United States v. Davis, 370. U.S.65,62-2 USTC Paragraph 9509 (1962)
FACTS:
Davis and his former wife went into a divorce settlement which allowed his former wife to have certain personal property that was 1,000 share of stock after they divorced. To execute the agreement, Mr. Davis transferred 500 shares of stock with $74,775.37 basis in 1955 when the market value of the stocks is $82,250. Mr. Davis believed that the transfer was a nontaxable event. However, the Commissioner claimed that Mr. Davis should be taxed on the gain realized in the transfer. They brought the disagreement to the United States Court of Claims first, and the Court of Claims ruled in Mr. Davis’ favor. Then, the Commissioner appealed this case to the Court of Appeals which ruled in the Commissioner’s favor. Finally, the case reached the United States Supreme Court.
ISSUE:
Whether the transaction to fulfill the marital settlement is a taxable event, and if it is a taxable event, how to determine the taxable gain realized of the transaction.
HOLDING:
Yes, the transfer of the property to release the husband’s marital obligation is a taxable event. The amount realized in the transaction should be equal to the market value of the property at the time of transfer.
LEGAL ANALYSIS:
Both the Tax Court and the Court of Appeals for the Sixth Circuit stated that the appreciated property transferred to fulfill the divorce settlement had no tax effect on the transferor because the market value of marital rights which were the amount realized by husband is indeterminable. However, the Courts of Appeals of the Second and Third Circuits argued that by assuming that the value of marital rights had the same value as the transferred property, the amount realized is determinable. SUMMARIZE THE TAXPAYER’S AND THE GOVERNMENT’S ARGUMENT:
The taxpayer argued that the property transaction in this situation was