Tax...here is how
to do it wrong....
Susie Salvatore, TC Memo
1970-30
MEMORANDUM FINDINGS OF
FACT AND OPINION
FEATHERSTON, Judge:
Respondent determined a deficiency
in petitioner's income tax for 1963 in the amount of $31,016.60.
The only issue presented for decision is whether petitioner is
taxable on all or only one-half of the gain realized on the sale
of certain real property in 1963.
FINDINGS OF FACT
Petitioner was a legal resident of
Greenwich, Connecticut, at the time her petition was filed. She
filed an individual Federal income tax return for 1963 with the
district director of internal revenue, Hartford, Connecticut.
Petitioner's husband operated an oil and gas service station in Greenwich, Connecticut, for a number of years prior to his death on October 7, 1948. His will, dated December 6, 1941, contained the following pertinent provisions:
SECOND: I give devise and bequeath all of my estate both real and personal of whatsoever the same may consist and wheresoever the same may be situated of which I may die possessed or be entitled to at the time of my decease, to my beloved wife, SUSIE SALVATORE, to be hers absolutely and forever.
I make no provision herein for my beloved children because I am confident that their needs and support will be provided for by my beloved wife.
***
FOURTH: I hereby give my Executors full power to sell any and all of my property in their discretion and to execute any and all necessary deed or deeds of conveyance of my said property or any part or parts thereof, and which said deed or deeds, conveyance or assignment so executed by my Executors shall be as good and effectual to pass the title to the property therein described and conveyed as if the same had been executed by me in my lifetime.
For several years after her husband's
death petitioner's three sons, Amedeo, Eugene, and Michael, continued
operating the service station with the help of her daughter Irene,
who kept the books of the business. Sometime prior to 1958, however,
Michael left the service station to undertake other business endeavors;
and in 1958 Eugene left to enter the real estate business, leaving
Amedeo alone to manage and operate the service station.
During this period and until 1963,
petitioner received $100 per week from the income of the service
station. This sum was not based on the fair rental of the property,
but was geared to petitioner's needs for her support. The remaining
income was divided among the family members who worked in the
business.
The land on which the service station
was located became increasingly valuable. Several major oil companies
from [pg. 70-108]
time
to time made purchase proposals, which were considered by members
of the family. Finally, in the early summer of 1963 representatives
of Texaco, Inc. (hereinafter Texaco), approached Amedeo regarding
the purchase of the service station property. Petitioner called
a family conference and asked for advice on whether the property
should be sold. Realizing that Amedeo alone could not operate
the station at peak efficiency, petitioner and her children decided
to sell the property if a reasonable offer could be obtained.
Amedeo continued his
negotiations with Texaco and ultimately received an offer of $295,000.
During the course of the negotiations Eugene discovered that tax
liens in the amount of $8,000 were outstanding against the property.
In addition, there was an outstanding mortgage, securing a note
held by Texaco, on which approximately $50,000 remained unpaid.
The family met again to consider Texaco's offer.
As a result of the
family meeting (including consultation with petitioner's daughter
Geraldine, who lived in Florida), it was decided that the proposal
should be accepted and that the proceeds should be used, first,
to satisfy the tax liens and any other outstanding liabilities.
Second, petitioner was to receive $100,000, the estimated amount
needed to generate income for her life of about $5,000 per year
-
the approximate equivalent of the $100 per week she previously
received out of the service station income. Third, the balance
was to be divided equally among the five children. To effectuate
this family understanding, it was agreed that petitioner would
first convey a one-half interest in the property to the children
and that deeds would then be executed by petitioner and the children
conveying the property to Texaco.
On July 24, 1963, petitioner
formally accepted Texaco's offer by executing an agreement to
sell the property to Texaco for $295,000, the latter making a
down payment of $29,500. Subsequently, on August 28, 1963, petitioner
executed a warranty deed conveying an undivided one-half interest
in the property to her five children. This deed was received for
record on September 6, 1963. By warranty deeds dated August 28
and 30, 1963, and received for record on September 6, 1963, petitioner
and her five children conveyed their interest in the property
to Texaco; Texaco thereupon tendered $215,582.12, the remainder
of the purchase price less the amount due on the outstanding mortgage.
