Academic journal article Journal of Accountancy

Divorce Tax Implications

Academic journal article Journal of Accountancy

Divorce Tax Implications

Article excerpt

Divorce Tax Implications

According to IRC section 1041, no gain or loss is recognized on a transfer of property between spouses in a divorce. However, there are circumstances in which a transfer of property to a third party on behalf of a spouse (or former spouse) also qualifies for nonrecognition treatment.

A transfer is considered to be "on behalf of" a spouse if it satisfies that spouse's obligation or liability. In a situation where a property transfer to a third party is required by a divorce or separation agreement, the transfer is treated as if it had been made to the nontransferring spouse and, then, transferred by that spouse to the third party (regulations section 1.104-1T(c), Q & A 9).

In United States v. Craven, DC GA 2-18-99, 83 AFTR [paragraph] 99-526, a wife sued her husband for divorce and equitable distribution of their marital property. The settlement agreement required the couple's closely held corporation (third party) to redeem the wife's stock. The agreement also required the husband to guarantee the corporation's payment to the wife.

When filing her tax return, the wife argued that because the stock redemption was pursuant to her divorce agreement it qualified for nonrecognition treatment. The IRS disagreed. It claimed that the wife was liable for the capital gains tax related to the redemption of her stock.

The court found that state law required the husband to equitably divide the marital property. It then concluded that the stock redemption satisfied the husband's marital obligations under the settlement agreement. In finding for the wife, the court relied on United States v. Arnes, 981 F.2d 456 (1992), where the Ninth Circuit Court of Appeals had held that a stock redemption required by a divorce agreement warranted nonrecognition treatment because the stock transfer had relieved her former husband of a debt that he owed directly to her. …

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