Court Opinion

ID: 8917676
Source: CourtListenerOpinion
Date Created: 2022-11-27 05:45:29.068042+00
Date Added: 2024-06-11T17:09:08.571829
License: Public Domain

POSNER, Circuit Judge,
concurring.
I agree that the judgment of the district court should be affirmed but I respectfully disagree with the ground — section 2516 of the Internal Revenue Code — on which my brethren have decided to place affirmance.
If you use stock or other capital assets that have appreciated since their acquisition to pay off a debt, the payment is a realization of the gain on the property and you must pay capital gains tax. So if in transferring appreciated stock to the trust which he created for his children Mr. Massey was paying off debts to his wife or his children (or both his wife and his children) he realized a capital gain on the stock, but the trust — the taxpayer in this case — did not when it later sold the stock at a price no greater than its fair market value on the day the trust received it. If on the other hand the transfer was merely a gift to the children (in trust) no gain was realized till the trust sold the stock, and the trust must pay capital gains tax.
If I were free to do so, I would hold that when a husband transfers property to his wife as part of a divorce settlement there is no presumption that he is simply paying off a debt arising from the claim that family law gives a divorced wife to continued support by the husband. The transfer is more likely to be, at least in part, a recognition of the wife’s contribution to the creation of the marital property, as in a division of partnership assets when a partnership dissolves — a distribution that in general is not taxable, see Chommie, The Law of Federal Income Taxation 526 (2d ed.1973). But in United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962), the Supreme Court adopted a rule that a transfer of property between divorcing spouses is consideration for the recipient’s surrender of her (as it usually is) marital rights rather than a distribution of assets of the marital partnership. Although it has been strongly criticized, see, e.g., Areen, Cases and Materials on Family Law 691-92 (1978); Chirelstein, Federal Income Taxation 84-85 (1979), Davis was a unanimous decision from which the Supreme Court has shown no disposition to recede.
The present case is factually distinguishable from Davis because the wife did not receive the property; the trust for the children did. But she submitted an uncontradicted affidavit that the transfer was in settlement of her marital rights. This is not implausible; if she loves her children, an increase in their wealth is a benefit to her which she might accept in partial compensation for relinquishing her marital rights as a divorced wife. The transfer may also represent payment of a contingent debt to the children arising from their (qualified) right under Indiana law to require their father to pay for their college and postgraduate education. Probably the transfer is not all gift or all payment of claims but in part a gift to the children and in part satisfaction of their and the wife’s family-law claims against Mr. Massey, and it may also be in part — perhaps in major *1187part — an indirect return to the wife of the part of the marital property created by her efforts whether in the market or in the home. (A housewife contributes to the wealth of the family by freeing up, for the production of additional market income, time that the husband would otherwise have to devote to household work. This and other points made in the growing literature on the economics of the family, on which see Becker, A Treatise on the Family (1981), reinforce the criticisms that have been made of the Davis decision.) But the Court in Davis was unwilling to partition the transfer of property to the wife between debt-payment and other purposes; it insisted, for reasons of administrative convenience, that the transfer be treated as consideration for the surrender of her marital rights and as nothing else. In this case, the wife’s affidavit and the children’s right (qualified and contingent as it is) under Indiana law to require parents who can afford to do so to pay for their college and postgraduate education were some evidence that the transfer was properly characterized as a purchase of actual or potential claims rather than as a gift or a distribution of assets already equitably owned by the wife or children; and the government put in no contrary evidence.
So this is a fact case; and section 2516 of the Internal Revenue Code is irrelevant or at least unhelpful. The section provides that if a transfer of property pursuant to an agreement in contemplation of divorce is made either in settlement of the transferee spouse’s marital rights or “to provide a reasonable allowance for the support of issue of the marriage during minority,” the transfer shall be deemed to have been “made for a full and adequate consideration”; in other words, it is not a gift. There is grave doubt that the statute is intended to have any application except in gift-tax cases but in any event it has no useful application to this case. The first part of the section, relating to settlement of marital rights, is identical to the standard of Davis; and the issue here is not what the standard is but its application to the facts— an issue that section 2516, even if applicable, does not illuminate. The second part of section 2516, relating to support of children, is by its terms inapplicable to this case, since the trust that Massey set up was not limited to support of his children “during minority.” We are not authorized to delete these words from the statute, and, with all due respect, I fail to understand what my brethren mean in saying that section 2516 can be applied here by analogy.