ST.
JOHN’S UNIVERSITY SCHOOL OF LAW
NEW YORK, NEW YORK
Prof. Todres
Basic Federal Income Tax
Problem 8 — Disposition Property
Assignment:
Code §~ 61(a)(3), 1001(a) (c), 1011(a), 1012(a) & (b), 1014(a)(1) & (b)(1), 1015(a),
-
(d)(1)(A), (d)(4), (d)(6), (e), 1016(a)(1) & (2), 1041(a)-(c), 1223(2) & (9),
770 1(a)(42)-(45), (g).
Regs.: § 1.61-6(a), 1.1001-1(a) & (e), 1.1012-1(a), 1.1014-1(a), 3(a), 1.1015-1(a), -4.
-
Text: pp. 113-20, 134-37, 140-57, 121-34, 138-40
Other: Diedrich v. Comm’r, 457 U.S. 191 (1982) (read after Tufts)
(Attachcd)
[Please focus especially on Crane, Tufts and Philadelphia Park. We will cover these first
in class. After focusing on the general rules we will turn to gifts (~1015) then to inheritances
(~ 1014).]
In each of the following problems assume TP is a cash basis, calendar year taxpayer.
TP bought 1,000 shares of ABC stock 5 years ago for $20,000. He just sold it for
$40,000. What tax results to TP?
a. What if TP sold the stock for $6,000?
2. TP owns land with a FMV of $200,000. TP’s adjusted basis (AB”) in the land is
$50,000. The land is subject to a $90,000 mortgage. TP sells the land to X, free and
clear of the mortgage, for $200,000 in cash. What are the tax results to TP?
a. How much cash will TP “net” from this sale? (ignore income taxes)
3. Same as question 2 except that TP transfers the land to X for $110,000 in cash and X
agrees to “take care” of the mortgage. What are the tax results to TP?
a. How much cash will TP net from this sale? (ignore income taxes)
b. Would your answer change if TP was personally liable on the mortgage and
(i) X assumed the mortgage?
(ii) X did not assume the mortgage?
c. Would your answer change if TP was not personally liable on the mortgage and
(i) X assumed the mortgage?
(ii) X did not assume the mortgage?
4. In questions 2 and 3, what is X’s adjusted basis in the purchased land?
5. TS owns land with anAB of $25,000. The FMV of the land is $50,000 and it is subject
to a mortgage of $60,000. Ms. Z, a shrewd real estate speculator, agrees to buy the land
for $1, but she takes it subject to the mortgage. How much gain will TS recognize?
6. TP bought his home in 1985 for $150,000. Having retired recently, TP decided to move
to Florida. On a recent trip to Florida he met his old pal Judy who wants to move to
N.Y. despite the fact that she owns a mansion in Florida. After talking for a while, TP
and Judy decide on an even trade of TP’s house in N.Y. for Judy’s mansion in Florida.
TP doesn’t really know what his house is worth, but a broker friend of his “opined” that
Judy’s mansion is worth $1 million. What tax results to TP?
7. In question 6, assume that for some reason it is impossible to value TP’s house. What
tax results to Judy if the mansion cost her $250,000 three years ago?
8. In question 6, what is TP’s basis in the mansion he acquires from Judy?
a. What is Judy’s basis in the house she acquires from TP?
9. TP owns a building worth $500,000 which is subject to a mortgage of $300,000. TP’s
AB in building is $100,000. TP gives the building to her daughter as a wedding present.
What income tax consequences to TP?
10. Last year TP received a car worth $35,000 from her employer as a year-end bonus. TP,
who had been using the car for personal, non-business purposes, sold it this year for
$37,000. What income tax consequences to TP?
11. Is there a taxable event in each of the following situations if TP
a. mortgages real estate? What if the cash received exceeds the basis of the property?
b. pledges a diamond ring as security for a loan? What if the pledgee sells the ring
and applies the proceeds to the loan?
c. converts a joint tenancy to a tenancy in common?
d. who is an equal beneficiary of an estate, entitled to a half interest in the estate’s
stocks and real estate, agrees to take all of the stocks and the other beneficiary
takes all the real estate? (The stock and the real estate are of equal value.)
e. abandons property?
f. owns a piece of property that is totally destroyed by lightning?
g. gives appreciated property to a child?