Petitioner filed a
Federal gift tax return for 1963, reporting gifts made to each
of her five children on August 1, 1963, of a 1/10 interest in
the property and disclosing a gift tax due in the amount of $10,744.35.
After discharge of
the mortgage and the tax liens the remaining proceeds of the sale
(including the down payment) amounted to $237,082, of which one-half,
$118,541, was paid to petitioner. From the other half of the proceeds
the gift tax of $10,744.35 was paid and the balance was distributed
to the children.
In her income tax return
for 1963 petitioner reported as her share of the gain from the
sale of the service station property a long-term capital gain
of $115,063 plus an ordinary gain of $665. Each of the children
reported in his 1963 return a proportionate share of the balance
of the gain.
In the notice of deficiency
respondent determined that petitioner's gain on the sale of the
service station property was $238,856, all of which was taxable
as long-term capital gain. Thereafter each of petitioner's children
filed protective claims for refund of the taxes which they had
paid on their gains from the sale of the service station property.
OPINION
The only question is whether petitioner is taxable on all or only one-half of the gain realized from the sale of the service station property. This issue must be resolved in accordance with the following principle stated by the Supreme Court in Commissioner v. Court Holding Co., 324 U.S. 331, 334 [ 33 AFTR 593] (1945):
The incidence of taxation depends upon the substance of a transaction. The tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed for[pg. 70-109] tax purposes into a sale by another by using the latter as a conduit through which to pass title.4 To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress. [Footnote omitted. Emphasis added.]
See Harry C. Usher,
Sr., 45
T.C. 205 (1965); John E. Palmer, 44
T.C. 92 (1965), affirmed per curiam 354
F.2d 974 [
16 AFTR 2d 6112] (C.A. 1, 1965).
The evidence is unmistakably
clear that petitioner owned the service station property prior
to July 24, 1963, when she contracted to sell it to Texaco. Her
children doubtless expected ultimately to receive the property
or its proceeds, either through gifts or inheritance, and petitioner
may have felt morally obligated to pass it on to them. But at
that time the children "held" no property interest therein.
1
Petitioner's subsequent conveyance, unsupported by consideration,
of an undivided one-half interest in the property to her children
-
all of whom were fully aware of her prior agreement to sell the
property -
was merely an intermediate step in the transfer of legal title
from petitioner to Texaco: petitioner's children were only "conduit[s]
through which to pass title." That petitioner's conveyance
to the children may have been a bona fide completed gift prior
to the transfer of title to Texaco, as she contends, is immaterial
in determining the income tax consequences of the sale, for the
form of a transaction cannot be permitted to prevail over its
substance. In substance, petitioner made an anticipatory assignment
to her children of one-half of the income from the sale of the
property.
The artificiality of
treating the transaction as a sale in part by the children is
confirmed by the testimony by petitioner's witnesses that the
sum retained by her from the sale was a computed amount -
an amount sufficient to assure that she would receive income in
the amount of approximately $5,000 annually. If the sales price
had been less, petitioner would have retained a larger percentage
of the proceeds; if more, we infer, she would have received a
smaller percentage. 2
While the children's desire to provide for their mother's care
and petitioner's willingness to share the proceeds of her property
with her children during her lifetime may be laudable, her tax
liabilities cannot be altered by a rearrangement of the legal
title after she had already contracted to sell the property to
Texaco.
All the gain from sale
of the service station property was taxable to petitioner. We
find nothing in Oscar Deinert, 11
B.T.A. 651 (1928), or Charles W. Walworth, 6
B.T.A. 788 (1927), cited by petitioner, which requires an opposite
conclusion.
Decision will be entered for the respondent.
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Sec. 1221, I.R.C. 1954, defines the term "capital asset" to mean "property held by the taxpayer."
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Eugene Salvatore testified
as follows:
Q You stated that you
wanted one hundred thousand dollars for your mother. That is,
this was to be her share, more or less?
A Yes.
Q If the property was
sold for one hundred thousand dollars would your mother have kept
all the money?
A She had to.
Q She would have?
A She would have kept
all the money.
Q Because she needed
the money to live on the interest?
A Because we felt she
needed it to live on.
Q The children would
have got nothing?
A If she got $90 a week the five children would have made up the difference. We felt she needed the money to live on.