Davis v. United States
370 U.S. 65 (1962)

  • Mr. and Mrs. Davis were getting a divorce. As part of the settlement, Mr. Davis agreed to give some stocks to his ex-wife.
    • Ms. Davis didn't give anything to Mr. Davis in return.
  • The IRS claimed Mr. Davis owed taxes because he had a realized gain from the transfer of stock, despite the fact he didn't receive anything.
    • The IRS argued that Davis received the benefit of being released from his legal, marital obligations (like paying alimony) to Ms. Davis. The IRS felt that relief must be worth something.
      • There is known value of relief for marital obligations. However, the value of the stock is known. So the IRS assumed that the value of the relief was equal to the value of the stock.
        • That's the analysis used in Philadelphia Park Amusement Co. v. United States (126 F.Supp. 184 (1954)).
    • Therefore, the IRS argued that Mr. Davis' realized gain was the value of what he got (relief from marital obligations (aka the amount realized)), - the initial cost of the stocks (aka the adjusted basis), and based on 26 U.S.C. 1001, you have to pay taxes on realized gains.
  • The US Supreme Court found for the IRS.
    • The US Supreme Court agreed with the IRS's analysis.
    • Mr. Davis argued that in a community property State, the stock would have been considered to be legally-owned by both spouses, while it would not be in a common-law State. So it is a violation of equal protection. However the Court disagreed.
  • In response to this decision, Congress passed 1041, which basically reversed Davis and said that during a divorce, the recipient and the transferor of the property will not have any income.
    • Congress felt that divorce was difficult enough without dragging tax issues into the division of property.