Divorce Without Marriage: Taxing Property Transfers Between Cohabiting Adults

University of Cincinnati Law Review University of Cincinnati Law Review

Volume 89 Issue 4 Article 3

May 2021

Divorce Without Marriage: Taxing Property Transfers Between Divorce Without Marriage: Taxing Property Transfers Between

Cohabiting Adults Cohabiting Adults

Keeva Terry

Howard University School of Law

, kterry@law.howard.edu

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Part of the Common Law Commons, Constitutional Law Commons, Family Law Commons, and the

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Recommended Citation Recommended Citation

Keeva Terry,

Divorce Without Marriage: Taxing Property Transfers Between Cohabiting Adults

, 89 U. Cin. L.

Rev. 882 (2021)

Available at: https://scholarship.law.uc.edu/uclr/vol89/iss4/3

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882

DIVORCE WITHOUT MARRIAGE: TAXING PROPERTY

TRANSFERS BETWEEN COHABITING ADULTS

Keeva Terry

INTRODUCTION

Are you or someone you know living with another person in a long-

term, committed relationship? The answer is probably yes, since one

out of every ten couples in the United States has chosen to live together

without marriage.

But what happens when a couple’s relationship

dissolves, and property is divided as part of the break-up? The answer

is less than clear. Unlike marriage, there are no federal income tax

provisions that deal directly with nonmarriage.

Nonmarriage is undoubtedly on the rise in the United States.

Major

news outlets continue to report that more and more couples are

choosing to live together in exclusive, committed relationships without

marriage.

Specifically, USA Today reported in a front-page story that

the number of couples choosing not to marry increased by twenty-five

percent in ten years.

Yet, despite this growing group of taxpayers,

. Associate Professor of Law, Howard University School of Law. A.B., Harvard University;

M.B.A., University of Michigan; J.D., Columbia University. I would like to express my profound

gratitude and heartfelt appreciation to my student research assistants who have provided invaluable

assistance over the years.

. See generally Families and Living Arrangements, U.S. CENSUS BUREAU,

https://www.census.gov/topics/families.html (last visited Nov. 25, 2020); see also Haya El Nasser & Paul

Overberg, Fewer Couples Embrace Marriage, USA TODAY (McLean, Va.), May 26, 2011, at 1A

(“Unmarried couples made up 12% of U.S. couples in 2010, a 25% increase in 10 years, according to

Census data out today.”).

. Patricia A. Cain, Taxing Families Fairly, 48 SANTA CLARA L. REV. 805, 825 (2008) (“It is

unclear, however, how unmarried couples will be treated when they dissolve their relationships and enter

into agreements about the division of property...there is no direct authority dealing with unmarried

couples, and so the outcome is less than clear.”).

. See generally Wendy Wang & Kim Parker, Record Share of Americans Have Never Married:

As Values, Economics and Gender Patterns Change, PEW RES. CENTER (Sept. 24, 2014),

https://www.pewresearch.org/social-trends/2014/09/24/record-share-of-americans-have-never-married/.

. See, e.g., Veronica Dagher, How to Buy a Home Together When You’re Not Married, WALL

ST. J. (Nov. 3, 2020), https://www.wsj.com/articles/how-to-buy-a-home-together-when-youre-not-

married-11604399401 (“The number of unmarried partners living together nearly tripled in the past two

decades...according to the U.S. Census Bureau.”); Liam Stack, Unmarried Couples Gain in Numbers, But

Survey Finds Married Ones May Be Happier, N.Y. TIMES (Nov. 7, 2019),

https://www.nytimes.com/2019/11/07/us/pew-research-marriage-cohabitation.html (“[T]he share of

American adults who live with an unmarried partner has more than doubled since 1993....”); Hannah Reed,

More Unmarried Partners are Living Together. These Couples Explained Why Cohabiting Works for

Them., CHI. TRIB. (Oct. 11, 2019), https://www.chicagotribune.com/suburbs/post-tribune/ct-ptb-

couples-living-together-st-1013-20191011-arz7klkiozdgvfujl4j755lhzi-story.html (“[T]he number of

unmarried partners living together has increased by more than 13 million since 1996....”).

. El Nasser & Overberg, supra note 2 (“Unmarried couples made up 12% of U.S. couples in

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there is no direct authority providing federal income tax guidance to

cohabiting adults.

As a result, scholars and practitioners differ in their

analyses regarding the taxation of property transfers between

cohabiting adults upon dissolution of their relationship.

Scholars and practitioners agree that a transfer of property between

spouses, or a transfer between former spouses incident to divorce, is

not a taxable event. There is no consensus, however, regarding the tax

consequences of a property transfer between cohabiting adults upon

dissolution of their relationship.

Currently, there are two

contradictory approaches. The first approach treats property transfers

between cohabiting adults as taxable events akin to a taxable sale or

exchange.

This approach essentially disregards the personal

relationship between the parties and treats the transfer like a

transaction between strangers.

The second approach treats property

transfers between cohabiting adults as nontaxable events similar to a

nontaxable gift.

This approach accords great significance to the

personal relationship between the parties and treats the transfer in a

manner virtually identical to a property transfer between married

persons, even though the parties have made the conscious choice not

to marry. The consequences of this divergence in views impact

millions of dollars in federal tax revenue and present a legal quandary

for those involved.

Sadly, the Internal Revenue Service (“IRS”) continues to remain silent

and fails to provide clear guidance to cohabiting adults regarding the

federal income tax consequences of property transfers upon dissolution

2010, a 25% increase in 10 years, according to Census data out today.”).

. See Anthony C. Infanti, Decentralizing Family: An Inclusive Proposal for Individual Tax

Filing in the United States, 2010 UTAH L. REV. 605, 644 (“For the nontraditional family, it is clear that

the benefits of §§ 1041, 2056, and 2523 are off limits because, by their terms, these provisions apply only

to transfers between husbands and wives.”).

. 26 U.S.C. § 1041. See BORIS I. BITTKER, MARTIN J. MCMAHON, JR. & LAWRENCE A.

ZELENAK, FEDERAL INCOME TAXATION OF INDIVIDUALS ¶ 36.09[2] (3d

ed. 2002) (“Section 1041...treats

such transfers as nontaxable events.”); J. MARTIN BURKE & MICHAEL K. FRIEL, UNDERSTANDING

FEDERAL INCOME TAXATION §§ 35.01–35.06 (6th

ed. 2019); MERTENS LAW OF FEDERAL INCOME

TAXATION § 31A:63–67 (2021); MARVIN A. CHIRELSTEIN, FEDERAL INCOME TAXATION ¶ 5.04 (14th

ed.

2018). These same tax treatises are silent with respect to the federal income tax treatment of property

transfers between cohabiting adults.

. See, e.g., Patricia A. Cain, Taxation of Property Divisions at Dissolution of Nonmarital

Relationships, LGBT BAR (Nov. 2015), http://lgbtbar.org/wp-content/uploads/2015/12/Taxation-of-

Property-Divisions-at-Dissolution-of-Nonmarital-Relationships.pdf (stating that family lawyers report

that they often treat all payments from one partner to the other as taxable transfers).

. See, e.g., LEON GABINET, TAX ASPECTS OF MARITAL DISSOLUTION § 15:5 (2d ed. 2020)

(“[P]roperty divisions pursuant [to property settlement agreements in long standing cohabitations] should

not be treated as gifts.”).

. See, e.g., Cain, Taxation of Property Divisions at Dissolution of Nonmarital Relationships,

supra note 9, and Cain, Taxing Families Fairly, supra note 3, at 805 (stating that similarly situated

families and couples, whether they are married or unmarried, should be taxed similarly).

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884 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

of their relationship.

Given the lack of direct authority, uncertainty

persists regarding the appropriate tax treatment of property transfers for

this growing group of taxpayers. The lack of IRS guidance perpetuates

confusion on how these transfers should be treated. Therefore, the time

has come for the IRS finally to disclose public guidance to this

burgeoning group of taxpayers.

This Article proposes a theory for the taxation of nonmarriage and

provides a framework to reconcile these two contradictory approaches. It

advocates for the adoption of an interdisciplinary approach that

incorporates family law principles which recognize more fully the

changing landscape of the American family. This Article also embraces

the idea that nonmarriage should be considered a distinct body of law on

its own terms.

The rules applicable to cohabiting adults should not

simply mirror marital provisions. Instead, laws regulating nonmarriage

should attempt to respect the myriad of choices that cohabiting adults

have made in their relationship and apply the tax consequences that flow

naturally from such choices. One size does not fit all. Facts and

circumstances do matter.

This theory of taxation is also consistent with

a larger movement toward a substantive deregulatory model of

nonmarriage that differs dramatically from the status-based regulation of

marriage.

This Article proceeds in three parts. Part I discusses the legal bases for

the two current approaches to the taxation of property transfers between

cohabiting adults upon dissolution of their relationship. This Part

analyzes the seminal Supreme Court case United States v. Davis

and the

legislative response to Davis embodied in Internal Revenue Code Section

1041

(“Section 1041”). Ironically, these authorities, which focus on

married persons, form the legal bases for the two current approaches to

the taxation of unmarried persons. Although the laws involving the

. Notably, considering the demographics, this lack of guidance further marginalizes certain

already marginalized groups. See Wang & Parker, supra note 4 (“This trend cuts across all major racial

and ethnic groups but has been more pronounced among blacks.”) and (“Today one-in-five never-married

adults ages 25 and older are black....”).

. June Carbone and Naomi Cahn, Nonmarriage, 76 MD. L. REV. 55, 58 (2016), available at

https://scholarship.law.umn.edu/faculty_articles/588 (“[T]he time has come to consider ‘nonmarriage’ as

a distinct body of law on its own terms.”).

