United States v. Davis

370 U.S. 65 (1962)

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Nature of the Case

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Facts

Davis (P) and his then-wife made a voluntary property settlement and separation agreement with support payments to the wife, child support and a transfer of certain personal property to the wife. Under Delaware law, all of the property transferred was subject to the statutory marital rights of the wife for intestate succession and for divorce. P transferred 1,000 shares of stock in Dupont. The wife accepted the division in full settlement and satisfaction of any and all claims against P. The Tax Court held that the accretion to property transferred pursuant to a divorce settlement could not be taxed as a capital gain to the transferor because the amount realized by the satisfaction of P’s obligations was indeterminable and even if ascertainable, the transaction was a nontaxable division of property. That decision was reversed by the Court of Appeals in the 3^rd and 2^nd Circuits. They reasoned that the accretion to the property was realized by the transfer and that the gain could be measured on the assumption that the relinquishment of the marital rights were equal in value to the property transferred. The 6^th Circuit ruled that the gain could not be determined because of evaluating the fair market value of the wife’s marital rights. That court rejected the idea that the rights could be presumed to be equal in value to the property transferred for their release.