12. X gave land to Y as a gift on January 1 of this year. At the time of the gift the land’s
FMV was $100,000 and X’s basis in the land was $50,000. No gift tax was incurred on
the gift. What is Y’s basis in the land for determining gain or loss?
a. How would your answer change if X paid gift tax of $10,000 on the gift?
13. Father gave Son property worth $60,000 on the date of the gift. Father bought it for
$40,000 three years ago. There was no gift tax due on the gift. What tax consequences if
Son sells the property for (i) $80,000; (ii) $30,000 or (iii) $50,000?
a. What if the property was worth $40,000 on the date of the gift and it cost Father
$60,000?
14. Mother owns real estate worth $200,000 in which her adjusted basis is $90,000. In a part
gift/part sale she sells it to Daughter for $120,000. Assuming no gift tax is incurred, how
much gain is recognized by Mother? What is Daughter’s basis in the property?
15. A died on June 1, of this year. At his death he owned an automobile which cost him
$25,000 but which was then worth $27,000. B, A’s son, inherited the car and sold it on
June 13 of this year for $27,500. How much gain will B recognize?
a. What is B’s holding period in the car?
16. Husband owns land having a fair market value of $200,000 in which his adjusted basis is
$50,000. Wife, who needs the land for use in her business buys it from Husband for
$200,000 cash. What are the tax consequences to Husband and Wife?
FLS
Court Decisions—Cited 82-1 USTC 8 4, 2 0 3
Diedrich v. Corn.
[if 9419] Victor P. Diedrich et ux., Petitioners v. Commissioner of Internal Revenue.
United Missouri Bank of Kansas v. Commissioner of ‘Internal Revenue.
Supreme Court of the United States, No. 80-2204, 6/15/82. Affirming CA-8, 81-1 usTc
if 9249, 643 F2d 499.
On writ of Certiorari to the United States Court of Appeals for the Eighth Circuit.
[Code Secs. 61, 677 and 1001]
Gross income: Discharge of indebtedness: Income for benefit of grantor: Gift tax
paid by donee.—Donors who made gifts of appreciated securities directly and through a
trust arrangement on condition that the donees pay the resulting gift tax realized income
to the extent that the taxes paid by the donees exceeded the donors adjusted bases in the
stock. When the donors made the gifts to the donees, a “debt” to the United States for
the amount of the gift tax arose and the discharge of this indebtedness by the donees
resulted in an economic benefit to the donor. This benefit was not diminished by the fact
that the liability attached during the course of the donative transfer and not beforehand.
The amount of income was the amount of the gift tax liability less the donors’ adjusted
bases in the property. Back references: if 202.018, 631.6705, 3749.1816, 4470.306 and 4470.3062.
Syllabus in the property as income, is consistent
with § 1001 of the Internal Revenue Code,
Held: A donor (such as petitioner hus
which provides that the gain from the dis
band and wife and petitioner executor’s dece
position of property is the excess of the
dent) who makes a gift of property on
amount realized over the transferor’s ad
condition that the donee pay the resulting
justed basis in the property. Pp. 8.
gift taxes realizes taxable income to the
extent that the gift taxes paid by the donee [81-I uSTc ¶9249] 643 F. 2d 499, affirmed.
exceed the donor’s adjusted basis in the BURGER, C. J., delivered the opinion of the
property. Pp. 4-9. Court, in which BRENNAN, WHITE, MAR
(a) The substance, not the form, of the SHALL, BLAcKHuae, PowELL, STEvENs, and
agreed transaction controls in determining O’CoNNoR, JJ., joined. REHNQUIsT, J., filed
whether taxable income was realized. Old a dissenting opinion.
