Diedrich v. Commissioner of Internal Revenue United Missouri Bank of Kansas v. Commissioner of Internal Revenue, 80-2204
| Decision Date | 15 June 1982 |
| Docket Number | No. 80-2204,80-2204 |
| Citation | 102 S.Ct. 2414,457 U.S. 191,72 L.Ed.2d 777 |
| Parties | Victor P. DIEDRICH et ux., Petitioners v. COMMISSIONER OF INTERNAL REVENUE. UNITED MISSOURI BANK OF KANSAS v. COMMISSIONER OF INTERNAL REVENUE |
| Court | U.S. Supreme Court |
¢s191¢s Held : A donor (such as petitioner husband and wife and petitioner executor's decedent) who makes a gift of property on condition that the donee pay the resulting gift taxes realizes taxable income to the extent that the gift taxes paid by the donee exceed the donor's adjusted basis in the property. Pp. 194-200.
(a) The substance, not the form, of the agreed transaction controls in determining whether taxable income was realized. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918; Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301. Pp. 2417-2418.
(b) When a donor makes a gift, he incurs a "debt" to the United States for the amount of whatever gift taxes are due, which are as much the donor's legal obligation as his income taxes. When conditional gifts, such as those in question here, are made, the donor realizes an immediate economic benefit by the donee's assumption of the donor's legal obligation to pay the gift taxes. Subjective intent, while relevant in determining whether a gift has been made, is not characteristically a factor in determining whether an individual has realized income. Even if intent were a factor, the donor's intent as to the condition shifting the gift tax obligation to the donee is plainly to relieve the donor of the debt owed to the United States. And the economic benefit realized by the donor is not diminished by the fact that the liability attaches during the course of the donative transfer, such benefit being indistinguishable from the benefit arising from discharge of a pre-existing obligation. Pp. 196-198.
(c) Treating the amount by which the gift taxes exceed the donor's adjusted basis in the property as income is consistent with § 1001 of the Internal Revenue Code, which provides that the gain from the disposition of property is the excess of the amount realized over the transferor's adjusted basis in the property. Pp. 198-199.
8th Cir., 643 F.2d 499, affirmed.
Norman E. Beal, Kansas City, Mo., for petitioners.
We granted certiorari to resolve a Circuit conflict as to whether a donor who makes a gift of property on condition that the donee pay the resulting gift tax receives taxable income to the extent that the gift tax paid by the donee exceeds the donor's adjusted basis in the property transferred. 454 U.S. 813, 102 S.Ct. 89, 70 L.Ed.2d 82 (1981). The United States Court of Appeals for the Eighth Circuit held that the donor realized income. 643 F.2d 499 (1981). We affirm.
In 1972 petitioners Victor and Frances Diedrich made gifts of approximately 85,000 shares of stock to their three children, using both a direct transfer and a trust arrangement. The gifts were subject to a condition that the donees pay the resulting federal and state gift taxes. There is no dispute concerning the amount of the gift tax paid by the donees. The donors' basis in the transferred stock was $51,073; the gift tax paid in 1972 by the donees was $62,992. Petitioners did not include as income on their 1972 federal income tax returns any portion of the gift tax paid by the donees. After an audit the Commissioner of Internal Revenue determined that petitioners had realized income to the extent that the gift tax owed by petitioners but paid by the donees exceeded the donors' basis in the property. Accordingly, petitioners' taxable income for 1972 was increased by $5,959.1 Petitioners filed a petition in the United States Tax Court for redetermination of the deficiencies. The Tax Court held for the taxpayers, concluding that no income had been realized. 39 TCM 433 (1979).
In 1970 and 1971 Mrs. Frances Grant gave 90,000 voting trust certificates to her son on condition that he pay the resulting gift tax. Mrs. Grant's basis in the stock was $8,742.60; the gift tax paid by the donee was $232,620.09. As in Diedrich, there is no dispute concerning the amount of the gift tax or the fact of its payment by the donee pursuant to the condition.
Like the Diedrichs, Mrs. Grant did not include as income on her 1970 or 1971 federal income tax returns any portion of the amount of the gift tax owed by her but paid by the donee. After auditing her returns, the Commissioner determined that the gift of stock to her son was part gift and part sale, with the result that Mrs. Grant realized income to the extent that the amount of the gift tax exceeded the adjusted basis in the property. Accordingly, Mrs. Grant's taxable income was increased by approximately $112,000.2 Mrs. Grant filed a petition in the United States Tax Court for redetermination of the deficiencies. The Tax Court held for the taxpayer, concluding that no income had been realized. Grant v. Commissioner, 39 TCM 1088 (1980).