. See id. at 57 (“Indeed, relatively few states are willing to imply an agreement, impose a duty

to share property, or provide continued support from the fact of cohabitation alone. Instead, the courts

take their lead from the parties’ formal agreements and their actions in commingling their assets. As

though they were dealing with business partnerships, the courts unwind the parties’ financial

entanglements in accordance with express contract terms and the law of unjust enrichment.”).

. See id. at 58 (“[T]he laws governing financial obligations [between cohabiting adults] are

moving toward a deregulatory model that differs radically from the status-based regulation of

marriage....”).

. United States v. Davis, 370 U.S. 65 (1962).

. 26 U.S.C. § 1041.

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distribution of marital property do not apply directly to the division of

property following a cohabiting relationship, scholars and practitioners

have looked to these laws for guidance in the same way judges have

sometimes done.

Part II provides a framework to resolve the conflict based on an

interdisciplinary approach to the taxation of nonmarriage. Utilizing

principles of family law, this Part encourages consideration of the

individual facts and circumstances in a cohabiting relationship to

determine the appropriate tax treatment of a property transfer upon

dissolution of the relationship.

Consistent with a deregulatory model of

nonmarriage, this proposed framework recognizes the plethora of

possible choices made by cohabiting adults and accepts the reality that

such choices may yield varying tax consequences.

Part III describes the benefits of adopting this proposed framework.

First, this Part explains why an interdisciplinary approach is beneficial

from a legal and a social perspective. Second, this Part discusses how this

proposed framework reinforces long established principles in federal tax

law which dictate that state law determines ownership and state law

creates property rights.

Finally, this Part maintains that the economic

realities present in a cohabiting relationship should determine the tax

treatment of a property transfer upon dissolution of the relationship, and

that this approach is consistent with federal income tax jurisprudence

which states that the substance of a transaction, not its mere form, will

control the tax treatment.

. See LYNN DENNIS WARDLE & LAURENCE C. NOLAN, FAMILY LAW IN THE USA §§ 700, 706

(2011) (Facts and circumstances to consider may include, inter alia, the length of the relationship; the age

and physical and emotional health of the parties; the income or property brought to the relationship by

each person; the standard of living established during the relationship; any written agreement made by the

parties before or during the relationship concerning property distribution; the economic situation of each

person at the time the division of property becomes effective; the income and earning potential of each

person; the contribution by each person to the education, training or earning power of the other person;

the contribution of each person as to the acquisition of any property as well as the contribution of a person

as a homemaker; the tax consequences to each person; the market and emotional value of the assets; the

need for the custodial parent to remain in the home and keep possession of household effects; the debts

and liabilities of each person and the ability of each person to pay those debts.); see also ECONOMIC

RIGHTS OF UNMARRIED COHABITANTS ACT, at 3 (Nat’l Conf. of Commissioners on Uniform State L.,

Discussion Draft 2021), available at

https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=8

c8ca36d-9185-a9db-9fb4-5c53428a8e89&forceDialog=0.

. See Keeva Terry, Separate and Still Unequal? Taxing California Registered Domestic

Partners, 39 U. TOL. L. REV. 633, 641 (2008), available at

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1267328.

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I. DAVIS AND SECTION 1041: POLAR OPPOSITES SETTING THE

STANDARD

Currently, the taxation of nonmarriage incorporates two contradictory

approaches. The first approach treats a property transfer between

cohabiting adults upon dissolution of their relationship like a taxable sale

transaction.

Some scholars and practitioners believe such property

transfers should be considered taxable events akin to arm’s length

transactions, and United States v. Davis is often cited as support for their

position.

The Davis decision illustrates the well-established rule that,

unless both parties have an ownership interest in the property, a transfer

of property from one person to another generally constitutes a taxable

exchange in which gain or loss must be recognized by the transferor of

the property.

Others contend, however, that a property transfer between cohabiting

adults upon dissolution of their relationship should be treated as a

nontaxable event and viewed as a nontaxable gift under the Internal

Revenue Code.

Section 1041 is often cited as support for this position;

it provides that any transfer between former spouses incident to the

divorce shall be treated as a nontaxable gift.

The second approach

advocates for the same tax treatment of property transfers between

cohabiting adults upon dissolution of their relationship as the federal

income tax treatment of property transfers between former spouses

incident to their divorce. These advocates assert that the emotional and

financial connections present in a cohabiting relationship are substantially

similar to those present in a marriage. Therefore, the federal income tax

treatment of property transfers upon dissolution of a cohabiting

relationship should similarly be nontaxable as well.

A. United States v. Davis

Before the Supreme Court decided United States v. Davis,

the

seminal case regarding the federal income taxation of property transfers

. See, e.g., LEON GABINET, TAX ASPECTS OF MARITAL DISSOLUTION § 15:5 (2d ed. 2020)

(“[P]roperty divisions pursuant [to property settlement agreements in long standing cohabitations] should

not be treated as gifts.”).

. United States v. Davis, 370 U.S. 65 (1962).

. 26 U.S.C. § 1001(a); Davis, 370 U.S. at 71 (Having determined that the transaction was a

taxable event....”).

. See, e.g., Cain, Taxation of Property Divisions at Dissolution of Nonmarital Relationships,

supra note 9, and Cain, Taxing Families Fairly, supra note 3, at 805 (stating that similarly situated

families and couples, whether they are married or unmarried, should be taxed similarly).

. 26 U.S.C. § 1041.

. Davis, 370 U.S. at 65.

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made incident to divorce, there was considerable confusion over how and

whether such transfers should be taxed.

Federal Courts of Appeals

disagreed whether such a transfer resulted in a taxable gain.

This

confusion mirrors the confusion experienced by cohabiting adults today.

The Supreme Court ended all debate with Davis and clearly stated that a

transfer of property between spouses incident to a divorce is a taxable

event triggering potential income tax liability for the transferor of the

property.

In Davis, Mr. Thomas Davis brought suit against the IRS to recover

federal income taxes erroneously assessed to him.

Mr. Davis and his

former wife, Alice M. Davis, had entered into a property settlement

agreement in connection with their divorce.

Pursuant to this agreement,

Mr. Davis transferred to Mrs. Davis 500 shares of DuPont stock, which

had been held solely in his name.

At the time of the transfer, the DuPont

stock had appreciated in value from the time when Mr. Davis acquired

it.

The IRS argued that the transfer of stock amounted to a taxable

exchange because Mr. Davis had transferred the stock to Mrs. Davis in

satisfaction of his legal obligations resulting from Mrs. Davis’s statutory

marital rights.

Mr. Davis contended that the transfer of stock was a nontaxable

division of property between co-owners.

He further argued that even if

the transfer was a taxable event, it was too difficult to calculate the fair

. See Karen B. Brown, The Story of Davis: Transfers of Property Pursuant to Divorce, in TAX

STORIES 171 (Paul L. Caron ed., 2d ed., 2009).

. Compare Comm’r v. Marshman, 279 F.2d 27 (6th Cir. 1960) (holding that the Commissioner’s

ruling that fair market value of property received during a property settlement due to divorce was an

“insurmountable obstacle” to determine whether a realized tax gain occurred), with Comm’r v. Mesta,

123 F.2d 986 (3d Cir. 1941) (holding that the property transfer after divorce was a taxable gain because

the property’s fair market value was readily determinable), and Comm’r v. Halliwell, 131 F.2d 642 (2d

Cir. 1942) (holding that securities transferred pursuant to a divorce created a gain realized).

. Ordinary taxpayers have characterized cohabiting relationships as “the wild west where some

exceptionally non-intuitive [and] unjust outcomes can happen.” See, e.g., Can My Ex Boyfriend Sue Me

for Money He Gave Me?, AVVO (July 19, 2013), https://www.avvo.com/legal-answers/can-my-ex-

boyfriend-sue-me-for-money-he-gave-me--1333371.html.

. Davis, 370 U.S. at 71-73.

. Id. at 66.

. Id.

. Id. at 66-67 (“Pursuant to the above agreement which had been incorporated into the divorce

decree, one-half [500 shares] of this [E. I. du Pont de Nemours & Co.] stock was delivered in the tax year

involved, 1955, and the balance thereafter.”).

. Id. at 67 (“Davis’ cost basis for the 1955 transfer was $74,775.37, and the fair market value of

the 500 shares there transferred was $82,250.”).

. Id. at 66-67 (“The then Mrs. Davis agreed to accept this [property] division ‘in full settlement

and satisfaction of any and all claims and rights against the husband whatsoever (including but not by way

of limitation, dower and all rights under the laws of testacy and intestacy) ....’”).

. Id. at 69.

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market value of the marital rights Mrs. Davis had surrendered.

As a

result, it was impossible to determine the “amount realized” by Mr. Davis

and any taxable gain resulting from the transaction.

In a taxable

exchange, the amount realized by the transferor of the property equals the

sum of any money received plus the fair market value of any property the

transferor received in the exchange.

If Mrs. Davis’s marital rights had

an indeterminable value, then the amount realized by Mr. Davis was also

indeterminable.

The Supreme Court rejected both of these arguments.

The first question the Court addressed was whether the transfer of stock

constituted a taxable event or a nontaxable division of property between

co-owners.

The Court stated that the transfer of stock constituted a

taxable event because Delaware law did not grant Mrs. Davis any

ownership rights in her husband’s property.

According to the Court, the

statutory marital rights granted by Delaware law more closely resembled

a personal liability of the husband instead of a property interest of the

wife.

The Court reasoned that if Mrs. Davis had no ownership rights in

the stock that was transferred, then she was not a co-owner of the stock.

And if she was not a co-owner of the stock, then the transfer did not

constitute a division of property between co-owners.

Once the Court determined that the transfer of stock was indeed a

taxable event, it next addressed whether the amount realized by Mr. Davis

could be calculated with any accuracy.

The Court reasoned that when

two parties make an exchange, it is assumed that the properties exchanged

are at least approximately equal in value.

