapleton were obligors

on both the mortgage and the line of credit.

      After identifying the couple’s jointly owned properties, the MSA stated in

relevant part:

      3
          Some of the facts have been stipulated and are so found.
                                    -4-

       Upon execution hereof, Wife shall execute a special warranty
deed conveying all of her right title and interest to the Horse Ranch
Property to Husband. Husband agrees to sell the Horse Ranch
Property with most of the personal property. The Horse Ranch
Property shall be listed by BJ Adams & Company and Husband shall
not be responsible for any listing commissions to BJ Adams &
Company. Husband agrees to accept any offer of 93% of the list
price. Prior to closing, Wife shall be responsible for all insurance,
property taxes, etc. for the Horse Ranch Property. Husband shall be
responsible for other expenses (i.e. utilities, maintenance, etc.) for the
Horse Ranch Property. Wife also shall pay mortgage on the Horse
Ranch Property until the Horse Ranch Property is sold. Wife shall be
entitled to rent the Horse Ranch Property starting no later than
December 1, 2007 and Wife shall be entitled to receive all rental
proceeds. Wife shall be entitled to claim the mortgage interest that
she is obligated to pay hereunder in accordance with the applicable
tax laws and regulations. Upon closing and thereafter, Husband shall
be responsible for all taxes (capital gain or otherwise), commissions,
closing costs and other expenses typically paid by the seller in a real
estate transaction.

       Husband shall maintain the Horse Ranch Property in a high
quality manner and shall fully cooperate in any showings. Wife
agrees to use her best efforts in good faith to facilitate the sale of the
Horse Ranch Property.

       If the Horse Ranch Property is not under contract by March 30,
2008, Husband agrees to lower the listing price to $4,025,000.00 and
to accept 93% of the list price. Thereafter, Husband agrees to lower
the listing price at least 5% every six (6) months and to accept 93% of
the list price until the Horse Ranch Property is sold.

      Upon execution hereof, Husband shall execute a special
warranty deed conveying all of his right title and interest to the
Terrace Lane Property, the Columbine Court Property and the Little
Elk Creek Property to Wife. Wife agrees to be solely responsible for
the expenses relating to these three Properties such as the mortgages,
                                         -5-

      taxes, insurance, maintenance, etc. Wife’s attorney shall prepare the
      appropriate special warranty deeds.

II. Efforts To Sell the Ranch Property

      Consistent with the MSA, petitioner and Maureen Stapleton listed the ranch

property for sale with BJ Adams & Co. The initial listing price of the ranch

property was $4,200,000. When the ranch property did not sell, the listing price

was gradually lowered in March 2008, October 2008, and March 2009.

      In September 2009 Maureen Stapleton began working as a real estate agent

and broker with Morris & Frywald Sotheby’s International Realty (M&F). At that

time petitioner executed an agreement authorizing M&F to list the ranch property

at a price of $3,473,000. When the ranch property did not sell, the listing price

was gradually reduced in April 2010, July 2010, and March 2011.

      In April 2011 petitioner received an offer of $2.4 million for the ranch

property. Although petitioner negotiated a sale price of $2.6 million with the

potential buyer, the contract promptly fell through.

      Petitioner did not receive any additional offers for the ranch property in

2011. The listing price of the ranch property was reduced again in June 2012.
                                          -6-

III. Sale of the Ranch Property to Maureen Stapleton

      In November 2012 petitioner asked Maureen Stapleton whether she would

be interested in purchasing the ranch property, and he offered to sell it to her for

$225,000 and the assumption of all debt encumbering the property. She made a

counteroffer to pay petitioner $175,000 for the ranch property (in three

installments) and to assume the outstanding debt. In November 2012 the principal

amounts due on the mortgage and the line of credit encumbering the ranch

property totaled $1,986,741.

      On December 3, 2012, Maureen Stapleton sent an email to petitioner stating

in relevant part:

             This is to confirm I will pay David W. Stapleton $175,000 as a
      final property settlement in the dissolution of Case No. 07 DR 320.
      David in turn will sign over the deed for * * * [the property] to
      Maureen Stapleton. The following is the payment schedule:

             December 03, 2012 $50,000
             January 15, 2013 $50,000
             January 15, 2014 $75,000.