Colony Trz43-t Co. v. Commissioner [1 usrc CHIEF JUSTICE BURGER delivered the opin
IT 408], 279 U. S. 716, Crane v. Commissioner ion of the Court: We granted certiorari
[47-1 usrc ¶9217], 331 U. S. 1. Pp. 4-5. to resolve a circuit conflict as to whether
(b) When a donor makes a gift, he in a donor who makes a gift of property on
curs a “debt” to the United States for condition that the donee pay the resulting
the amount of whatever gift taxes are due, gift tax receives taxable income to the
which are as much the donor’s legal obli extent that the gift tax paid by the donee
gation as his income taxes. When condi exceeds the donor’s adjusted basis in the
tional gifts, such as those in question here, property transferred. — U. S. — (1981).
are made, the donor realizes an immediate The United States Court of Appeals for the
economic benefit by the donee’s assumption Eighth Circuit held that the donor realized
~f the donor’s leggi obligation to pay the income. [81-1 USTC ¶f 9249] 643 F. 2d 499
gift taxes. Subjective intent, while relevant (1981). We affirm.
in determining whether a gift has been I
made, is not characteristically a factor in
determining whether an individual has real A
ized income. Even if intent were a factor, Diedrich v. Com’r Internal Revenue
the donor’s intent as to the condition shift
ing the gift tax obligation to the donee In 1972 petitioners Victor and Frances
is plainly to relieve the donor of the debt Diedrich made gifts of approximately 85,000
owed to the United States. And the eco shares of stock to their three children, using
nomic benefit realized by the donor is not both a direct transfer and a trust arrange
diminished by the fact that the liability ment. The gifts were subject to a condition
attaches during the course of the donative that the donees pay the resulting federal
transfer, such benefit being indistinguishable and state gift taxes. There is no dispute
from the benefit arising from discharge of a concerning the amount of the gift tax paid
pre-existing obligation. Pp. 5-7. by the clonees. The donors’ basis in the
(c) Treating the amount that the gift transferred stock was $51,073; the gift tax
taxes exceed the donor’s adjusted basis paid in 1972 by the donees was $62,992. Pe
1982 Standard Federal Tax Reports ¶9419
84,204 U. [Link] Cases
Diedrich V. Corn.
titioners did not include as income on their realized. — T. C. — (1980) [CCH Dec.
1971 federal income tax returns any por 36,418(M)).
tion of the gift tax paid by the donees. After
an audit the Commissioner of Internal
C
Revenue determined that petitioners had The United States Court of Appeals for
realized income to the extent that the gift the Eighth Circuit consolidated the two
tax owed by petitioners but paid by the appeals and reversed, concluding that “to
donees exceeded the donors’ basis in the the extent the gift taxes paid by donees”
property. Accordingly, petitioners’ taxable exceed the donors’ adjusted bases in the
income for 1972 was increased by $5,959.’ property transferred, “the donors realized
Petitioners filed a petition in the United taxable income.” 643 F. 2d 499, 504 (1981).
States Tax Court for redetermination of the The Court of Appeals rejected the Tax
deficiencies. The Tax Court held for the Court’s conclusion that the taxpayers merely
taxpayers, concluding that no income had had made a “net gift” of the difference be
been realized. — T. C. — (1980) [CCH tween the fair market value of the transferred
Dec. 36,418(M)]. property and the gift taxes paid by the
donees. The court reasoned that a donor
B receives a benefit when a donee discharges a
donor’s legal obligation to pay gift taxes.
United .4’!o. Bank of Kansa,r v. Com’r
The Court of Appeals agreed with the
Internal Revenue
Commissioner in rejecting the holding in
In 1970 and 1971 Mrs. Frances Grant Turner v. Commissioner [CCH Dec. 28,814],
gave 90,000 voting trust certificates to her 49 T. C. 356 (1968), aff’d per curiam [69-1
son on condition that he pay the resulting tJSTC 119416],4l0 F. Zd 752 (CA6 1969), and
gift tax. Mrs. Grant’s basis in the stock was its progeny, and adopted the approach of
$8,742.60; the gift tax paid by the donee was Johnson v. Commissioner [CCH Dec. 31,886],
$232,620.09. As in Diedrich, there is no dis 59 T. C. 791 (1973), aff’d, .[74-1 usrc
pute concerning the amount of the gift tax ~f 9355] 495 F. 2d 1079 (CA6), cert. denied,
or the fact of its payment by the donee 419 U. S. 1040 (1974), and Estate of Levine
pursuant to the condition. v. Commissioner [CCH Dec. 36,214], 72 T. C.