Therefore, the Court declared

that the fair market value of the marital rights surrendered by Mrs. Davis

is presumed to equal the fair market value of the stock surrendered by Mr.

. Id. at 67-68.

. Id. (“[A]lthough such a transfer might be a taxable event, the gain realized thereby could not

be determined because of the impossibility of evaluating the fair market value of the wife’s marital

rights.”).

. 26 U.S.C. § 1001(b).

. Davis, 370 U.S. at 67-68.

. Id. at 66.

. Id. at 68 (“We now turn to the threshold question of whether the transfer in issue was an

appropriate occasion for taxing the accretion to the stock.”).

. Id. at 70 (“[T]he inchoate rights granted a wife in her husband’s property by the Delaware law

do not even remotely reach the dignity of co-ownership.”).

. Id. (“Regardless of the tags, Delaware seems only to place a burden on the husband’s property

rather than to make the wife a part owner thereof.”).

. Id. at 70-71.

. Id. (“The effectuation of these marital rights may ultimately result in the ownership of some

of the husband’s property as it did here, but certainly this happenstance does not equate the transaction

with a division of property by co-owners.”).

. Id. at 71 (“Having determined that the transaction was a taxable event, we now turn to…the

measurement of the taxable gain realized by the taxpayer.”).

. Id. at 72.

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Davis.

The DuPont stock had a clearly ascertainable fair market value of

$82,250.

As a result, the fair market value of the marital rights

surrendered by Mrs. Davis was deemed to equal $82,250 and the amount

realized by Mr. Davis was similarly $82,250.

From a policy

perspective, the Court felt it was more consistent with the general purpose

and intent of the taxing statutes to approximate the gain realized in a

taxable transaction rather than ignore such gain completely.

The Court

held that Mr. Davis realized a taxable gain on the transfer of stock to his

former wife, and such gain could be quantified and must be recognized

by Mr. Davis for federal income tax purposes.

Mr. Davis was taxed in

the same way he would have been had he sold the stock to a stranger for

its fair market value. In other words, the Supreme Court held in Davis

that, unless both parties have an ownership interest in the property, a

property transfer made incident to divorce should be treated as a taxable

event just like any other arm’s length sale transaction.

The holding in Davis generated a fair amount of controversy.

The

tax treatment of property transfers between spouses involving various

forms of ownership was frequently unclear, and litigation often resulted

from varying state laws.

Moreover, many taxpayers felt that it was

inappropriate for the government to intrude on intimate relationships, and

to tax property transfers between spouses upon divorce was akin to doing

just that.

Davis taxed a property transfer between spouses in the same

manner as a property transfer between strangers, ignoring the obvious

. Id. (“It must be assumed, we think, that the parties acted at arm’s length and that they judged

the marital rights to be equal in value to the property for which they were exchanged.”).

. Id. at 67.

. See 26 U.S.C. § 1001(b); Davis, 370 U.S. at 72-73.

. Davis, 370 U.S. at 72-73.

. Id. at 71-73.

. See Stephen E. Solomon, Property Transfer Pursuant to Divorce-Taxable Event?, 17 STAN.

L. REV. 478, 490 (1965) (“[T]he Davis case is open to criticism…its result is not compelled.”); Edward

W. Turley, Jr., Divorce and Taxes-Texas Style, 48 TEX. L. REV. 721, 737 (1970) (“The Davis decision has

not been enthusiastically received by the tax bar.”); Note, Should State Courts Determine Federal Tax

Policy? Imel v. United States, 47 U. COLO. L. REV. 533, 550 (1976) (“The time has come to

overrule Davis. Imel reached the right result, but by the wrong methods. The transfer of property pursuant

to a divorce settlement should not be a taxable event, not because the state court says that it is not, but

because it is consistent with federal tax legislation and policy that it not be taxable.”).

. See, e.g., Collins v. Comm’r, 412 F.2d 211 (10th Cir. 1969); Beth W. Corp. v. United States,

350 F. Supp. 1190 (S.D. Fla. 1972), aff’d per curiam, 481 F.2d 1401 (5th Cir. 1973); Imel v. United States,

523 F.2d 853 (10th Cir. 1975); United States v. Bosch, 590 F.2d 165 (5th Cir. 1979); Cook v. Comm’r.,

80 T.C. 512 (1983), aff’d per curiam, 742 F.2d 1431 (2d Cir. 1984).

. See Turley, supra note 53, at 737 (“The ABA Committee on Domestic Relations Tax Problems

has advocated the overruling of Davis, stressing the point that a tax burden should not be added ‘to the

emotional and financial strains implicit in the tragedy of the breakup of a family.’”).

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890 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

emotional history present in the relationship.

Equating spouses with

strangers also proved troublesome because it did not accurately reflect the

economic reality that spouses usually represent a single economic unit,

which is certainly not the case with strangers.

Federal tax revenues also suffered as a result of the Davis decision.

Taxpayer non-compliance with Davis adversely impacted the federal

budget.

The transferor spouse would often not report any gain on the

transfer of appreciated property, even though the Davis decision

mandated such tax treatment.

Nevertheless, the recipient spouse was

still entitled to a “stepped up basis” in the property equal to its fair market

value on the date of the transfer.

This unfortunate combination resulted

in reduced revenue for the Treasury.

B. Internal Revenue Code Section 1041

In response to the controversy generated by the Davis decision,

Congress enacted Internal Revenue Code Section 1041 in 1984, which

essentially overruled the holding in Davis.

Section 1041 created

uniformity among the several States, notwithstanding the presence of

differing state property laws. This code section unequivocally states that,

for federal income tax purposes, no gain or loss shall be recognized on a

transfer of property to a spouse or a former spouse if such transfer is

incident to the divorce.

Thus, even when both parties do not have an

. Note, Should State Courts Determine Federal Tax Policy? Imel v. United States, 47 U. COLO.

L. REV. 533, 549-50 (1976) (“The principal argument against recognition of capital gains on divorce

settlements, however, concerns the peculiarly noncommercial context in which divorce settlements take

place and the consequent problems of measuring ‘gain.’ Emotional factors often predominate during

settlement negotiations; financial concessions serve to assuage guilt feelings and secure cooperation,

rather than simply representing economic value received. [T]he words ‘fair market value’ would seem to

indicate that the capital gains tax is to apply to transactions of a more commercial nature than a ‘single

transaction between a husband and wife made under the emotion, tension and practical necessities

involved in a divorce proceeding.’” (citations omitted)).

. Id.

. See Brown, supra note 26. (“Davis was likely a net money loser for the Treasury, a factor

which must have contributed heavily to the Treasury’s decision to support a legislative abrogation of

Davis.” (citations omitted)).

. See H.R. REP. NO. 432, pt. 2, at 1491-92 (1984) (“Furthermore, in divorce cases, the

government often gets whipsawed.”)

. Id.

. See Rev. Rul. 67-221, 1967-2 C.B. 63 (concluding that in a Davis situation there is no gain or

loss to the recipient spouse and the recipient spouse’s basis in the property received is its fair market value

on the date of the transfer).

. See Brown, supra note 26 (“Davis was likely a net money loser for the Treasury, a factor which

must have contributed heavily to the Treasury’s decision to support a legislative abrogation of Davis.”

(citations omitted)).

. See H.R. REP. NO. 432, pt. 2, at 1491-92 (1984).

. 26 U.S.C. § 1041.

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ownership interest in the property, property transfers between spouses, or

between former spouses if such transfer is incident to the divorce, are now

treated as nontaxable events for federal income tax purposes.

Section 1041 only applies to married couples, but many couples who

live together in an exclusive, committed relationship without marriage

generally function in the same manner as a married couple.

They often

pool their resources and operate as a single economic unit.

These

cohabiting relationships are substantially similar to marriage, and when

they dissolve, the emotional and financial dissolution process bears a

striking resemblance to that which married couples experience upon

divorce.

As a result, scholars and practitioners sometimes apply the

logic and rationale for the enactment of Section 1041 to cohabiting adults,

and advocate the extension of nontaxable federal income tax treatment to

property transfers between cohabiting adults upon dissolution of their

relationship.

II. THE STATE OF STATE LAW REGARDING NONTAXABLE PROPERTY

TRANSFERS

In the years following the Davis decision,

there was extensive

litigation questioning the taxability of property transfers made pursuant

to divorce.

Since the holding in Davis was based on the Court’s

. Id. See BITTKER ET AL., supra note 8, ¶ 36.09[2] (“Section 1041…treats such transfers as

nontaxable events.”); BURKE & FRIEL, supra note 8, §§ 35.01–35.06; MERTENS LAW OF FEDERAL INCOME

TAXATION, supra note 8, § 31A:63–67; CHIRELSTEIN, supra note 8, ¶ 5.04.

. See Steven K. Berenson, Should Cohabitation Matter in Family Law?, 13 J. L. & FAM. STUD.

289, 290 (2011) (“[I]n at least some jurisdictions, the law considers the mere fact of cohabitation to be

sufficient in and of itself to cause a sometimes significant alteration in the legal relationship between two

parties. In some of these situations, the law treats cohabitation between unmarried partners essentially as

being equivalent to marriage, thereby extending many of the same legal perquisites that come from

marriage to such unmarried couples.”); John M. Yarwood, Note, Breaking Up Is Hard To Do: Mini-

DOMA States, Migratory Same-Sex Marriage, Divorce, and a Practical Solution to Property Division,

B.U. L. REV. 1355, 1365 (2009) (“Unmarried cohabitating couples share property, domestic labor,

children, and many other things that married and civilly unionized couples share.”).

. See Anthony C. Infanti, Decentralizing Family: An Inclusive Proposal for Individual Tax

Filing in the United States, 2010 UTAH L. REV. 605, 615 (“[T]he class of potential joint return filers is

underinclusive because it excludes many nontraditional families who actually do pool financial resources

and act as a single economic unit.”).