The next day petitioner executed a special warranty deed transferring title to the

ranch property to Maureen Stapleton. The deed stated that petitioner was

transferring the ranch property to her “as a part of the distribution of marital

property in the dissolution of Case No. 07 DR 320”.
                                         -7-

      After Maureen Stapleton purchased the ranch property, petitioner was

relieved of liability on the mortgage and the line of credit encumbering the

property. Maureen Stapleton made the required installment payments to petitioner

to complete the transaction. She continued to reside at the ranch property when

this case was tried.

IV. Tax Returns and Deficiency Notice

      Petitioners filed joint Forms 1040, U.S. Individual Income Tax Return, for

the taxable years 2013 and 2014. On their 2013 tax return petitioners claimed a

capital loss carryforward of $598,341 (arising from the sale of the ranch property)

and applied it to offset $23,918 of reported capital gain. On their 2014 tax return,

petitioners claimed a capital loss carryforward of $574,423 and applied it to offset

$17,821 of reported capital gain.4

      Respondent issued a notice of deficiency to petitioners disallowing the

deductions for the capital loss carryforwards claimed on their tax returns for 2013

and 2014 on the ground that the initial capital loss arose from a transfer of

property incident to divorce that is subject to nonrecognition under section 1041.


      4
       The parties now agree that petitioner overstated his capital loss and, in the
event petitioners prevail on the merits, the correct amounts of capital loss
carryforwards would be $359,623 and $335,705 for the taxable years 2013 and
2014, respectively.
                                          -8-

                                      Discussion

      As a general rule, the Commissioner’s determination of a taxpayer’s liability

in a notice of deficiency is presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). Tax deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving entitlement to any deduction claimed. Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

      Under certain circumstances, the burden of proof with respect to relevant

factual issues may shift to the Commissioner under section 7491(a). Although

petitioners do not assert that section 7491(a) applies, the facts that are relevant to

the disposition of this case are not in dispute. Consequently, the placement of the

burden of proof is immaterial.

      Section 1041(a)(2) provides the general rule that “no gain or loss shall be

recognized on a transfer of property from an individual to * * * a former spouse,

but only if the transfer is incident to divorce.” Section 1041(c) provides that, for

purposes of subsection (a)(2), a transfer is incident to divorce if it occurs within

one year after the date on which the marriage ceases or such transfer is related to

the cessation of the marriage.
                                        -9-

      Although the Code does not define the phrase “related to the cessation of

the marriage”, section 1.1041-1T(b), Q&A-7, Temporary Income Tax Regs., 49

Fed. Reg. 34453 (Aug. 31, 1984), states:

      A transfer of property is treated as related to the cessation of the
      marriage if the transfer is pursuant to a divorce or separation
      instrument, as defined in section 71(b)(2), and the transfer occurs not
      more than 6 years after the date on which the marriage ceases. A
      divorce or separation instrument includes a modification or amend-
      ment to such decree or instrument. Any transfer not pursuant to a
      divorce or separation instrument and any transfer occurring more than
      6 years after the cessation of the marriage is presumed to be not
      related to the cessation of the marriage. This presumption may be
      rebutted only by showing that the transfer was made to effect the
      division of property owned by the former spouses at the time of the
      cessation of the marriage. For example, the presumption may be
      rebutted by showing that (a) the transfer was not made within the one-
      and six-year periods described above because of factors which
      hampered an earlier transfer of the property, such as legal or business
      impediments to transfer or disputes concerning the value of the
      property owned at the time of the cessation of the marriage, and (b)
      the transfer is effected promptly after the impediment to transfer is
      removed.

A divorce or separation instrument, as defined in section 71(b)(2), includes a

written separation agreement.

      Respondent maintains that section 1041(a)(2) bars recognition of the loss

that petitioner realized on the sale of the ranch property to Maureen Stapleton

because the transfer was related to the cessation of the couple’s marriage within
                                         -10-

the meaning of section 1041(c)(2) and section 1.1041-1T(b), Q&A-7, Temporary

Income Tax Regs., supra.

      Petitioners aver that the sale of the ranch property to Maureen Stapleton was

not related to the cessation of the couple’s marriage because the transfer was not

carried out pursuant to a divorce or separation instrument and the transfer was not

made to effect the division of property that the couple owned at the time of the

cessation of their marriage. Petitioner maintains in relevant part that a transfer

between former spouses is related to the cessation of the marriage within the

meaning of the statute (and the related temporary regulation) only if the transfer is

made as consideration for an outstanding marital obligation.

