§1041 — Transfers of property between spouses or incident to divorce

Read had a constructive dividend, 9The majority does not purport to overrule or modify Arnes II.

language in the "Tax Free Transfers" section ofthe agreement, however, respondent takes the position that petitioner fails to satisfy subparagraph (B) ofsection 71(b)(1) because the divorce decree designates the Sallie Mae student loan payments as nonalimony and subject to the provisions of section 1041. According to petitioner, that section ofthe agreement applies only to the division ofproperty, not community debt, and therefore it does not apply to the Sallie Mae student loan payments.

The third sentence ofthe regulation provides that there is a presumption that section 1041 does not apply to "[a]ny transfer not pursuant to a divorce or separation instrument".

Second, Davis is inapposite because it involved an exchange, not a gift.

In any event, section 1041 is inapplicable to any transfer in 1980 incident to either the agreement or the decree, since any such transfer would be pursuant to an instrument that predates the effective date of section 1041 .

In any event, section 1041 is inapplicable to any transfer in 1980 incident to either the agreement or the decree, since any such transfer would be pursuant to an instrument that predates the effective date of section 1041 .

Transfer of Property Incident to Divorce Respondent contends that section 1041 applies to John's transfer of the Land to Louise. John agrees with respondent's contention, while Louise contends that section 1041 does not apply.

90- 31-022 (May 7, 1990) (concluding that section 1041 does not apply to characterize interest expense on loan proceeds allocable to investment expenditures as personal interest for purposes of section 163(h)).

Because property settlements (or transfers ofproperty between spouses) incident to a divorce are neither taxable events nor give rise to deductions or recognizable income pursuant to section 1041, Mr.

The Parties intend, understand and agree that all transfers of property and Deferred Payments pursuant to Paragraph 15 above (excluding alimony payments) made to the Wife pursuant to this Agreement are intended to be tax-free to the Wife, pursuant to Section 1041 of the .

roposed adjustment $102,274.41 Section 1041(a)(2) Section 1041(a)(2) provides for nonrecognition of gain or loss on a transfer of property from an individual to a former spouse provided that the transfer to the former spouse is incident to the divorce.2 For a transaction to be considered 2 Although section 1041 applies to both spouses and former spouses, only “former spouse” will be used in the discussion of the statute.

- 11 - Reading the agreement from a reasonable, commonsense perspective, we find that it contains a nonalimony designation within the purview of subparagraph (B) of section 71(b)(1).1 Consequently, we hold that the $20,000 monthly payments Mr.

g. 34453 (Aug. 31, 1984), addresses a transfer of property by a spouse (trans- ferring spouse) to a third party on behalf of a spouse or former spouse (nontransferring spouse). Provided that the other requirements of that temporary regula- tion and sec. 1041, I.R.C., are satisfied, Q&A-9 treats such a transfer as a transfer of property by the trans- ferring spouse directly to the nontransferring spouse that qualifies for nonrecognition treatment under sec. 1041, I.R.C., and an immediate transfer

Instead, petitioner contends that Smith does not provide a reasonable basis in law for respondent’s position because the District Court in Smith incorrectly applied section 1041.2 We disagree.

Finally, petitioner’s argument that section 1041 renders receipt of the pension payments nontaxable is misguided.

In enacting section 1041 in the Deficit Reduction Act of 1984, Pub.

e executed between the Corporation and Dr. Bowman. Since there was no transfer of the Note or of a beneficial interest in the Note, section 453B(g) is not applicable in this case. Petitioner's receipt of $1,750 each. month from Dr. Capps falls under section 1041. As discussed above, under section 1041(a), no gain or loss is recognized on the transfer of property from an individual to a spouse, or to a former spouse if the transfer is incident to divorce. Balding v. Commissioner, 98 T.C. 368 (199

e in 1994 and 1996 that were denominated as interest (namely, $10,664 and $4,950, respectively) represented postdivorce appreciation in the value of her ex-spouse’s law practice and that these amounts should be treated as nontaxable transfers under section 1041. To the contrary, it is clear that the above amounts compensated petitioner for delay in the receipt of the marital assets to which petitioner was entitled as of the day of the divorce. The amounts received are consistent with the 5.5-per

$7,161. By the petition, petitioner assigns error to respondent’s determination of deficiencies, additions to tax, and a penalty. Among the averments made by petitioner is that the payments were transfers of property incident to divorce pursuant to section 1041. Discussion I. Deficiencies in Tax A. Introduction Petitioner was divorced from ex-husband on January 3, 1980. Incorporated into the final judgment was the agreement by which ex-husband agreed to pay to petitioner “her community property

rement payments constitute alimony income to petitioner under section 71. Petitioner contends that the payments she received from the military retirement plan were in furtherance of a division of property and should be excluded from her income under section 1041. Section 61 defines gross income to mean all income from whatever source derived, including alimony payments. Sec. 61(a)(8). Whether a payment constitutes alimony within the meaning of section 61(a)(8) is determined by reference to secti