. See 6 FAMILY LAW AND PRACTICE §65.08 (Arnold H. Rutkin ed., 2010) (“Ending a long-term,

stable cohabitation relationship forces an individual to go through many of the same psychological

traumas that he or she would experience during a divorce.”); Yarwood, supra note 66, at 1365

(“[Unmarried cohabitating couples] also end their relationships, as many couples in legally recognized

relationships do. This type of dissolution presents many of the same problems as marriage dissolution,

especially if the couple has cohabitated for a long time.”).

. United States v. Davis, 370 U.S. 65 (1962).

. See, e.g., Collins v. Comm’r, 412 F.2d 211 (10th Cir. 1969); Beth W. Corp. v. United States,

350 F. Supp. 1190 (S.D. Fla. 1972), aff’d per curiam, 481 F.2d 1401 (5th Cir. 1973); Imel v. United States,

523 F.2d 853 (10th Cir. 1975); United States v. Bosch, 590 F.2d 165 (5th Cir. 1979); Cook v. Comm’r,

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892 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

examination of Delaware law, and Mrs. Davis’s ownership interest under

Delaware law, much of the litigation focused on the state law that

controlled the property transfer at issue.

The critical question debated

was whether the controlling state law deemed the property transfer a

division of property between co-owners. If so, then for federal income

tax purposes, the property transfer constituted a nontaxable event. As

such, state law determinations of ownership rights and property interests

greatly influenced the federal income tax treatment of property

transfers.

Federal tax law has a long tradition of looking to state law to

determine family relationships and ownership of property rights and has

traditionally relied on state law to define property rights, while federal tax

law has determined how those property rights should be taxed.

Therefore, the IRS should adopt this same approach to determine the

taxability of property transfers between cohabiting adults upon

dissolution of their relationship.

Property ownership rights are often granted to cohabiting adults upon

dissolution of their relationship in the same way the court would grant

property ownership rights under similar circumstances to a married

couple upon divorce.

As a result, Davis and its progeny provide a model

to develop a framework to analyze the federal income tax treatment of

property transfers between cohabiting adults upon dissolution of their

relationship. The individual facts and circumstances in a cohabiting

relationship should be examined and considered to determine the

appropriate federal income tax treatment of a property transfer upon

80 T.C. 512 (1983), aff’d per curiam, 742 F.2d 1431 (2d Cir. 1984).

. See, e.g., Collins, 412 F.2d 211 (discussing Oklahoma law); Beth W. Corp., 350 F.Supp. 1190

(discussing Florida law); Imel, 523 F.2d 853 (discussing Colorado law); Bosch, 590 F.2d 165 (discussing

Florida law); Cook, 80 T.C. 512 (discussing Connecticut law).

. Davis, 370 U.S. at 71 (“Although admittedly such a view may permit different tax treatment

among the several States, this Court in the past has not ignored the differing effects on the federal taxing

scheme of substantive differences [in state law] ….”).

. Cain, Taxing Families Fairly, supra note 3, at 838.

. See, e.g., Becker v. Ashworth, 252 P.3d 647 (Kan. Ct. App. 2011) (per curiam) (“Even if the

parties were not married and merely cohabitated, the court may, in its discretion, make an equitable

division of property either jointly accumulated by the parties or acquired with intent that both parties have

an interest in the property.”); Connell v. Francisco, 898 P.2d 831, 836 (Wash. 1995) (Income and property

acquired during a meretricious relationship is characterized as community property in the same manner

as if the couple had been married, and therefore, is subject to equitable division upon the dissolution of

the relationship); Goode v. Goode, 396 S.E.2d 430, 438-39 (W.Va. 1990) (While indicating a preference

for property division between unmarried cohabitating couples by contract principles, the court does allow

for equitable division of property in the absence of a contract provided a “party claiming relief must

demonstrate that equitable principles would provide the relief being sought.”); Wilbur v. DeLapp, 850

P.2d 1151, 1153 (Or. Ct. App. 1993) (In making a property distribution upon the termination of the

relationship of a non-marital cohabiting couple, “[t]he primary consideration . . . is the intent of the parties.

However…in distributing the property of a domestic relationship, [the Court is] not precluded from

exercising [its] equitable powers to reach a fair result based on the circumstances of each case.”).

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dissolution of the relationship.

Laws regulating nonmarriage should

attempt to respect the myriad of choices that cohabiting adults have made

in their relationship and apply the tax consequences that flow naturally

from such choices, with a clear understanding that such choices may yield

varying tax consequences.

If a transfer is deemed a division of property

interests between the parties under state law, then for federal income tax

purposes, the transfer should similarly be deemed a nontaxable division

of property between co-owners. Based on the foregoing, the following

property transfers between cohabiting adults are likely to be treated as

nontaxable events.

A. Partition of Joint Property

If property is equally owned and titled in both names, the mere partition

of such property is generally not a taxable event. Instead, it is a

nontaxable division of property between co-owners. For example, if

Party A and Party B jointly own 100 acres of land worth $100,000, 1,000

shares of stock in X corporation worth $100,000, and a bank account of

$50,000, and each took half of each item, then no taxable transaction

results. Alternatively, if Party A takes all the land and half of the bank

account (a total of $125,000) and Party B takes all the stock and the other

half of the bank account (a total of $125,000), then no taxable transaction

results.

. A facts and circumstances inquiry to determine the appropriate federal income tax treatment

is not new to the IRS. For example, whether an individual qualifies as an independent contractor or an

employee for federal income tax purposes depends on the facts and circumstances of each case,

Independent Contractor (Self-Employed) or Employee?, IRS (Apr. 13, 2021),

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-

or-employee. Likewise, whether an activity constitutes a trade or business for federal income tax purposes

depends on the facts and circumstances of each case, Business Activities, IRS (May 26, 2020),

https://www.irs.gov/businesses/small-businesses-self-employed/business-activities. With respect to

property interests, however, well-established and longstanding federal income tax jurisprudence dictates

that state law determines ownership and creates property rights.

. See WARDLE & NOLAN, supra note 18, §§ 700, 706 (Facts and circumstances to consider may

include, inter alia, the length of the relationship; the age and physical and emotional health of the parties;

the income or property brought to the relationship by each person; the standard of living established during

the relationship; any written agreement made by the parties before or during the relationship concerning

property distribution; the economic situation of each person at the time the division of property becomes

effective; the income and earning potential of each person; the contribution by each person to the

education, training or earning power of the other person; the contribution of each person as to the

acquisition of any property as well as the contribution of a person as a homemaker; the tax consequences

to each person; the market and emotional value of the assets; the need for the custodial parent to remain

in the home and keep possession of household effects; the debts and liabilities of each person and the

ability of each person to pay those debts.); see also ECONOMIC RIGHTS OF UNMARRIED COHABITANTS

ACT, at 3 (Nat’l Conf. of Commissioners on Uniform State L., Discussion Draft 2021), available at

https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=8

c8ca36d-9185-a9db-9fb4-5c53428a8e89&forceDialog=0.

. Hornback v. United States, 298 F. Supp. 977, 981 (W.D.Mo. 1969), cited with approval in

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894 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

In Beth W. Corporation v. United States,

a Florida federal district

court held that the distribution of property, held as tenants by the entirety,

between husband and wife pursuant to a divorce property settlement

agreement was a nontaxable division of property between co-owners.

This decision was affirmed by the Fifth Circuit Court of Appeals without

opinion.

Jewell and Wiley Waldrep jointly held various parcels of real

property as tenants by the entirety.

Pursuant to a property settlement

agreement entered into during their divorce proceedings, each of the

Waldreps conveyed to the other certain real properties they owned.

The

property settlement agreement was structured to arrive at an equal

division of the total value of jointly owned property.

The court

examined the state law of Florida and determined that a wife holding such

an interest is, in actuality as well as in theory, a co-owner of the subject

property.

Thus, the conveyance to Jewell Waldrep of land jointly owned

by her and husband constituted a nontaxable division of property between

co-owners.

Similarly, in Cofield v. Koehler,

a Kansas federal district court held

that the equal division of the total value of property jointly owned by

husband and wife in the divorce decree was not a taxable event.

Lester

and Marguerite Cofield were issued, in their joint names, a substantial

amount of United States Series E Savings Bonds.

They also

accumulated other joint assets during their marriage, including a large

amount of real estate and considerable personal property.

All property

was held in both names.

At the time of their divorce, the couple did not simply divide each of

Beth W. Corp. v. United States, 350 F. Supp. 1190, 1192 (S.D. Fla. 1972), aff’d per curiam, 481 F.2d

1401 (5th Cir. 1973).

. Beth W. Corp., 350 F. Supp. at 1190.

. Id. at 1192 (“Thus the Waldrep transaction resembles a non-taxable division of property

between co-owners.” “Accordingly, it is the opinion of the Court that no taxable transaction took

place….”).

. Beth W. Corp. v. United States, 481 F.2d 1401 (5th Cir. 1973).

. Beth W. Corp., 350 F. Supp at 1191.

. Id.at 1190.

. Id. at 1192.

. Id. at 1191 (“The essence of the entireties concept is that each spouse is seised of the whole

and not of a share, moiety, or divisible part.”).

. Id. at 1192 (“If husband and wife literally divide or partition the property…so that each just

gets his own proper part, there is no taxable transaction involved.” (citations omitted)).

. Cofield v. Koehler, 207 F.Supp. 73 (D. Kan 1962).

. Id. at 74.

. Id. (“The court specifically found that these bonds were the joint accumulations of the husband

and wife and were not purchased from separate funds of the wife.”).

. Id. at 73.

. Id.

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their joint assets in half.

Instead, they divided their entire marital estate

in half.

Certain jointly owned assets were transferred in full to the

husband in exchange for certain other jointly owned assets that were

transferred in full to the wife.

The property transfers were equal in

value.

The court ruled that the husband’s transfer of savings bonds to

his wife pursuant to their divorce decree did not result in the realization

of income to him because the property transfers had been equal in value.

