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Court of Appeal, First District, Division 4, California.

Betty Richwhite KULCHAR, Plaintiff and Appellant, v. George Victor KULCHAR, Defendant and Respondent.

Civ. 26024.

Decided: June 18, 1969

James Martin MacInnis, San Francisco, for appellant. Goth, Dennis & Aaron, Redwood City, for respondent.

Betty Richwhite Kulchar appeals from an order modifying a decree of divorce. She and respondent, Dr. George Kulchar, were married in 1955. No children were born to the marriage. When the marriage had broken down, an understanding concerning property and support was reached by the parties; after a brief hearing, at which respondent offered no evidence and cross-examined no witnesses, an interlocutory decree of divorce was entered on July 3, 1964.

The decree contained lengthy and detailed provision for settlement of the reciprocal rights of the parties in their substantial property holdings. The family residence was assigned to appellant, but upon completion of a pending sale of the property for $200,000 the proceeds were to be divided equally (subject to certain adjustments not now material). Appellant was to receive $12,000 in alimony, payable in twelve $1,000 monthly installments. Certain business property (including realty) was assigned to respondent. Finally, the decree included a direction for respondent to hold Mrs. Kulchar harmless ‘in the matter of any monies due any taxing agency, whether Federal, State or County, for the calendar years prior to 1964; * * *’ Both parties and their counsel signed an endorsement upon the decree, approving it without reservation.

Appellant had received, by gift from her father, 49 percent of the capital stock of David Lloyd Company, Ltd., a New Zealand Corporation. She gave her father power of attorney to vote her stock and took no interest in corporate affairs. She did receive about $2,800 per year in dividends from New Zealand. These payments were never reported as income on the joint federal income tax returns filed by the parties, but were discovered in a detailed audit of the 1964 return. The Internal Revenue Service made further inquiries and now asserts that not only those payments but also all dividends earned by appellant's stock in the New Zealand corporation should have been declared as income even though funds were held in New Zealand rather than (with the exception of the annual $2,800 referred to above) remitted to appellant in the United States. The government's contention is that additional income should have been reported for the years 1958 to 1963, as follows:

Because joint returns were filed for those years, demands have been made upon both parties by the Internal Revenue Service. Mrs. Kulchar contends that, under the tax indemnity provision of the divorce decree, Dr. Kulchar should bear the entire additional tax liability.

Resisting that contention, Dr. Kulchar initiated the proceedings now under review to modify the divorce decree; he moved to set aside all of the provisions of the decree relating to property and support, asserting extrinsic fraud and extrinsic mistake. In support of the motion, Dr. Kulchar testified that he had no knowledge of Mrs. Kulchar's New Zealand interests except that ‘she owned some property or was involved in the David Lloyd Company, but this was held in trust for her nephews.’ The value of this testimony was somewhat depreciated by the fact that Dr. Kulchar had executed and filed, before the interlocutory decree was entered, an affidavit in the form of a questionnaire relating to support in which he had declared under oath that his wife's separate property consisted of ‘50% stock interest in David Lloyd Co., Ltd.,—a New Zealand holding corporation for many subsidiary companies (cement, coal, paper)—exact worth unknown to defendant—estimated to run into millions of dollars.’ It also developed that in an answer to interrogatories addressed to her early in the divorce proceedings, Mrs. Kulchar reported ‘It is my understanding that I own forty–nine percent of the stock in the David Lloyd Company in New Zealand as a gift from my father, but my father has my power of attorney to vote and manage the stock and I am unable to transfer more than $2,800.00 a year to America under New Zealand law.’

Although the claim of extrinsic fraud was thus not well supported, Mrs. Kulchar candidly testified that she had no thought of any New Zealand problem when she read and approved the form of interlocutory decree. In his testimony, Dr. Kulchar suggested, somewhat obliquely, that the tax indemnity provision was put into the decree because of federal tax audits that were already pending in relation to his business deductions and certain exchanges of property. That explanation was supported by testimony of the lawyer who represented respondent when the decree was entered. Concluding that the tax indemnity provision of the decree ‘was included and approved by the parties as a result of the mutual mistake of the parties and further, that there was no intent of the parties that defendant should pay United States Federal income tax resulting from income to plaintiff in New Zealand,’ the court modified the decree by relieving respondent ‘of any liability which might result from the provisions of the Decree for payment of United States Federal Income Taxes assessed against the parties hereto or either of them as the result of any income allegedly accruing to or received by plaintiff in New Zealand.’ The order also invited either party to move for ‘further hearing to determine whether or not defendant should be liable for taxes assessed against the plaintiff because of plaintiff's New Zealand income.’

On appeal, Mrs. Kulchar contends that the evidence does not support the order modifying the decree. This contention is sound; there was no evidence that respondent was laboring under an extrinsic mistake, i.e., a mistake which effectively deprived him of an opportunity to appear and present his claim or defense (3 Witkin, Cal.Procedure, Attack on Judgment in Trial Court, § 74, pp. 21–28). Even if respondent did not know that additional tax liability would be asserted by the United States, he was in possession of facts which might well have put him on inquiry; no concealment on the part of appellant was shown (cf. Jorgensen v. Jorgensen (1948) 32 Cal.2d 13, 22, 193 P.2d 728; Dandini v. Dandini (1953) 120 Cal.App.2d 211, 216, 260 P.2d 1033). Respondent asserts that if he had known the magnitude of the emerging tax threat he would not have approved the form of decree adopted by the court. But appellant, with equal plausibility, contends that if she had possessed such information she could not have accepted the tax obligation without some augmentation of the property and support awards included in the decree.

The provision for tax indemnity was embodied not in a mere agreement between the parties, which would have been subject to rescission or reformation upon an appropriate showing of mistake. It was part of a judgment protected by the doctrine of res judicata (3 Witkin, California Procedure, Judgment, p. 1894). Where the parties and their counsel knew the facts regarding appellant's New Zealand holdings and the taxable income produced thereby, or were reasonably put to inquiry for further information, and the party seeking to modify the judgment consented to it upon failing fully to appreciate its consequences, there is no extrinsic mistake; the judgment, once final, is res judicata and must not be disturbed (Lennefelt v. Cranston (1964) 231 Cal.App.2d 171, 177, 41 Cal.Rptr. 598).

The order is reversed.

CHRISTIAN, Associate Justice.

DEVINE, P. J., and RATTIGAN, J., concur.