Internal Revenue Service
Revenue Ruling
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smRev. Rul. 76-83
1976-1 C.B. 213
Section 61
Section 1001
Section 1002
IRS Headnote
Divorce settlement division of community property; basis. No gain or loss will be recognized from the approximately equal division of the fair market value of community property in a community property state under a divorce settlement agreement that provides for transfer of some assets in their entirety to one spouse or the other. The assets each spouse receives will retain their community basis.
Full Text
Rev. Rul. 76-83
Advice has been requested whether, under the circumstances described below, a transfer of community property incident to a divorce is an equal division of such property with no gain or loss recognized to either spouse, or is a taxable exchange. In addition, advice has been requested whether the basis of each asset received in the division retains its present community basis in the hands of the spouse receiving it.
The taxpayers were married in a community property state in which they presently reside. The taxpayers separated, and a suit for a dissolution of the marriage was filed. Incident to the separation, the taxpayers executed a marital settlement agreement that provides for an equal division of their community property. Neither taxpayer owns any separate property.
The taxpayers intend to effect an equal division of their community property. However, certain community assets cannot feasibly be partitioned between the taxpayers because the nature of the assets makes them incapable of division, they are associated with a particular liability, or they are part of a business venture that can be managed by only one of the taxpayers. Under the terms of the settlement agreement, certain assets will be assigned to the husband and certain other assets of approximate equal value will be assigned to the wife. The remaining community assets will be equally partitioned between the taxpayers.
The total net fair market value of the taxpayers' community property is $300,000. Under the scheduled division, the husband will receive community property valued at $150,258, and the wife will receive community property valued at $149,742. The difference in the value of the property that each will receive ($516) is due to the inability to assign the nonpartitioned property in exactly equal amounts. Due to the lack of liquid assets, the husband will issue a note to the wife in the amount of $258 in order that each will receive property valued at exactly the same amount.
Section 1001(a) of the Internal Revenue Code of 1954 provides, in part, that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.
Section 1002 of the Code provides that except as otherwise provided in subtitle A, on the sale or exchange of property the entire amount of the gain or loss, determined under section 1001, shall be recognized.
In community property states, a division of community property incident to a divorce or a property settlement agreement may result in a taxable event. C. C. Rouse, 6 T.C. 908 (1946), aff'd, 159 F.2d 706 (5th Cir. 1947); Jessie Lee Edwards, 22 T.C. 65 (1954); Jean L. May, 33 CCH Tax Ct. Mem. 256 (1974); Jean C. Carrieres, 64 T.C. 959 (1975). However, such a division is not considered a taxable event to either spouse when there is an equal division of the fair market value of the community property with some of the assets going in their entirety to one spouse and some going in their entirety to the other. Frances R. Walz, Administratrix, 32 B.T.A. 718 (1935); Clifford H. Wren, 24 CCH Tax Ct. Mem. 290 (1965). Nor is such a division taxable when the aggregate fair market value of the community property received by or on behalf of each spouse is approximately equal. Jessie Lee Edwards.
In the instant case, the marital settlement agreement provides for an approximately equal division of the total value of the taxpayer's community property in order that each taxpayer's interest in the total community property will be satisfied. Although technically the husband's note could be viewed as a sale or exchange by one spouse to the other of property rights in some of the community estate for consideration not part of the assets of the community estate, it is not of sufficient magnitude to prevent the division from being approximately equal. Thus, the transaction does not involve a sale or exchange of community property between the husband and wife but merely an approximately equal division of such property.
Accordingly, the division of the community property pursuant to the above-described marital settlement agreement is a nontaxable transaction with no gain or loss recognized to either spouse and no amount included in their respective incomes.
With regard to the basis of each individual asset received in the division, the basis of community property divided equally between spouses with some assets going entirely to one spouse and other assets going entirely to the other spouse is the adjusted basis of the property in the community. Ann Y. Oliver, 8 CCH Tax Ct. Mem. 403 (1949); C. C. Rouse; Jean C. Carrieres.
Accordingly, the basis of each individual asset received in its entirety by one spouse or the other in the division will retain its present community basis in the hands of the spouse receiving it. The basis of each asset that will be partitioned will be the applicable percentage of such asset received multiplied by that asset's present basis in the community. For example, if corporate stock that has a community basis of $15,000 is partitioned so that the husband receives 40 percent of the stock and the wife receives the remaining 60 percent of the stock, the basis of the stock received by the husband will be $6,000 (40 percent of $15,000) and the basis of the stock received by the wife will be $9,000 (60 percent of $15,000).