Like the Diedrichs, Mrs. Grant did not 780 (1979), aff’d, [80-2 usrc 119549] 634
include as income on her 1970 or 1971 F. 2d 12 (CA2 1980). We granted certiorari
federal income tax returns any portion of to resolve this conflict, — U. S. — (1981),
the amount of the gift tax owed by her but and we affirm.
paid by the domee. After auditing her re
turns, the Commissioner determined that II
the gift of stock to her son was part gift
and part sale, with the result that Mrs. A
Grant realized income to the extent that Pursuant to its Constitutional authority,
the amount of the gift tax exceeded the Congress has defined “gross income” as
adjusted basis in the property. Accordingly, income “from whatever source derived,”
Mrs. Grant’s taxable income was increased including “[i]ncome from discharge of in
by approximately $112,000.~ Mrs. Grant debtedness.” 26 U. S. C. § 61 (1976).’ This
filed a petition in the United States Tax Court has recognized that “income” may be
Court for redetermination of the deficien realized by a variety of indirect means. In
cies. The Tax Court held for the tax Old Colony Tr. Co. v. Commissioner [1 usrc
payer, concluding that no income had been 11408], 279 U. S. 716 (1929), the Court held
‘Subtraetlng the stock basis of $51,073 from City, the decedent’s executor, was substituted
the gift tax paid by the donees of $62,992, the as petitioner.
Commissioner found that petitioners had real The United States Constitution provides that
ized a long term capital gain of $11,919. After Congress shall have the power to lay and collect
a 50% reduction In long term capital gain, 26 taxes on Income “from whatever source de
U. S. C. ~ 1202 (1976). the Diedrichs’ taxable rived.” Art. I, 8, ci. 1; Amendment XVI.
income Increa.~d by $5,959. In Helvermg v. Eruun [40-1 uric 1 9337], 309
The gift taxes were $232,630.09. Subtracting U. S. 461, 469 (1940), the Court noted:
the adjusted basis of $8,742.60, the Commis “While It Is true that economic gain is not
sioner found that Mrs. Grant realized a long always taxable as Income, It is settled that the
term capital gain of $223,881.49. After a 50% realization of gain need not be In cash derived
reduction for long term capital gaIn, 26 U. S. C. from the sale of an asset. Gain may occur as
~ 1202 (1976), Mrs. Grant’s taxable Income In a result of exchange of property, payment of
creased by $111,943.75. the taxpayer’s indebtedness, relief from a 1:0-
During pendency of this lawsuit, Mrs. Grant bility, or other profit realized from the comple
died and the United Missouri Bank of Kansas tion of a transaction.” (Emphasis supplied.)
¶ 9419 © 1982, Commerce Clearing House, Inc.
Court Decisions—Cited 82-1 USTC 8 4205
Diedrick v. Corn.
that payment of an employee’s income taxes Again, it was the “reality,” not the form,
by an employer constituted income to the of the transaction that governed. Ibid. The
employee. Speaking for the Court, Chief Court found it immaterial whether the
Justice Taft concluded that “[t]he payment seller received money prior to the sale in
of the tax by the employer[] was in con order to discharge the mortgage, or whether
sideration of the services rendered by the the seller merely transferred the property
employee and was a gain derived by the subject to the mortgage. In either case the
employee from his labor.” Id., at 729. The taxpayer realized an economic benefit.
Court made clear that the substance, not
the form, of the agreed transaction controls. B
“The discharge by a third person of an
obligation to him is equivalent to receipt The principles of Old Colony and Crane
by the person taxed.” Ibid. The employee, control.’ A common method of structuring
in other words, was placed in a better posi gift transactions is for the donor to make
tion as a result of the employer’s discharge the gift subject to the condition that the
of the employee’s legal obligation to pay donee pay the resulting gift tax, as was
the income taxes; the employee thus re done in each of the cases now before us.
ceived a gain subject to income tax. When a gift is made, the gift tax liability
falls on the donor under 26 U. S. C.
