CERTIORARI TO THE COURT OF CLAIMS.
Warren, Black, Douglas, Clark, Harlan, Brennan, Stewart; Frankfurter took no part in the decision of these cases; White took no part in the consideration or decision of these cases.
MR. JUSTICE CLARK delivered the opinion of the Court.
These cases involve the tax consequences of a transfer of appreciated property by Thomas Crawley Davis*fn1 to his former wife pursuant to a property settlement agreement executed prior to divorce, as well as the deductibility of his payment of her legal expenses in connection therewith. The Court of Claims upset the Commissioner's determination that there was taxable gain on the transfer but upheld his ruling that the fees paid the wife's attorney were not deductible. 152 Ct. Cl. 805, 287 F.2d 168. We granted certiorari on a conflict in the Court of Appeals and the Court of Claims on the taxability of such transfers.*fn2 368 U.S. 813. We have decided that the taxpayer did have a taxable gain on the transfer and that the wife's attorney's fees were not deductible.
In 1954 the taxpayer and his then wife made a voluntary property settlement and separation agreement calling for support payments to the wife and minor child in addition to the transfer of certain personal property to the wife. Under Delaware law all the property transferred was that of the taxpayer, subject to certain statutory marital rights of the wife including a right of intestate succession and a right upon divorce to a share of the husband's property.*fn3 Specifically as a "division in settlement of their property" the taxpayer agreed to transfer to his wife, inter alia, 1,000 shares of stock in the E. I. du Pont de Nemours & Co. The then Mrs. Davis agreed to
accept this 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) . . . ." Pursuant to the above agreement which had been incorporated into the divorce decree, one-half of this stock was delivered in the tax year involved, 1955, and the balance thereafter. 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. The taxpayer also agreed orally to pay the wife's legal expenses, and in 1955 he made payments to the wife's attorney, including $2,500 for services concerning tax matters relative to the property settlement.
The determination of the income tax consequences of the stock transfer described above is basically a two-step analysis: (1) Was the transaction a taxable event? (2) If so, how much taxable gain resulted therefrom? Originally the Tax Court (at that time the Board of Tax Appeals) held that the accretion to property transferred pursuant to a divorce settlement could not be taxed as capital gain to the transferor because the amount realized by the satisfaction of the husband's marital obligations was indeterminable and because, even if such benefit were ascertainable, the transaction was a nontaxable division of property. Mesta v. Commissioner, 42 B. T. A. 933 (1940); Halliwell v. Commissioner, 44 B. T. A. 740 (1941). However, upon being reversed in quick succession by the Courts of Appeals of the Third and Second Circuits, Commissioner v. Mesta, 123 F.2d 986 (C. A. 3d Cir. 1941); Commissioner v. Halliwell, 131 F.2d 642 (C. A. 2d Cir. 1942), the Tax Court accepted the position of these courts and has continued to apply these views in appropriate cases since that time, Hall v. Commissioner,
T. C. 53 (1947); Patino v. Commissioner, 13 T. C. 816 (1949); Estate of Stouffer v. Commissioner, 30 T. C. 1244 (1958); King v. Commissioner, 31 T. C. 108 (1958); Marshman v. Commissioner, 31 T. C. 269 (1958). In Mesta and Halliwell the Courts of Appeals reasoned that the accretion to the property was "realized" by the transfer and that this gain could be measured on the assumption that the relinquished marital rights were equal in value to the property transferred. The matter was considered settled until the Court of Appeals for the Sixth Circuit, in reversing the Tax Court, ruled that, although 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. Commissioner v. Marshman, 279 F.2d 27 (1960). In so holding that court specifically rejected the argument that these rights could be presumed to be equal in value to the property transferred for their release. This is essentially the position taken by the Court of Claims in the instant case.
We now turn to the threshold question of whether the transfer in issue was an appropriate occasion for taxing the accretion to the stock. There can be no doubt that Congress, as evidenced by its inclusive definition of income subject to taxation, i. e., "all income from whatever source derived, including . . . gains derived from dealings in property,"*fn4 intended that the economic growth of this stock be taxed. The problem confronting us is simply when is such accretion to be taxed. Should the economic gain be ...