      Section 1041 was enacted as part of the Deficit Reduction Act of 1984, Pub.

L. No. 98-369, sec. 421, 98 Stat. at 793-795. Legislative history states that

Congress enacted the provision in an effort to eliminate or reduce extensive

litigation and uncertainty surrounding the tax treatment of divisions of property

between spouses incident to divorce. See H.R. Rept. No. 98-432 (Part 2), at 1491-

1492 (1984), 1984 U.S.C.C.A.N. 697, 1134-1135. In particular, section 1041 was

intended in part to replace the Supreme Court’s holding in United States v. Davis,

370 U.S. 65 (1962), that a divorce-related transfer of property between former

spouses in exchange for the release of marital claims resulted in recognition of
                                        -11-

gain to the transferor/spouse. H.R. Rept. No. 98-432, supra at 1491-1492, 1984

U.S.C.C.A.N. at 1134. The Committee on Ways and Means (committee) noted

that the Government could be whipsawed if a transferor did not report any gain on

a transfer of appreciated property and observed that several States had amended

their property law with the aim of avoiding the result in Davis. H.R. Rept. No. 98-

432, supra at 1491-1492, 1984 U.S.C.C.A.N. at 1134. The committee further

noted that the Code provided for different tax treatment of losses realized on

transfers of property between spouses and similar transfers between former

spouses. Id. at 1491, 1984 U.S.C.C.A.N. at 1134.

      Congress enacted section 1041 to defer the recognition of any gain or loss

on interspousal transfers of property. The committee explained the new provision

in relevant part as follows:

             The bill provides that the transfer of property to a spouse
      incident to a divorce will be treated, for income tax purposes, in the
      same manner as a gift. Gain * * * or loss will not be recognized to
      the transferor, and the transferee will receive the property at the
      transferor’s basis (whether the property has appreciated or
      depreciated in value). A transfer will be treated as incident to a
      divorce if the transfer occurs within one year after the parties cease to
      be married or is related to the divorce. This nonrecognition rule
      applies whether the transfer is for the relinquishment of marital rights,
      for cash or other property, for the assumption of liabilities in excess
      of basis, or for other consideration and is intended to apply to any
      indebtedness which is discharged. Thus, uniform Federal income tax
      consequences will apply to these transfers notwithstanding that the
                                         -12-

      property may be subject to differing state property laws. [Id. at 1492,
      1984 U.S.C.C.A.N. at 1135; emphasis added; fn. ref. omitted.]

      In defining the phrase “incident to divorce” which appears in section

1041(a)(2), Congress adopted the blanket phrase “related to the cessation of the

marriage” in section 1041(c)(2). In the absence of a statutory definition of the

latter phrase, and consistent with the legislative history quoted above, courts have

concluded that the phrase should be broadly construed. See Young v.

Commissioner, 240 F.3d 369, 375-376 (4th Cir. 2001), aff’g 113 T.C. 152 (1999);

Blatt v. Commissioner, 102 T.C. 77, 79 (1994).

      In Young, a couple divorced in 1988 and the following year entered into a

property settlement agreement under which they divided their marital property and

the wife received a promissory note from her former husband. In 1992, after the

husband had defaulted on the note, the wife obtained a judgment against him.

Thereafter, the couple entered into a second settlement agreement under which the

husband transferred a tract of land to his former wife in exchange for the

promissory note and cancellation of the judgment. After the transfer was

completed, the wife sold the property.

       On review, the Court sustained the Commissioner’s determination that the

husband’s transfer of the land to his former spouse was subject to nonrecognition
                                        -13-

under section 1041. The Court noted initially that the parties agreed that the 1989

property settlement agreement was “incident to” the divorce decree because its

purpose was to divide the marital property. Young v. Commissioner, 113 T.C. at

156. The Court further found that the 1992 settlement agreement resolved a

dispute arising under the 1989 property settlement agreement and completed the

division of marital property. Id. Consequently, the Court held that the 1992

settlement agreement was “incident to” the divorce decree, and, as a result, the

husband’s property transfer to his former spouse was “related to the cessation of

the marriage” within the meaning of the temporary regulation (quoted above). Id.

