[1] In 1984, "having heard criticism of the Davis/Farid rule for many years,"[2] Congress overruled the main holding: Under § 1041(a), no gain or loss shall be recognized by the transferor-spouse (or former spouse, but "only if the transfer is incident to divorce"); as a corollary, §1041(b) provides that transferor's basis shall carry over into the hands of the transferee-spouse.

)[2] Pursuant to a separation agreement, the taxpayer's (ex-)wife agreed to relinquish any potential claims or marital rights, in exchange for which he transferred to her 1,000 shares of stock in DuPont.

The government argued that the appreciation should be included in the taxpayer's gross income, viewing the transfer of property as an exchange for the release of an independent legal obligation.

[3] The Supreme Court held that the $7,000 appreciation should count as gross income, as "the 'amount realized' from the exchange is the fair market value of the released marital rights, which in this case would be equal to the value of the stock transferred.

While this statute overrules the specific holding of Davis, it does not change the general rule—that "a taxpayer recognizes a gain on the transfer of appreciated property in satisfaction of a legal obligation.