Young v. Commissioner

John and Louise Young (plaintiffs) divorced and settled their marital assets in 1989, with John executing a $1.5 million promissory note to Louise secured by 71 acres. When he defaulted, Louise sued in state court and won a judgment; before she could execute it, the two entered a 1992 agreement where John transferred 59 of the 71 acres in full satisfaction, retaining a repurchase option he later assigned to a third party who bought the property from Louise for $2.2 million. Neither reported capital gains on the 59-acre transfer; the Commissioner (defendant) assessed deficiencies against both, and the consolidated Tax Court held the transfer from John to Louise was incident to divorce (so nontaxable to John, with Louise taking his basis), making Louise liable for gains on her later $2.2 million sale.

Whether a transfer of property between former spouses is incident to divorce if the transfer satisfies obligations arising from the divorce.