The Court concluded in the alternative that, even if the temporary regulation was

not applicable, the transfer completed the division of marital property and,

therefore, was related to the cessation of the marriage within the meaning of

section 1041(c). Id.

      Similar circumstances arose in Belot v. Commissioner, T.C. Memo. 2016-

113, a case in which a couple had agreed in the course of divorce proceedings to

make the necessary transfers to equalize their interests in several businesses,

including a dance studio. Joint ownership of the dance studio quickly led to

discord, and the wife filed suit to compel her former husband to sell his entire

interest in the business to her. The couple then entered into a settlement
                                          -14-

agreement under which the wife purchased from her former spouse all of his

interests in their various business enterprises.

      The Commissioner determined that Mr. Belot realized and was required to

recognize gain on the transfer of his interests in the couple’s business enterprises

to his former spouse. On review, the Court determined that the transfers in

question qualified for nonrecognition treatment under section 1041. Specifically,

the Court concluded that Mr. Belot had shown that the settlement agreement was

made to effect the division of property owned by the former spouses at the time of

the cessation of the marriage. Id. at *10-*11. In rejecting the Commissioner’s

position, the Court held that Mr. Belot was not required to show that the transfers

in dispute were attributable to legal or business impediments that prevented a

transfer called for by the divorce decree, that section 1041 is not limited in its

application to a single or the first division of marital property, and that the

provision is equally applicable to divisions of marital property accomplished

through sales. Id.

      The instant case is similar in material respects to the factual scenarios

presented in Young and Belot. The MSA provided for the division of petitioner

and Maureen Stapleton’s marital property and included relatively complex terms

governing the final disposition of the ranch property. While Maureen Stapleton
                                          -15-

was compelled to transfer legal title to the ranch property to petitioner, she

remained responsible for payment of the insurance, mortgage, and property taxes;

and she retained the right to lease the property and to collect any rents thereon.

Although petitioner held legal title to the ranch property, he was obliged to sell it

(within specific parameters) and to pay the normal expenses related to the

maintenance of the property in the meantime. In sum, without delving into the

nuances of servitudes, covenants, and beneficial interests in real property, the

record shows that petitioner and Maureen Stapleton held specific interests in and

were subject to particular obligations in respect of the ranch property throughout

the five-year period that it was listed for sale.

      The record shows that petitioner and Maureen Stapleton respected the terms

of the MSA and made a good-faith effort to sell the ranch property. It appears,

however, that a timely sale of the ranch property was hindered by a challenging

real estate market. Against this backdrop, petitioner agreed to sell the ranch

property to Maureen Stapleton.

      The parties debate the significance of Maureen Stapleton’s December 3,

2012, email to petitioner which referred to the sale as a “final property settlement

in the dissolution of Case No. 07 DR 320”, and terms of the special warranty deed

which referred to the transfer as a “distribution of marital property in the
                                         -16-

dissolution of Case No. 07 DR 320”. Petitioners maintain that neither petitioner

nor Maureen Stapleton understood the legal import of the quoted phrases. In any

event, the Court does not consider the quoted phrases to be dispositive of the

question presented in this case.

      What is clear on this record is that the division of the couple’s marital

property, as prescribed by the MSA, was not complete until the ranch property was

sold. As discussed above, both petitioner and Maureen Stapleton had retained

significant rights and obligations in respect of the ranch property after their

marriage was dissolved. We therefore conclude that petitioner’s sale of the

property to Maureen Stapleton was made to effect the division of property that the

couple owned at the time of the cessation of their marriage within the meaning of

section 1.1041-1T(b), Q&A-7, Temporary Income Tax Regs., supra. Moreover,

the sale was “related to the cessation of the marriage” when we construe section

1041(c) broadly in accordance with the legislative history of the provision and this

Court’s caselaw.

      We reject petitioner’s argument that a transfer of property between former

spouses relates to the cessation of the marriage only if the transfer is made as

consideration for an outstanding marital obligation. Neither section 1041(c), the

temporary regulation, nor the legislative history imposes such a restriction on the
                                        -17-

application of the statute. Consistent with the preceding discussion, respondent's

determinations disallowing the capital loss deductions that petitioners claimed for

the years in issue is sustained.

      To reflect the foregoing,


                                               Decision will be entered

                                      for respondent.