The holding in Old Colony was reaffirmed § 2502(d).’ When a donor makes a gift to
in Crane v. Comrnirsioner [47-1 usrc IF 9217], a donee, a “debt” to the United States for
331 U. S. 1 (1947). In Crone the Court con the amount of the gift tax is incurred by
cluded that relief from the obligation of a the donor. Those taxes are as much the
nonrecourse mortgage in which the value legal obligation of the donor as the donor’s
of the property exceeded the value of the income taxes; for these purposes they are
mortgage constituted income to the tax the same kind of debt obligation as the in
payer. The taxpayer in Crane acquired come taxes of the employee in Old Colony,
depreciable property, an apartment build supra. Similarly, when a dance agrees to
ing, subject to an unassumed mortgage. discharge an indebtedness in consideratior~
The taxpayer later sold the apartment of the gift, the person relieved of the tax
building, which was still subject to the floss-c- liability realizes an economic benefit. In
course mortgage, for cash plus the buyer’s short, the donor realizes an immediate
assumption of the mortgage. This Court economic benefit by the dance’s assumption
held that the amount of mortgage was prop of the donor’s legal obligation to pay the
erly included us the amount realized on gift tax.
the sale, noting that if the taxpayer trans
An examination of the donor’s intent does
fers subject tcs the mortgage,
not change the character of this benefit.
“the benefit to him is as real and sub Although intent is relevant in determining
stantial as if the mortgage were dis whether a gift has been made, subjective
charged, or as if a personal debt in an
equal amount had been assumed by an intent has not characteristically been a fac
other.” Id., at 14.~ tor in determining whether an individual
In Crane the taxpayer received favorable It should be noted that the gilt tax conse
tax treatment for the loan and was allowed quences of a conditional gift will be unaffected
depreciation on the property. The Court con by the holding in this case. When a conditional
cluded that the taxpayer could not then later “net” gift is given, the gift tax attributable to
escape taxation after having received these the transfer is to be deducted from the value
benefits when the loan obligation was assumed of the property in determining the value of
by another. the gift at the time of transfer. See Rev. Rul.
Whether income would have been realized in 75-72, 1975-1 C. B. 310 (general formula for
Crane if the value of the property at the time computation of gift tax on conditional gift);
of transfer had been less than the amount of Rev. Rul. 71-232, 1971-1 C. B. 275.
the mortgage need not be considered here. See ‘“The tax imposed by section 2501 shall be
Crane, suPrcs, at 14, n. 37. paid by the donor.”
‘Although the Commissioner has argued con Section 6321 imposes a lien on the personal
sistently that payment of gift taxes by the property of the donor when a tax is not paid
donee results in income to the donor, several when due. The donee Is secondarily responsible
courts have rejected this interpretation. See, for payment of the gift tax should the donor
e. g., Turner v. Commissioner (CCH Dee. fail to pay the tax. 26 U. S. C. ~ 6324(b). The
28.814], 49 T. C. 356 (1968), aff’d per curiom donee’s liability, however, is Uniited to the
(69-1 usrc ¶ 9416), 410 F. 2d 752 (CA6 1969); value of the gift. Ibid. This responsibility of
Ilirst v. Commissioner (78-1 urre ¶ 9166). 572 F. the donee is analogous to a lien or security.
2d 427 (CA4 1978) (en bane). Cf. Johnson v. Ibid. See also S. Rep. No. 665, 72d Cong., 1st
Commissioner (74-1 usi’c ¶ 9355), 495 F. 2d 1979 Sass. 42 (1932); H. R. Rep. No. 708, 72d Cong..
(CA6), cart, denIed, 419 U. S. i,040 (1974). 1st Seas. 30 (1932).
