Harris v. Commissioner

Cornelia Harris (plaintiff) and Reginald Wright filed for divorce in a Nevada state court. As part of the divorce, Harris and Wright negotiated an agreement to divide their property interests. Both parties received property under the agreement. However, Wright received approximately $107,000 more in property value than Harris in exchange for agreeing to release his marital rights in Harris’s remaining property. The agreement also stated that it would be binding on the parties regardless of what the divorce court ordered. The court then issued a divorce decree that incorporated most but not all of the agreement’s terms. For instance, in the agreement, Harris promised to pay one of Wright’s debts, but the court order did not make Harris responsible for that debt. When Harris transferred property to Wright, the commissioner of Internal Revenue (commissioner) (defendant) determined that Harris’s transfers were being made pursuant to the agreement. Because United States Supreme Court precedent held that a transfer of property in exchange for a release of marital rights was a gift, the commissioner imposed a gift tax on the transfers that were supported only by Wright’s release of his marital rights. Harris petitioned the United States Tax Court for a determination that the transfers were not gifts because they were made pursuant to a court order, not an agreement. The Tax Court agreed and found that Harris did not owe gift taxes. The Second Circuit reversed the Tax Court, finding that the transfers were taxable. The United States Supreme Court agreed to review the issue.