Family Law Newsletter
| Publication year | 1981 |
| Pages | 2553 |
| Citation | Vol. 10 No. 10 Pg. 2553 |
1981, October, Pg. 2553. Family Law Newsletter
Since the early 1970s, many family law practitioners in Colorado have been structuring property settlements without much concern about possible federal income tax consequences. There seems to be an assumption implicit in many settlements that the decisions handed down in the Imel cases(fn1) set a precedent of nontaxability for divorce-forced property settlements in Colorado. While the Imel decisions are undoubtedly significant, any broad reliance on them to avoid taxation may well be misplaced. To date, the IRS has not recognized Imel, either in revenue rulings or in tax cases. Attorneys who assume that Imel makes Colorado a quasi-community property state(fn2) might also note that the IRS has attacked certain settlements in California, a statutory community property state. It is possible that the IRS is simply waiting for the right Colorado case to come along in order to attack the Imel decisions.
Attorneys who prepare property settlements in divorce cases should discuss the risks of taxability with their clients, if for no other reason than to avoid later charges of negligence stemming from unexpected assessment notices. Such risks can be further reduced by inserting several tax-related provisions in the settlement agreement.
United States v. Davis(fn3) is the leading case involving the tax consequences of a division of property due to divorce. In Davis, the husband transferred stock to the wife in settlement of an "obligation owed to her."(fn4) The stock had appreciated in value since the husband purchased it. The Supreme Court held that this transfer was a taxable event, with the husband owing capital gains tax on the difference between his basis in the stock and its fair market value. The wife's acquisition of the stock did not result in any tax consequences to her.
That result is confirmed in IRS Revenue Ruling 67-221,(fn5) which illustrates an administrative policy that the wife's receipt does not enter her gross income, and that the basis of the property in her
hands is its fair market value on the date of transfer. In an article on this subject, it was noted that, "the husband in Davis who starts with stock but ends up with nothing incurs a tax, while the wife who starts with nothing and ends up with stock incurs no tax. A layman who doesn't have the benefit of training in tax law, might think that the result should be exactly the opposite."(fn6)
In their Davis opinion, the Supreme Court offered as rationale the conclusion that the wife's rights in her husband's property, under Delaware law, "... do not even remotely reach the dignity of coownership."(fn7) Implicit in this reasoning, although not specifically stated, is the nontaxability of a division of community property.
Colorado and Oklahoma, both separate property states with similar statutes governing the wife's property rights, saw a string of settlement cases in the early 1960s.
Pulliam v. Commissioner(fn8) was a Colorado case decided in the Tenth Circuit. The court held that under Colorado law, "a wife's rights during marriage do not vest in her an ownership of any part of the husband's property."(fn9) Subsequent to that decision, the first Collins v. Commissioner case(fn10) was decided and appealed in Oklahoma. The Tenth Circuit relied heavily on its Pulliam(fn11) decision, and determined that Oklahoma law also gave the wife no species of common ownership; therefore, tax was due and payable. In each case, the tests for determining co-ownership status were those later established as "federal criteria":(fn12) the wife's power to dispose of or manage her interest, the descendability of that interest, and whether the size of the interest is within the discretion of the court.
During this same time period, Mr. Collins' tax liability on the property settlement was brought to the Oklahoma Supreme Court, under an Oklahoma tax statute, in an effort to get a ruling from the state courts on the question of state law involved.(fn13) This court, considering only the Oklahoma law governing mandatory division of jointly owned property, decided that this statute did indeed give the wife a vested...
To continue reading
Request your trial