The United States Court of Appeals for the Eighth Circuit consolidated the two appeals and reversed, concluding that "to the extent the gift taxes paid by donees" exceeded the donors' adjusted bases in the property transferred, "the donors realized taxable income." 643 F.2d, at 504. The Court of Appeals rejected the Tax Court's conclusion that the taxpayers merely had made a "net gift" of the difference between the fair market value of the transferred property and the gift taxes paid by the donees. The court reasoned that a donor receives a benefit when a donee discharges a donor's legal obligation to pay gift taxes. The Court of Appeals agreed with the Commissioner in rejecting the holding in Turner v. Commissioner, 49 T.C. 356 (1968), aff'd per curiam, 410 F.2d 752 (CA6 1969), and its progeny, and adopted the approach of Johnson v. Commissioner, 59 T.C. 791 (1973), aff'd, 495 F.2d 1079 (CA6), cert. denied, 419 U.S. 1040, 95 S.Ct. 527, 42 L.Ed.2d 317 (1974), and Estate of Levine v. Commissioner, 72 T.C. 780 (1979), aff'd, 634 F.2d 12 (CA2 1980). We granted certiorari to resolve this conflict, 454 U.S. 813, 102 S.Ct. 89, 70 L.Ed.2d 82 (1981), and we affirm.
Pursuant to its constitutional authority, Congress has defined "gross income" as income "from whatever source derived," including "[i]ncome from discharge of indebtedness." 26 U.S.C. § 61(12).3 This Court has recognized that "income" may be realized by a variety of indirect means. In Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918 (1929), the Court held that payment of an employee's income taxes by an employer constituted income to the employee. Speaking for the Court, Chief Justice Taft concluded that "[t]he payment of the tax by the employe[r] was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor." Id., at 729, 49 S.Ct. at 504. The Court made clear that the substance, not the form, of the agreed transaction controls. "The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed." Ibid. The employee, in other words, was placed in a better position as a result of the employer's discharge of the employee's legal obligation to pay the income taxes; the employee thus received a gain subject to income tax.
The holding in Old Colony was reaffirmed in Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947). In Crane the Court concluded that relief from the obligation of a nonrecourse mortgage in which the value of the property exceeded the value of the mortgage constituted income to the taxpayer. The taxpayer in Crane acquired depreciable property, an apartment building, subject to an unassumed mortgage. The taxpayer later sold the apartment building, which was still subject to the nonrecourse mortgage, for cash plus the buyer's assump- tion of the mortgage. This Court held that the amount of the mortgage was properly included in the amount realized on the sale, noting that if the taxpayer transfers subject to the mortgage,
"the benefit to him is as real and substantial as if the mortgage were discharged, or as if a personal debt in an equal amount had been assumed by another." Id., at 14, 67 S.Ct. at 1054.4
Again, it was the "reality," not the form, of the transaction that governed. Ibid. The Court found it immaterial whether the seller received money prior to the sale in order to discharge the mortgage, or whether the seller merely transferred the property subject to the mortgage. In either case the taxpayer realized an economic benefit.
The principles of Old Colony and Crane control.5 A common method of structuring gift transactions is for the donor to make the gift subject to the condition that the donee pay the resulting gift tax, as was done in each of the cases now before us. When a gift is made, the gift tax liability falls on the donor under 26 U.S.C. § 2502(d).6 When a donor makes a gift to a donee, a "debt" to the United States for the amount of the gift tax is incurred by the donor. Those taxes are as much the legal obligation of the donor as the donor's income taxes; for these purposes they are the same kind of debt obligation as the income taxes of the employee in Old Colony, supra. Similarly, when a donee agrees to discharge an indebtedness in consideration of the gift, the person relieved of the tax liability realizes an economic benefit. In short, the donor realizes an immediate economic benefit by the donee's assumption of the donor's legal obligation to pay the gift tax.
An examination of the donor's intent does not change the character of this benefit. Although intent is relevant in determining whether a gift has been made, subjective intent has not characteristically...
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