e. OTHER TRANSFERS OF APPRECIATED PROPERTY (Not interspousal or incident to divorce) that are transferred to satisfy an obligation, a gain subject to tax or a deductible loss may occur. f. YOUNG v. COMMISSIONER : Husband transferred land to wife as part of divorce obligation; then she sold the property but the basis remained the same and there was a huge tax consequence. Pursuant to their settlement agreement, Mr. Young signed a promissory note for $1.5 million, payable in five installments, with 71 acres of land as security for the payment. He defaulted on his obligations. In their second settlement, he transferred to Mrs. Young a 59 acre tract of land, with an option to repurchase for $2.2 million. Mr. Young assigned the option to a third party who then exercised the option and paid Mrs. Young $2.2 million for the land. Mrs. Young reported no capital gain from
66 the sale of the land nor the portion of the $2.2 million ($300,606) that went to pay for her attorney’s fees. i. Mrs. Young argues that the settlement agreement would have provided her with $1.5 million, but if forced to pay the capital gains tax on the sale of the property, she will be receiving less than this. ii. Mrs. Young AGREED to accept the 59 acres in lieu of enforcing her judgment against her former husband. iii. Issue : Is a transfer of property between former spouses incident to divorce if the transfer satisfies obligations arising from the divorce? iv. CT : transfer between the Young’s was related to the cessation of the marriage and did “effect the division of marital property” 1. The only status relevant to §1041 is “spouse” or “former spouse” 2. §1041 looks to the character of and reason for the transfer, not to the status of the transferee as a creditor, lien holder, devisee, trust beneficiary, or otherwise. v. POLICY of §1041: Congress has chosen to treat a husband and a wife [and former husband and wife acting incident to divorce] as one economic unit, and to defer, but not eliminate, the recognition of any gain or loss on interspousal property transfers until the property is conveyed to a third party outside the economic unit. vi. Had Mrs. Young received cash rather than property, she would have been better off B/C there is no basis in cash (no gain or loss recognized on the receipt of cash). g. ROL : Anytime former spouses transfer appreciated property incident to divorce, the transferee spouse will bear the tax burden of the property’s appreciated value after selling it and receiving the proceeds. h. REBUTTABLE PRESUMPTION : (when beyond 6 years) i. There is a presumption then that this is not in relation to the cessation of the marriage B/C it falls outside the 6 year safe harbor window. ii. This presumption can be rebutted if there is some showing that the transfer was delayed or there was good reason why it could not be made within the 6 year window but is still made in relation to the cessation of the marriage iii. Where there are parties whose main asset is investment real property, it may
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