The equal division of the total value of property jointly owned by husband

and wife in the divorce decree was held to be a nontaxable division of

property between co-owners.

The IRS adopted this position in Revenue Ruling 81-292.

This

revenue ruling plainly stated that an approximately equal division of the

total value of jointly owned property, under a divorce settlement

agreement that provides for transferring some assets in their entirety to

one spouse or the other, in a state that is not a community property state

is a nontaxable division and does not result in the realization of gain or

loss.

“The dignity of co-ownership,” as the Court used the phrase in

Davis, is present when property is jointly owned and titled in both

names.

Cohabiting adults who choose to hold property as joint tenants

should also be able to enjoy all the rights and privileges associated with

ownership, since substantive property rights accompany joint tenancy

under state law.

100

Thus, the equal division of the total value of property

jointly owned and titled in both names of the cohabiting adults should

similarly be a nontaxable division of property between co-owners and not

a taxable event.

101

. Id. at 74.

. Id.

. Id. (“He exchanged these bonds…for other property of equal value, also jointly owned by

them.”).

. Id.

. Id. (“The effect of the divorce decree did no more than set apart to each in severalty the interest

they owned in their [joint] property.”).

. Id. (“From the beginning the revenue laws have been interpreted as defining ‘realization’ of

income as the taxable event….”).

. Rev. Rul. 81-292, 1981-2 C.B. 158.

. cf. Rev. Rul. 73-476, 1973 -2 C.B. 300 (holding that IRC § 1031(a) precludes the recognition

of any gain or loss realized on an equal division of the total value of property held by three individuals as

tenants in common, thereby leaving open the possibility that gain or loss was realized, even if not

recognized, on the transfer of property held as tenants in common).

. See United States v. Davis, 370 U.S. 65, 70 (1962).

100

. See Morgan v. Comm’r, 309 U.S. 78, 80 (1940) (State law creates legal interests and rights in

property); see also, e.g., Libby v. Lorrain, 430 A.2d 37 (Me. 1981) (partition action disentangling the

property involvements of an unmarried couple who bought a house as joint tenants).

101

. See also Rev. Rul. 74-347, 1974-2 C.B. 26 (describing an unequal division of jointly owned

property, pursuant to a divorce decree, and holding that realization occurs only with respect to the amount

in excess of an equal division of the jointly owned property).

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896 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

B. Division of Community Property

For federal income tax purposes, there are nine community property

states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico,

Texas, Washington, and Wisconsin.

102

The community property system

is based on an equal economic partnership model in which the

contributions, financial or otherwise, made by each member of the

community are fully appreciated and equally valued.

103

Three community

property states–California, Nevada, and Washington– make no

distinction between the community property laws affecting married

persons and the community property laws affecting domestic partners.

104

Each member of the community equally contributes his or her industry

to its prosperity and possesses an equal right to succeed to its property.

105

Therefore, each spouse or domestic partner is vested with an equal fifty

percent ownership interest in all community property. Community

property generally includes property acquired by a spouse or domestic

partner while domiciled in the state during the course of the marriage or

domestic partnership.

106

For many of the same reasons that the partition

of joint property is a nontaxable event, it is well-established that 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 the transfer of

some assets in their entirety to one spouse or the other.

107

Domestic partners are clearly unmarried couples

108

who have full

community property rights under the laws of these three states.

109

Certainly, the division of entity rationale which applies to the

approximately equal division of community property under a divorce

102

. See DEP’T OF THE TREASURY, INTERNAL REVENUE SERVICE, PUB. 555, CAT. NO. 15103C,

COMMUNITY PROPERTY (Mar. 2020). This Article does not address the federal tax treatment of income or

property subject to the “community property” election under Alaska, Tennessee, and South Dakota state

laws.

103

. See Terry, Separate and Still Unequal?, supra note 19, at 646 (citations omitted).

104

. All domestic partner references are to those domestic partners registered with the State of

California in accordance with CAL FAM. CODE §§ 297–299.6 (West 2021), and those domestic partners

registered with the State of Nevada in accordance with NEV. REV. STAT. ANN. §122A.100 (West 2020),

and those domestic partners registered with the State of Washington in accordance with WASH. REV.

CODE. ANN. §§ 26.60.030–040 (West 2021).

105

. See Susan Kalinka, Federal Taxation of Community Income: A Simpler and More Equitable

Approach, 1990 WIS. L. REV. 633, 637 (1990).

106

. See CAL. FAM. CODE § 760 (West 2021); see also CAL. FAM. CODE § 297.5 (West 2021).

107

. Rev. Rul. 76-83, 1976-1 C.B. 213; see Wren v. Comm’r, 24 T.C.M. (CCH) 290 (1965).

108

. See Rev. Rul. 2013-17, 2013-38 I.R.B. 201; see also Smelt v. Cnty. of Orange, 447 F.3d 673

(9th Cir. 2006) (a domestic partner does not constitute a married individual); In re Rabin v. Schoenmann,

359 B.R. 242 (B.A.P. 9th Cir. 2007) (domestic partners are not identical to spouses).

109

. See CAL. FAM. CODE § 297.5 (West 2021); NEV. REV. STAT. ANN. § 122A.200 (West

2020); WASH. REV. CODE ANN. § 26.60.080 (West 2021).

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settlement agreement should similarly apply to the approximately equal

division of community property upon dissolution of a domestic

partnership.

110

Thus, the approximately equal division between domestic

partners of the fair market value of community property upon dissolution

of a domestic partnership should likewise be a nontaxable transaction

with no gain or loss recognized to either domestic partner.

C. Transfer of Property to Satisfy an Equitable Interest in Property

Equitable distribution principles have been utilized to resolve property

disputes between cohabiting adults arising from the dissolution of their

relationship.

111

Equitable distribution, which is not the same as equal

distribution, is generally defined as a fair and just meting out of property

between interested parties.

112

It is a judicial division of property rights

and obligations between individuals. The court does not necessarily

divide the property equally, but attempts to make a fair and just allocation

after considering all relevant factors.

113

110

. See Rev. Rul. 76-83, 1976-1 C.B. 213 for explanation of the “division of entity rationale”

(When the aggregate fair market value of the community property received by or on behalf of each spouse

is approximately equal, such division is not a taxable event.).

111

. See, e.g., Connell v. Francisco, 898 P.2d 831, 836 (Wash. 1995) (Income and property acquired

during a meretricious relationship is characterized as community property in the same manner as if the

couple had been married, and therefore, is subject to equitable division upon the dissolution of the

relationship); Goode v. Goode, 396 S.E.2d 430, 438-39 (W.Va. 1990) (While indicating a preference for

property division between unmarried cohabitating couples by contract principles, the court does allow for

equitable division of property in the absence of a contract provided a “party claiming relief must

demonstrate that equitable principles would provide the relief being sought.”); Wilbur v. DeLapp, 850

P.2d 1151, 1153 (Ore. Ct. App. 1993) (In making a property distribution upon the termination of the

relationship of a non-marital cohabiting couple, “[t]he primary consideration . . . is the intent of the parties.

However…in distributing the property of a domestic relationship, [the Court is] not precluded from

exercising [its] equitable powers to reach a fair result based on the circumstances of each case.”); Becker

v. Ashworth, No. 104,417, 252 P.3d 647, 2011 WL 2206635 (Kan. Ct. App. June 3, 2011) (per curiam)

(unpublished) (“Even if the parties were not married and merely cohabitated, the court may, in its

discretion, make an equitable division of property either jointly accumulated by the parties or acquired

with intent that both parties have an interest in the property.”).

112

. AMERICAN LAW INSTITUTE, PRINCIPLES OF THE LAW OF FAMILY DISSOLUTION: ANALYSIS

AND RECOMMENDATIONS, § 4.09, cmt. a (2002) (“The dominant model is ‘equitable distribution,’ in

which the governing statute provides a list of ‘factors’ that the trial judge is authorized or directed to

consider in deciding the fairest allocation of the property.”).

113

. See WARDLE & NOLAN, supra note 18, §§ 700, 706 (factors considered in equitable

distribution include the length of the relationship; the age and physical and emotional health of the parties;

the income or property brought to the relationship by each person; the standard of living established during

the relationship; any written agreement made by the parties before or during the relationship concerning

property distribution; the economic situation of each person at the time the division of property becomes

effective; the income and earning potential of each person; the contribution by each person to the

education, training or earning power of the other person; the contribution of each person as to the

acquisition of any property as well as the contribution of a person as a homemaker; the tax consequences

to each person; the market and emotional value of the assets; the need for the custodial parent to remain

in the home and keep possession of household effects; the debts and liabilities and the ability of each

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898 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

Regardless of who holds title to the property, a person who has made

non-tangible contributions, such as domestic contributions to the

household, may claim an equitable interest in the property upon

dissolution of the relationship.

114

These equitable rights only come into

identifiable form upon dissolution of the relationship; and when granted

by the court, they translate into ownership rights in the property.

115

As a

result, under state law, the property is determined to be co-owned by both

parties. Accordingly, for federal income tax purposes, the transfer of

property to satisfy an equitable ownership interest is likely to be treated

as a nontaxable division of property between co-owners, even when only

one person held title to the property.

In Bosch v. United States,

116

the Fifth Circuit held that the transfer of

real estate, which was titled solely in the husband’s name, constituted a

nontaxable division of property between co-owners because such real

estate was transferred to the wife to satisfy a special equity interest

awarded to her pursuant to her divorce decree.

117

During her marriage,

Lillian Bosch advanced more than $115,000 of her own funds to her

husband to improve certain acres of land that were titled solely in his

name.

118

On the basis of this financial contribution, a Florida divorce

court recognized a special equity interest that Lillian Bosch held in the

improved land.

119

Florida has long recognized the vested ownership right

of a wife who contributed substantially to the growth and development of

her husband’s property.

