Opinion ID: 660176
Heading Depth: 2
Heading Rank: 2

Heading: The Interdependence Test

Text: 26 The interdependence test is a variation of the end result test. See Penrod, 88 T.C. at 1430. It focuses on whether the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. American Bantam Car Co. v. Commissioner, 11 T.C. 397, 405, 1948 WL 50 (1948), aff'd, 177 F.2d 513 (3d Cir.1949), cert. denied, 339 U.S. 920, 70 S.Ct. 622, 94 L.Ed. 1344 (1950). To apply this test, a court must determine whether the individual steps had independent significance or whether they had meaning only as part of the larger transaction. Penrod, 88 T.C. at 1430. 27 The government declares there was no independent consequence from giving the Institute unsold contracts because the admitted purpose of the donation--funding the Institute's operations--could not be met until the contracts were sold. Additionally, it asserts the donation had no independent significance because the amount of the charitable contribution could not be determined until the contracts were sold, and that the Greenes' retention of the short-term capital gains would similarly be of no consequence unless the contracts were sold. 28 This argument falls far short of being compelling. First, the Greenes' donations were not intermediate or transitory steps in some overarching plan. The donations had the independent significance of providing the Institute with investment property and control over the decision of whether to hold on to the property in anticipation that its value would increase, or to sell the property in order to have immediate access to funds. The fact that the Institute could not use the gift for its operating revenues without a sale does not make the gift of the contracts of no independent significance and therefore subject to the step transaction doctrine. If it did, then all charitable donations of appreciated property would result in tax liability if the charity later sold the property. It would be naive not to recognize that whenever a gift of appreciated property is made to a charity it can be anticipated that the property will be sold, because [o]nly through such a step [can] the purpose of the charitable contribution be achieved. S.C. Johnson & Son, Inc., 63 T.C. at 789. Accordingly, the result urged by the government is directly in conflict with the well-established rule that a gift of appreciated property does not result in income to the donor. See, e.g., Grove, 490 F.2d at 246; Sheppard v. United States, 361 F.2d 972, 977-78 (Ct.Cl.1966). 29 Second, the government's view that the amount of the deduction could not be determined until there was a sale is also without substance. It is well settled that the amount of a charitable deduction is determined by the fair market value of the property on the date of the donation, reduced according to other Code provisions. 26 C.F.R. Sec. 1.170A-1(c)(1) (1993); McGuire v. Commissioner, 44 T.C. 801, 806, 1965 WL 1207 (1965). Third, while the government correctly asserts that the Greenes' retention of a right to the short-term gains on the donated contracts would have been of no consequence unless the contracts were sold, this sort of dependence in the circumstances of this case does not trigger the application of the interdependence test. As stated, that test focuses on whether each step in a series of transactions would have been fruitless had not the subsequent steps occurred. The relevant issue therefore is not whether the Greenes' retention of a right to the short-term gains would have had significance absent a sale of the contracts, but rather whether the sale by the Institute would have had significance absent the Greenes' being entitled to the short-term gains from the sale. We have no doubt that the sale of the futures contracts by the Institute was a wholly independent event, possessing significance separate from the Greenes' retention of a right to the short-term gains. The sale of these contracts was the means by which the Institute converted the gift of property into operating funds. The Institute's decision to sell those futures contracts was driven by its own needs, as to which the requirement that in the event of a sale it turn over part of the proceeds to the Greenes was irrelevant. 