Source: https://supreme.justia.com/cases/federal/us/370/65/
Timestamp: 2019-04-23 02:28:33+00:00

Document:
Pursuant to a property settlement agreement later incorporated in a divorce decree, a taxpayer in Delaware transferred to his former wife, in return for the release of her marital claims, certain shares of stock which had appreciated in market value and which were solely his property subject to certain inchoate marital rights of the wife, including a right of intestate succession and a right upon divorce to a "reasonable" share of the husband's property. He also paid the fees of her attorney for advice given to her about the tax consequences of the property settlement.
1. In these circumstances and in view of pertinent provisions of Delaware law, this transfer of stock is to be considered under the Internal Revenue Code of 1954 not a nontaxable division of property between co-owners, but a taxable transfer of property in satisfaction of a legal obligation. Pp. 370 U. S. 68-71.
2. On the record in this case, the Commissioner's assessment of a taxable gain based upon the value of the stock at the date of its transfer has not been shown to be erroneous. Pp. 370 U. S. 71-74.
3. The amount paid by the husband to his former wife's attorney as a fee for advice given to her about the tax consequences of the property settlement was not deductible by the husband under § 212(3) of the Internal Revenue Code of 1954. Pp. 370 U. S. 74-75.
152 Ct.Cl. 805, 287 F.2d 168, affirmed in part and reversed in part.
These cases involve the tax consequences of a transfer of appreciated property by Thomas Crawley Davis [Footnote 1] to his former wife pursuant to a property settlement agreement executed prior to divorce, as well as the deductibility of his payment of her legal expenses in connection therewith. The Court of Claims upset the Commissioner's determination that there was taxable gain on the transfer but upheld his ruling that the fees paid the wife's attorney were not deductible. 152 Ct.Cl. 805, 287 F.2d 168. We granted certiorari on a conflict in the Courts of Appeals and the Court of Claims on the taxability of such transfers. [Footnote 2] 368 U. S. 813. We have decided that the taxpayer did have a taxable gain on the transfer, and that the wife's attorney's fees were not deductible.
"in full settlement and satisfaction of any and all claims and rights against the husband whatsoever (including but not by way of limitation, dower and all rights under the laws of testacy and intestacy). . . ."
Pursuant to the above agreement, which had been incorporated into the divorce decree, one-half of this stock was delivered in the tax year involved, 1955, and the balance thereafter. Davis' cost basis for the 1955 transfer was $74,775.37, and the fair market value of the 500 shares there transferred was $82,250. The taxpayer also agreed orally to pay the wife's legal expenses, and, in 1955, he made payments to the wife's attorney, including $2,500 for services concerning tax matters relative to the property settlement.
9 T.C. 53 (1947); Patino v. Commissioner, 13 T.C. 816 (1949); Estate of Stouffer v. Commissioner, 30 T.C. 1244 (1958); King v. Commissioner, 31 T.C. 108 (1958); Marshman v. Commissioner, 31 T.C. 269 (1958). In Mesta and Halliwell, the Courts of Appeals reasoned that the accretion to the property was "realized" by the transfer, and that this gain could be measured on the assumption that the relinquished marital rights were equal in value to the property transferred. The matter was considered settled until the Court of Appeals for the Sixth Circuit, in reversing the Tax Court, ruled that, although such a transfer might be a taxable event, the gain realized thereby could not be determined because of the impossibility of evaluating the fair market value of the wife's marital rights. Commissioner v. Marshman, 279 F.2d 27 (1960). In so holding, that court specifically rejected the argument that these rights could be presumed to be equal in value to the property transferred for their release. This is essentially the position taken by the Court of Claims in the instant case.
statutory language, which provides that gains from dealings in property are to be taxed upon "sale or other disposition," [Footnote 5] is too general to include or exclude conclusively the transaction presently in issue. Recognizing this, the Government and the taxpayer argue by analogy with transactions more easily classified as within or without the ambient of taxable events. The taxpayer asserts that the present disposition is comparable to a nontaxable division of property between two co-owners, [Footnote 6] while the Government contends it more resembles a taxable transfer of property in exchange for the release of an independent legal obligation. Neither disputes the validity of the other's starting point.
and subtle casuistries which . . . possess no relevance for tax purposes," Helvering v. Hallock, 309 U. S. 106, 309 U. S. 118 (1940), and would create disparities between common law and community property jurisdictions in contradiction to Congress' general policy of equality between the two. The taxpayer's analogy, however, stumbles on its own premise, for the inchoate rights granted a wife in her husband's property by the Delaware law do not even remotely reach the dignity of co-ownership. The wife has no interest -- passive or active -- over the management or disposition of her husband's personal property. Her rights are not descendable, and she must survive him to share in his intestate estate. Upon dissolution of the marriage, she shares in the property only to such extent as the court deems "reasonable." 13 Del.Code Ann. § 1531(a). What is "reasonable" might be ascertained independently of the extent of the husband's property by such criteria as the wife's financial condition, her needs in relation to her accustomed station in life, her age and health, the number of children and their ages, and the earning capacity of the husband. See, e.g., Beres v. Beres, 2 Storey 133, 52 Del. 133, 154 A.2d 384 (1959).
property as it did here, but certainly this happenstance does not equate the transaction with a division of property by co-owners. Although admittedly such a view may permit different tax treatment among the several States, this Court in the past has not ignored the differing effects on the federal taxing scheme of substantive differences between community property and common law systems. E.g., Poe v. Seaborn, 282 U. S. 101 (1930). To be sure, Congress has seen fit to alleviate this disparity in many areas, e.g., Revenue Act of 1948, 62 Stat. 110, but in other areas the facts of life are still with us.
