Mr. Kochansky Meets Revenue Ruling 2002-22
Richard W. Kochansky was a medical malpractice attorney who divorced his wife, Carol, in 1985. As part of their property settlement Richard agreed that he would share the contingent fee in a medical malpractice suit he was pursuing.
Little did he know that his agreement to share his prospective earnings with his soon to be former spouse would, more than a decade later, become part of a landmark revenue ruling that would determine how Silicon Valley royalty would be taxed on millions (perhaps billions) of dollars in stock options.
The general rule of dividing property between spouses in a divorce is governed by IRC Section 1041, which states that such transfers are as tax free gifts between the spouses with mandatory non-recognition of gain or loss. There is a carryover of basis and holding period to the transferee spouse. If and when the transferee spouse disposes of the property, he or she will recognize gain or loss as if he or she had owned the property from inception, and there is no tax effect on the transferor spouse.