1982 Standard Federal Tax Reports ¶ 9419
8 4, 2 0 6 U. S. Tax Cases
Diedrich v. Corn.
has realized income.7 Even if intent were for less than the fair market value. The
a factor, the donor’s intent with respect to “sale” price is the amount necessary to dis
the condition shifting the gift tax obligation charge the gift tax indebtedness; the bal
from the donor to the donee was plainly to ance of the value of the transferred property
relieve the donor of a debt owed to the is treated as a gift. The gain thus derived
United States; the choice was made be by the donor is the amount of the gift tax
cause the donor would receive a benefit in liability less the donor’s adjusted basis in
relief from the obligation to pay the gift the entire property. Accordingly, income
tax.’ is realized to the extent that the gift tax
Finally, the benefit realized by the tax exceeds the donor’s adjusted basis in the
payer is not diminished by the fact that property. This treatment is consistent with
the liability attaches during the course of § 1001 of the Internal Revenue Code, whids
a donative transfer. It cannot be doubted provides that the gain from the disposition
that the donors were aware that the gilt of property is the excess of the amount
tax obligation would arise immediately upon realized over the transferor’s adjusted basis
the transfer of the property; the economic in the property.’
benefit to the donors in the discharge of
the gift tax liability- is indistinguishable III
from the benefit arising from discharge of We recognize that Congress has struc
a pre-existing obligation. Nor is there any tured gift transactions to encourage transfer
doubt that had the donors sold a portion of property by limiting the tax consequences
of the stock immediately before the gift of a transfer. See, e. g., 26 U. S. C. § 102
transfer in order to raise funds to pay the (gifts excluded from donee’s gross income).
expected gift tax, a taxable gain would have Congress may obviously provide a similan
been realized. § 1001. The fact that the exclusion for the conditional gift. Should
gift tax obligation was discharged by way Congress wish to encourage “net gifts,”
of a conditional gift rather than from funds changes in the income tax consequences of
derived from a pregiIt sale does not alter such gifts l~e within the legislative responsi~
the underlying benefit to the donors. bility. Until such time, we are bound by
Congress’ mandate that gross income in
C cludes income “from whatever source de
rived.” We therefore hold that a donor
Consistent with the economic reality, the
Commissioner has treated these conditional who maices a gift of property au condition
gifts as a discharge of indebtedness through that the donee pay the resulting gift taxes
a part gift and part sale of the gift prop realizes taxable income to the extent that
erty transferred. The transfer is treated as the gift taxes paid by the donee exceed the
if the donor sells the property to the donee donor’s adjusted basis in the property.”
‘Several courts have found It highly sig 26 I. R. C. ¶ 1001 provides:
nificant that the donor Intended to make a gift. “(a) Compatation of gain or ioss.—The gain
Turner v. Commissioner, aupra; Ilirst i,. Corn from the sale or other disposition of property
missioner, supra. It Is not enough, however, to shall be the excess of the amount realized
state that the donor Intended simply to make therefrom over the adjusted basis provided in
a gift of the amount which will remain after section 1011 for determining gain, and the loss
the donee pays the gift tax. As noted above. shall be the excess of the adjusted basis pro
subjective intent has not characteristically been vided In such section for determining 1088 over
a factor In determining whether an Individual the amount realized.
has realized Income. In Commissioner v. (b) Amount reajiZed,—The amount realized
Duberstein [60-2 us’rc ¶ 9515], 363 U. S.] 278, from the sale or other disposition of property
286 (1960). the Court noted that “. . . the shall be the sum of any money received plus
donor’s characterization of his action Is not de the fair market value of the property (other
terminative See also Minnesota Tea Co. than money) received...
t~. Helvering [38-1 raTe ¶ 9050], 302 U. S. 609. By treating conditional gifis as a part gift
613 (1938) (“(a] given result at the end of a and part sale, income Is realized only when
straight path Is not made a different result be highly appreciated property Is transferred, for
cause reached by following a devious path”). only highly appreciated property will result In
‘The existence of the “condition” that the a gift tax greater then the adjusted basis.
gift will be made only if the donee assumes the 20 Petitioners argue that even if this Court
gift tax consequences precludes any character holds that a donee realizes income on a condi
ization that the payment of the taxes was tional gift to the extent that the gift tax ex
simply a gift from the donee back to the donor. ceeds the adjusted basis, that holding should be
A conditional gift not only relieves the donor applied prospectively and should not apply to
of the gift tax liability, but also may enable the taxpayers In this ease. In thiS case, how~
the donor to transfer a larger sum of money ever, there was no dispositive Eig~ith CIrcuit
to the donee than would otherwise be possible holding prior to the decision on review. In
due to such factors as differing Income tax addition, this Court frequently has applied deci
brackets of the donor and donee. sions which have altered the tax law and
¶ 9419 © 1982, Commerce Clearing House, Inc.
