Tax Consequences of Divorce and Intra-Family Transactions

AuthorWilliam Kratzke
Chapter 8: Tax Consequences of Divorce and Intra-Family
I. Introduction
The tax consequences of marriage, support of a family, and divorce reflect how we
choose to apply the basic principles that we tax income once and only once and that
expenditures for personal consumption are not deductible. Taxpayer chooses
whether to have a spouse or a child, so expenditures for the support of a spouse or
a child presumably are not deductible. The Supreme Court’s decision in Poe v.
Seaborn assured that the legal ownership of income within a family unit would be
an important issue. We consider now the extent to which we recognize the family
as a taxpaying unit.
We already know that the filing status
“married filing jointly” implies that
married persons are in fact one taxpaying
unit, whether one or both contribute to its
taxable income. The fact that a taxpayer
provides financial support to another
person may give that other person the tax
status of “dependent” and entitle taxpayer
to a dependent deduction. We learn shortly
that whether taxpayer may claim another as
a dependent usually turns on the existence
of a family relationship.
The definition of “marriage” is a matter of
state law; state law determines who is and
who is not married.171 State law also
defines the rights that spouses have with
respect to their property and income before, within, and after the marriage. State
171 States may not deny same-sex couples of the right to marry . See Obergefell v. Hodges, ___ U.S. ___,
___, 135 S. Ct. 2584, 2604-05 (2015) (fundamental liberty as well as right under Due Process, and Equal
Protection clauses).
The Tax Formula:
(gross income)
MINUS § 62 deductions
EQUALS (adjusted gross income
MINUS (standard deduction or
itemized deductions)
M IN U S (personal exem ptions)
EQUALS (taxable income)
Compute income tax liability from
tables in § 1 (indexed for inflation)
MINUS (credits against tax)
law governs adoptions and so is determinative of who is a “child” of the taxpayer.
State (or local) law also governs the placement of foster children. State law defines
the obligations that family members have towards each other notably that parents
have obligations of support for their children up to a certain age. This may affect
whether one person is a dependent of a taxpayer.
We consider here the tax ramifications of marriage and famil y before, during, and
II. Before Marriage
The Code treats a married couple as a single taxpayer – although spouses may elect
to be taxed separately. Until they are married, they remain separate taxpayers
although one might be a dependent of the other. Taxpayers may enter certain
transactions with each other in contemplation of marriage, but presumptively such
transactions are arm’s-length transactions.
Farid-es-Sultaneh v. Commissioner, 160 F.2d 812 (2d Cir. 1947)
CHASE, Circuit Judge.
The problem presented by this petition is to fix the cost basis to be used by the
petitioner in determining the taxable gain on a sale she made in 1938 of shares of
corporate stock. She contends that it is the adjusted value of the shares at the date
she acquired them because her acquisition was by purchase. The Commissioner’s
position is that she must use the adjusted cost basis of her transferor because her
acquisition was by gift. The Tax Court agreed with the Commissioner and
redetermined the deficiency accordingly.
The petitioner is an American citizen who filed her income tax return for the
calendar year 1938 ... and ... reported sales during that year of 12,000 shares of the
common stock of the S.S. Kresge Company at varying prices per share, for the total
sum of $230,802.36 which admittedly was in excess of their cost to her. ...
In December 1923 when the petitioner, then unmarried, and S.S. Kresge, then
married, were contemplating their future marriage, he delivered to her 700 shares
of the common stock of the S.S. Kresge Company which then had a fair market
value of $290 per share. The shares ... were to be held by the petitioner “for her
benefit and protection in the event that the said Kresge should die prior to the
contemplated marriage between the petitioner and said Kresge.” The latter was
divorced from his wife on January 9, 1924, and on or about January 23, 1924 he
delivered to the petitioner 1800 additional common shares of S.S. Kresge Company
which were also ... to be held by the petitioner for the same purposes as were the
first 700 shares he had delivered to her. On April 24, 1924, and when the petitioner
still retained the possession of the stock so delivered to her, she and Mr. Kresge
executed a written ante-nupt ial agreement wherein she acknowledged the receipt of
the shares “as a gift made by the said Sebastian S. Kresge, pursuant to this
indenture, and as an ante-nuptial settlement, and in consideration of said gift and
said ante-nuptial settlement, in consideration of the promise of said Sebastian S.
Kresge to marry her, and in further consideration of the consummation of said
promised marriage” she released all dower and other marital rights, including the
right to her support to which she otherwise would have been entitled as a matter of
law when she became his wife. They were married in New York immediately after
the ante-nuptial agreement was executed and continued to be husband and wife
until the petitioner obtained a final decree of absolute divorce from him on, or
about, May 18, 1928. No alimony was claimed by, or awarded to, her.
The stock so obtained by the petitioner from Mr. Kresge had a fair market value of
$315 per share on April 24, 1924, and of $330 per share on, or about May 6, 1924,
when it was transferred to her on the books of the corporation. She held all of it for
about three years, but how much she continued to hold thereafter is not disclosed
except as that may be shown by her sales in 1938. Meanwhile her holdings had
been increased by a stock dividend of 50%, declared on April 1, 1925; one of 10 to
1 declared on January 19, 1926; and one of 50%, declared on March 1, 1929. Her
adjusted basis for the stock she sold in 1938 was $10.66 per share computed on
the basis of the fair market value of the shares which she obtained from Mr. Kresge
at the time of her acquisition. His adjusted basis for the shares she sold in 1938
would have been $0.159091.
When the petitioner and Mr. Kresge were married he was 57 years old with a life
expectancy of 16½ years. She was then 32 years of age with a life expectancy of
33¾ years. He was then worth approximately $375,000,000 and owned real estate
of the approximate value of $100,000,000.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT