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United States v. Davis - 370 U.S. 65, 82 S. Ct. 1190 (1962)

Rule:

I.R.C. § 1001(a) (1954) defines the taxable gain from the sale or disposition of property as being the excess of the amount realized therefrom over the adjusted basis. The amount realized is further defined as the sum of any money received plus the fair market value of the property, other than money, received.

Facts:

Pursuant to a property settlement agreement executed prior to divorce, Thomas Crawley Davis, a Delaware taxpayer, transferred to his wife shares of stock having at the time a market value of $82,250, Davis’ cost basis for the stock being $74,775.37. He also paid $5,000 for tax advice in relation to the property settlement, one-half of which went to his wife's attorney. The Commissioner of Internal Revenue ruled that (1) one-half of the appreciation in value of the stock, or $3,737.31, was includible in the husband's gross income as a net long-term capital gain, and (2) the fees paid to the wife's attorney were not deductible. Davis sued in the Court of Claims to recover for an alleged overpayment of taxes based on the Commissioner's rulings. The Court of Claims upset the Commissioner's determination as to (1), reasoning that the gain could not be determined because of the impossibility of evaluating the fair market value of the wife's inchoate marital rights, and upheld the Commissioner's ruling as to (2).

Issue:

Did Davis have a taxable gain, which was based upon the value of the stock on the date he transferred it to his former wife?

Answer:

Yes

Conclusion:

The United States Supreme Court concluded that Davis did have a taxable gain on the transfer, and its value was based upon the value of the stock on the date he transferred it to his former wife. The Court also agreed that the former wife's attorney fees were not deductible because the attorney's advice was directed to the former wife's tax situation, not Davis.

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