LOCATION: United States Court of Appeals District of Columbia Circuit
DOCKET NO.: 190
DECIDED BY: Warren Court (1962)
CITATION: 370 US 65 (1962)
ARGUED: Mar 28, 1962
DECIDED: Jun 04, 1962
Facts of the case
Media for United States v. DavisAudio Transcription for Oral Argument - March 28, 1962 (Part 1) in United States v. Davis
Audio Transcription for Oral Argument - March 28, 1962 (Part 2) in United States v. Davis
Mr. Kutz, you may continue your argument.
I. Henry Kutz:
Thank you, Your Honor.
On March 21, 1955, the taxpayer delivered the 500 shares of du Pont stock, which he -- a little early, he was supposed to deliver it on April 1.
His cost basis for the stock was $74,775 in market value, at the time of transfer was $82,250.
The Commissioner determined that he had realized the gain between the cost basis and the market value, with the date of transfer and has held that this gain was in the amount of about $7500.
The court below did not rule that the transfer was not a taxable event, but relieved the husband from liability only because it felt unable to measure the amount of the taxable gain.
That is the value of the discharge of his marital obligations, a consideration which he received for the transfer.
I should like, however, to discuss because it discussed in taxpayer's brief and we have discussed it in our brief whether this transfer was a taxable event.
The pertinent statutory provisions have been in the revenue laws for many years.
They're the ones that -- familiar ones that deal with the gain on -- or loss on disposition of property in the 1954 code which governs here, Section 1001 (a) provides, that the gain from the sale or other disposition of property shall be the excess of the amount realized there from over the adjusted basis.
In subsection b, the statute defines what the amount realized as.
The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property other than money received.
Now, we say that it's our contention and that is the sale or other dispos -- disposition of this du Pont stock, in exchange for the discharge of the marital obligations owed by taxpayer to his wife, was a discharge of a legal obligation that it's the familiar situation, where taxes have often -- have been assessed without any question.
That the satisfaction of a legal obligation, that is a discharge of a debt is a receipt to the obligor.
And here, he used property which had appreciated in value great -- to some extent during his period of ownership and he used it, we say at its market value, he is therefore liable for the difference between the basis and the value of the stock at the time of transfer.
It's the same as if he had sold the stock and used the proceeds to pay the debt, that he goes through the form of selling a stock that doesn't go through the form of the selling of stock, doesn't take away from his realization of economic gains who increased in market value.
In the earlier cases decided by the Third and the Second Circuits in 1941 and 1942, this was the holding, and in those cases in the Third Circuit case, the Mesta case, the taxpayer transferred to his wife a stock that it cost him $7500, and at the time of the transfer, it was worth $156,000.
In the Halliwell case, the Second Circuit case, he transferred stock that it cost a $160,000 and the market value was $461,000.
John M. Harlan II:
(Inaudible) to you, is that the marital case?
I. Henry Kutz:
Yes, Your Honor, they both were marital cases.
They both were cases where in this charge of the husband's marital obligations, he transferred appreciated property.
There was -- the cases were hard fought.
The -- in the -- both cases represented reversals of the Board of Tax Appeals and in the Mesta case, the Third Circuit said en banc and there were -- it was a three to two decision, but they have been the law since 1941 and when the Mesta case was decided and the first questioning of them in long -- in the period of about 20 years from that time to this was in the Sixth Circuit, in the Marshman case, decided in 1960.
Although, that case actually didn't go on that ground, there was reasoning in it.
The case -- the Marshman case went on the ground that the market value of the security there in option couldn't be determined.
Now, taxpayer argues that this wasn't a taxable event.
There were two possible categories other than sale or exchange that this might fall into.One is, that it was a division of property of a -- between the spouses.
But that we say is not the fact under the state of the law of Delaware, and it wasn't then the Halliwell case, the Second Circuit case, discussed that same thing under the similar common-law rules of the State of Connecticut.
There was nothing that could have prevented Mr. Davis from selling his stock at any time.
His wife had no share in it.