                        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.
                                - 2 -


     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."
                                  - 3 -


     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
                                - 4 -


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.
                               - 5 -


     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
                                - 6 -


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.
                                 - 8 -


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,
                              - 9 -


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.
