Howard
v.
Comm'r of Internal Revenue

United States Tax CourtApr 27, 1970
54 T.C. 855 (U.S.T.C. 1970)
54 T.C. 855T.C.

Docket No. 4948-67.

1970-04-27

LUCILLE HOWARD, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Robert O. Rogers, for the petitioner. J. Patrick McElroy, for the respondent.


Robert O. Rogers, for the petitioner. J. Patrick McElroy, for the respondent.

In 1944, petitioner's former husband Vince Nelson, who was in the U.S. Army, instituted a suit for divorce in the Circuit Court of St. Lucie County, Fla., and on the basis of allegations in his complaint, inter alia, that he was unable to ascertain her place of residence, the court allowed service by publication on petitioner and granted him a decree of divorce. In September 1944, she learned of the divorce. In 1947, she married again and for more than 20 years took no positive steps to restore the marriage or claim any marital rights through legal proceedings. Between 1950 and 1961, Nelson acquired several parcels of land in Florida and during 1965, he entered into a contract to sell a portion of the property for $322,350. The purchaser questioned the validity of Nelson's divorce decree and requested a release of petitioner's dower right as a condition to closing of the sales contract. An oral agreement was reached between petitioner and Nelson whereby she agreed to join in the deed for $30,000 in cash and two waterfront lots having a combined value of $10,000. The sales transaction was closed on Apr. 19, 1965. At that time, Nelson was in dire need of a substantial amount of cash because a mortgage foreclosure suit against him involving the land to be sold and other property owned by him was scheduled to be held on Apr. 19, 1965. Held, petitioner has failed to prove that Nelson's divorce decree was invalid and, therefore, she had no inchoate dower right in his land to release in April 1965. Accordingly, the $40,000 in question constitutes ordinary taxable income to her under sec. 61, I.R.C. 1954.

WITHEY, Judge:

Respondent determined a deficiency in petitioner's income tax for the taxable year 1965 in the amount of $12,362.65.

The sole issue presented for our consideration is whether the two lots valued at $5,000 each and the cash amount of $30,000 received by petitioner on April 19, 1965, from Vince Nelson for signing her name to a deed constituted a nontaxable payment for her inchoate right of dower or taxable income under section 61, I.R.C. 1054.

Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. The facts reflected in the exhibits received in evidence are incorporated herein by reference.

Lucille Howard, hereinafter sometimes called petitioner, filed her Federal income tax return for the year 1965 with the district director of internal revenue, Jacksonville, Fla.

Petitioner was born in Lockport, N.Y., and raised in Pennsylvania and New York. At the time of filing of her petition, she resided at Juno Beach, Fla.

On May 6, 1942, petitioner married Vince Nelson, hereinafter sometimes referred to as Nelson. On August 15, 1944, Nelson instituted a suit for divorce against petitioner in the Circuit Court of St. Lucie County, Fla. In his bill of complaint, Nelson alleged, inter alia:

that diligent search and inquiry has been made to discover the place of residence of the Defendant and that the same is set forth herein as particularly as is known to Complainant. That the Defendant is above twenty-one years of age, and that there is no person in Florida upon whom service of process would bind said Defendant.

In an affidavit attached to this bill of complaint, Nelson stated that he had read the complaint and its contents were true. Nelson obtained service of process in the divorce proceeding upon petitioner by publication.

On September 22, 1944, the circuit judge rendered a final decree of divorce upon Nelson's complaint. When Nelson obtained this divorce, he was in the U.S. Army and petitioner had not been living with him.

We note that there is no mention of the property rights of either Lucille or Nelson in the complaint and the court made no reference to the adjudication of property rights in the final decree.

Nelson notified the Armed-Service Forces that he had obtained a divorce from petitioner. The U.S. Army, Office of Dependency Benefits, mailed a family-allowance form to petitioner notifying her that as of September 30, 1944, the allotment payment to her was discontinued and the reason given for this action was ‘soldier divorced.’

Petitioner was notified by the U.S. Army that her allotment had been terminated at Lake Park, Fla.

After petitioner learned that Nelson had obtained a divorce, she did not attempt to restore the marriage through legal proceedings.

In November of 1947 at Folkston, Ga., petitioner entered into a ceremony of marriage with Edgar Charles Kingsbury. Thereafter, she filed a complaint for divorce against Kingsbury in the Circuit Court, Palm Beach County, Fla., and under oath alleged that she and Kingsbury were ‘lawfully married to each other on or about the 24th day of November 1947 at Folkston, Georgia, and thereafter lived and co-habited as man and wife until on or about September 1, 1949, when the parties separated.’ A final decree of divorce of this marriage was entered by the court on December 15, 1949.