120

To satisfy this special equity interest, Mr.

person to pay those debts; any other factors the court deems appropriate); see also ECONOMIC RIGHTS OF

UNMARRIED COHABITANTS ACT, at 3 (Nat’l Conf. of Commissioners on Uniform State L., Discussion

Draft 2021), available at

https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=8

c8ca36d-9185-a9db-9fb4-5c53428a8e89&forceDialog=0.

114

. See WARDLE & NOLAN, supra note 18, § 683 (“In response to the substantial disparity in

economic consequences of divorce for men and women in common-law states, legislation authorizing

judicial discretion to distribute some part of the property according to principles other than title began to

be passed in the twentieth century.”); see also AMERICAN LAW INSTITUTE, supra note 112, § 4.02 Reporter

Notes cmt. a (“By the mid-1980s, however, all common-law states had moved to some form of ‘equitable

distribution,’ under which the divorce court could allocate property on a basis other than title or the source

of earnings used to acquire it….”).

115

. See WARDLE & NOLAN, supra note 18, § 684 ([an inchoate interest in the property acquired

by the other] “ripens into an [ownership] interest of variable scope and duration, depending on how the

judge sees the equities of the case.”).

116

. Bosch v. United States, 590 F.2d 165 (5th Cir. 1979).

117

. Id. at 168.

118

. Id. at 166.

119

. Id. at 166 (“The [divorce] court’s decree included the following finding: ‘That the defendant

(husband) is the owner of approximately 3500 acres of land, which is in the name of the defendant solely,

but which have been managed and improved by the use of plaintiff’s money, and in which the plaintiff

has a special equity.’”).

120

. Id. at 167 (“Florida has long recognized a ‘special equity’ in a wife where she has made

identifiable contributions to her husband’s property during marriage even though the special equity only

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Bosch transferred one-third of the land to Mrs. Bosch.

121

On the basis of

Florida law, the Fifth Circuit concluded that the divorce decree awarded

Lillian Bosch a vested property interest in the improved land.

122

As a

result, the transfer of one-third of the land to Mrs. Bosch to satisfy her

special equity interest constituted a nontaxable division of property

between co-owners and did not constitute a taxable event.

123

A related group of cases, including Imel v. United States

124

(discussing

Colorado law), Collins v. Commissioner

125

(discussing Oklahoma law),

and McIntosh v. Commissioner

126

(discussing Montana law), determined

that, upon dissolution of the marriage, both spouses automatically possess

a vested interest in property held under a species of common ownership

jointly acquired during the marriage. Essentially, these cases held that in

every marriage the law of each respective state automatically grants

ownership rights in all marital assets to both spouses, regardless of who

actually holds title to the property, and such ownership rights vest upon

dissolution of the marriage.

127

In each of these cases, the transfer to the

wife, pursuant to the divorce decree, of property titled solely in the

husband’s name was deemed a nontaxable division of property between

co-owners.

128

In contrast, certain states reject the notion that both spouses in every

marriage possess an automatic vested interest in all marital property upon

divorce.

129

Even in those jurisdictions, however, state law does recognize

that vested ownership rights might exist in property not titled in a person’s

name depending on the specific circumstances present in an individual

marriage.

130

For example, in Cook v. Commissioner,

131

the Tax Court

held, pursuant to a divorce decree, the transfer by a husband to his former

comes into actual identifiable form upon the termination of the marriage status.”).

121

. Id. at 166.

122

. Id. at 167 (“The parties agree that the question whether this decree was a division of property

interests between the parties or was an award in lieu of alimony is to be resolved by reference to state

law.”).

123

. Id. at 168 (“We conclude that the Florida divorce court decree awarding the special equity to

the wife in this case constituted a division of existing property interests, and it did not constitute a taxable

event to the husband.”).

124

. Imel v. United States, 523 F.2d 853 (10th Cir. 1975).

125

. Collins v. Comm’r., 412 F.2d 211 (10th Cir. 1969).

126

. McIntosh v. Comm’r, 85 T.C. 31 (1985).

127

. Imel, 523 F.2d at 855; Collins, 412 F.2d at 212; McIntosh, 85 T.C. at 43.

128

. Imel, 523 F.2d at 857; Collins, 412 F.2d at 212; McIntosh, 85 T.C. at 44-45.

129

. See, e.g., Cook v. Comm’r, 80 T.C. 512, 522 (1983), aff’d per curiam, 742 F.2d 1431 (2d Cir.

1984) (“[T]he Supreme Court of Connecticut found that neither husband nor wife acquires by statute any

right in the property of the other…[that] amount to co-ownership.”).

130

. See, e.g., id. at 528 (“Judge Dube believed that Sheila had some sort of interest in these

properties, tangible or intangible, legal or equitable, which became vested in her when the marriage

contract was dissolved.”).

131

. Id. at 512.

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900 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

wife of stock and certain real property, which was titled solely in the

husband’s name, was a nontaxable division of property between co-

owners since the wife had an equitable interest in such property because

she and her family had given or sold the property to her husband.

Sheila and Charles Cook divorced in 1976.

132

Sheila Cook was the

daughter of John Gamble, one of the founders and principal stockholders

of Proctor & Gamble (“P&G”).

133

During the course of their marriage,

Charles Cook received shares of P&G stock as gifts from Sheila Cook

and her parents, and her parents also sold Mr. Cook certain real property

from the Gamble family estate.

134

Under the circumstances, the divorce

court judge believed that Sheila Cook possessed some interest in these

properties, which became vested in her upon dissolution of their marriage,

even though legal title to the properties was undoubtedly exclusively in

Mr. Cook.

135

Pursuant to the Connecticut equitable distribution statute,

the court ordered the transfer of P&G stock and certain real property to

Sheila Cook in the divorce decree.

136

Given that the transfer of property

was made to satisfy Mrs. Cook’s vested interest in such property, the Tax

Court held that the transaction was not taxable to Mr. Cook and was a

nontaxable division of property between co-owners.

137

Similarly, in Beard v. Commissioner,

138

the Tax Court held that cash

payments from a husband to his former wife were not taxable and did not

constitute alimony because the cash payments were made to satisfy her

equitable interest in property that had been titled solely in his name.

Shirley Beard and Richard Patterson had been married 28 years when they

divorced in Michigan in 1975.

139

Neither Ms. Beard nor Mr. Patterson

owned any property when they entered the marriage, so all marital

property had been jointly acquired during their marriage.

140

Their largest

marital assets were shares of common stock in the family business–almost

132

. Id. at 513.

133

. Id.

134

. Id. at 514-16.

135

. Id. at 528 (“Judge Dube believed that Sheila had some sort of interest in these properties,

tangible or intangible, legal or equitable, which became vested in her when the marriage contract was

dissolved.”).

136

. Id. at 527-28 (“[Judge Dube] apparently gave considerable weight to the last factor mentioned

in Conn. Gen. Stat. Ann. sec. 46-51 which requires the divorce court to give consideration to the

contribution of each party in the acquisition of the assets in making a division of property.” (citations

omitted)).

137

. Id. at 528 (“We conclude that under these particular circumstances, the transfer of the

properties was more in the nature of a division of property rather than a satisfaction of any marital

obligations of petitioner to Sheila.”); cf. Cook v. United States, 904 F.2d 107 (1st Cir. 1990).

138

. Beard v. Comm’r, 77 T.C. 1275 (1981).

139

. Id. at 1277.

140

. Id.

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100% of which were held solely in Mr. Patterson’s name.

141

Michigan law provides for equitable distribution of property upon

divorce.

142

As such, the divorce court determined that Ms. Beard was

entitled to an equitable share of the marital property, regardless of who

actually held title to the property, because she had properly raised a family

and equally contributed to the family and business affairs.

143

Since Mr.

Patterson would continue to operate the family business after the divorce,

it was agreed that Mr. Patterson would compensate Ms. Beard in cash for

the value of the shares of common stock that had been equitably

apportioned to her, with such cash payments to be paid in equal

installments over a certain period of time.

144

The Tax Court concluded

that these cash payments were not taxable and did not constitute alimony

because the cash payments were not a support allowance, but instead were

made to satisfy Ms. Beard’s vested property interest in the shares of

common stock.

145

Since equitable distribution principles have been extended to

cohabiting adults when considering the division of property upon

dissolution of their relationship, it certainly seems likely that a nontaxable

division of property will result, no matter whose name is on the title, when

property is transferred in satisfaction of an equitable property right.

146

D. Cash Property Settlements

There are virtually no federal income tax cases that have been litigated

questioning the taxability of property transfers between cohabiting adults

upon dissolution of their relationship. There is, however, one case that

discusses the taxability of cash proceeds received from the settlement of

a lawsuit arising in connection with the dissolution of a cohabiting

relationship: Violet A. Reynolds v. Commissioner of Internal Revenue.

147

In Reynolds, Ms. Violet A. Reynolds petitioned the United States Tax

Court to redetermine her federal income tax liability.

148

Ms. Reynolds

and Mr. Gregg P. Kent cohabited as an unmarried couple for twenty-four

141

. Id. at 1278 (“In addition, the outstanding common stock of Shults Equipment was owned as

follows: Richard, 1965 shares; Richard and Shirley (jointly with rights of survivorship), 35 shares; and an

unrelated third party, 20 shares.”).

142

. See MICH. COMP. LAWS ANN. § 552.19 (West 2020).

143

. Beard, 77 T.C. at 1279.

144

. Id. at 1279-80 (“[Richard] shall pay the balance of $310,000.00 in monthly installments over

a 121 month period commencing November 1, 1975.”).

145

. Id. at 1288-89 (“[W]e think that these payments more closely resemble a property settlement

than a support allowance.”).

146

. See Cain, Taxing Families Fairly, supra note 3, at 825.

147

. See Reynolds v. Comm’r, 77 T.C.M. 1479 (1999).

