United States v. Davis

Infobox SCOTUS case
Litigants= United States v. Davis
ArgueDate= March 28
ArgueYear= 1962
DecideDate= June 4
DecideYear= 1962
FullName= United States v. Thomas Crawley Davis, et al.
USVol=370
USPage=65
Citation= 82 S.Ct. 1190, 8 L.Ed.2d 335
Prior=
Subsequent=
Holding= A taxpayer recognizes a gain on the transfer of appreciated property in satisfaction of a legal obligation
SCOTUS=1962
Majority=Clark
JoinMajority="unanimous court"
NotParticipating= Frankfurter, White
Overruled=Internal Revenue Code § 1041

"United States v. Davis", 370 U.S. 65 (1962), is a case argued before the United States Supreme Court in 1962.

Facts

Pursuant to a separation agreement, the taxpayer, Thomas Crawley Davis, transferred 1,000 shares of stock in the E.I. du Pont de Nemours & Co. to his spouse. In exchange, his spouse relinquished any claims or marital rights she may have had against the taxpayer.

Half the shares of stock were transferred in 1955. They had cost the taxpayer $74,775.37, but they were valued at about $82,250 when they were transferred.

The taxpayer argued that the $7,000 appreciation of this stock should not count as gross income, since the transfer was more like a division of property between co-owners than a sale that resulted in gain. The government argued that the transfer of property was in exchange for the release of an independent legal obligation and thus the appreciation should be included in the taxpayer's gross income. [370 U.S. 65, 69 (1962).]

Holding

The Supreme Court held that the $7,000 appreciation should count as gross income, as "the 'amount realized' from the exchange is the fair market value of the released marital rights, which in this case would be equal to the value of the stock transferred." [cite book |title=Federal Income Taxation of Individuals: Cases, Problems and Materials |last=Donaldson |first=Samuel A. |authorlink= |coauthors= |year=2007 |publisher=Thompson-West |location=St. Paul, MN |isbn=9780314175977 |edition=Second Edition |pages=135 ] [See "Philadelphia Park Amusement Co. v. United States", 126 F.Supp. 184 (U.S. Court of Claims, 1954), determining that the fair market value of consideration of indeterminable value is equal to the value of the property exchanged for it, assuming arms-length transaction.]

Further Reasoning

The court bolstered its position by arguing that the lower court's ruling (that the value of the released marital rights is indeterminable and therefore, not included in gross income) could prejudice the spouse of the taxpayer, as her basis in the shares would not include the $7,000 appreciation, and she would have to include this in her gross income if she decided to sell the shares.

Overruled by Congress

In response to this decision, Congress enacted Internal Revenue Code § 1041. This statute provides that, generally, "no gain or loss shall be recognized on a transfer of property from an individual to...(2) a former spouse, but only if the transfer is incident to divorce." While this statute overrules the specific holding of "Davis", it does not change the general rule- that "a taxpayer recognizes a gain on the transfer of appreciated property in satisfaction of a legal obligation." [Donaldson (2007), 136.]

ee also

*List of United States Supreme Court cases, volume 370

References

Further reading

*cite book |title=Tax stories: An in-depth look at ten leading federal income tax cases |chapter=The Story of "Davis": Transfers of Property Pursuant to Divorce |last=Brown |first=Karen B. |authorlink= |editor=Caron, Paul L. (ed.) |year=2002 |publisher=Foundation Press |location=New York |isbn=1587784033 |pages=131–154