Opinion
Civil Action No. 3:00-CV-2028-D
July 5, 2002
MEMORANDUM OPINION AND ORDER
Plaintiff Hexin E. McPhee ("McPhee") brought this action under 26 U.S.C. § 7426 to recover proceeds in the amount of $45,864.24 that he maintains the Internal Revenue Service ("IRS") wrongfully obtained from the sale of his residence at 321 Crooked Tree Court, Coppell, Texas ("Residence") to satisfy a tax lien that secured the recovery of unpaid income taxes owed by his former wife, Debra McPhee ("Debra"). The threshold question the court must decide is whether the Residence was the couple's community property or McPhee's separate property. Following a bench trial, the court holds, for the reasons that follow, that McPhee failed to prove by clear and convincing evidence that the Residence was his separate property. The court directs the parties to stipulate to the extent of the IRS' lien rights in the Residence, or (absent agreement) to brief the remaining issues concerning the extent of the IRS' rights.
As permitted by Fed.R.Civ.P. 52(a), the court sets out its findings of fact and conclusions of law in this memorandum opinion and order. The court's findings do not address all matters in dispute. They are primarily confined to those factual matters that affect the legal basis for the court's decision.
I
McPhee sues the IRS and the United States Attorney (collectively, the "United States") to recover the sum of $45,864.24 that he paid the IRS from the proceeds of the sale of the Residence to obtain the release of an IRS tax lien. While McPhee and Debra were still married, but were living apart under the terms of a California separation agreement ("Separation Agreement") (PX 1), Debra failed over a period of several years to file federal income tax returns and pay income taxes. The IRS assessed her unpaid taxes in 1995 and on April 2, 1996 perfected a tax lien by filing a notice of federal tax lien in Dallas County, Texas. McPhee maintains that he is entitled to recover what he paid to obtain release of the lien because the Residence was his separate property. The United States does not contend that McPhee is liable for Debra's tax debts. It maintains that the Residence is community property and therefore liable for Debra's indebtedness.
McPhee and Debra married on April 23, 1977 and took up residence in California. Two daughters were born of the marriage. Ultimately, the couple decided to separate and live apart. Effective November 6, 1987 they entered into the Separation Agreement, which is permitted under California law. They never divorced while they lived in California. The couple did not share income or expenses, but McPhee made child support payments to Debra. Each spouse was responsible for filing his or her own separate federal income tax returns and paying his or her respective federal income tax liabilities. Debra worked in jobs that did not require withholding of such taxes from her income. During the period they were separated. McPhee purchased a home with his separate property. McPhee and Debra had a cordial, amicable relationship that centered around their children; they were not intimate. For a time, another woman and her children lived with McPhee in his home.
In 1993 McPhee's employer transferred him to the Dallas, Texas area. He did not want to leave his daughters, so he asked Debra if she would consider permitting them to relocate with him, provided he continued to make child support payments. He did not intend that Debra move to Texas with their children. McPhee brought her to Texas, however, so that she could see that the move would not be detrimental to their children.
McPhee located a home — the Residence at issue — and on November 19, 1993 he made an earnest money payment of $2,500 from his separate property personal checking account. He intended to pay the balance of the purchase price from the proceeds of the sale of his separate property California home. The total purchase price of $194,295.00 was paid using the $2,500 earnest money payment, an additional $14,000 from a bank loan that his employer guaranteed, and a mortgage loan that the relocation company insisted be in McPhee's and Debra's names.
McPhee moved to Texas in February 1994 as part of the employer's advance team, and he lived in corporate housing until May 20, 1994, while awaiting the move to the Residence. His intention that Debra not move to Texas changed, however, when she appeared to renege on her agreement that their daughters could move with him. Heartbroken by this turn of events, but not wanting to forfeit his job in Texas, McPhee suggested that Debra move with their daughters and that the two attempt a reconciliation of their marriage.
Although the mortgage documents (e.g., deed of trust, see DX 5) were executed by both McPhee and Debra and the deed to the Residence was prepared in both their names as "husband and wife," see DX 4, McPhee testified credibly at trial that this was required by the relocation company that was involved in the sale of his California home and the acquisition of the Residence, and it did not reflect his intentions. McPhee signed the closing documents in Texas and Debra did so in California.
In July 1994 Debra moved to Texas and she and McPhee began their reconciliation. The two opened a joint checking account. They cohabited until the spring of 1995 and slept in the same bedroom. The couple and their daughters lived together as a family in the Residence.
In February 1995 McPhee learned of Debra's unpaid taxes. This started a series of disagreements that resulted in their separation (sleeping in separate bedrooms) and the eventual return of Debra and their daughters to California.
McPhee filed for divorce in September 1995. The state district court granted the divorce on April 19, 1996. In the final decree of divorce, the court found that McPhee and Debra jointly owned the Residence, and it awarded the Residence to McPhee as his separate property. See DX 8 at 21. On June 15, 2000, however, the court filed a nunc pro tunc final decree of divorce in which it found that McPhee owned the Residence as his separate property. See PX 21 at 2. The United States was not made a party to, or notified of this proceeding.
