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Law School Case Brief

Balding v. Commissioner - 98 T.C. 368 (1992)


Under 26 USCS § 1041, no gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of) (1) a spouse, or (2) a former spouse, but only if the transfer is incident to the divorce. In the case of any transfer of such property, it shall be treated as acquired by the transferee by gift, and the basis of the transferee in the property shall be the adjusted basis of the transferor. A transfer of property is incident to the divorce if such transfer occurs within 1 year after the date on which the marriage ceases, or is related to the cessation of the marriage.


Petitioner and Joe M. Balding (“Balding”) were married in 1962, less than 1 year after Balding entered the military. In December 1981, subsequent to Balding's retirement from the military, they were divorced. Among other things, the divorce court ordered a division of their community property and affirmed that Balding's military retirement pay was his sole and separate property. In 1984, because of changes in  California's community property law, petitioner asked the divorce court to reopen its judgment of divorce and award her a community property share of Balding's military retirement pay.  Before the divorce court could act, petitioner and Balding reached a settlement with regard to the retirement pay, which settlement was stipulated between them and entered as an order by the divorce court.  Petitioner relinquished any claim to Balding's military retirement pay (and agreed not to bring any further claims with regard to marital property) in consideration of Balding's promise to pay to her $ 15,000, $ 14,000, and $ 13,000 in 1986, 1987, and 1988, respectively (hereinafter the settlement payments). Petitioner did not include the settlement payments in her original returns for the years in question. After petitioner received a private letter ruling from respondent concluding that the settlement payments were includable, petitioner submitted unsigned Forms 1040X for 1986, 1987, and 1988, including in gross income for each year the settlement payment received in that year.


Were payments received by petitioner in settlement of her claim to a community property share of her ex-husband's military retirement pay includable in gross income?




The court reversed the deficiencies in petitioner's income tax returns for years 1986, 1987, and 1988. The court reviewed the nature of the settlement payments in light of 26 USCS § 1041 and 26 USCS § 102. Petitioner released her claim to a community property share of her ex-husband's military retirement benefits in exchange for the settlement payments, which was incident to the divorce. The state of the law in California with regard to community property was unsettled at the time petitioner and her ex-husband entered into the settlement agreement. Nevertheless, whether petitioner's release was viewed as constituting (or equivalent to) a transfer of property, or simply a release of marital rights, the transaction whereby she received the settlement payments required analysis of her receipt of property in light of 26 USCS § 1041. The settlement payments having been received from her ex-husband, incident to her divorce (and in consideration of her release of any claim to his military retirement benefits), the court concluded that they constituted nontaxable gifts.


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