Craven v. United States

Linda Craven (plaintiff) and her husband, Billy Joe Craven, started a pottery company in 1971 and incorporated the company as Craven Pottery in 1975. Billy Joe, the company’s president, owned 51 percent of the stock, Linda owned 47 percent of the stock, and their two children each owned 1 percent of the stock. In 1991 Linda and Billy Joe divorced. They agreed to divide their marital property. As part of the agreement, Linda sold her stock in Craven Pottery to the company for $4.8 million. Linda received the money in four payments and filed a disclosure with the Internal Revenue Service (the IRS) (defendant) stating that the payments qualified for nonrecognition under § 1041 of the Internal Revenue Code because they were incident to a divorce. The IRS determined that the payments did not qualify for nonrecognition because the stock was transferred to the company instead of to Billy Joe. The IRS concluded that the payments were capital gains on which Linda owed taxes. Linda paid the taxes and sued the IRS in district court for a refund. The district court granted Linda’s motion for summary judgment, accepting Linda’s argument that Georgia law required equal distribution of marital property and that, because Linda was required to sell her stock back to the company pursuant to the divorce agreement, she transferred the stock on behalf of Billy Joe. The IRS appealed.