1041 applies to the 1992 transfer of property, from H to W, that resolved a dispute that arose from their property settlement. 2. Held, further, W's 1992 gross income includes $308,906 relating to the value of property transferred to her to discharge certain debts. - 2 - 3. Held, further, W may deduct, pursuant to section 212(1), I.R.C., lega

rial, briefing, and opinion. After concessions by the parties, the remaining issues for decision are: (1) Whether the transfer of property to resolve John B. Young and Louise F. Young’s dispute that arose from their property settlement is subject to section 1041. We hold it is. (2) Whether the value of property transferred to Louise F. Young, to discharge certain debts, must be included in her gross income. We hold it must. (3) Whether Louise F. Young is entitled, pursuant to section 212(1), to

Gross income, however, does include amounts received as alimony or separate maintenance payments. Secs. 61(a)(8), 71(a). Section 215(a) allows a deduction for the payment of alimony during a taxable year. Section 215(b) defines alimony as payment that is includable in the gross income of the recipient under section 71. Section 71(c) prov

Respondent contends that because the assets were transferred incident to a divorce, the treatment of the transaction under section 1041 prevents the allocation of petitioner’s indebtedness to such assets, and the interest should be allocated to his personal obligation and, thus, characterized as nondeductible personal interest under section 163(h)(1).

* 'deposits' [received prior to the transfer] should be taxed to Howard in 1989." - 49 - We find that there was no change in accounting method, that Woodbine's combination of methods clearly reflected income during 1988 and 1989, and that, although section 1041 prevents Howard's March 1989 transfer of his interest in Woodbine to Alice from being treated as a gain recognition event to him, the transfer triggered the accrual of Howard's share of the income from crypt sales that had been previously

* 'deposits' [received prior to the transfer] should be taxed to Howard in 1989." - 49 - We find that there was no change in accounting method, that Woodbine's combination of methods clearly reflected income during 1988 and 1989, and that, although section 1041 prevents Howard's March 1989 transfer of his interest in Woodbine to Alice from being treated as a gain recognition event to him, the transfer triggered the accrual of Howard's share of the income from crypt sales that had been previously

The transfer of petitioner wife's interest in her residence to petitioner husband constituted a nontaxable gift under section 1041.5 Pursuant to section 1041, the basis of the transferee 5SEC.

us to comment further. Petitioner points out that, incident to her divorce from him, the payments she received from Mr. Gibbs were for her share of SuperAmerica. That being the case, she argues that the payments are excludable from her income under section 1041. Pursuant to section 1041(a), no gain or loss is recognized on the transfer of property from an individual to a spouse, or former spouse, if the transfer is incident to divorce. See Balding v. Commissioner, 98 T.C. 368, 370 (1992). - 7 -

s disallowing the deductions for the capital loss carryforwards claimed on their tax returns for 2013 and 2014 on the ground that the initial capital loss arose from a transfer of property incident to divorce that is subject to nonrecognition under section 1041. 4The parties now agree that petitioner overstated his capital loss and, in the event petitioners prevail on the merits, the correct amounts ofcapital loss carryforwards would be $359,623 and $335,705 for the taxable years 2013 and 2014,

If the transfers occur within one year of the divorce, it is clear that Internal Revenue Code Section 1041 would apply.

As Oregon is not a community property State,4 the decree here did not have the effect of dividing a preexisting community ownership of the retired pay of petitioner's former spouse. See Powell v. Commissioner, 101 T.C. 489, 497-499 (1993); Darby v. Commissioner, 97 T.C. 51, 67 (1991). Because the retired pay, out of which petitioner rece

ij< :{: ‡ # ‡ ifc 6.5 The parties intend and agree that all transfers of property as provided for herein are subject to the provisions of Section 1041, Internal Revenue Code of 1954, as amended, entitled “Treatment of Transfers of Property Between Spouses or Incident to Divorce”, and that they shall be accounted for and reported on his or her respective individual income tax returns in such a manner so that no gain or loss shall be recognized as a result of the division and transfer

Specifically, petitioner claims that before the issuance of the notice of deficiency, respondent knew or had reason to know that the $750,000 received by petitioner in 1992 was in the nature of a property settlement incident to divorce and thus, pursuant to section 1041, not includable in her gross income.