The nunc pro tunc final decree of divorce did not recite why it was entered or why any particular change was made. The state judge who signed both decrees testified at trial that, according to her notes of the original ruling, she found that the Residence was McPhee's separate property based on the inception of title rule, because he purchased it with his separate property funds, as determined under California law, and he acquired it before Debra came to Texas.
In 2000 McPhee attempted to sell the Residence and found that the IRS lien was in effect. He paid the IRS the sum of $45,864.24 to obtain release of the lien and permit the sale to close.
II
This court looks to state law to decide whether Debra had a property interest in the Residence. See Aquilino v. United States, 363 U.S. 509, 512-13 (1960). Under Texas law,
[c]ommunity property consists of the property, other than separate property, acquired by either spouse during marriage. Separate property is that property owned by a spouse before marriage, acquired during the marriage by gift, devise, or descent, or as a recovery for personal injuries sustained during the marriage. The characterization of property as either "community" or "separate" is determined by the inception of title to the property. The major consideration in determining the characterization of property as community or separate is the intention of spouses as shown by the circumstances surrounding the inception of title.
Winkle v. Winkle, 951 S.W.2d 80, 88 (Tex.App. 1997, writ denied) (citations omitted). "The inception of title occurs when a party has the right of claim to the property by virtue of which title is finally vested." In re Marriage of Parker, 997 S.W.2d 833, 837 (Tex.App. 1999, pet. denied). In the case of a real estate purchase, inception of title generally occurs when the purchase contract is signed rather than when the deed is dated. See id. (holding that date that party purchased property under contract for deed determined character of property).
"Any property acquired during marriage is presumed to be community property in the absence of clear and convincing evidence to the contrary." Dutton v. Dutton, 18 S.W.3d 849, 852 (Tex.App. 2000, pet. denied) (citing Tex. Fam. Code Ann. § 3.003 (Vernon 1998)). "In order to rebut the community property presumption, the party claiming separate property must trace and identify the property claimed as separate property by clear and convincing evidence." Celso v. Celso, 864 S.W.2d 652, 654 (Tex.App. 1993, no writ). "Tracing involves establishing the separate origin of the property through evidence showing the time and means by which the spouse originally obtained possession of the property. Separate property will retain its character through a series of exchanges so long as the party asserting separate ownership can overcome the presumption of community property by tracing the assets on hand during the marriage back to property that, because of its time and manner of acquisition, is separate in character." Id. (citations omitted). Texas law generally, and the Texas Family Code in particular, provide that "`[c]lear and convincing evidence' means the measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established." Tex. Fam. Code Ann. § 101.007 (Vernon 1996); see State v. Addington, 588 S.W.2d 569, 570 (Tex. 1979) (per curiam). "This is an intermediate standard, falling between the preponderance standard of ordinary civil proceedings and the reasonable doubt standard of criminal proceedings." Addington, 588 S.W.2d at 570.
Dutton cites a provision of the Texas Family Code that has been recently recodified but does not materially change the one extant during the period at issue.
Debts contracted during marriage are also presumed to be community. In re Marriage of Gill, 41 S.W.3d 255, 258 (Tex.App. 2001, no pet.) ("[I]t is well established that debts contracted during marriage are presumed to be community obligations, unless it is shown by clear and convincing evidence that the creditor agreed to look solely to the separate estate of the contracting spouse.").
Under the "quasi-community property" statute, Tex. Fam. Code Ann. § 7.002 (Vernon Supp. 2002), "property that would be classified as community property if the spouses had resided in Texas at the time of its acquisition is classified as community property on divorce in Texas regardless of the characterization of the property in the state of its acquisition." Dawson-Austin v. Austin, 920 S.W.2d 776, 789 (Tex.App. 1996) (addressing precursor § 3.63(b)), rev'd on other grounds, 968 S.W.2d 319 (Tex. 1998).
This statute has been amended several times since the McPhees' divorce. The court is relying on the version that appears to have been in effect during the period in question.
Texas law recognizes the validity of post-nuptial agreements that partition community property. See Miller v. Miller, 700 S.W.2d 941, 951 (Tex.App. 1985, writ ref'd n.r.e.). But Texas law also generally provides that reconciliation, in which the parties subsequently live together, annuls such agreements. See, e.g., Hornsby v. Hornsby, 127 Tex. 474, 476, 93 S.W.2d 379, 380 (Tex. 1936); Rose v. Rogers, 264 S.W. 954, 956 (Tex.Civ.App. 1924, no writ); Cox v. Mailander, 178 S.W. 1012, 1015 (Tex.Civ.App. 1915, writ ref'd). "The general rule in this jurisdiction is that a separation agreement between husband and wife regarding their property rights is `annulled by a subsequent reconciliation, followed by a resumption of marital relations.'" Standard v. Standard, 199 S.W.2d 180, 181 (Tex.Civ.App. 1947, no writ) (quoting Hornsby, 127 Tex. 474, 93 S.W.2d at 380).
