Taxation of Property Divisions by Same-Sex Couples

By on May 15, 2013 5:46 pm
Same Sex Tax

Years ago I blogged about the tax treatment of alimony payments ordered by the courts in the case of a divorce or dissolution of a same-sex relationship. I thought I had also blogged about the probable tax treatment of property divisions. But since I keep getting questions about the property division question, I’m guessing  I didn’t say as much as I should have. So here is my opinion for today.

 

Section 1041 of the Internal Revenue Code provides that property transfers between spouses or ex-spouses (incident to divorce) are not taxable. That is a clear reversal of a 1962 Supreme Court opinion (U.S. v Davis) that had held that a transfer of appreciated property from one spouse to another at divorce would be treated as a sale and thus would trigger taxable income to the transferor.

 

But, so long as DOMA is on the books, no same-sex couple can rely on Section 1041. And, even if DOMA is repealed or struck down by the courts, the question of tax treatment for Registered Domestic Partners and partners to a Civil Union who dissolve their relationships remains an open question.

 

Tax advisors should remember the world that existed before Section 1041 was passed in 1984. Between 1962 and 1984 there was much litigation about the tax consequences of property divisions. Sometimes the courts held that the divisions were not taxable events and sometimes they held otherwise. These decisions were based on general principles of tax law and focused on the realization requirement for recognition of gain.

 

Same-sex couples should be able to rely on these decisions based on general principles even if they cannot rely on Section 1041. For further details about this litigation see my white paper on the matter posted here.