30 Moreover, this case is distinguishable from those in which the interdependence test has been met. For example, in Blake v. Commissioner, a taxpayer donated appreciated stock to a charity with an understanding that the charity would liquidate the stock and purchase the taxpayer's yacht. See 697 F.2d at 478-79. We applied the step transaction doctrine to disregard the initial gift of the stock, and treated the transaction as a gift of the yacht. Id. at 480. Here, in contrast, taxpayers made a substantial gift to the Institute and received nothing in return. They retained a right to a portion of the income from the contracts, but giving a partial gift is quite different from giving away something with an understanding that the donee will later buy something back from the donor with the proceeds of the donated gift. There was no understanding that the Institute would handle the contracts or the donated portion of the proceeds from sale in any way that would benefit the Greenes. In fact, they were not benefited by the charity. 31 Further, the interdependence test has been applied almost exclusively in cases involving complicated corporate transactions. See, e.g., Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517 (10th Cir.1991) (merger and reorganization followed by transfer of subsidiary treated as complete liquidation); Security Indus. Ins. Co. v. United States, 702 F.2d 1234 (5th Cir.1983) (acquisitions and reorganizations followed by transfer treated as complete liquidations); McDonald's Restaurants of Illinois, Inc. v. Commissioner, 688 F.2d 520 (7th Cir.1982) (merger and stock transfer followed by sale of stock treated as liquidation); South Bay Corp. v. Commissioner, 345 F.2d 698 (2d Cir.1965) (purchase of controlling interest in corporations followed by merger into principal corporation treated as purchase by principal corporation of controlling interests); King Enters., Inc. v. United States, 418 F.2d 511 (Ct.Cl.1969) (stock acquisition followed by merger treated as reorganization). 32 In all of these cases the individual steps taken by the taxpayers obscured the actual character of a corporate change. For example, in Kuper v. Commissioner, 533 F.2d 152 (5th Cir.1976), shareholders of a realty-owning corporation contributed all of their shares to an automobile dealership corporation owned by the same shareholders. The automobile corporation made a cash capital contribution on the same day to the realty corporation, and on the following day the automobile corporation exchanged the realty corporation's shares for one stockholder's one-third ownership of the automobile corporation. Id. at 154. The Fifth Circuit agreed with the tax court's finding that these transactions were mere steps to disguise a stock-for-stock transaction at the shareholder level, and therefore it treated the steps as a taxable exchange of stock. Id. at 156. 33 Unlike these cases, the present taxpayers did not undertake a series of steps according to an overall plan in order to obscure the character of the transaction. Their only plan was to make a contribution to the Institute and retain for themselves the right to a portion of any income from the donated contracts, should they be sold. This is exactly the transaction that took place. Hence, the interdependence test was not met, and the step transaction doctrine is inapplicable to this case. III Application of 26 U.S.C. Sec. 1256(c) 34 Finally, the government raises for the first time on appeal an argument that in any transfer of futures contracts, including a charitable donation, Sec. 1256(c) of Title 26 requires taxpayers to recognize the entire amount of gain inherent in commodity futures contracts whenever they are transferred. To begin, it is a well-established general rule that an appellate court will not consider an issue raised for the first time on appeal. See Singleton v. Wulff, 428 U.S. 106, 120, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976). This rule is not an absolute bar to raising new issues on appeal; the general rule is disregarded when we think it necessary to remedy an obvious injustice. See Thomas E. Hoar, Inc. v. Sara Lee Corp., 900 F.2d 522, 527 (2d Cir.), cert. denied, 498 U.S. 846, 111 S.Ct. 132, 112 L.Ed.2d 100 (1990). We will also sometimes entertain arguments not raised in the trial court if the elements of the claim were fully set forth and there is no need for additional fact finding. See Vintero Corp. v. Corporacion Venezolana de Fomento, 675 F.2d 513, 515 (2d Cir.1982). Entertaining issues raised for the first time on appeal is discretionary with the panel hearing the appeal. 35 The government asks us to construe a 1981 statute. This task would require a thorough investigation of the legislative history of the statute, as well as the applicable case law. In its brief the government discusses the application of Sec. 1256(c) in less than three pages, and at oral argument it did not mention the issue. No reason is offered by the government for the failure to raise it below, nor does it suggest that there will be any great injustice if we refuse to resolve it. Therefore, we decline the invitation to address this issue.