Our interpretation of the general statutory language is fortified by the longstanding administrative practice as sounded and formalized by the settled state of law in the lower courts. The Commissioner's position was adopted in the early 40's by the Second and Third Circuits, and, by 1947, the Tax Court had acquiesced in this view. This settled rule was not disturbed by the Court of Appeals for the Sixth Circuit in 1960 or the Court of Claims in the instant case, for these latter courts, in holding the gain indeterminable, assumed that the transaction was otherwise a taxable event. Such unanimity of views in support of a position representing a reasonable construction of an ambiguous statute will not lightly be put aside. It is quite possible that this notorious construction was relied upon by numerous taxpayers, as well as the Congress itself, which not only refrained from making any changes in the statutory language during more than a score of years, but reenacted this same language in 1954.
gain from the sale or disposition of property as being the "excess of the amount realized therefrom over the adjusted basis. . . ." I.R.C. (1954) § 1001(a). The "amount realized" is further defined as "the sum of any money received plus the fair market value of the property (other than money) received." I.R.C. (1954) § 1001(b). In the instant case, the "property received" was the release of the wife's inchoate marital rights. The Court of Claims, following the Court of Appeals for the Sixth Circuit, found that there was no way to compute the fair market value of these marital rights, and that it was thus impossible to determine the taxable gain realized by the taxpayer. We believe this conclusion was erroneous.
consequences. Cf. Helvering v. Safe Deposit & Trust Co., 316 U. S. 56, 316 U. S. 67 (1942).
Moreover, if the transaction is to be considered a taxable event as to the husband, the Court of Claims' position leaves up in the air the wife's basis for the property received. In the context of a taxable transfer by the husband, [Footnote 7] all indicia point to a "cost" basis for this property in the hands of the wife. [Footnote 8] Yet, under the Court of Claims' position, her cost for this property, i.e., the value of the marital rights relinquished therefor, would be indeterminable, and, on subsequent disposition of the property, she might suffer inordinately over the Commissioner's assessment which she would have the burden of proving erroneous, Commissioner v. Hansen, 360 U. S. 446, 360 U. S. 468 (1959). Our present holding that the value of these rights is ascertainable eliminates this problem; for the same calculation that determines the amount received by the husband fixes the amount given up by the wife, and this figure, i.e., the market value of the property transferred by the husband, will be taken by her as her tax basis for the property received.
then, it cannot be said that . . . [his] advice was directed to plaintiff's tax problems. . . ." 152 Ct.Cl 805, 287 F.2d at 171. We therefore conclude, as did the Court of Claims, that those fees were not a deductible item to the taxpayer.
* Together with No. 268, Davis et al. v. United States, also on certiorari to the same court.
Davis' present wife, Grace Ethel Davis, is also a party to these proceedings because a joint return was filed in the tax year in question.
The holding in the instant case is in accord with Commissioner v. Marshman, 279 F.2d 27 (C.A.6th Cir. 1960), but is contra to the holdings in Commissioner v. Halliwell, 131 F.2d 642 (C.A.2d Cir. 1942), and Commissioner v. Mesta, 123 F.2d 986 (C.A.3d Cir. 1941).
12 Del.Code Ann. (Supp.1960) § 512; 13 Del.Code Ann. § 1531. In the case of realty, the wife, in addition to the above, has rights of dower. 12 Del.Code Ann. §§ 502, 901, 904, 905.
Internal Revenue Code of 1954, § 61(a).
Internal Revenue Code of 1954, §§ 1001, 1002.
Any suggestion that the transaction in question was a gift is completely unrealistic. Property transferred pursuant to a negotiated settlement in return for the release of admittedly valuable rights is not a gift in any sense of the term. To intimate that there was a gift to the extent the value of the property exceeded that of the rights released not only invokes the erroneous premise that every exchange not precisely equal involves a gift, but merely raises the measurement problem discussed in Part III, infra, p. 370 U. S. 71. Cases in which this Court has held transfers of property in exchange for the release of marital rights subject to gift taxes are based not on the premise that such transactions are inherently gifts, but on the concept that in the contemplation of the gift tax statute they are to be taxed as gifts. Merrill v. Fahs, 324 U. S. 308 (1945); Commissioner v. Wemyss, 324 U. S. 303 (1945); see Harris v. Commissioner, 340 U. S. 106 (1950). In interpreting the particular income tax provisions here involved, we find ourselves unfettered by the language and considerations ingrained in the gift and estate tax statutes. See Farid-Es-Sultaneh v. Commissioner, 160 F.2d 812 (C.A.2d Cir. 1947).
Under the present administrative practice, the release of marital rights in exchange from property or other consideration is not considered a taxable event as to the wife. For a discussion of the difficulties confronting a wife under a contrary approach, see Taylor and Schwartz, Tax Aspects of Marital Property Agreements, 7 Tax L.Rev. 19, 30 (1951); Comment, The Lump Sum Divorce Settlement as a Taxable Exchange, 8 U.C.L.A.L.Rev. 593, 601-602 (1961).
"The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses). . . ."
We do not pass on the soundness of the taxpayer's other attacks upon this determination, for these contentions were not presented to the Commissioner or the Court of Claims.

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