Nelson was a reclusive person who preferred the wilderness of Florida to modern civilization. Between 1950 and 1961, he acquired several large parcels of land near the Loxahatchee River in Martin County, Fla. In September 1960, he obtained a $100,000 loan at 10- percent annual interest from George W. Offutt III, giving in return a mortgage on this land. It was a loan for 5 years without any provision for amortization.

During the year 1965, Nelson entered into a sales contract for a portion of the property (214.9 acres) with Bessemer Properties, Inc., for $322,350.

In the course of examining the title to the property, the purchaser's attorney became aware of the foregoing facts relating to petitioner's marriage to Nelson, including the fact that Nelson had obtained a divorce from her by mail and publication, i.e., without personal service on petitioner, in Fort Pierce, Fla., and determined in his opinion that there was a question as to the validity of the divorce. Bessemer then requested a release of dower as a condition to closing. An agreement, which was not reduced to writing, was eventually reached between petitioner and Nelson whereby she agreed to join in the deed for a consideration of $30,000 in cash and two waterfront lots having a combined value of $10,000. Prior to this time, she had not claimed any rights in any other land owned by Nelson. In connection with this proceeding, she incurred and paid attorney fees in the amount of $4,000.

The transaction involving the sale of land to Bessemer was closed on April 19, 1965. The amount of $30,000 in cash was paid to petitioner at the time of closing and was designated in the buyers-sellers closing statement as ‘Paid Lucille Howard for release of dower.’ At the same time, she received by deed the two waterfront lots mentioned above.

The deed of conveyance to Bessemer dated April 19, 1965, states that the grantors were ‘Vince Nelson, joined by Lucille Nelson Howard, formerly Lucille Nelson, the wife of said Vince Nelson.’ In the warranty deed dated April 19, 1965, in which Nelson conveyed the two waterfront lots to petitioner, each of them is designated therein as ‘a single adult.’

A mortgage foreclosure proceeding was instituted against Nelson on December 11, 1964, relating to the property to be sold to Bessemer, together with other property owned by Nelson. The mortgage foreclosure sale was to be held on April 19, 1965, the same date as the closing between Nelson, Lucille, and Bessemer. The outstanding balance of the mortgage at that time was $114,412.60.

After paying off all indebtedness against the land sold to Bessemer, including $30,000 paid to Lucille ‘for release of dower,‘ Nelson received a net payment of $63,323.15.

Nelson died in 1968 while a resident of Martin County, Fla. Probate proceedings have been instituted and petitioner has filed a claim for dower therein.

In his notice of deficiency, respondent determined that petitioner realized ordinary income in the amount of $40,000 from ‘a transaction relative to clearing of title to land’ which she failed to report on her income tax return for the taxable year 1965. Respondent allowed a deduction in the amount of $4,000 from the $40,000 involved herein as legal expense incurred by petitioner in this transaction.

OPINION

Respondent contends that the $30,000 in cash and the two waterfront lots valued at $5,000 each received by petitioner from her former husband Vince Nelson on April 19, 1965, for signing her name to a deed constitute taxable income to her under section 61 of the 1954 Code and the correlative regulations. Essentially, it is respondent's position that petitioner was validly divorced from Nelson in 1944 and, consequently, she had no inchoate dower rights in his land to release upon the sale thereof to Bessemer more than 20 years after this divorce. Petitioner, in opposition, claims that the Nelson divorce was invalid because of fraudulent constructive service of the divorce complaint on her and, therefore, she still had her inchoate dower rights which she released in 1965 for the $40,000 in controversy which constitutes nontaxable income.

SEC. 61. GROSS INCOME DEFINED. GENERAL DEFINITION.(a) GENERAL DEFINITION.— Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:(1) Compensation for services, including fees, commissions, and similar items: Income Tax Regulations: Sec. 1.61-1. Gross Income.(a) General definition. Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. * * *

Respondent's determination is, of course, prima facia correct and the burden is on petitioner to demonstrate error therein. For reasons hereinafter discussed, we do not believe that she has sustained her burden of proof.

Preliminarily, we note there is no dispute herein that under a valid divorce decree and in accordance with a property settlement agreement incorporated therein, any real estate or other property transferred by a husband to his wife in consideration for a discharge of her dower rights is generally not taxable to her. Rev. Rul. 67-221, 1967-2 C.B. 63. See United States v. Davis, 370 U.S. 65 (1962), which holds that under present administrative practice, a payment for the release of marital rights is not considered a taxable event as to the wife.

