Young v. Commissioner

240 F.3d. 369 (4th Cir. 2001)

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Nature of the Case

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Facts

Louise Young (W) and John Young (H) married in 1969 and divorced in 1988. They entered into a Mutual Release and Acknowledgment of Settlement Agreement to resolve 'their Equitable Distribution [of] Property claim and all other claims arising out of the marital relationship.' H delivered to W a promissory note for $1.5 million, payable in five annual installments plus interest, which was secured by a deed of trust on 71 acres of property that H received as part of the same 1989 Settlement Agreement. In 1990, H defaulted on his obligations under the 1989 Settlement Agreement. W brought a collection action in state court in North Carolina. The state court awarded her principal, interest, and reasonable attorneys' fees. H paid only $160,000 toward satisfaction of that judgment, prompting W to initiate steps to execute the judgment. H and W then entered into a Settlement Agreement and Release ('1992 Agreement'), where H would transfer to W in full settlement of his obligations, a 59-acre tract of land (42.3 of the 71 acres that had collateralized his $1.5 million note and 16.7 acres adjoining that tract). H retained an option to repurchase the land for $2.2 million before December 1992. H assigned the option to a third party, who exercised the option and bought the land for $2.2 million. On her 1992 and 1993 federal income tax returns, W reported no capital gain from the sale of the property in 1992 or 93 nor the $300,606 portion of the $2.2 million that went directly to pay her attorneys' fees. H did not report any gain from his transfer of property, in which he had a $130,794 basis, to satisfy his then almost $2.2 million obligation to W. The Commissioner assessed deficiencies against H and W. The Tax Court ruled that the capital gain was properly taxable to W under 26 U.S.C. S 1041(a)(2) (1994), which provides that 'no gain or loss shall be recognized on a transfer of property . . . to . . . a former spouse, . . . if the transfer is incident to the divorce.' W took H's adjusted basis in the land and should have recognized a taxable gain upon the subsequent sale of that property. The portion of the proceeds from the sale, which was paid directly to her attorneys, must be included in W's gross income. W and her current husband owed $206,323 in additional income tax in 1992, and W alone owed $262,657 in additional income tax in 1993. W and her current husband appealed.