## Facts

- Linda Karen Brownlow Craven and Billy Joe Craven married in 1966 and started a pottery business that was incorporated as Craven Pottery, Inc.
- Ownership of the closely held corporation was divided among family members: Billy Joe held 51%, Linda 47%, and each of their two children 1%.
- Linda stopped working for the corporation in 1987 amid marital breakdown; the couple separated in 1988.
- In 1989, Linda sued for divorce and sought relief that included a sale of the corporation and distribution of proceeds among shareholders.
- In 1991, a divorce decree incorporated a settlement agreement among Linda, Billy Joe, and the corporation, resolving all matters and dividing marital property.
- Under the settlement, Linda agreed to transfer her shares through a corporate redemption: she agreed to sell, and the corporation agreed to buy, her stock; the divorce was the sole reason for the transfer.
- The corporation issued Linda a $4.8 million promissory note for the shares; Billy Joe guaranteed the note and stated that the note’s terms were of direct interest and benefit to him.
- Linda reported the transaction as a nonrecognition transfer incident to divorce under I.R.C. § 1041.
- The IRS treated the payments as taxable capital gain because the stock was redeemed by the corporation rather than transferred directly to Billy Joe; Linda paid the assessed tax and sued for a refund.
- The district court granted summary judgment for Linda, and the United States appealed.

## Issues

1. Whether I.R.C. § 1041’s nonrecognition rule applies when, under a divorce property settlement, a spouse’s stock is redeemed by a closely held corporation rather than transferred directly to the other spouse.
2. Whether the redemption could be treated as a transfer “to” or effectively “on behalf of” a spouse or former spouse incident to divorce for purposes of § 1041.

## Decision

- The Eleventh Circuit affirmed the grant of summary judgment for Linda.
- The court held that the stock redemption, executed pursuant to the divorce settlement and incident to the divorce, qualified for nonrecognition under I.R.C. § 1041.
- Because § 1041 applied, Linda did not recognize gain on the redemption proceeds, and she was entitled to a tax refund.

## Legal Principles

- I.R.C. § 1041 generally provides nonrecognition of gain or loss for property transfers between spouses or former spouses when the transfer is incident to divorce.
- In applying § 1041 to divorce settlements, courts may consider the substance of the transaction and the role of state domestic-relations law in characterizing the property division.
- A transfer structured through a third-party mechanism (including a corporate redemption) may fall within § 1041 when it is required by, or effectuates, the spouses’ divorce-related division of property and operates for the economic benefit of the other spouse.
- Where material facts are undisputed, summary judgment is appropriate on the legal characterization of a divorce-related property transfer for federal tax purposes.

## Conclusion

The Eleventh Circuit treated a divorce-driven corporate redemption of a spouse’s shares as a § 1041-eligible, incident-to-divorce transfer in substance, rejecting the IRS’s formalistic view that a redemption by the corporation necessarily triggers taxable capital gain to the transferring spouse.


Craven v. United States, 215 F.3d 1201 (11th Cir. 2000)