148

. Id. at 1480.

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years before their relationship dissolved.

149

In connection with the

dissolution of their relationship, Ms. Reynolds entered into a settlement

agreement with Mr. Kent.

150

Pursuant to that settlement agreement, Mr.

Kent agreed to transfer certain property and cash to Ms. Reynolds in

exchange for her full and complete release of any claims to any real or

personal property acquired during their relationship that was titled in Mr.

Kent’s name or in the name of the company in which Mr. Kent was the

majority shareholder.

151

The IRS argued that the transfer should be

included in the gross income of Ms. Reynolds as compensation for

homemaking services.

152

Ms. Reynolds challenged the IRS and instead

asserted that the property and cash were excludable from her gross income

as gifts from Mr. Kent.

153

The taxability of proceeds recovered in settlement of a lawsuit rests

upon the nature of the claim for which the proceeds were received and the

actual basis of recovery.

154

Ascertaining the nature of the claim is a

factual determination that is generally made by reference to the settlement

agreement in light of the facts and circumstances surrounding it.

155

The

Tax Court declared that the court must ask itself “in lieu of what was the

payment received?”

156

The payment’s ultimate character depends on the

payor’s dominant reason for making the payment.

157

The settlement

agreement indicated that Mr. Kent paid the disputed amount to Ms.

Reynolds in exchange for the surrender of her rights in most of the

property purchased during their relationship.

158

Since the payor’s intent

controls the characterization of settlement proceeds, the Tax Court found

149

. Id.

150

. Id. at 1481.

151

. Id. at 1482.

152

. Id.

153

. Id.

154

. Id.(citations omitted).

155

. Id.(citations omitted).

156

. Id.(citations omitted).

157

. Id.(citations omitted).

158

. Id. (“The settlement agreement provided in pertinent part: WHEREAS, KENT in said case

contends that REYNOLDS has no right, title, or interest, or legitimate claim in and to the real and personal

property referred to therein, and further, KENT contends REYNOLDS has no right, title, or legitimate

claim to any real and/or personal property of KENT, whether alleged in the case or not, and further, that

Kent is not liable or responsible for any sums whatsoever; and WHEREAS, REYNOLDS contends that

she has a claim to said real and personal property and to other property, both real and personal, which

may belong to or stand in the name of KENT; and WHEREAS, each of the parties hereto disputes the

other's contentions: and WHEREAS, the parties, KENT and REYNOLDS desire to resolve their

respective differences concerning their respective claims and to memorialize their agreement resolving

those differences, and further, forever place the dispute behind them * * * * * * *

1. In consideration for the full and complete release by REYNOLDS of any claims of any nature, including

but not limited to, any sums of money, and/or claims to any real and/or personal property of KENT, KENT

agrees to pay REYNOLDS the following sums, on the following terms….”).

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that Mr. Kent intended to perfect his sole possession of most of their joint

property when he paid Ms. Reynolds the disputed amount.

159

Interestingly, the Tax Court did not treat this transaction as a

nontaxable division of property between co-owners.

160

Instead, the Tax

Court stated that the sale of her property interest to Mr. Kent was a taxable

event for which Ms. Reynolds must recognize gain to the extent the

selling price exceeded her basis in the property.

161

The Tax Court,

however, determined that her basis in the property equaled or exceeded

the selling price, so there was no gain to be recognized, much in the same

way a nontaxable division of property between co-owners does not yield

any taxable gain.

162

Therefore, it appears that even when an equitable

interest in property is exchanged for cash upon dissolution of a cohabiting

relationship, there is generally no taxable income to be recognized based

heavily on the facts and circumstances present.

III. THE TAXATION OF NONMARRIAGE

A. Family Law as a Guide

The number of adults choosing to live together in exclusive, committed

relationships without marriage has steadily increased over the past few

decades.

163

The rise in cohabitation has understandably led to questions

regarding property divisions between cohabiting adults upon dissolution

of their relationship. Many domestic relations courts and state legislatures

have been willing to address these questions as family law jurisprudence

more fully recognizes the changing landscape of the American family.

164

159

. Id. at 1483.

160

. cf. Beard v. Comm’r., 77 T.C. 1275 (1981) (cash payment in settlement of property interest

deemed not alimony and not includible in income of recipient because “payments more closely resemble

a property settlement than a support allowance.”).

161

. Reynolds, 77 T.C.M. at 1483; see 26 U.S.C. § 1001(a).

162

. Reynolds, 77 T.C.M. at 1484; see 26 U.S.C. § 1015(a).

163

. See Wang & Parker, supra note 4 (“After decades of declining marriage rates and changes in

family structure…the shares of adults cohabiting and raising children outside of marriage have increased

significantly.”).

164

. See, e.g., Libby v. Lorrain, 430 A.2d 37 (Me. 1981) (partition action disentangling the property

involvements of an unmarried man and woman who bought a house as joint tenants); Connell v. Francisco,

898 P.2d 831, 836 (Wash. 1995) (Income and property acquired during a meretricious relationship is

characterized as community property in the same manner as if the couple had been married, and therefore,

is subject to equitable division upon the dissolution of the relationship); Goode v. Goode, 396 S.E.2d 430,

438-39 (W.Va. 1990) (While indicating a preference for property division between unmarried

cohabitating couples by contract principles, the court does allow for equitable division of property in the

absence of a contract provided a “party claiming relief must demonstrate that equitable principles would

provide the relief being sought.”); Wilbur v. DeLapp, 850 P.2d 1151, 1153 (Ore. Ct. App. 1993) (In

making a property distribution upon the termination of the relationship of a non-marital cohabiting couple,

“[t]he primary consideration…is the intent of the parties. However…in distributing the property of a

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As the IRS considers the federal income tax consequences of property

transfers between cohabiting adults upon dissolution of their relationship,

an interdisciplinary approach that incorporates principles of family law is

advisable.

Interdisciplinary work has been heralded as the path to creative

problem solving because it draws insight from other fields, involves

thinking across boundaries, and encourages the synthesis and integration

of knowledge across disciplines.

165

When researchers from two or more

areas of study pool their approaches and modify them so that they are

better suited to the problem at hand, this amalgamation can truly benefit

society.

166

Notably, some tax scholars have long advocated for an

interdisciplinary approach to solve tax problems.

167

Regrettably, the myth that the law of taxation is fundamentally

different from other areas of the law persists.

168

Tax myopia, a concept

discussed extensively by Paul Caron, is the tendency of the tax law to

view itself as an isolated body of law separate from other areas of law;

this misperception has impaired the development of tax law by ignoring

domestic relationship, [the Court is] not precluded from exercising [its] equitable powers to reach a fair

result based on the circumstances of each case.”); Becker v. Ashworth, No. 104,417, 252 P.3d 647, 2011

WL 2206635 (Kan. Ct. App. June 3, 2011) (per curiam) (unpublished) (“Even if the parties were not

married and merely cohabitated, the court may, in its discretion, make an equitable division of property

either jointly accumulated by the parties or acquired with intent that both parties have an interest in the

property.”); see also, e.g., ECONOMIC RIGHTS OF UNMARRIED COHABITANTS ACT, at 3 (Nat’l Conf. of

Commissioners on Uniform State L., Discussion Draft 2021), available at

https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=8

c8ca36d-9185-a9db-9fb4-5c53428a8e89&forceDialog=0; CAL. FAM. CODE§ 297.5 (West 2021); NEV.

REV. STAT. ANN. § 122A.200 (West 2020); WASH. REV. CODE ANN. § 26.60.080 (West 2021).

165

. Janet Weinstein, Coming of Age: Recognizing the Importance of Interdisciplinary Education

in Law Practice, 74 WASH. L. REV. 319, 322 (1999), available at

https://digitalcommons.law.uw.edu/wlr/vol74/iss2/4 (“One aspect of creative problem solving that almost

all approaches have in common is its interdisciplinary nature.”).

166

. Dave Owen & Caroline Noblet, Interdisciplinary Research and Environmental Law,

41 ECOLOGY L.Q. 887 (2015), available at https://repository.uchastings.edu/faculty_scholarship/1231

(“Interdisciplinary research…can be one of the most productive and inspiring of human pursuits—one

that provides a format for conversations and directions that lead to new knowledge.” (citations omitted)).

167

. See, e.g., Paul L. Caron, Tax Myopia, or Mamas Don’t Let Your Babies Grow Up to be Tax

Lawyers, 13 VA TAX REV. 517, 531-54 (1994) (criticizing courts and commentators for ignoring nontax

developments in statutory construction and legislative process theory in advocating unique role for

legislative history in construing the Internal Revenue Code); Paul L. Caron, Estate Planning Implications

of the Right of Publicity, 68 TAX NOTES 95, 95-96 (1995) (criticizing courts for subjecting right of

publicity embodied in famous decedent's name to federal estate tax without consideration of how such

interests are treated under state property law); Paul L. Caron, The Role of State Court Decisions in Federal

Tax Litigation: Bosch, Erie, and Beyond, 71 OR. L. REV. 781 (1992) (criticizing courts and commentators

for inadequate attention to principles of Erie R.R. v. Tompkins, 304 U.S. 64 (1938), in debate over

appropriate mechanism to determine the meaning of state law in federal tax litigation); Paul L. Caron,

When Does Life Begin for Tax Purposes?, 68 TAX NOTES 320, 324 (1995) (criticizing courts and Internal

Revenue Service for grappling over definition of "person" for tax purposes without consideration of how

the issue has been addressed in other areas of law).

168

. Caron, Tax Myopia, supra note 167, at 531.

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insights from other areas of law that should inform the tax debate.

169

The

taxation of property transfers between cohabiting adults presents an

opportunity to change or correct this myth and to engage in

interdisciplinary work in contravention of this myth. A crucial part of the

legal analysis will be missed if the taxability of property transfers between

cohabiting adults upon dissolution of their relationship is determined in

isolation of the principles of family law that are so fundamental to it.

