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Abstract

Generally, during marriage, most of the property of husband and wife is held in the husband's name. Then, if there should be a divorce, the husband often finds himself required to transfer some of this property to his wife as a "property settlement." If the transferred property has appreciated in value while held by the husband, this appreciation may be treated as taxable income to the husband. Whether the appreciation is so treated depends on the marital property law of the taxpayer's domicile. In the United States, two different systems of marital property law have developed. Most states have evolved a system based upon the common law of England. These states consider the husband and the wife to own respectively the property each has purchased with his or her earnings or has received by gift, bequest, devise, or descent. The wife's rights in the property owned by her husband are generally limited to a dower or statutory dower right in all realty acquired during covertures and a right to an intestate share of the property at his death. Both of these rights are contingent upon the wife surviving her husband. If there is a divorce, her interest in her husband's property is limited to a possible right to alimony arising out of his marital obligation to support her financially. A small number of states have developed a "community property" marital property system based upon the civil law of continental Europe. These states carve out of the husband's and the wife's separately owned properties a third class of property called "community property." Community property consists of all property acquired during marriage by the efforts of either spouse except that acquired by either of them by gift, bequest, devise, or descent. Although the wife's rights in her husband's remaining separate property are similar to her rights in common law states, her rights in the community property are more substantial. She is deemed a one-half owner of this property, is entitled to a share of it upon divorce, and may devise one-half of it at her death. Thus, if she and her husband divorce, her marital rights include both a right to a share of the community property and a possible right to alimony out of her husband's separate property. The federal income tax consequences of a divorce-forced transfer of appreciated property from husband to wife may vary according to the marital property system of their domicile. Thus, traditionally, divorce-forced transfers of appreciated property have been accorded differing federal income tax treatment depending on the applicable marital property system. Taxable transfers were the rule in common law states; only in community property states could nontaxable transfers occur. In two recent Tenth Circuit decisions, Collins v. Commissioner and Imel v. United States, however, transfers of appreciated property in common law states have been held to be nontaxable divisions of property between co-owners. These states had altered the traditional common law marital property system by incorporating the concept of "jointly-acquired" or "marital" property. Marital property refers to the same class of property as community property, but is a concept used solely with reference to divorce proceedings. As in community property states, upon divorce a wife is entitled to a share of the marital property in addition to her possible right to alimony. Thus, these common law states had adopted a community property system solely for the purpose of property allocation upon divorce. To ascertain whether Collins and Imel are correct, it is necessary to determine whether the transfers in those cases were properly deemed in satisfaction of the wife's property interest in the marital property. Essentially, this question can be answered by ascertaining whether the hybrid marital property systems there at issue more resembled common law or community property systems when considered in the context of the federal income tax law respecting divorce-forced transfers.

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