Section 1041 provides that no gain or loss shall be recognized on the transfer of property incident to divorce, and the property is treated as having passed to the transferee by gift. Respondent argues that the interest here is nondeductible because the underlying debt is traced back to the divorce, a personal purpose. This is essentially the same

end income from 303 Products when it distributed cash to, and forgave a debt owed it by, petitioner Praegitzer.2 Petitioner Praegitzer argues that the cash and relief from indebtedness were received incident to a divorce and thus were tax free under section 1041. Respondent alternatively argues that if petitioner Praegitzer is not taxable 1 Tai K. Praegitzer is a party to this action solely because she filed a joint Federal income tax return with Dennis A. Praegitzer for the taxable year 1990. A

Jackson incident to divorce, section 1041 requires that petitioner's life interest in the trust be treated as if she acquired it by gift.

Section 215 allowed a deduction for “any alimony or separate mainte- nance payment (as defined in section 71(b)) which is includible in the income of the recipient under section 71.” See § 215(a) and (b).

e alleged failings of her divorce attorney and are not excluded from gross income. 3 Petitioner does not argue that the settlement proceeds should be excluded from income under sec. 104(a), which deals with compensation for personal injury, or under sec. 1041, which deals with transfers of property between spouses incident to divorce. She maintains that the settlement proceeds represent a nontaxable return of capital. -7- [*7] I. Burden of Proof Generally, the taxpayer bears the burden of provin

- 8 - [*8] payments give rise to a deduction for the paying spouse and to income for the receiving spouse.¹° An alimony payment is any cash payment that satisfies the four requirements ofsection 71(b)(1): (A) the payment is received by (or on behalfof) a spouse under a divorce or separation instrument; (B) the divorce or separation inst

1041; Estate ofGoldman v. Commissioner, 112 T .C. 317, 322 (1999), affd 5For purposes ofsec. 71, the term "spouse" includes a former spouse. Sec. 71(d). - 10 - without published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). On the other hand, amounts received as alimony or separate maintenance payments are taxable

1041; Estate ofGoldman v. Commissioner, 112 T .C. 317, 322 (1999), affd 5For purposes ofsec. 71, the term "spouse" includes a former spouse. Sec. 71(d). - 10 - without published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). On the other hand, amounts received as alimony or separate maintenance payments are taxable

1041; Estate ofGoldman v. Commissioner, 112 T.C. 317, 323 (1999), aff'd withoutpublished opinion, 242 F.3d 390 (10th Cir. 2000); Springer v. Commissioner, T.C. Memo. 2003-221, 2003 Tax Ct. Memo LEXIS 220, at *13; Zampini v. Commissioner, T.C. Memo. 1991-395, 1991 Tax Ct. Memo LEXIS 460, at *11. Respondent argues that the $63,500 payment is a p

1041; Estate ofGoldman v. Commissioner, 112 T.C. 317, 322 (1999), aff'd without published opinion sub. nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). On the other hand, amounts received as alimony or separate maintenance payments are taxable to the recipient. Secs. 61(a)(8), 71(a), 215(a). The phrase "alimony or separate mainten

basis in the transferredproperty is the same as the transferor's adjusted basis.3 Three days before signing the divorce decree, Ms. Howleyquitclaimedher 50% interest in the home to petitioner as part ofthe property settlement agreement 2 In general, sec. 1041 is effective for transfers after July 18, 1984, in taxable years ending after that date. See Deficit Reduction Act of 1984, Pub. L. No. 98-369, sec. 421(a), 98 Stat. at 793-795. Prior lawprovidedthat the transfer ofappreciated property inci

Laremore should be held liable for income tax on the $48,921 that was paid to her pursuantto thejudgment, and in this connection he cites section 1041, which provides rules for gain, loss, and basis when property is transferred incident to a divorce.

titioner asserts that he also made several capital improvements to propertyA which increased his basis in the property by additional amounts. This argument involves facts in dispute and is therefore not appropriate for summary judgment. 3In general, sec. 1041 is effective for transfers after July 18, 1984, in taxable years ending after that date. See Deficit Reduction Act of 1984, Pub. L. No. 98- 369, sec. 421(a), 98 Stat. at 793-795. (continued...) - 10 - [*10] 1041(b)(1) provides that for Fede

4(p)(1)(A)(i). See, e.g., Fernandez v. Commissioner, (cid:16)042 138 T.C. 378, 381 n.3 (2012). - 9 - B. Petitioner's·Theory ofExclusion Petitioner argues that the $25,248 distribution he received in 2007 is excluded from his·2007 gross income under section 1041. In thdt regard petitioner alleges that his withdrawal ofthe TSP funds constituted a transfer ofproperty to a third party on behalfofhis former spouse withirí the purview ofse~ction 1.1041- 1T(c), Q&A-9, Temporary Income Tax Regs., 49 Fed