It has long been settled under Florida law that a decree of divorce based on service by publication where personal service of process cannot be had is valid. As a condition precedent to service by publication, an affidavit must be filed in the action executed by the plaintiff, his agent, or attorney, setting forth, inter alia, that diligent search and inquiry have been made to discover the name and address of the defendant and that such residence is unknown to the affiant. Fla. Stat. Ann. sec. 49.041 (1969). Constructive service by publication in a divorce suit has been held valid even though the defendant has been within the State when the plaintiff in good faith believed that the defendant has not been within the State. Ringling v. Ringling, 117 Fla. 423, 158 So. 125 (1934). Also, it is well established in Florida that where the decree of divorce is obtained by perjury and fraud practiced upon the court by means of a false affidavit for an order allowing constructive service, the defendant may institute a bill in the nature of a bill of review to vacate and set aside the decree so that the marital status of the parties, including dower rights, is revived. Russell v. Russell, 129 Fla. 868, 177 So. (1937); DeSosa v. DeSosa, 104 Fla. 219, 139 So. 581 (1932); Parramore v. Parramore, 61 Fla. 701, 55 So. 795 (1911). Likewise, it is settled that one who seeks to set aside a final decree of divorce on the ground of deceit assumes the burden of proving its invalidity by a preponderance of the evidence, including the fact that he acted in good faith and with reasonable promptness. Larsen v. Larsen, 180 So.2d 393 (Fla. 1965).

Sec. 49.041. Sworn statement, natural person as defendant.The sworn statement of the plaintiff, his agent or attorney, for service of process by publication against a natural person, shall show:(1) That diligent search and inquiry have been made to discover the name and residence of such person, and that the same is set forth in said sworn statement as particularly as is known to the affiant; and(2) Whether such person is over or under the age of twenty-one years, if his age is known, or that his age is unknown; and(3) In addition to the above, that the residence of such person is, either:(a) Unknown to the affiant; or(b) In some state or country other than this state, stating said residence if known; or(c) In the state, but that he has been absent from the state for more than sixty days next preceding the making of the sworn statement, or conceals himself so that process cannot be personally served upon him, and that affiant believes that there is no person in the state upon whom service of process would bind said absent or concealed defendant.

In the instant case, the record shows that in 1944 Nelson, who was in the U.S. Army and not living with his wife, instituted divorce proceedings against Lucille with constructive service. Based upon an affidavit attached to his bill of complaint for divorce, alleging that Lucille was a resident of Lockport, N.Y., and testimony received at the hearing, a divorce was granted by default judgment by the Circuit Court of St. Lucie County, Fla., on September 22, 1944. Petitioner learned of the divorce within a few weeks but took no positive steps to restore the marriage or claim any marital rights through legal proceedings. After more than 20 years, petitioner now urges that this decree was void because the service by publication was procured by fraud, since Nelson knew where she was living at the time he brought his divorce action and intentionally perjured himself to the court in his affidavit to prevent her from responding to his complaint.

No convincing evidence has been adduced by petitioner to support her contention. The last-known address of petitioner mentioned by Nelson in his Martin County divorce complaint, which was dismissed without prejudice by mutual consent, is ‘c/o the 19th Hole,‘ a bar in Lake Park, Fla., where she was served with a copy of the complaint on November 6, 1943, in a prior divorce action which he instituted and later dismissed. She admitted this to be her address in her answer to the complaint. Lucille testified that at this time she was living on Juno Plantation which she rented in Juno, Fla. While Lucille may only have been working at the bar in Lake Park, Fla., at the time, it appears that Nelson did not know of her permanent place of abode even when he brought his first action and her residence in Juno explains, to some extent, why Nelson was unable to locate her when he brought his second suit for divorce.

Although Lucille avers that she resided in Juno until 1947 or 1948, the record strongly suggests that she virtually lived as a transient during the period involved and it is, therefore, quite understandable that Nelson was forced to resort to service upon her by publication. In this connection, we note that during her marriage to Nelson she received her family military allotment in the mail at Jupiter, Fla. However, she received a notice through the mail at the Post Office in Lake Park, Fla., that her family allowance had been discontinued as of September 30, 1944. Also we note that the attorney for Bessemer traced her residence to Lake Park some 20 years later. Lucille admits that she was not living in Jupiter, Fla., where she previously had received her family allotment and where Nelson claimed they last cohabited as man and wife in August 1944 when he filed the complaint for divorce. She has failed to convince us that Nelson knew her whereabouts when he filed his complaint or thereafter during the pendency of the final divorce action. Manifestly, the court which granted him the divorce decree was satisfied that he had made an effort appropriate to the circumstances under the Florida statute, sec. 49.041, supra, to ascertain Lucille's last-known address so that personal service of process could be obtained.

Petitioner relies principally upon self-serving declarations that the Nelson divorce was procured by fraud on the court and is void. Her testimony for the most part was inconclusive and conclusory in nature and we are unable to find any substantiation in the record for her claim. In our opinion, she has not established that the Nelson divorce decree was obtained by fraud. Under the circumstances, we find no justification to impeach or disregard the Florida decree of divorce.