B. The Primacy of State Law when Determining Property Ownership

In previous articles, this Author has discussed longstanding principles

in federal tax law which dictate that state law determines ownership and

creates property rights.

170

This proposed framework reinforces those

principles. For more than a century, Congress has respected a state’s

determination of the property rights granted to its citizens for federal

income tax purposes. Unless Congress decides to remove that right from

the states, the IRS should respect a state’s determination of property rights

in accordance with principles of federalism. Several Supreme Court

decisions provide that state law controls in determining the nature of the

legal interest which the taxpayer has in property sought to be reached by

the federal income tax statute.

171

Utilizing principles of family law to address critical tax questions is not

new. Federal tax law has a long tradition of looking to state law to

determine family relationships and ownership of property rights, while

federal tax law has determined how those property rights should be

taxed.

172

An interdisciplinary approach that incorporates principles of

family law would enhance the taxpayer experience and improve the

administration of Congressional tax policies by eliminating uncertainty

and providing consistency in the law. Taxpayers would also be able to

engage in appropriate tax planning.

C. Substance over Form Prevails

Substance over form is a fundamental tax principle, which “provides

that the tax consequences of a transaction are determined based on the

underlying substance of the transaction rather than its legal form.”

173

The

169

. Id. at 518.

170

. See Terry, Separate and Still Unequal?, supra note 19, at 641; Keeva Terry, Same-Sex

Relationships, DOMA, and the Tax Code: Rethinking the Relevance of DOMA to Straight Couples, 20.1

COLUM. J. GENDER & L. 383 (2011), available at http://ssrn.com/abstract=1920852.

171

. Terry, Same-Sex Relationships, DOMA, and the Tax Code, supra note 170, at 408.

172

. Cain, Taxing Families Fairly, supra note 3, at 838.

173

. Southgate Master Fund, L.L.C. v. United States, 659 F.3d 466, 479 (5th Cir. 2011) (citations

omitted).

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906 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

substance over form doctrine allows courts to recharacterize a transaction

so that its taxable form corresponds to its economic substance.

174

The

Supreme Court has endorsed this doctrine.

175

In applying the doctrine of

substance over form, the Supreme Court has looked to the objective

economic realities of a transaction rather than to the particular form the

parties employed.

176

The reality is that many couples choose to live together and pool their

resources as one economic household. Substantively, cohabiting adults

face many of the same economic challenges as a married couple.

Therefore, when it comes to the dissolution of these relationships, the IRS

should consider the substance of the relationship to determine the

appropriate tax treatment. This approach comports with well-established

Supreme Court precedent.

In Commissioner of Internal Revenue v. Court Holding Co., the

respondent corporation’s sole asset was an apartment building.

177

The

corporation was owned by two individual shareholders.

178

While the

corporation still had legal title to the apartment building, it negotiated the

sale of the property.

179

An oral agreement was reached as to the terms

and conditions of sale, but soon after, the purchaser was advised by the

corporation’s attorney that the sale could not take place because it would

result in a large income tax to the corporation.

180

The next day, the corporation liquidated its assets, which made the two

shareholders the new owners of the property in their individual

capacities.

181

A sale contract was then executed between the new property

owners and the same purchaser with substantially the same terms and

conditions as previously negotiated by the corporation.

182

The

Commissioner argued that, despite the liquidation of assets followed by

the transfers of legal title, the corporation had not abandoned the sales

negotiations and instead used mere formalities designed to make the

transaction appear to be something other than what it was in order to avoid

tax liability.

183

The Supreme Court agreed and stated that the incidence

174

. Southgate Master Fund, 659 F.3d at 479.

175

. See Frank Lyon Co. v. United States, 98 S. Ct. 1291 (1978).

176

. Frank Lyon Co. v. United States, 98 S. Ct. 1291, 1298 (1978); see Blueberry Land Co. v.

Comm’r, 361 F.2d 93, 101 (5th Cir. 1966) (“[C]ourts will, and do, look beyond the superficial formalities

of a transaction to determine the proper tax treatment.”).

177

. 324 U.S. 331, 332 (1945).

178

. Id. at 332–33.

179

. Id. at 333.

180

. Id.

181

. Id.

182

. Id.

183

. Id.

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of taxation depends upon the substance of a transaction.

184

Therefore, the

transaction must be viewed as a whole, and each step, from the

commencement of negotiations to the consummation of the sale, is

relevant. The Court held that it was evident that the substance of the

transaction was a sale by the corporation rather than a sale by the

shareholders.

185

The Court Holding Co. case illustrates how courts will take a holistic

view of the circumstances when determining the substance of a

transaction. One of the main considerations when determining the

substance of a transaction is the party’s motivation in conducting the

transaction. In other words, a party’s sole purpose for a transaction cannot

be for a tax benefit. Instead, a taxpayer must be able to demonstrate that

there was some non-tax motivation. Certainly, the motivation for

cohabiting adults is rarely to secure a tax benefit, so there is little risk of

subverting the legislative purpose of the Tax Code by taxing property

transfers between cohabiting adults using the interdisciplinary approach

of this proposed framework.

In PPL Corp. v. Commissioner of Internal Revenue, the United

Kingdom privatized a number of government-owned companies, which

became significantly profitable.

186

The U.K. subsequently imposed a

windfall tax to account for the excess profits earned by the companies

during the first four years of privatization.

187

A U.S. taxpayer, who was

part owner of one of the affected companies, tried to take a foreign tax

credit for the windfall tax, but the Commissioner contended that the

windfall tax was not creditable for U.S. tax purposes.

188

In its analysis,

the Supreme Court took a “commonsense approach.”

189

The Court

considered the predominant character of the tax and followed the

substance over form doctrine to recognize that the U.K.’s windfall tax was

nothing more than an income tax (in the U.S. sense) on actual profits

above a certain threshold.

190

The Court stated that the Commissioner’s

approach in reading the Tax Code was too rigid as “tax law deals in

economic realities, not legal abstractions.”

191

The Court’s reasoning in rejecting the Commissioner’s restrictive

reading of the Tax Code is important, and it shows that the Tax Code

should be read and viewed adaptively so that it can encompass new

184

. Id. at 334.

185

. Id.

186

. 569 U.S. 329, 331–32 (2013).

187

. Id. at 332.

188

. Id. at 334.

189

. Id. at 331.

190

. Id. at 338.

191

. Id. at 340 (citations omitted).

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908 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 89

economic realities. This is important when considering cohabiting adults,

because the reality is that the number of people choosing to live together

without marriage is substantially increasing. Therefore, the need for the

IRS to provide guidance to cohabiting adults regarding the federal income

tax consequences of the dissolution of their relationship, and property

transfers resulting from such dissolution, has become more than an

economic reality – it has become an economic necessity.

In Frank Lyon Co. v. United States, Frank Lyon was Frank Lyon Co.’s

majority shareholder and board chairman. He also served on the board of

Worthen Bank.

192

Worthen was planning the construction of a multistory

bank and office building.

193

The bank, however, could not secure

approval of its initial plan because of certain rules under Arkansas law

and the regulations of the Federal Reserve System.

194

Nevertheless, the

bank found a solution, which was to enter into a sale and leaseback

arrangement with Lyon Co. as the borrower and New York Life Insurance

Company as the lender.

195

As a result of this new plan, Lyon Co. claimed

depreciation deductions on its federal income tax returns, which the

Commissioner challenged.

196

The Supreme Court used the substance

over form doctrine to analyze the “objective economic realities” and

determine whether Lyon Co. was entitled to the deductions.

197

The Court

concluded that this was not a sham business transaction and that it was

Lyon Co.’s capital that was invested (and consequently risked) in the

building according to the agreement.

198

Therefore, Lyon Co. was entitled

to the depreciation deductions.

199

Lyon is an important case because it highlights another factor courts

are encouraged to consider under the substance over form doctrine –the

actual investment and liabilities associated with the transaction.

200

This

analysis goes beyond just merely looking at motives or facts that may

have been incorporated in the decision-making process, but specifically

examines the investment made and the liabilities incurred by the taxpayer.

Considering the economic realities associated with cohabitating adults,

there is little doubt that these relationships often require significant

financial investment. When they dissolve, the emotional and financial

dissolution process bears a striking resemblance to that which married

192

. 98 S. Ct. 1291, 1293 (1978).

193

. Id.

194

. Id. at 1293–94.

195

. Id. at 1294.

196

. Id. at 1296.

197

. Id. at 1298.

198

. Id. at 1300, 1302.

199

. Id. at 1302.

200

. Id. at 1303.

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couples experience upon divorce. As a result, the substance of these

relationships, not their form, should control and determine the tax

consequences of property transfers between cohabiting adults.

CONCLUSION

As our society evolves, so do our relationship structures, and so must

our Tax Code. In the twenty-first century, more and more couples who

choose to maintain exclusive, committed relationships have opted not to

marry. Many domestic relations courts and state legislatures have been

willing to address questions regarding property divisions between

cohabiting adults as family law jurisprudence more fully recognizes the

changing landscape of the American family.

201

There is no need for

federal tax law to recreate the wheel. If a transfer is deemed a division of

property interests between the parties under state law, then for federal

income tax purposes, the transfer should similarly be deemed a

nontaxable division of property between co-owners. To ensure

consistency and uniformity, as the IRS prepares to strengthen its ability

to collect tax revenues, it is essential for the IRS to provide clear and

specific guidance to this growing group of taxpayers, thereby ensuring

they receive fair and equitable treatment.

202

201

. supra note 164.

202

. See The American Families Plan Tax Compliance Agenda, U.S. Department of the Treasury

(May 2021), available at https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-

Compliance-Agenda.pdf.

University of Cincinnati Law Review, Vol. 89, Iss. 4 [2021], Art. 3

https://scholarship.law.uc.edu/uclr/vol89/iss4/3