1041; Estate of Goldman v. -Commissioner, 112 T.C. 317, 322 (1999), affd. without published opinion sub nom.. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). Conversely, alimony payments generally are taxable to the rec'ipient and deductible by the payor in the year paid. Secs: 61(a) (8), 71(a), 215(a). The label assigned to a - payme

On the other hand, individuals are allowed a deduction equal to alimony or separate maintenance payments made during the taxable year. Sec. 215(a). Alimony or separate maintenance payments are defined in section 71(b) and must be included in the gross income of the recipient under section 71. Sec. 215(b). An alimony or separate maintenan

Section 215(b) provides that the paying spouse may deduct a payment as alimony if the payment is “includible in the gross income of the recipient under section 71”.

Respondent made no adjustments in the notice of deficiency to reflect such a gain, presumably in deference to the terms of the agreement between petitioner and his former spouse, which provides that each party was responsible for income taxes on their respective returns.

1041; Estate of Goldman v. Commissioner, 112 T.C. 317, 322 (1999), affd. without published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). However, section 215(a) allows a deduction for the payment of alimony during a taxable year. Section 215(b) defines alimony as payment which is includable in the gross income of th

For tax purposes, the term “alimony or separate maintenance payment” is defined in section 71(b)(1) as any payment in cash meeting the following four criteria: (A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument, (B) the divorce or separation instrument does not designate such payment as a

1041; Estate of Goldman v. Commissioner, 112 T.C. 317, 322 (1999), affd. without published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). Conversely, amounts received as alimony or separate maintenance payments are taxable to the recipient and deductible by the payor in the year paid. 6This Court’s interpretation of

half of the property is deemed to have been sold by the transferor spouse to the transferee spouse at fair market value. The transferee spouse keeps her original basis in her one-half interest while receiving a cost basis for her spouse’s one-half 5Sec. 1041 is not applicable in this case because the transfer of Mr. Anthony’s interest in the Compton residence occurred prior to July 18, 1984, and nothing in the record indicates petitioner and Mr. Anthony elected to have sec. 1041 apply to the po

For tax purposes, the term "alimony or separate maintenance payment" is defined in section 71(b)(1) as any payment in cash meeting the following four criteria: 4 (...continued) Government's right to tax revenue is recognized as a valid practice. See, e.g., Gerardo v. Commissioner, 552 F.2d 549, 555- 556 (3d Cir. 1977), affg. in part and

For tax purposes, the term "alimony or separate maintenance payment" is defined in section 71(b)(1) as any payment in cash meeting the following four criteria: 4 (...continued) Government's right to tax revenue is recognized as a valid practice. See, e.g., Gerardo v. Commissioner, 552 F.2d 549, 555- 556 (3d Cir. 1977), affg. in part and

The legislative language thus described in the Conference Committee Joint Explanatory Statement was enacted as section 1041 of the Employee Retirement Income Security Act of 1974, Pub.

- 7 - Petitioners, however, do not agree that the alimony provisions contained in the divorce decree were part and parcel of the division of marital property between petitioner and his former spouse. They further argue that even if so, because the payments fit within the definition of alimony for Federal income tax purposes, the intende

Petitioner agreed to be bound on the issue of "assignment of anticipatory income" as presented in the Court of Appeals, but never intended to waive other issues in other cases. 4 Briefly stated, petitioner is an attorney who had filed a medical malpractice action in 1984 on a contingent fee basis. At the time, petitioner was married to Car

. 24 Sec. 1.861-2(b)(1), Income Tax Regs., provides that the interest on the deposits with persons carrying on the banking business must be "paid or credited before January 1, 1977, to a nonresident alien individual or foreign corporation". However, sec. 1041 of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1634, repealed the last sentence of sec. 861(c), which had read: "Effective with respect to the amounts paid or credited after December 31, 1976, subsection (a)(1)(A) and this subsecti

. 24 Sec. 1.861-2(b)(1), Income Tax Regs., provides that the interest on the deposits with persons carrying on the banking business must be "paid or credited before January 1, 1977, to a nonresident alien individual or foreign corporation". However, sec. 1041 of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1634, repealed the last sentence of sec. 861(c), which had read: "Effective with respect to the amounts paid or credited after December 31, 1976, subsection (a)(1)(A) and this subsecti

obviously appeared more convenient to cast the divorce decree in terms of percentages of the proceeds to be received, since a satisfactory resolution of the details of the sale under the buy-sell agreement had not yet been negotiated. Although the 3 Sec. 1041. TRANSFERS OF PROPERTY BETWEEN SPOUSES OR INCIDENT TO DIVORCE. (a) General Rule.--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, b