The United States raised this issue in support of its summary judgment motion, but it did not do so until its reply brief. See D. Mar. 22, 2002 Rep. Br. at 1-2. Although McPhee's counsel asserted inter alia during her opening statement at trial that Cox v. Mailander, 178 S.W. 1012 (Tex.Civ.App. 1915, writ ref'd), has been distinguished by subsequent decisions and should not be viewed in isolation, McPhee has not directly addressed this principle in his proposed findings of fact and conclusions of law.
There are recognized exceptions to this general rule. It does not apply where the parties provide to the contrary in the partition agreement or agree, while they were living apart, that their reconciliation will not annul the agreement. Id.; Cox, 178 S.W. at 1015; see Speckels v. Kneip, 170 S.W.2d 255, 260-61 (Tex.Civ.App. 1942, writ ref'd) ("We think the testimony warrants no other conclusion than that at the time Mrs. Speckels returned she and her husband had a mutual understanding that the division of community property made by the agreement of May 5, 1924, was to remain unimpaired by the resumption of marital relations, and that such understanding was recognized and lived up to by both parties until the time of Mr. Speckels' death. . . . Here, there was an agreement when the marital relations were resumed that the prior agreement as to division of the community estate should remain effective, and this mutual understanding was carried out by both parties until Mr. Speckels' death."). Another recognized exception provides that the general rule cannot "have the effect to reinvest title already vested through instruments of conveyance executed in a manner required by law . . . when applied to separation agreements which have been fully executed." Id. at 261. This exception has been construed to mean "that where there has been a final and irrevocable conveyance of property from one spouse to another, upon sufficient consideration it would require a reconveyance, executed under legal formalities, to divest such title and reinvest it in the other spouse." Standard, 199 S.W.2d at 182. The court in Standard stated that it did "not think it should be given the interpretation that in so far as a conveyance of realty is involved in a separation agreement, it can not be annulled by subsequent reconciliation and living together of the spouses without the formality of a reconveyance." Id.
III
McPhee failed to prove by clear and convincing evidence that the Residence was his separate property. Both parties agree that McPhee and Debra reconciled in July 1994 and cohabited as husband and wife until the spring of 1995. To avoid the Texas rule that the Separation Agreement was thereby annulled, McPhee was required to prove that the Separation Agreement provides to the contrary; while they were living apart, they agreed that their reconciliation would not annul the Separation Agreement; or some other exception to the general rule applied. The court finds that he did not. The Separation Agreement does not address the subject of reconciliation. See PX 1. McPhee did not prove at trial that he and Debra agreed that their reconciliation would not annul the Separation Agreement. And he did not establish any other factual or legal basis for avoiding the general rule.
McPhee did not attempt to offer clear and convincing evidence tracing any proceeds he used to purchase the Residence from property he owned before marriage or acquired during the marriage by gift, devise, or descent, or as a recovery for personal injuries sustained during the marriage.
McPhee and Debra were still married when McPhee arranged for the purchase of the Residence. Their reconciliation in 1994 and 1995 annulled the Separation Agreement. Consequently, the $2,500 that McPhee used to make the earnest money deposit on the Residence was community property. McPhee acknowledges that, under his own construction of the Texas inception of title rule, the character of the funds he used to purchase the Residence determines its classification. See P. Prop. Concl. Law No. 30(i) (arguing that inception of title for real property is determined by signing of purchase contract, not date of deed, and that McPhee "paid the escrow funds from separate property."). McPhee thus failed to prove by clear and convincing evidence that the Residence was his separate property. Cf. Winkle, 951 S.W.2d at 88 ("In the instant case, the property at 904 Waterview was purchased during the marriage and intended as a home for the community. The down payment on the lot was paid, by appellant's own testimony, with community funds. The property at 904 Waterview therefore is community property.").
McPhee relies on a nunc pro tunc final decree of divorce to contend that the Residence was his separate property. It is undisputed, however, that the United States was not made a party to the nunc pro tunc proceeding, despite the obvious potential impact on its tax lien against the Residence. Because the United States was not a party to the nunc pro tunc proceeding, the nunc pro tunc final decree of divorce is not binding on this court. See Comm'r v. Bosch, 387 U.S. 456, 457 (1967) (holding that federal court or agency is not bound by state court's characterization of property interests in federal estate tax controversy where United States is not party to proceeding).
McPhee made the payment that he seeks to recoup on May 19, 2000, he obtained the nunc pro tunc final decree of divorce on June 15, 2000, and he filed the instant suit on September 15, 2000.
* * *
For the reasons set forth, the court holds that McPhee failed to prove by clear and convincing evidence that the Residence was his separate property. The court directs the parties to stipulate to the extent of the IRS' lien rights in the Residence, or (absent agreement) to submit briefs to the court on the following schedule: McPhee's initial brief must be filed no later than July 22, 2002; the United States' responsive brief must be filed no later than August 5, 2002; and McPhee may file reply brief no later than August 12, 2002.