Davis, Fonstein, Epstein & Irc §1041—a History of "immediate and Specific"

• Jurisdiction: California,United States
• Author: Judge Edward B. (Ned) Huntington
• Publication year: 2014
• Citation: Vol. 36 No. 1

Davis, Fonstein, Epstein & IRC §1041—A History of "Immediate and Specific"

Judge Edward B. (Ned) Huntington

Judge Edward B. (Ned) Huntington is a retired San Diego Superior Court Judge who served more than half of his judicial careeras a Family Court Judge in San Diego and in North San Diego County. Prior to his appointment by Governor Wilson, Huntington practiced Family Law and Taxation for28 years. As an attorney, he was California Board Certified in both Family Law and Tax Law. To date the only lawyer double certified in those specific areas. He received his BS degree in Accounting from San Diego State, his JD degree from the University of California, Hasting College of Law and his LL.M. in Taxation from University of San Diego's Graduate Tax Program. He is a long time member of both the Family Law and Tax Sections of the Bar Association. In 1988 he was President of the San Diego County Bar Association and from 1991 to 1994, he served on the California State Bar Board of Governors and chaired the Discipline Committee. He loves boating, family, yellow labs, fishing, skiing and golfing.

In the Beginning

Back in the dark ages, when Steve Kolodny was a young lawyer who had yet to shave or file a 200 question get-acquainted demand letter; and Jaffe & Clemens was a Rock Band playing in the Haight/Ashbury District; and Don Gursey was still operating under the original Internal Revenue Code of 1913 (he may still be), the rules of taxation in a divorce case (and yes, it was still called a "divorce" in the good old days) were few and far between. The court could only consider the relevance of taxes if those taxes were immediate and specific. In spite of significant changes in divorce tax law, the rules of "immediate and specific" remain an important part of calculating the division of Community Property. In those bygone days, the ultimate effects of taxation on the transfer of property in a divorce were governed by the general principals of the law of taxation between two unrelated persons transferring property. If a transfer of property was not immediate and specific, then the court could not consider any possible tax consequences. If taxation was to be immediate and specific and a gain was realized, then possible tax consequences had to be considered.

So what was and is "immediate and specific"? How is it determined, and how is it applied? This article outlines where the law was, how it was applied, and the progression of case law and statutory law to the present day. It also outlines the absolute importance of the "immediate and specific" concepts in our present day laws of divorce taxation, because in negotiating division of property between spouses or obtaining rulings from the court, counsel must be aware of the tax consequences, if any, for their clients.

Under general tax law between strangers: If Mr. Bushkin owned a parcel of unimproved real estate in Southern California for which he paid $200,000 and he then sold the entire parcel for cash to Mr. Carson two years later for $500,000, then he realized and recognized a capital gain of $300,000. In the tax year in which the property transferred from one to the other, the seller (Mr. Bushkin) would owe a capital gains tax on the gain of $300,000. In this straightforward example, the "transfer" pulled the tax "trigger" in the year of sale. Pulling the tax trigger means that all events required to invoke taxation on the transfer had been completed and would then be, without question, a tax to the seller of the property. If a court orders a tax ripe property to be sold, it is a "trigger" or immediate transfer that will cause a tax to be imposed. If two independent parties to a deed execute a sale and record a deed that constitutes a transfer, then that is a trigger to a taxable event. The "all events test" has been met and a tax will ensue.

Likewise, since there were no other statutory rules (i.e., marital rules) in effect, the husband who was generally presumed by the IRS to be the one who owned the property was also presumed to be the seller of the property when it was transferred to his wife in a contract for divorce. At that time, the Davis case controlled the transfer of all transfers of property "incident to a divorce". This was the 1962 Supreme Court case, (U.S. v. Davis, 370 U.S. 65 (1962)) in which the court held the transfer of a piece of property in the Husband's name to the Wife's name was a taxable disposition of property, in exchange for a release of marital rights by the Wife. In Davis, Husband transferred to Wife 1,000 shares of stock in DuPont Corporation. These shares had cost him $74,775 and had appreciated to $82,250 at the time of the transfer.

Note that cash or other property in consideration would also qualify, but the release of rights was sufficient to constitute a taxable event. The value of the transaction would be done by a valuation or appraisal of the actual property being transferred. In this case, the value of the publicly traded stock determined its original basis. The acquisition cost of $74,775 and the value at the time that the divorce agreement became effective determined its sales value, $82,250 — and thus the gain on the sale of $7,475.

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The government argued the appreciation should be included in the taxpayer's gross income, viewing the transfer of property as an exchange for the release of an independent legal obligation. Husband argued that the appreciation 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 Supreme Court held the $7,475 appreciation should count as gross income since 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. Remember in the Bushkin example above that the gain to Bushkin was the sales price minus Bushkin's basis in the...