Lucas v. Earl
281 U.S. 111 (1930).
Facts
Analysis
Additional Notes
Helvering v. Horst
311 U.S. 112 (1940).
Facts
The taxpayer was to receive a bond. Shortly before the bond was to give out the bond coupon (interest on the bond), the taxpayer gifted the coupons (but not the bond) to his son. The son then went to obtain the interest. The question now is who should be taxed, the father or the son.
Analysis
Here, the court says the father should be taxed because the father had realized the income and had gifted the asset. This is because the father had control over the property, including how the property was to be devised. To have avoided this result, the father should have given the son the whole bond (and the son would then have been required to pay taxes).
Salvatore v. Commissioner
T.C. Memo. 1970–30.
Facts
Mr. and Mrs. Salvatore owned and operated a service station until Mr. Salvatore’s death. At that point, the service station was entirely in Mrs. Salvatore’s possession and the station continued to be serviced by her children. Eventually, the value of the property increased, and the service station became difficult to manage, and the family received offers for the land.
Texaco provided an offer of 395,000. After realizing lien and mortgage obligations, they accepted the offer. Mrs. Salvatore was to take half of the proceeds to live on, while the rest was divided evenly between the remaining children.
Mrs. Salvatore accepted the offer, gave half of her interest in the property to her children, then facilitated the transaction. That is, she received payment and all of her children devised their interest to Texaco.
When taxes came around, Mrs. Salvatore listed half as her taxes, and the children reported their respective shares. Ultimately, this puts each member is a smaller tax bracket.
Analysis
The question is whether Mrs. Salvatore needed to be taxed on the full rate or half. Here, the mother was attempting to minimize tax liability by giving interest in the property to her children before the sale (instead of after). So, the mother should have been taxed at the full rate (and the children not pay taxes), because she had anticipated the full sale.
In other words, because there was an offer to sell before, the tax liability will remain the same after. Because she had control of the property, she will be taxed on it.
Additional Notes
Essentially, the mother should have given the half interest to her children before the offer came through (although this generally isn’t practical).
Here, the fruit of the tree was ripe.
Estate of Stranahan v. Commissioner
Facts
Frank Stranahan was seriously deficient to the IRS. He came to an agreement to pay the deficiency but didn’t want to lose a large interest deduction by paying the taxes later. So, he decided to sell an assignment of income in a company to his son. The son paid 115,000, the value of the income (who was to receive 122,000 the next year). This was reported as income and ofsetted the interest deficiency.
Instead of receiving 122,000, the stock appreciated into gaining an additional 40,000. Now, the commissioner is saying the father should have been taxed for the additional 40,000 (because the father still owns the stock).
Analysis
Here, the additional 40,000 is not taxed against the father’s estate because the son paid full value of the assignment. This was also a fair deal, no gift was provided.
