Tax Brake with Robert G. Nath, Esq.

In Young v. Commissioner of Internal Revenue, the couple married in 1969 and divorced in 1988. In their settlement agreement, husband gave wife a promissory note, secured by land. He defaulted two years later, so the wife sued to collect. Things got more ugly, so husband and wife settled again. This time, the husband transferred land to the wife, and the wife sold the land in 1992. She reported no gain, believing the basis of the land was equal to its market value.

But if the land transfer was "incident to the divorce," as the tax code provides, then she had to pay a tax because the tax basis would have been the "carryover" basis from the husband. So the issue was whether the transfer of the land was "incident to the divorce."

It was said the court, even though it was all about four years afterward, and after a second settlement agreement.

The lesson of this case is clear: when you divide property after a divorce, be aware of the fact that appreciated property often carries a (hidden) tax with it into the hands of the recipient.

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