Considering the foregoing and the record as a whole, we must conclude that the marital status of Lucille and Nelson was terminated by the divorce decree obtained by him in September 1944 and that any inchoate right of dower on the part of Lucille was also extinguished by this decree. North v. Ringling, 149 Fla. 739, 7 So.2d 476 (1940); Pawley v. Pawley, 46 So.2d 464 (Fla. 1950). Accordingly, we hold that petitioner had no dower right to release in April 1965 when Nelson sold a tract of land to Bessemer.

It appears settled under Florida law that neither party can maintain an action after the final divorce decree for an adjudication of property rights, and that such rights become res judicata on the entry of the decree, even if they were not submitted to the court, since such rights could and should have been adjudicated in the divorce proceeding. Cooper v. Cooper, 69 So.2d 881 (Fla. 1954).

Assuming arguendo that Nelson's divorce had been obtained as a result of his perjury and fraud practiced on the St. Lucie County Court, it is clear under Florida law that petitioner would nevertheless be precluded by laches from claiming any dower rights in Nelson's property because of her conduct and lack of diligence subsequent to the decree. Carpenter v. Carpenter, 93 F.Supp. 225 (S.D. Fla. 1950). Despite her knowledge of the Nelson divorce and her alleged doubts as to its validity, she failed to take any affirmative steps to assert her rights as the wife of Nelson prior to 1965. In fact, she remarried in 1947 and was again divorced in 1949. No plausible excuse has been presented by Lucille for the long delay in contesting Nelson's divorce. Ostensibly, she has sat by idly for more than 20 years in an attitude of acquiescence to this decree until she was asked by Bessemer's attorney to join in the execution of the deed. Under the circumstances, we believe that her asserted claim for dower in 1965 would have become stale and barred by equitable estoppel under Florida law. Valverde v. Valverde, 121 Fla. 576, 164 So. 287 (1935).

In challenging respondent's determination, petitioner relies on Lyeth v. Hoey, 305 U.S. 188 (1938), for the principle that where there is a bona fide controversy between the parties, the tax treatment of a payment in compromise thereof is to be determined by looking to the nature of the item for which the payment is a substitute and that this principle is equally applicable to those situations where a compromise settlement is reached as a result of negotiations prior to the institution of a suit. Petitioner maintains that as a result of her dispute with Nelson in 1965, she received the $40,000 as a substitute for whatever dower rights she had in the land sold to Bessemer. We have carefully considered this case and find it distinguishable on its facts and inapposite. In Lyeth v. Hoey, supra, and numerous cases following it, there was threatened litigation over a will which was compromised in a good-faith settlement, and the heirs receiving the proceeds of the compromise received them by virtue of their heirship, as if by will. In those cases the taxpayers became heirs upon the moment of death of the decedent in question and the taxpayers' standing as heirs was not challenged. This is not the situation in the instant case, since petitioner's status as a wife had been contested. In this type of situation, State law governs the character of the funds received by petitioner, rather than the compromise rationale of Lyeth v. Hoey, supra. See Grossman v. Campbell, 368 F.2d 206 (C.A. 5, 1966), where the Court held that it must look to State law to determine whether there was an actual and genuine dispute out of which a bona fide settlement arose, and if there was no such dispute and settlement, then the principle of Lyeth v. Hoey, supra, would not apply. As discussed hereinabove, petitioner has not established to our satisfaction that she would be successful in her contention that she was the wife of Nelson in April 1965 under Florida law.

Even if the doctrine of the Lyeth case were applicable here, petitioner would not prevail. Some evidence beyond the mere retention of a lawyer, a hollow threat and recognition (under economic duress) of the existence and disposal of a groundless claim must be shown. There is no direct evidence of actual threatened litigation by petitioner with respect to the 1944 divorce decree having been communicated either to Nelson or his attorney. Petitioner's receipt of the $40,000 did not reflect the strength or merit of her legal position in claiming to be the wife of Nelson in 1965. We are convinced that Lucille received the $40,000 because that was the only apparent way in which Nelson was able to raise the required money to prevent a mortgage foreclosure sale of the land in question, as well as other property, scheduled to take place on April 19, 1965, the same day as the closing of the land sale to Bessemer. In order for the doctrine of the Lyeth case to apply, the claim asserted must have had some color of merit and the compromise must have resulted from something more than a ‘naked threat.’ Bailey v. Ratterre, 144 F.Supp. 449 (N.D. N.Y. 1956), affd. 243 F.2d 454 (C.A. 2, 1957). Here there was no compromise settlement arising from threatened litigation involving a bona fide claim for dower rights with some measure of merit. At most, Lucille received the payment under review because Nelson was in financial distress and had no time to pursue any other course of action. She had no dower rights in Nelson's property and we therefore find that no part of the settlement payment was paid for such rights.

Decision will be entered for the respondent.