Court Decisions—82-1 USTC 84,207
Diedrich v. Corn.
The judgment of the United States Court Unlike Old Colony or Crane, the question
of Appeals for the Eighth Circuit is in this case is not the amount of income the
Affirmed. taxpayer has realized as a result of a can
cededly taxable transaction, but whether a
[Dissenting Opinion] taxable transaction has taken place at all.
JUSTICE REHNQUIST, dissenting: It is a Only after one concludes that a partial sale
well-settled principle today that a taxpayer occurs when the donee agrees to pay the
realizes income when another person re gift tax do Old Colony and Crane become
lieves the taxpayer of a legal obligation relevant in ascertaining the amount of in
in connection with an otherwise taxable come realized by the donor as a result of
transaction. See Crane v. Commissioner the transaction. Nowhere does not Court
[47-1 usrc 119217], 331 U. S. 1 (1947) (sale explain why a gift becomes a partial sale
of real property); Old Colony Tr. Co. v. merely because the donor and donee struc
Commissioner [1 usic ¶408], 279 U. S. 716 ture the gift so that the gift tax imposed
(1929) (employment compensation). In by Congress on the transaction is paid by
neither Old Colony nor Crane was there any the donee rather than the donor.
question as to the existence of a taxable In my view, the resolution of this case
transaction; the only question concerned turns upon congressional intent: whether
the amount of income realized by the tax Congress intended to characterize a gift as
payer as a result of the taxable transaction. a partial sale whenever the dance agrees
The Court in this case, however, begs the to pay the gift tax. Congress has deter
question of whether a taxable transaction mined that a gift should not be considered
has taken place at all when it concludes income to the donee. 26 U. S. C. § 102.
that “[t]he principles of Old Colony and Instead, gift transactions are to be subject
Crane control” this case. Ante, at 5. to a tax system wholly separate and dis
In Old Colony, the employer agreed to tinct from the income tax. See Id. § 2501
pay the employee’s federal tax liability as et seq. Both the donor and the donee may
part of his compensation. The employee be held liable for the gift tax. Id. §~ 2502
provided his services to the employer in (d), 6324(b). Although the primary lia
exchange for compensation. The exchange bility for the gift tax is on the donor, the
of compensation for services was undenia donee is liable to the extent of the value
bly a taxable transaction. The only ques of the gift should the donor fail to pay the
tion was whether the employee’s taxable tax. I see no evidence in the tax statutes
income included the employer’s assumption that Congress forbade the parties to agree
of the employee’s income tax liability. among themselves as to who would pay the
gift tax upon pain of such an agreement
In Crane, the taxpayer sold real property being considered a taxable event for the
for cash plus the buyer’s assumption of a purposes of the income tax. Although
mortgage. Clearly a sale had occurred, and Congress could certainly determine that
the only question was whether the amount the payment of the gift tax by the donee
of the mortgage assumed by the buyer constitutes income to the donor, the rele
should be included in the amount realized vant statutes do not affirmatively indicate
by the taxpayer. The Court rejected the that Congress has made such a deter
taxpayer’s contention that what she sold
was not the property itself, but her equity mination.
in that property. I dissent.
[If 9820—13,441 ReseivedL]
[Estate and Gilt Tax Cases for the first half of 1982 begin on page 84,211.]
applied the clarified law to the facts of the Estate of DonneiZy [70.1 usrc ~ 9290), 397 U. S.
case before it. See, a. 0, United States v. 286, 294-95 (1910).
1982 Standard Federal Tax Reports ¶ 9418